Future strategic approach to interconnection

What this is about

Ofgem is overhauling how interconnectors get built in GB, shifting from developer-led merchant models to centrally planned state-directed development. Under current arrangements, private developers propose interconnector projects, secure planning consent, bear commercial risk, and recover costs through merchant revenues from trading electricity across borders. Ofgem now proposes that NESO identifies strategic interconnector needs through system planning, with government setting delivery and financing arrangements for these strategically identified projects.

This marks a fundamental shift from market-driven infrastructure development to state planning. The move reflects concerns that the current merchant model may not deliver interconnection aligned with broader system needs, particularly as GB transitions to net zero and requires more strategic coordination between electricity infrastructure, renewables deployment, and system security. However, it also represents a significant expansion of state control over energy infrastructure investment, socialising commercial risks that were previously borne by private developers.

Options on the table

Strategic Planning-Led Delivery Approach

Rather than developers identifying and proposing interconnector projects based on commercial opportunity, NESO would identify strategic interconnector needs through its system planning processes. This would integrate interconnector development with broader electricity system planning, renewable energy deployment, and system security requirements. Government would then determine the specific delivery model for each strategically identified project.

This approach promises better coordination between interconnection and wider system needs, potentially avoiding situations where merchant interconnectors are built in locations that make sense commercially but not strategically. However, it removes the market discovery mechanism that allows developers to identify efficient connection opportunities, potentially missing commercially viable projects that don't align with central planning assumptions. Developers lose the ability to initiate projects, while consumers gain interconnectors that better serve system-wide objectives but may pay more for projects that wouldn't survive commercial scrutiny.

Regulated Financing Model

Instead of merchant developers bearing commercial risk and recovering costs through electricity trading revenues, interconnectors would be funded through regulated charges paid by consumers. This socialises investment risk while providing more predictable funding for projects deemed strategically necessary.

The regulated model ensures funding for projects that serve strategic purposes but may not be commercially viable under merchant arrangements. It provides greater investment certainty and could accelerate deployment of interconnection capacity needed for system security and net zero. However, it transfers commercial risk from private developers to consumers, who will pay for interconnectors through network charges regardless of whether the projects deliver expected benefits. This removes market discipline on investment decisions and could lead to overinvestment in interconnection if central planners lack the commercial incentives to optimise project selection and design.

Questions being asked

Future Delivery Approach

- Views on proposals for future delivery approach for strategically identified interconnectors (whether NESO strategic planning should replace developer-initiated projects as the primary mechanism for identifying new interconnection needs)

Future Financing Approach

- Views on proposals for future financing approach for strategically identified interconnectors (whether regulated consumer funding should replace merchant developer financing for interconnectors identified through strategic planning)

How to respond

Submit responses by 1 May 2026 by emailing cap.floor@ofgem.gov.uk. Ofgem particularly welcomes responses from developers, investors, system operators, national regulatory authorities, and consumer representatives.