OFTO projects and cap and floor interconnectors: Interest During Construction (IDC) rates for 2026 to 2027

What changed

Ofgem has set the Interest During Construction rates for 2026–2027, effective for projects reaching Final Investment Decision in that window. The OFTO rate falls to 9.55% pre-tax nominal, down 19 basis points from 9.74% in 2025–2026. The Window 3 cap and floor interconnector rate rises to 5.49% vanilla real-CPIH, up 12 basis points from 5.37%. The reference date for both calculations is 31 January 2026.

The two rates move in opposite directions because they measure different things. The OFTO rate is pre-tax nominal — it includes inflation and tax. The interconnector rate is vanilla real-CPIH — it strips out inflation and blends debt and equity without a tax wedge. A falling nominal rate alongside a rising real rate is consistent with lower inflation expectations and modestly higher real financing costs.

What this means in practice

For OFTO projects: IDC compensates the transmission owner for the cost of capital tied up during construction, before the asset earns revenue. At 9.55%, a project spending £500m over a three-year build accumulates roughly £75–80m in IDC costs, which get folded into the regulated asset value. That asset value determines the annual revenue the OFTO collects from consumers via TNUoS charges for 20–25 years. The 19bp reduction trims this slightly — perhaps £2–3m on a £500m project — but the effect compounds over the revenue term.

The projects affected are the next tranche of offshore wind transmission links. These are the assets that connect offshore wind farms to the onshore grid. The developer builds the link, Ofgem runs a competitive tender, and the winning bidder (the OFTO) takes ownership and earns a regulated return. IDC is one input to the price the winning bidder pays, and therefore to the revenue consumers fund.

For Window 3 interconnectors: The cap and floor regime guarantees interconnector developers a minimum revenue (the floor) and caps their upside (the cap). IDC feeds into the capital cost base that determines both thresholds. At 5.49% real, the construction cost allowance is marginally more generous than last year's 5.37%. This benefits developers of projects like Greenlink, NeuConnect, and any other Window 3 interconnectors still approaching FID.

The 12bp increase in the real rate reflects genuinely higher real financing costs. Gilt yields have risen, credit spreads for infrastructure debt have widened modestly, and the cost of equity for regulated assets has edged up. Ofgem's methodology — which benchmarks against market data at the reference date — captures this mechanically.

For Windows 1 and 2: Outstanding Window 1 projects will have IDC set after their FID date under current policy. Window 2 projects follow the methodology from the 2023–2024 decision letter. These are legacy provisions for projects that have not yet reached financial close — a shrinking pool, but the distinction matters for any developer still in the pipeline.

Who pays: Consumers, through TNUoS charges. IDC costs are embedded in the regulated revenue allowances for both OFTOs and interconnectors. They are not separately visible on bills, but they are real costs that feed into the transmission charges paid by suppliers and passed through to end users. The amounts are modest relative to total TNUoS — tens of millions across the portfolio, not billions — but they accumulate across every offshore transmission and interconnector asset built under these regimes.

What happens next

This is a final decision, not a consultation. The rates apply immediately to any project reaching FID in 2026–2027. No further action is required from developers — the rates are set and will be applied mechanically when projects reach financial close.

The next IDC decision will come in spring 2027 for 2027–2028 rates, following the same methodology with an updated reference date. Developers planning FID timing should note that the rate is locked at the point of FID, not at the point of application or construction start. A project that delays FID into the next window gets the next year's rate, for better or worse.

Two related processes to watch. First, Ofgem's broader OFTO regime is under pressure as offshore wind scales up — the Tender Round 11 and beyond will test whether the competitive process still delivers value, or whether construction costs and financing terms have shifted the economics. Second, the cap and floor regime itself is due for review as Window 3 projects progress. The floor in particular matters: if interconnector revenues fall below the floor (which recent price convergence between GB and continental markets makes more likely), consumers pick up the difference. The IDC rate determines how high that floor sits.

The decision document is available on Ofgem's website. It runs to 10 pages and details the methodology updates, market data inputs, and the rationale for each parameter choice.