Initial Project Assessment of the Offshore Hybrid Asset pilot projects

What this is about

Ofgem is assessing whether two Offshore Hybrid Asset (OHA) pilot projects — LionLink to the Netherlands and Nautilus to Belgium — should be awarded a regulatory regime. OHAs are a new category of infrastructure that combines two functions currently built and regulated separately: offshore wind transmission (radial connections from wind farms to shore) and interconnection (cross-border links for power trading). Instead of building two sets of cables, an OHA routes both functions through shared infrastructure.

The two projects emerged from an application window that closed in October 2022. LionLink proposes a 1.8 GW connection to a Dutch offshore converter platform. Nautilus proposes a 1.4 GW connection to Belgium's Modular Offshore Grid 2 (MOG2) energy island. Together they represent 3.2 GW of cross-border capacity that would also serve as transmission for offshore wind. This is the Initial Project Assessment (IPA) — the stage where Ofgem decides whether the needs case for GB consumers is made and whether to proceed with a regulatory framework. The consultation sets out Ofgem's minded-to position on both projects. Because OHAs are classified as Non-Standard Interconnectors, they sit outside the standard cap-and-floor regime and require bespoke regulatory treatment.

The consultation deadline was extended from 30 April to 31 May 2024 (now closed, with a decision issued) after stakeholders requested additional data from the supporting NGESO system impact analysis and Arup market modelling reports. That extension itself signals the complexity: respondents needed time to interrogate the cost-benefit numbers before forming a view.

`★ Insight ─────────────────────────────────────` OHAs sit at the intersection of three distinct regulatory regimes: the OFTO (Offshore Transmission Owner) framework for wind connections, the cap-and-floor regime for interconnectors, and the emerging Multi-Purpose Interconnector (MPI) pilot framework. The IPA is not just a needs-case assessment — it is effectively a decision about which regulatory category these assets belong to, which determines who bears the costs and who captures the revenues. `─────────────────────────────────────────────────`

The economics

The core proposition is infrastructure efficiency. A radial offshore wind connection moves power one way: from turbines to shore. An interconnector moves power two ways: between GB and a connected market, depending on price differentials. An OHA does both on the same cable. The potential savings come from avoiding duplicate converter stations, cable routes, and seabed corridors. The potential complications come from the fact that interconnection revenues and wind transmission costs are recovered through entirely different mechanisms with different risk profiles.

For GB consumers, the needs case turns on three questions. First, does the combined asset cost less than building separate radial and interconnector links? Second, does cross-border trading on the interconnector element deliver net welfare benefits (lower wholesale prices through access to cheaper generation abroad)? Third, do the system benefits — reduced curtailment of offshore wind, improved security of supply through import capacity — justify the costs?

The Arup market modelling and NGESO system impact analysis underpin Ofgem's assessment of these questions. The nine consultation responses — from regulators (Belgian CREG, Belgian Federal Public Service), system operators (NGESO, NGV/Elia), generators (EDF), and local opposition groups (Suffolk Energy Actions Solutions, Walberswick Against LionLink) — indicate the range of interests at stake. Belgian counterparts have a direct stake in cost-sharing arrangements. EDF's interest likely relates to the interaction with its nuclear and offshore wind portfolio. Local opposition focuses on onshore impacts — cable landfall, substations, construction disruption.

What matters

Cost allocation between countries. An OHA serves two nations. The wind transmission element primarily benefits GB (connecting GB-consented offshore wind). The interconnector element benefits both GB and the connected country through trade. How costs are split between GB consumers and Dutch/Belgian consumers is not a technical question — it is a negotiation with significant distributional consequences. If GB consumers bear the full infrastructure cost but interconnector revenues flow partly to foreign market participants, the needs case weakens.

Regulatory classification determines the revenue model. OFTOs earn a regulated revenue stream funded through TNUoS charges — effectively a cost passed to all GB electricity consumers. Interconnectors under cap and floor earn merchant revenue from cross-border price differentials, with a floor guaranteeing minimum returns and a cap limiting upside. An OHA that is classified primarily as an interconnector exposes consumers to different risks than one classified primarily as transmission. The "Non-Standard Interconnector" label suggests Ofgem is leaning toward the interconnector framework, but with bespoke modifications.

Interaction with offshore wind buildout. LionLink and Nautilus are not standalone interconnector projects. They are designed to integrate with specific offshore wind developments. If those wind farms are delayed or downsized — not an unlikely scenario given the state of offshore wind economics in 2024 — the hybrid asset loses its hybrid character and becomes an expensive interconnector with surplus capacity. The needs case assumes both functions operate as planned.

Precedent value. These are pilots. The regulatory framework developed here will shape how future OHAs — and the broader category of Multi-Purpose Interconnectors — are treated. Getting the cost allocation, revenue model, and risk sharing wrong on these two projects will embed those errors into the framework for subsequent projects. The stakes are higher than the 3.2 GW of capacity would suggest.

`★ Insight ─────────────────────────────────────` The OHA concept is a direct response to the North Sea becoming congested with competing infrastructure claims — wind arrays, interconnectors, carbon storage pipelines, hydrogen transport. Coordination through hybrid assets is an engineering solution to what is fundamentally a property-rights problem: who has the right to use the seabed corridor, and how should the costs of shared use be allocated? The regulatory framework is doing the work that a market in seabed rights would do if one existed. `─────────────────────────────────────────────────`

Key tensions

Efficiency versus complexity. Shared infrastructure costs less to build but is harder to regulate. Two separate assets (radial link + interconnector) have clean regulatory boundaries. A hybrid asset requires Ofgem to determine what proportion of revenue comes from wind transmission versus interconnection, how to allocate costs when the asset is doing both simultaneously, and who bears the risk if one function underperforms. The efficiency savings may be consumed by regulatory overhead.

GB consumer interest versus bilateral negotiation. Ofgem's statutory duty is to protect GB consumers. But an OHA requires agreement with a foreign regulator (ACM in the Netherlands, CREG in Belgium) on cost sharing and market access. The Belgian and Dutch responses to this consultation indicate active engagement from those regulators. Ofgem cannot unilaterally set terms — it must negotiate. That creates a risk that GB consumer interests are traded against diplomatic considerations.

Pilot framing versus commercial reality. Calling these "pilots" suggests a learning exercise. But LionLink and Nautilus are multi-billion-pound infrastructure projects with 25+ year asset lives. The developers (National Grid Ventures for both) are making investment decisions now based on the regulatory framework Ofgem establishes. "Pilot" implies flexibility and iteration; the capital commitments involved demand certainty.

How to respond

This consultation closed on 31 May 2024 (extended from 30 April). Ofgem has issued its decision: *Initial Project Assessment for the Offshore Hybrid Asset Pilot Projects — decision* (linked from the consultation page).

Responses were submitted to:

- Contact: Nick Pittarello - Email: cap.floor@ofgem.gov.uk

Nine responses were published, from CREG, EDF, NGESO, the Belgian Federal Public Service, NGV/Elia (two responses covering Nautilus and LionLink separately), Suffolk Energy Actions Solutions, and Walberswick Against LionLink (two responses).

The supporting documents — Arup's market modelling report, multi-criteria assessment, NGESO's system impact analysis, and the Arup data workbook — are available on the consultation page for anyone reviewing the decision or preparing for future OHA/MPI proceedings.