Electricity Interconnector Licence

Source: Ofgem (Gas and Electricity Markets Authority) Legal basis: Electricity Act 1989, s.6(1)(e) Consolidated to: 01 October 2024 Canonical: ~/knowledge/sources/ofgem/licences/electricity-interconnector-slc.md

What it is

The Electricity Interconnector Licence is the regulatory licence required to operate, or participate in the operation of, an electricity interconnector between GB and another country. Section 6(1)(e) of the Electricity Act 1989 prohibits anyone from participating in the transmission of electricity by means of an interconnector without a licence granted by Ofgem.

The licence creates the primary regulatory relationship between Ofgem and the interconnector owner. Standard Conditions (Part II) apply to all holders. Where the cap and floor regime has been awarded, the Authority issues separate directions activating Sections G and H of the SLCs, and the licensee's individual special conditions contain the operative financial parameters.

The SLCs were consolidated to 01 October 2024. The key structural additions since the original licence are Sections G and H, added to implement the cap and floor regime from 2014 onwards.

Who holds one

GB interconnectors and their licence status as at early 2026:

Window 3 projects (LirIC, MaresConnect, Tarchon) are approved in principle but not yet operational.

The cap and floor regime

The cap and floor regime is the regulated route for new electricity interconnector development in GB. Ofgem introduced it in August 2014 to unlock investment by reducing developer exposure to electricity market price risk.

How it works: - Revenues are measured annually (or every five years in the default design) against a floor and a cap over a 25-year Regime Duration - If revenues fall below the floor: the GB ISOP (National Energy System Operator from October 2024, previously National Grid ESO) makes a top-up payment to the licensee. This cost is socialised via Transmission Network Use of System (TNUoS) charges - effectively a consumer-funded underwrite of the floor - If revenues exceed the cap: the licensee pays the excess back to the GB ISOP, which reduces TNUoS charges for transmission users

How the levels are set: The floor and cap are set using a Regulated Asset Base approach. Building blocks are: capital expenditure, operating expenditure, decommissioning costs, tax, and allowed return. - Floor: cost recovery plus a low return equal to a cost of debt index (iBoxx), applied to 100% of Regulatory Asset Value - Cap: equity return rates estimated via a Capital Asset Pricing Model (CAPM), applied to 100% of Regulatory Asset Value

Developers may request variations to the default design (for example, adjustments to support specific financing structures) if they can demonstrate these are in GB consumers' interests.

Three application windows: - Nemo Link (pilot, 2013) - Window 1 (2014-2018): NSL, FAB Link, IFA2, Viking Link, Greenlink - Window 2 (2018-2022): GridLink, NeuConnect, NorthConnect (NorthConnect regime withdrawn 2022) - Window 3 (2022-2023): LirIC, MaresConnect, Tarchon

Total approved capacity (excluding NorthConnect): approximately 12.05GW across 12 projects.

Post-Brexit note: Before Brexit, interconnectors in the EU internal energy market operated under implicit capacity allocation - the interconnector capacity was allocated automatically within coupled electricity markets. Since IP completion day (31 January 2020), GB is no longer part of coupled markets. All GB interconnectors now participate in explicit capacity auctions via JAO and individual allocation platforms. The cap and floor regime adapted to this change: revenues from explicit auctions are measured against the cap and floor levels, and the building-block-based financial model is not dependent on implicit allocation.

Key obligations on licence holders

Under the SLCs, all electricity interconnector licensees are required to:

• Be party to the BSC and CUSC and comply with their applicable provisions (Condition 3)
• Comply with the Grid Code and applicable Scottish grid code (Condition 3)
• Furnish Ofgem with information required for its regulatory functions (Condition 4)
• Submit a Use of Revenues Statement annually by 31 January showing that congestion revenues were applied in accordance with Article 19 of the retained EU electricity regulation (Condition 9)
• Maintain an Ofgem-approved Charging Methodology for third party access, reviewed at least annually, and published at least 28 days before taking effect (Condition 10)
• Offer access terms to any person who applies; provide reasons for any refusal within 28 days (Condition 11)
• Maintain Ofgem-approved Access Rules covering: capacity calculation, auction procedures, congestion management, curtailment arrangements, and ancillary services (Condition 11A)
• Keep separate internal accounts for interconnection, generation, transmission, distribution and supply activities (Condition 6)
• Maintain adequate resources (management, financial, technical) to operate the interconnector efficiently, securely and reliably (Condition 19)
• Not discriminate between users and not cross-subsidise related undertakings in supply or distribution (Condition 20)
• Not use commercially sensitive third-party information to benefit related undertakings (Condition 21)
• Notify Ofgem of any events affecting certification eligibility, including third-country control changes (Condition 22)

Cap-and-floor licensees additionally must: - Report Specified Information as required by Cap and Floor Regulatory Instructions and Guidance (Condition 25) - Provide annual ICFt estimates to the GB ISOP and Ofgem for incorporation in TNUoS calculations (Condition 26) - Notify Ofgem of Pre-Operational Force Majeure events causing delay to the Regime Start Date (Conditions 26A/26B) - Submit proposed ICP term values covering CACM-related costs for Ofgem determination (Condition 27)

Relationship to EU network codes post-Brexit

Several EU network codes and regulations are retained in the SLCs as "frozen" retained EU law:

• EU Regulation 2019/943 ("the Regulation"): Internal market for electricity - governs TPA obligations (Articles 6, 19) and congestion revenue use (Article 19). Retained via SI 2020/1006. The SLC TPA obligations in Sections C and D directly implement Article 19 and related provisions.

• CACM Regulation (EU 2015/1222): Governs Single Day-Ahead Coupling and Single Intraday Coupling. Section H of the SLCs creates the mechanism for recovering interconnector costs related to maintaining post-Brexit access to SDAC/SIDC processes (ICP term).

• HVDC Network Code (EU 2016/1447): Not referenced in the SLCs but cross-applies via the Grid Code requirements in Condition 3.

• Directive 2009/72/EC: The internal electricity market directive is retained for definitional purposes (particularly "relevant system operator").

The CACM-based market coupling that underpinned pre-Brexit interconnector operation (implicit capacity allocation via price coupling of regions) no longer applies to GB. GB now uses explicit auctions. This does not change the licence obligations materially, but it affects how cap and floor revenues are generated.

Cross-references

• Electricity Act 1989, s.6(1)(e): licence authority
• Electricity Act 1989, s.10B-10O: certification regime
• Energy Act 2023, s.162: GB ISOP designation
• Ofgem Cap and Floor Regime Handbook (December 2024, OFG1164)
• BSC (Balancing and Settlement Code)
• CUSC (Connection and Use of System Code)
• Grid Code
• TNUoS charging (how cap/floor payments are socialised via transmission charges)
• JAO (Joint Allocation Office): operator of explicit capacity auctions for GB interconnectors post-Brexit