My Lords, I am grateful to my noble friends Lady Parminter and Lord Teverson, and the noble Lord, Lord Whitty, for providing me with an opportunity to respond on the very important issue of electricity interconnection.
I turn first to Amendment 55ZB on electricity interconnection. The physical linking of the GB electricity market to others in Europe has the potential to offer a range of benefits, as my noble friend has ably set out. The Government firmly believe that greater levels of interconnection would be good for Britain and build on the 4 gigawatts that we have. A large number of interconnector projects are at different stages of development, including to Norway, Belgium, France and Ireland. Indeed, when you add up the capacity of potential projects, it comes to more than 12 gigawatts.
The UK Government are already playing an active role in seeking recognition of several UK interconnection projects as European projects of common interest under the EU regulation on guidelines for trans-European energy infrastructure. This regulation, which the UK Government were actively involved in negotiating, aims to accelerate the development of cross-border energy infrastructure with a view to completing the internal energy market.
Successful projects are due to be announced in early autumn, and will benefit from streamlined planning procedures and, where necessary, a mechanism to agree cross-border cost allocation. They will also be eligible to access financial instruments such as loan finance, grants for feasibility studies and, potentially, grants for works under the Connecting Europe Facility—a pot of €5.1 billion over seven years. The Government also continue to discuss interconnection with our counterparts across Europe. My noble friend may be aware that the Prime Minister committed last year to supporting the development of an interconnector with Norway, and we have signed a memorandum of understanding with Iceland to explore the possibility of linking our markets.
In part, the large number of projects in development is due to work that Ofgem has been doing to develop a new regulatory approach for interconnection. This “cap and floor” model retains the market incentives for interconnection but reduces some of the risks to
revenue that merchant developers face. This regulatory model is initially going to be applied to the project with Belgium, Project Nemo. Cap and floor has real potential in driving forward interconnector investment but, by its very nature, looks to consumers to potentially take on some risk in return, which will need careful consideration. Ofgem is taking this into account as part of its wider integrated transmission planning and regulation project, in which it is exploring whether there needs to be enhanced planning or strategic evaluation of future interconnection.
I should also like to highlight two further important developments that are taking place. First, developers invest on the basis of price differentials on either side of the link. Ofgem is working to ensure that Great Britain’s electricity prices reflect scarcity to a greater extent, thereby increasing the incentives for investing in interconnection. Secondly, on 27 June, the Government committed to continuing to explore ways in which interconnected capacity can participate in the capacity market. This is not simple and no other country has found a way to do this, but a solution could further increase investment appetite. It is worth reflecting that the single market is about not only the infrastructure between member states but the way in which that infrastructure operates.
The Government, with the support of Ofgem and National Grid, are playing an active role in the development of the European technical codes that will govern how trading over interconnectors will work in practice. This is essential if the full benefits of the infrastructure investments are to be realised.
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I now turn to the amendments on generation located abroad, tabled by my noble friend Lord Teverson. I thank my noble friend for the opportunity to explain the Government’s thinking on this matter. Generation outside the UK has the potential to contribute cheap, clean electricity to the benefit of UK consumers. The department is currently examining the technical requirements for making this happen and for ensuring that any overseas projects are connected in a way that maximises the full range of potential benefits while avoiding unnecessary cost.
In recognition of the promise held by overseas generation, the Bill already makes provision for its integration into the CFD regime. Specifically, Clause 6(1) and Clause 10(3) are constructed in a way that would allow overseas generation to fall within the scope of CFDs. However, these clauses are also drafted in a way that ensures we are not automatically committed to that course of action in advance of fully understanding its potential costs, including to consumers, and risks, both of which may be significant if not managed properly.
While I am sympathetic to the intention of my noble friend’s amendments, there is a risk that they could see us pursuing a course of action that has not yet been proven to be in the interests of UK consumers before we are even certain it can be made to work. I hope that noble Lords agree that before we could begin connecting to, for example, an Irish wind farm
or Icelandic geothermal power, we want to be absolutely sure that such projects provide a net benefit to UK consumers.
In addition, we need to make sure that our approach to such projects makes sense. That means considering in detail a large number of practical and policy issues, such as how best to meter the output for payment purposes, the costs and benefits of additional or avoided grid reinforcement works and our ability to manage risks associated with non-payment under the contract. I hope that by outlining the existing provisions in the Bill I have addressed my noble friend’s objective with Amendment 55AA, in that the legislation will already provide for overseas generation if we proceed down that route.
Amendment 55AD would require the Secretary of State to bring forward an order setting out targets for the allocation of CFDs to technologies outside the UK. My department and the regulator, Ofgem, continue to work through the detailed issues in connecting to overseas generation, with a particular early focus on overseas generators of renewable energy. As with my noble friend’s first amendment, we do not wish to prejudge the outcome of that work. As I have outlined, contracting with overseas projects would be new, innovative and potentially risky.
Additionally, because it requires the setting of new obligations, this amendment could limit our ability to react to changing circumstances in the future. The prospect of further targets on top of those related to carbon, renewables and so on begins to reduce flexibility to the point where it becomes quite difficult to ensure an efficient and responsive outcome. I do not believe that there are overriding grounds for introducing new targets, which risk reduced competition and distortion of the market for CFDs, simply to ensure a set level of foreign generation.
I hope that my noble friends agree that there are already many initiatives under way to enhance our interconnection capacity and are reassured of our support in principle for low-cost overseas generation, where it can be shown to bring about benefits and value for money for UK consumers. On that basis, I hope my noble friend will withdraw his amendment.