Multi-purpose interconnectors as a new asset class under the Energy Act 2023

Background and purpose

The Energy Bill, first announced in the Queen’s Speech on 10 May 2022 and introduced to Parliament on 6 July 2022, received Royal Assent on 26 October 2023, becoming the Energy Act 2023 (EA 2023). One of the purposes of the EA 2023 is to introduce multi-purpose interconnectors (MPIs) as a new licensable asset class.

The objective of this short article is to provide an overview of the following:

• MPIs (under the EA 2023);
• the provisions in the EA 2023 in connection with their licensing and regulation; and
• a few related matters regarding offshore assets.

 

What is a multi-purpose interconnector?

This question is best answered by contrasting an MPI with a standard (point-to-point) interconnector.

A standard interconnector is a high voltage cable¹ connecting the electricity systems of two countries so that energy can be transferred between them (whether in both directions or one only).

An MPI, on the other hand, is a transmission asset structure which combines (as a dual activity):

• an interconnector; and
• offshore transmission activities² (that is, transmission, within an area of offshore waters, of the electricity generated by offshore windfarms in that area).

The MPI operates by transmitting the electricity generated by the offshore windfarms to the interconnector, following which it can be transmitted via the interconnector to the onshore grid of each country or territory which is served by that interconnector. This MPI structure offers a number of key benefits, including: improvement to the security of the electricity supply; greater integration of renewable energy sources into the electricity transmission system; and a reduction in overall transmission infrastructure costs and a lower impact on the coastal environment, given the need for less transmission infrastructure (substations and cabling).

 

Relevant provisions of the EA 2023

The main provisions of the EA 2023 of relevance to MPIs are to be found in:

• sections 205 to 210 in Part 7 (Market Reform and Consumer Protection); and
• schedule 17 (Multi-Purpose Interconnectors: Consequential Amendments).³

One of the many factsheets published by the Department for Energy Security and Net Zero (DESNZ) on the Energy Bill (now the EA 2023) is the Energy Security Bill factsheet: Multi-purpose interconnectors – this provides the government’s thinking behind the above MPI provisions, and describes MPIs as a “new, innovative asset type”.

 

MPIs as a licensable asset class

Section 205 of the EA 2023 makes amendments to sections 4 to 6 of the Electricity Act 1989 by: defining an MPI (see below); making it unlawful to participate in the operation of an MPI unless licensed to do so; creating an MPI licensable activity; and making provision for the grant of the MPI licence. Section 205, therefore, serves to make participation in the operation of an MPI (as defined) licensable, with the licensing authority for this purpose to be Great Britain’s (GB’s) energy regulator, the Gas and Electricity Markets Authority, which exercises its functions via the Office of Gas and Electricity Markets (Ofgem).

The above MPI provisions give a definition of ‘multi-purpose interconnector’ for the purposes of the legislation – this is set out in section 205(5) of the EA 2023 which amends section 4 (Prohibition on unlicensed supply etc) of the Electricity Act 1989. In short, an MPI project under this definition will be one which conducts interconnection activities between GB and a connecting state, and which also conducts offshore transmission activities (ie there is a transmission connection to offshore windfarms) in GB waters (and possibly, although this is not required for a project to constitute an MPI under the EA 2023, also a transmission connection to offshore windfarms in the waters of the connecting state). The MPI, for the purposes of the EA 2023, will be that part of the project (as described above) which is in the jurisdiction (including territorial waters) of GB.

By virtue of section 205(9) of the EA 2023, which amends section 6 of the Electricity Act 1989, the same person may not be the holder of an MPI licence and the holder of a licence falling within any of paragraphs (a) to (e) of subsection (1) of section 6 the 1989 Act (those paragraphs reference generation, transmission, distribution, supply and interconnector licences).

Ofgem anticipates that the MPI licence will include both standard conditions and special conditions (similar in that respect to the structure of the electricity interconnector licence). The standard conditions for the MPI licence (which must be published) will, as set out in section 206 of the EA 2023, be determined by the Secretary of State for DESNZ. As for the special licence conditions containing provisions on the applicable revenue regulation regime, Ofgem expects to develop these. Ofgem also expects the MPI licence to be available by mid to late 2024 (this is set out in an Ofgem consultation document of 2 June 2023, which is discussed below) – it is understood that Ofgem and DESNZ intend to undertake a joint consultation in 2024 on the proposed MPI licence.⁴

The government factsheet referred to above explains that, by introducing MPIs as a licensable activity, the government is providing “certainty to investors and developers, enabling them to make decisions regarding future multi-purpose interconnector projects”.

 

Regulation of MPIs

Under the existing regulatory regime, standard (point-to-point) interconnectors are regulated via a ‘cap and floor’ regime and an interconnector licence. However, because offshore hybrid assets (OHAs), which comprise MPIs⁵ and non-standard interconnectors (NSIs),⁶ are a unique asset type with a different risk profile to standard interconnectors, this, as explained by Ofgem, called for the creation of both a new regulatory regime and licensing arrangements to allow for OHA pilot projects to develop. Since December 2022, Ofgem has been engaging with industry stakeholders through the Multi-Purpose Interconnectors Framework Discussion Group to develop a unique regime for OHAs.

Licensing has been considered above. As regards other regulatory aspects, on 2 June 2023 Ofgem announced the opening of two consultations under the heading ‘Consultation on the Regulatory Framework, including Market Arrangements, for Offshore Hybrid Assets: Multi-Purpose Interconnectors and Non-Standard Interconnectors’. The first of those consultations is on the ‘Regulatory Framework for Offshore Hybrid Assets: Multi-Purpose Interconnectors and Non-Standard Interconnectors’ and covers Ofgem’s proposals for licensing arrangements for OHAs, the design of the regulatory regime for OHAs, and network charging arrangements for offshore wind farms connecting to an MPI. The consultation document sets out (amongst other things) the options under consideration for the regulatory framework which is to apply to MPIs.

The second consultation of 2 June 2023 is on the ‘Market Arrangements for Multi-Purpose Interconnectors’ and is being conducted by Ofgem jointly with DESNZ – it covers, in particular, topics on market/bidding zone configuration (Home Market and Offshore Bidding Zone) and links with cross-border trading arrangements. On 14 December 2023, Ofgem announced the publication of responses to this consultation, as set out in the document ‘Summary of Responses on Market Arrangements for Multi-Purpose Interconnectors’ – this includes a ‘next steps’ section.

 

The OHA pilot scheme

There are two OHA pilot projects being taken forward at the time of writing, LionLink (previously called Eurolink) to the Netherlands, and Nautilus to Belgium, under what was initially known as the ‘Multi-purpose Interconnectors Pilot Regulatory Framework’ and now has the name of ‘Offshore Hybrid Asset (OHA) pilot’. The ‘Offshore Hybrid Assets’ page of National Grid Ventures (the developer) provides further information on these projects.

The objective of the OHA pilot is to explore and deliver an appropriate regulatory framework (including regime design, assessment framework and standard licence conditions) to enable the development of the early OHAs. Lessons learnt through the pilot will be used to adjust the framework for potential future OHA investment windows into an enduring regime.

 

International cooperation

Given their cross-border nature, MPIs and other OHAs, if they are to operate effectively and realise their potential, require cooperation between the nations which are planning to include OHAs as part of their energy transmission infrastructure. In that respect, note that Article 321 within Title VIII (Energy) of Heading One of Part 2 of the UK-EU Trade and Cooperation Agreement makes provision for cooperation in the development of offshore renewable energy.

It is also worth noting that a number of memoranda of understanding and joint declarations of cooperation have been signed by the UK with other nations and groups of nations in recent months of relevance to interconnection and offshore wind energy, including between the UK and the members of the North Seas Energy Cooperation forum, the UK and Denmark, the UK and Ireland, and the UK and Germany.

 

Conclusion

The EA 2023 is in large part about improving energy production, security and resilience - and MPIs (which are now to be a licensable asset class, with great potential to enhance the renewable energy sector) have an important role to play in helping to achieve that goal. We will be watching carefully as the EA 2023 is implemented and the MPI regime develops.