UK Interconnector Regulatory Framework[Draft]

Post-Brexit, the UK no longer participates in ACER or ENTSO-E governance. NESO engages bilaterally with ENTSO-E for system planning coordination. UK projects may still appear in the TYNDP through cooperative information sharing.

Introduced in August 2014, the cap-and-floor is Ofgem's bespoke regulatory framework for electricity interconnectors. It sits between full merchant risk and full cost-of-service regulation, designed to encourage investment while protecting consumers.

Projects go through a multi-stage assessment:

Alongside Window 3, Ofgem approved two OHA pilot projects (November 2024): LionLink (1.8 GW, Netherlands) and Nautilus (1.4 GW, Belgium). These combine interconnection with offshore wind transmission. Regulatory framework: RAB-based for the offshore converter platform + narrow cap-and-floor for the cable element. Developers estimate combined savings of \u00A31.2bn in capacity mechanism payments for 2032 (developer estimate, not an Ofgem-adopted figure).

As an alternative to cap-and-floor, developers can seek exemptions from certain regulatory requirements (historically under EU Regulation 714/2009 Article 17, now retained in UK law). Under this route, developers bear full upside and downside — no consumer underwriting.

The merchant route has diminished in practical viability post-Brexit. Many European TSOs cannot participate in merchant projects, and the TCA preserves existing exemptions but new applications follow a modified UK domestic process. Ofgem developed cap-and-floor specifically to overcome the limitations of this approach.

In England and Wales, interconnectors above 132 kV are classified as Nationally Significant Infrastructure Projects (NSIPs) under the Planning Act 2008 and require a Development Consent Order (DCO). In Scotland, energy infrastructure is consented under section 36 of the Electricity Act 1989 plus marine licensing.

UK interconnectors are typically developed as commercial joint ventures between transmission operators/developers, not through formal intergovernmental treaties. However, government-level engagement is important for securing regulatory approvals in both countries and coordinating seabed access.

The UK re-engaged with NSEC via an MoU (December 2022). At the January 2026 North Sea Summit, leaders reaffirmed 300 GW offshore renewables target, with a third through collaborative cross-border projects. UK OHA projects (LionLink, Nautilus) are part of this cooperation.

NESO (established 2024, succeeding National Grid ESO) is responsible for system planning and grid connections. The Network Options Assessment (NOA) for Interconnectors recommended 29 GW total GB-Europe capacity by 2036 but has been suspended pending the CSNP.

Interconnectors participate in the GB Capacity Market but are "de-rated" — their contribution is discounted to reflect import availability risk during stress events.

The primary revenue source for interconnectors is congestion rent — the electricity price differential between connected markets. Revenue increases with the average price spread and volatility.

The UK no longer participates in the EU PCI/PMI process. UK projects are ineligible for PCI designation or associated benefits (accelerated permitting, CEF funding). The revised TEN-E Regulation (2022) introduced Projects of Mutual Interest (PMI) for third countries, but no UK-EU bilateral agreement exists for this purpose.

Title VIII of the Trade and Cooperation Agreement provides a framework for cross-border electricity trading. Annex ENER-4 sets out Multi-Region Loose Volume Coupling (MRLVC) requirements — but MRLVC is still not implemented as of March 2026. The April 2022 deadline was missed. Current trading uses explicit auctions, which are less efficient than previous EU market coupling. TCA energy provisions extended to 31 March 2027.

Estimated cost of current arrangements vs. previous: ~\u00A3560m/year in additional generation costs (~1.5% of total).

The Energy Act 2023 introduced MPIs as a new asset class with a separate electricity licence, defined as subsea cables combining interconnection with offshore transmission. MPI holders must be certified by Ofgem for ownership unbundling. The enduring regime is still under development, informed by the OHA pilot scheme. Ofgem preferred "implicit trading with offshore bidding zones" after consultation.