This is an extract from a recent briefing by Clifford Chance titled “Multi-Purpose Interconnectors: Enabling the Transmission of Clean Energy in the UK”
As the UK strives towards its ambitious target of 50GW of offshore wind capacity by 2030, large-scale investment will be required in the offshore wind industry. It is increasingly clear that point-to-point connections between offshore wind farms and the grid will not be efficient for an expansion of this magnitude. Coupled with a realisation that the plentiful supply of renewable energy within the North Sea will be a crucial part of many European countries’ clean energy strategies, there is now an increased focus, both within the UK and elsewhere, on offshore co-ordination of energy transmission and rationalisation of the connection framework.
To help address these issues, the Department for Business, Energy and Industrial Strategy (BEIS) and UK energy regulator, Ofgem, have recently issued consultation responses setting out their proposals on the regulatory framework for multi-purpose interconnectors (MPIs). MPIs are assets that combine the transmission of electricity generated by (and direct connection to) offshore wind farms with cross-border interconnection between the power grids of nearby countries.
At the EU level, there is no specific legal or regulatory framework addressing the development of MPIs. Nevertheless, both the European Commission and the European Network of Transmission System Operators for Electricity (ENTSO-E) in various studies have highlighted that multi-purpose projects (such as transmission of power from offshore wind and cross-border interconnectors) can facilitate the evolution of offshore transmission infrastructure. They are also an essential first step towards the eventual construction of more complex ‘meshed’ grid structures, which could allow clusters of offshore wind farms to be connected to offshore hubs that connect to each other and then to various onshore terminals.
What are the benefits of MPIs?
Currently, offshore wind farms and interconnectors operate as standalone assets. However, MPIs can play an important role in the co-ordination of transmission infrastructure, by combining the functions of those assets and thereby reducing the number of landfall points required for grid connection. This will minimise disruption for communities by the coastline, whilst also reducing the overall planning and land rights burden for developers.
MPIs enable transmission infrastructure to be used more efficiently. There is often significant unused capacity in offshore wind transmission cables (typically around 50%), as the cable is sized to match the maximum capacity of the offshore wind farm, whilst the offshore wind farm’s load factor is reduced when conditions are not windy. MPIs would enable this excess capacity to be used to trade power between markets in nearby countries, thereby allowing efficient use of the infrastructure. High-voltage direct current (HVDC) technology can be utilised to transmit the energy generated over very large distances with little transmission loss and reduce the likelihood of curtailment by transmitting the power to the area where it is needed most.
There are clear cost benefits to such synergies, as there is an overall reduction in the amount of cable required in comparison with point-to-point offshore wind farms connections with side-by-side interconnection. In a market where cable prices are high and manufacturing slots are in short supply, this has significant advantages. Lower operational costs could also be expected.
There are also significant environmental benefits to a reduction in the amount of cable manufactured and laid along the seabed. With the proliferation of offshore wind farms, it is vital to ensure that every effort is made to limit damage to coastal ecosystems and biodiversity, therefore a co-ordinated approach, combining and rationalising transmission assets and connections, will be important to minimise the impact of such large-scale expansion of development.
To facilitate the development of MPIs, BEIS and Ofgem have separately sought feedback from interested parties regarding the regulatory framework for MPIs. The consultation forms part of the broader Offshore Transmission Network Review (OTNR), which aims to evaluate the way that the offshore transmission network is designed and delivered. Ofgem and BEIS’s responses to such consultations recognise that the existing legal and regulatory framework requires further development in order to encourage early adopters of MPI projects and to create an enduring regime.
Ofgem’s consultation primarily focuses on the incremental changes required to the existing regime in order to facilitate MPI development in the near term, whilst the BEIS consultation also explores legislative changes to create an enduring regime post-2030 – including by introducing a new licensable activity into the Electricity Act 1989 for the operation of an MPI, when parliamentary time allows.
Ofgem will run a pilot ‘cap and floor’ application MPI framework in mid-2022, which will apply to the interconnector asset of the MPI. The pilot is supported by BEIS and will allow MPI developers to benefit from a bespoke process, distinct from the assessment of point-to-point interconnectors. The results of the pilot, and potentially other early adopter projects, will be used to shape the enduring regime.
What are the challenges?
The various consultations have highlighted key challenges with the existing regime which need to be addressed to maximise the potential of MPIs and provide the clarity required to encourage investment in this evolving area. In particular:
Asset classification: There is some uncertainty regarding how an MPI would be classified under the current regime. Ofgem discusses two approaches: an Offshore Transmission Owner (OFTO)-led model, which combines a radial connection between the UK grid and an offshore wind farm, with a further connection between that offshore wind farm and the grid or offshore wind farm of a nearby country; and an interconnector-led model, in which a point-to-point cross border interconnector also includes a direct connection to an offshore wind farm (which can use that connection to access both markets).
Licencing regimes: The standard interconnector and OFTO licence conditions are not suitable for MPIs in their current form and require modifications to address a number of matters, including priority access, payment arrangements, flexibility, outage planning, and revenue.
Interaction with Contracts for Difference (CfD) regime: Similarly, for interconnector-led projects, there is a concern that an offshore wind farm connecting via the MPI would breach the terms of any CfD award it holds. The standard CfD conditions require the holder to connect to a ‘transmission licensee’ and it is currently not possible for the holder of an interconnector licence to also hold an offshore transmission licence.
MPI ownership: Both within the UK and the EU, ownership unbundling requirements operate to prevent ownership or control of connected transmission and generation assets by the same entities. As such, within the current regime, the offshore wind farm component of the MPI could not be owned or controlled by the same entity as the interconnector/OFTO component, and each would be required to hold its own licence.
Market arrangements: By their nature, MPIs particularly lend themselves to cross-border projects and therefore it is important to ensure compatibility with the regimes of neighbouring countries – both within the EU and outside.
The complete briefing can be accessed here