Ofgem have been running a pilot scheme (see our article on the interim regime for more detail) and are now consulting on the regulatory regime that will apply to these pilot projects. The regime covers licensing, regulation and network charging.

There is a separate but concurrent consultation on the market arrangements for MPIs. Offshore wind farms are affected by this as there are two options and one is more favourable to generators than the other.

Do you know your OHA from your MPI?

The Energy Bill currently going through Parliament will introduce MPIs as a new asset class and defines an MPI as an electric cable that connects GB to neighbouring markets and also connects offshore generation to shore. But only the part of the line that falls within GB waters is classed as an MPI. Assets connected to wind farms in a foreign jurisdiction, but not in GB, will not be classed as MPIs since their offshore transmission activity will be regulated in the connecting jurisdiction. These assets are referred to as non-standard interconnectors (NSIs). MPIs and NSIs together are referred to as offshore hybrid assets or OHAs.

Pilot projects: Nautilus and Lion Link

The pilot scheme launched in 2022. Two projects have been selected for Initial Project Assessment: Nautilus, connecting to Belgium; and Lion Link, connecting to the Netherlands. If successful, they will be awarded a regulatory regime in late 2023.

Licensing

MPIs will be performing a new type of licensable activity – a combination of offshore transmission and interconnection - that is not covered by the existing licensing framework. At the moment, each of these needs a separate licence. 

NSIs, which will not be performing any offshore transmission activity in GB, will be licensed as electricity interconnectors, with some amendments to their licences. They could be subject to lower regulation since they will not be performing any offshore transmission activity in GB.

The new Energy Bill will introduce a new MPI licence. Ofgem is considering whether an MPI licence should impose higher regulatory safeguards and compliance requirements compared to a standard interconnector licence. This may be appropriate because of the dual nature of the activity; particularly, if the MPI regime were to include elements of Regulated Asset Base (see below).

The generator licence of the assets connecting to the MPIs is also under review. If Ofgem identifies that any changes are needed, it will consult separately.

Regulatory Regime and sharing costs and revenues

The consultation looks at various regulatory regime options and how to share costs and revenues between the countries at either end of the OHA.

Ofgem's preferred approach to cost and revenue sharing is to treat the offshore converter platform separately from the cable, so that each component will receive independent income streams, appropriate to its business model. 

• The onshore converters and the cable would receive a narrow cap and floor. This is consistent with the cap and floor scheme for interconnectors whose income comes from congestion revenues (and possibly, provision of balancing and ancillary services). For MPIs, a narrower band of exposure is proposed, to account for the higher risks and increased revenue uncertainty.
• The capital-intensive offshore converter platform which does not earn congestion revenues would be remunerated with a form of the Regulated Asset Base (RAB), to give a pre-defined revenue stream to investors. 
• The offshore wind farm gets its main source of income from selling electricity in the wholesale electricity market. But which market, if the electricity could pass either to GB or the country at the other end of the interconnector (Offshore Bidding Zone, or OBZ)? Ofgem's preferred option is an adjusted CfD referencing the OBZ price rather than the (higher) GB price. This approach would require a higher consumer subsidy.
• Ofgem believes that offshore generators should be exempt from TNUoS charges unless they are entitled to priority access to the GB wholesale market and there is a known or likely impact on the GB offshore transmission system. 
• For NSIs the preferred option is a narrow cap and floor – the same support as for the cable element of the MPI, reflecting the fact that their only activity in GB will be as interconnector.

Ownership

The usual ownership unbundling rules would apply to MPIs and NSIs, which will need to be certified as independent. The regulator's minded-to position is that entities holding MPI licences, licences for standard interconnectors and NSIs may all be subsidiaries of the same parent company. Their licence conditions are expected to impose regulatory safeguards and compliance requirements in such a corporate structure.

It is possible that the same developer would build the MPI and offshore converter platform, as well as the connecting wind farm. Since under the unbundling rules, the same person cannot own both the generation asset and the MPI, the developer will have to divest itself from some of the assets. Ofgem seeks views on whether a competitive tender process under the OFTO regime would be appropriate in this scenario.

Anticipatory investment

Last year, Ofgem was consulting on the allocation of anticipatory investment (AI) in offshore transmission infrastructure (see our article Anticipatory Investment: Ofgem's minded-to decision).

There may be scenarios where one MPI developer invests in oversized assets in anticipation of another developer connecting at a later stage. For example, where the MPI developer builds an oversized cable and offshore transmission platform to accommodate a later connection of an offshore wind farm (or multiple wind farms).

If the AI policy were to apply, the cost of the MPI asset which is over and above what would be required for interconnection, would be recovered by the MPI developer from the offshore wind farm developer after the wind farm has connected (or, if there are multiple wind farms connecting, the AI element would be shared proportionately between the wind farms). Where the later asset fails to connect, the consumer would underwrite the cost.

Ofgem is seeking views on how the AI policy should apply to MPIs. It is not proposed to apply the policy to NSIs since any wind farm connecting in a foreign jurisdiction would be outside of the GB regulatory regime.

Alongside the consultation on the regulatory framework, Ofgem (jointly with the Department for Energy Security and Net Zero (DESNZ)) has published a consultation on market arrangements for MPIs. The two consultations should be read together to get the full picture, as the support scheme that is chosen will impact on the regulatory regime.

This consultation is most relevant to offshore wind farms as it sets out the options for selling their electricity and what government support they might need.

Home market or offshore bidding zone?

An offshore wind farm could have an MPI that connects it to GB and another country. Where should it sell the electricity it generates? Ideally the wind farm will want the home market (HM) model, which is effectively the status quo. The wind farm gets priority access to the MPI cable and so can always transport its electricity to the domestic GB market. So it gets GB market prices and clarity of revenue.

But this means the interconnector part of the MPI gets lower revenues as it will have less cross-border capacity available to sell. There are also problems if the wind farm generates more or less than anticipated: where the wind farm generated more electricity than forecast, foreign generation would have to be constrained. If the wind farm generated less electricity, the interconnector capacity could be underutilised. Having to correct capacity allocation errors would result in lower revenues for the MPI, less efficient utilisation of capacity and ultimately, higher costs to consumers.

The other option is the offshore bidding zone (OBZ) model. The wind farm competes with bids and offers from other market players for access to the cable to all connecting markets. A central algorithm effectively 'couples' the wind farm with whichever price zone is lower and will 'net' the export of that wind farm to the lower price zone off against exports in the opposite direction to optimise overall benefits and ensure the flow on the MPI is from the lower priced towards the higher priced zone. 

This is beneficial to consumers, the market and the MPIs (who benefit from opportunities to earn congestion income) but is a concern to windfarm operators (and investors) whose revenues could be lower than had they bid into the home zone only. 

Having compared both options and discussed them with stakeholders, Ofgem and DESNZ conclude that the OBZ model supported by implicit trading delivers the best outcomes in terms of market efficiency consumer benefits and integration of renewables.

Support schemes for offshore wind farms under the OBZ market model

The consultation looks at ways of compensating offshore wind farms for lower revenues under the OBZ model.  Even if an offshore wind farm connected to an MPI were eligible for a Contract for Difference (CfD) as currently designed (and this is under consideration), the top-up payment to the "strike price", which is benchmarked against the GB wholesale market, could be insufficient, potentially resulting in a gap in revenue.

Various options are being considered to mitigate this risk, including extending the CfD scheme to offshore wind farms connected to MPIs and, as an alternative to CfD, compensating offshore wind farms for lower revenues by redistributing congestion income between the MPI and the offshore wind farm.

Look out for the response to the Considerations for future CfD rounds consultation, due any time now, which should deal with some of the revenue issues in an OBZ scenario.