Initial Project Assessment of the third cap and floor window for electricity interconnectors

What this is about

Ofgem is deciding which new electricity interconnectors should receive the cap and floor regulatory framework — a consumer-backed revenue guarantee that underwriters a minimum return (the floor) while capping upside (the cap). Seven projects totalling 8.85 GW applied during the third application window (September 2022 to January 2023). This Initial Project Assessment is Ofgem's minded-to position on which of those seven should proceed.

The cap and floor regime has funded most of GB's interconnector buildout over the past decade. The regime works because it de-risks private capital: developers get a guaranteed revenue floor funded by consumers through transmission charges if market revenues fall short, in exchange for surrendering revenues above the cap back to consumers. It is not a subsidy in the conventional sense — in good years, consumers benefit from the cap. But in bad years, consumers underwrite the floor. The asymmetry of risk is the point: it exists to get interconnectors built that would not otherwise attract financing.

What makes Window 3 different is a fundamental shift in what interconnectors are for. When the regime launched, the case was straightforward: import cheap European power. GB prices were higher than continental prices, so interconnectors saved consumers money. That arithmetic has changed. With growing renewable penetration on both sides of the channel, interconnectors increasingly serve as flexibility assets — exporting surplus wind to neighbours, importing when GB is short, smoothing the volatility of a renewables-heavy system. Ofgem has accordingly expanded the assessment framework beyond pure socioeconomic welfare (the cost-benefit test used in earlier windows) to include security of supply and decarbonisation benefits. It has also placed more weight on deliverability, requiring projects to demonstrate they can be operational before the end of 2032.

The seven applicants

Aminth — 1.4 GW to Denmark. A new corridor. Denmark's wind surplus and participation in the Nordic hydro system make it a potentially valuable balancing partner, though the subsea route is long and expensive.

AQUIND — 2 GW to France. The largest project and the most controversial. AQUIND has faced years of planning objections, a Secretary of State refusal, and sustained local opposition (the "Let's Stop AQUIND" campaign submitted a formal response). A second GB-France link after IFA2, competing with the existing ElecLink and the already-consented GridLink.

Cronos — 1.4 GW to Belgium. Another new corridor. Belgium's nuclear phase-out and gas dependence create an interesting dynamic — GB could be exporting to Belgium as often as importing.

LirIC — 0.7 GW to Northern Ireland. The only project connecting to the single electricity market on the island of Ireland via Northern Ireland. Small capacity but addresses a genuine security-of-supply gap for NI, which has limited interconnection to GB.

MaresConnect — 0.75 GW to the Republic of Ireland. Direct to the Irish SEM. Similar strategic rationale to LirIC but a different route and developer.

NU-Link — 1.2 GW to the Netherlands. Adds to the existing BritNed link. The Netherlands is a significant gas and offshore wind market, and the Dutch are building out their own North Sea capacity rapidly.

Tarchon — 1.4 GW to Germany. A new direct link to Europe's largest electricity market. Germany's simultaneous nuclear exit and coal phase-out, combined with massive renewable buildout, creates large price differentials that an interconnector could arbitrage. Tarchon ran a notable public campaign in support of its application.

The assessment framework shift

The expanded framework is the most consequential element of this consultation. In Windows 1 and 2, the primary test was socioeconomic welfare — does this interconnector reduce system costs for GB consumers? That test favoured high-volume links to markets with structurally lower prices. It was a good test when GB was a net importer.

In a system heading toward 50 GW+ of offshore wind, the question changes. GB will increasingly have periods of massive surplus generation and periods of tight supply. The value of an interconnector is no longer "can it bring in cheap power?" but "can it absorb exports when GB is long, provide imports when GB is short, and do so reliably across different weather patterns?" This is why Ofgem added security of supply and decarbonisation criteria alongside the traditional welfare test, and why deliverability — can you actually build this by 2032? — now carries more weight.

The shift matters because it changes which projects look attractive. A link to a market with correlated wind patterns (similar weather systems) is less valuable for flexibility than a link to a market with uncorrelated patterns or dispatchable backup. Denmark's hydro access, Germany's residual thermal fleet, and Ireland's different wind profile all score differently under the new framework than they would under pure welfare.

Who pays and how

The consumer exposure is real but bounded. Under the cap and floor:

- If interconnector revenues exceed the cap: the surplus is returned to consumers via lower transmission charges. Consumers benefit. - If revenues fall between the cap and floor: the developer keeps the revenue. No consumer impact. - If revenues fall below the floor: consumers make up the difference through higher transmission charges. Consumers pay.

The floor payment is the risk. It crystallises when interconnector utilisation is low or when price differentials between connected markets are small. In a world of increasing renewable penetration on both sides of the link, price convergence during windy periods could compress interconnector revenues significantly. The question is whether the flexibility and security-of-supply value — which is hardest to monetise through market revenues alone — justifies the consumer-backed floor.

At 8.85 GW of total applications, the potential consumer exposure is substantial. Even if only a subset is approved, each GW of floor-backed interconnection represents a contingent liability on consumer bills. Ofgem's job at IPA is to select projects where the probability of floor payments is low relative to the system benefits.

Deliverability as a filter

The 2032 operational deadline is doing real work here. Interconnector projects require planning consent, seabed leases, grid connections at both ends, converter station construction, and cable manufacturing slots — all of which are constrained. AQUIND's planning history alone illustrates how difficult this path is. Ofgem is using deliverability as a de facto filter to avoid granting cap and floor to projects that will sit in development for a decade while consuming regulatory attention and grid queue capacity.

This is sensible. A cap and floor allocation that does not result in an operational interconnector by the early 2030s has no value to consumers but does impose opportunity costs — both on the grid connections those projects hold and on alternative projects that might have been more deliverable.

What to watch

This consultation is now closed with a decision issued. The decision document — "Initial Project Assessment of the Window 3 Interconnectors - decision" — determines which projects received cap and floor in principle. The next stages are Final Project Assessment (detailed cost and revenue modelling) and then financial close.

The strategic question remains: is the cap and floor the right mechanism for interconnectors in a renewables-dominated system, or should interconnectors compete merchant — earning what the market pays, without consumer underwriting? Every GW of floor-backed capacity is a GW where the consumer, not the developer, bears the downside risk of low utilisation. The regime was designed when interconnectors were clearly welfare-enhancing. Whether that assumption holds when GB is as likely to be exporting as importing is the unresolved question that sits behind Window 3 and every window that follows.

How to respond