Initial Project Assessment of the Window 3 Interconnectors - decision

What changed

Ofgem has issued its Initial Project Assessment (IPA) decision for Window 3 of the cap and floor regime, the third application round for new GB electricity interconnectors. Of the seven projects that applied between September 2022 and January 2023, three have been granted a cap and floor in principle: MaresConnect (0.75GW to the Republic of Ireland), LirIC (0.7GW to Northern Ireland), and Tarchon (1.4GW to Germany). The other four projects, Aminth (Denmark), AQUIND (France), Cronos (Belgium), and NU-Link (Netherlands), have not been taken forward.

The decision follows Ofgem's March-May 2024 consultation on its minded-to position and is accompanied by a NESO System Impacts Analysis. Successful projects now move to the Final Project Assessment stage, where the substantive cap and floor parameters are set. The decision is "in principle", meaning the regulatory support is conditional on the projects clearing the remaining stages and securing the necessary consents.

What this means in practice

The cap and floor regime is a consumer-backed revenue guarantee. Interconnector developers earn merchant income from price arbitrage between GB and the connected market, but their revenues are capped at an upper level (excess returned to consumers via TNUoS) and floored at a lower level (shortfall topped up by consumers via TNUoS). For successful projects this collapses the equity risk of merchant interconnector investment and is the reason the regime has delivered roughly 10GW of operating capacity since 2014. The cost sits on consumer bills through transmission charges. This is an administered revenue mechanism, not a market outcome.

The three successful projects add 2.85GW of in-principle capacity. The geographic mix is notable. Two of the three connect to the island of Ireland (LirIC to Northern Ireland, MaresConnect to the Republic), where price differentials, system stress, and the all-island Single Electricity Market dynamics differ materially from the continental routes. The third, Tarchon, is the only continental link in the successful set and at 1.4GW is the largest. Ofgem's framing is that these three are "likely to be in the interest of GB consumers" after considering the NESO system impacts analysis. The four rejected projects, between them, would have added a further 6GW pointing at Denmark, France, Belgium, and the Netherlands.

For developers of the rejected projects, the IPA failure is close to terminal under this regime. AQUIND in particular has been pursuing a GB-France link for the better part of a decade and faces a planning consent question on top of the regulatory one. Cronos, NU-Link, and Aminth lose their route to consumer-backed revenue support for this window. They can in principle apply to a future window, but there is no committed Window 4 timetable.

For consumers, the immediate effect is none. The cap and floor liability only crystallises when projects are operating, which is several years away even for the fastest. The longer-run effect is that GB's interconnector portfolio will skew further toward Irish and German links rather than French, Dutch, and Belgian. This matters for the merit order: which neighbouring system is on the other end of the cable changes both the price differential GB sees and the security-of-supply contribution.

The methodology question is live. Ofgem has flagged that it conducted "further analysis to address stakeholder feedback" between the May 2024 minded-to and this decision. That further analysis is what shifted the calculus on which projects clear the GB consumer-interest test. The detail sits in the decision document and the NESO system impacts analysis.

What happens next

The three successful projects move to Final Project Assessment. This is where Ofgem sets the project-specific cap and floor levels, the regulatory period (typically 25 years), and the operational parameters. The financial parameters and cap rate consultations Ofgem is running in parallel feed directly into the FPA stage. Developers will need to demonstrate route to consent, financing, and construction readiness.

Watch for three things. First, the FPA cap and floor parameters for MaresConnect, LirIC, and Tarchon, which will determine the consumer cost envelope. Second, whether any of the rejected developers challenge the IPA decision, AQUIND has previously been litigious on planning grounds. Third, whether DESNZ and Ofgem signal a Window 4. The cap and floor regime is the only committed mechanism for new GB interconnector investment, and a six-year gap between Window 2 (2014) and Window 3 (2022-23) is the precedent.

The broader question the IPA decision does not answer is whether consumer-backed revenue guarantees remain the right instrument for interconnector investment given the maturity of the technology and the volume of capacity already operating. Ten years in, the regime is still treating each window as a one-off administrative exercise rather than moving toward a routine market-based allocation. That is a Window 4 question, not a Window 3 one.