Ofgem to set final cap & floor levels for North Sea Link after post-construction review

Ofgem to set final cap and floor levels for North Sea Link

UK energy market regulator Ofgem is set to carry out a post-construction review of the North Sea Link (NSL) after which it will set the final cap and floor levels for the project connecting the UK and Norway.

The North Sea Link

Ofgem granted National Grid North Sea Link (NGNSL) a cap and floor regime with respect to the NSL interconnector in March 2015 and set the preliminary cap and floor levels in July 2017 after the assessment of the final project assessment (FPA).

The NSL project has reached the post-construction review (PCR), the final assessment stage of the regime, where Ofgem determines the value of the post-construction adjustment (PCA) terms and sets the final cap and floor levels.

At this stage, the aspects of the cost assessment that were not fixed at previous stages are revisited, and the efficiency of responses to events that have materialized during construction is assessed. Then the value of the PCA terms is determined, which adjusts the preliminary cap and floor levels to take into account the final view of the project’s costs.

“This consultation sets out our minded-to position on NGNSL’s PCR, in particular our views on the proposed values for the PCA terms submitted by NGNSL and proposed final cap and floor levels for the project,” Ofgem said.

The preliminary cap and floor levels for NGNSL, as specified in its license, are £89.85 million and £50.9 million each year (in 2015/16 prices).

NGNSL proposed upward adjustments to the preliminary cap and floor levels of £6.4 million and £9.5 million (in 2015/16 prices) respectively. These adjustments are based on the project’s updated costs primarily for operating expenditure (OPEX) due to rises in insurance costs but also due to finalization of replacement expenditure (REPEX) costs and an increase in the decommissioning scope.

Based on its assessment, Ofgem said it was minded to set the combined capital expenditure (CAPEX) and development expenditure (DEVEX) value at £510.5 million, a decrease of £3.3 million from NGNSL’s PCR submission, and the OPEX value at £741.5 million, a reduction of £3.7 million from NGNSL’s PCR submission.

“We are minded to determine that the proposed PCA values submitted by NGNSL should be adjusted downward by £3.1 million and £1.2 million and determined as £3.3 million and £8.3 million. Our minded-to-PCA values, after the downward adjustment, generate a final cap level of £93.1 million and a final floor level of £59.2 million in 2015/16 prices,” Ofgem reported.

Alongside the consultation on the PCR, Ofgem is also consulting on related changes to the special conditions of NGNSL’s interconnector license and is seeking views on updated Cap and Floor Financial Models 1 and 2 and associated handbooks for NGNSL.

The consultation will close on 7 August. Subject to stakeholder responses, the aim is to make the final decision on the PCR and on the other elements in September.

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North Sea Link runs between the Suldal municipality in Norway and the Newcastle area in England.

The 720-kilometer interconnector was completed in early June 2021 and on 18 June transmission between Norway and the UK was tested for the first time. The €1.6 billion project was commissioned on 1 October 2021.

A few months ago, Statnett decided to reduce the maximum capacity on the 1,400 MW interconnector in order to make a balance for import and export.