on the exemption of eleclink limited under article …...en 5 en 20 years. the entire project will...
TRANSCRIPT
EN EN
EUROPEAN COMMISSION
Brussels, 28.7.2014
C(2014) 5475 final
COMMISSION DECISION
of 28.7.2014
on the exemption of ElecLink Limited under Article 17 of Regulation (EC) No. 714/2009
for an electricity interconnector between France and Great Britain
Only the English and French texts are authentic
EN 2 EN
COMMISSION DECISION
of 28.7.2014
on the exemption of ElecLink Limited under Article 17 of Regulation (EC) No. 714/2009
for an electricity interconnector between France and Great Britain
Only the English and French texts are authentic
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union,
Having regard to Regulation (EC) No 714/2009 on conditions for access to the network for
cross-border exchanges in electricity1, and in particular, Article 17 thereof,
Whereas:
(1) Article 17 of Regulation (EC) No 714/2009 of 13 July 2009 on conditions for access
to the network for cross-border exchanges in electricity (hereinafter the “Electricity
Regulation") provides the possibility for Member State authorities to exempt new
electricity interconnectors from Article 16(6) of the Electricity Regulation and
Articles 9, 32 and 37(6) and (10) of Directive 2009/72/EC concerning common rules
for the internal market in electricity (hereinafter the "Electricity Directive")2 provided
certain conditions are fulfilled.
(2) Article 17(7) of the Electricity Regulation provides for the Commission to be notified
of the decision by the national authorities on an exemption request and its Article
17(8) provides for the Commission to approve the exemption or to take a decision
requesting the notifying bodies to amend or withdraw the decision to grant an
exemption.
1. Procedure
(3) On 11 September 2013, Eleclink Limited submitted its request for exemption to the
French Energy Regulator, Commission de Régulation de l'Energie, (hereinafter
"CRE") and on 18 September 2013 to the British Energy Regulator, the Gas and
Electricity Markets Authority (hereinafter "Ofgem") in accordance with Article 17 of
the Electricity Regulation.
(4) CRE and Ofgem undertook a joint public consultation between 28 November 2013
and 3 January 2014.
(5) Based on their assessment of the exemption application and the results of the
consultation, Ofgem and CRE developed a "Joint opinion of the Commission de
régulation de l'énergie (France) and the Gas and Electricity Markets Authority (Great
Britain) on Eleclink's exemption request under Article 17 of the Electricity Regulation
for an electricity interconnector between France and Great Britain" (hereinafter "Joint
Opinion") setting out the exemption decisions applying to their respective
jurisdictions.
1 OJ L 211, 14.08.2009 p. 15.
2 OJ L 211, 14.08.2009 p. 55.
EN 3 EN
(6) Both the French Exemption Decision and the British Exemption Decision (hereafter
referred to as "Exemption Decisions") were notified to the Commission on 20 March
2014, together with the Joint Opinion (which forms an integral part of the Exemption
Decisions).
(7) On 3 April 2014, the Commission published a notice on its website3 informing the
public of the notification and inviting third parties to send their observation by 22
April 2014. The Commission has received no observations from third parties.
(8) On 5 May 2014, the Commission services addressed to CRE and Ofgem a request for
additional information, in order to allow for a full assessment of the Exemption
Decisions. This information was provided on 26 May 2014. The request triggered the
extension of the deadline for the treatment of the case by a period of two months, until
28 July 2014, as provided for in Article 17(8) of the Electricity Regulation.
(9) On 23 April 2014 and 5 June 2014, the Commission services met with Eleclink.
Eleclink provided additional information at this meeting and subsequently.
(10) On 2 July 2014, the Commission services met with the relevant national regulatory
authorities (hereinafter "NRAs" or "Regulatory Authorities" or "Authorities"), CRE
and Ofgem.
2. Description of the project and modalities of the exemption request
(11) ElecLink is an interconnector linking the Great Britain and French markets through the
Channel Tunnel (hereinafter the "Project"). The project is being developed by
ElecLink Limited.
2.1. Shareholders in ElecLink Limited
(12) According to the information provided by ElecLink Limited in its exemption
application, it is owned 51% by STAR Capital and 49% by Groupe Eurotunnel
(together the “Shareholders”). The information provided indicates that:
– STAR Capital is a private equity fund4. STAR Capital has in excess of €1bn of
funds managed and/or advised by STAR Capital Partners Limited, a company
incorporated in England (registered number 03862379). STAR Capital’s
investors are a broad mix of pension funds, insurance companies, fund of
funds and family offices.
– Groupe Eurotunnel manages and operates the Channel Tunnel through the
Concession Agreement which lasts until 2086. The company has four
businesses: (i) Infrastructure manager for operators of rail services (e.g.
Eurostar); (ii) Transport operator through its own shuttles that carry cars,
coaches and trucks; (iii) Rail freight services provider since November 2007
and (iv) Cross-Channel ferry services, My Ferry Link, since 2012. Groupe
Eurotunnel is listed on the Paris stock exchange; its ordinary shares are fully
distributed between individuals, custodians and institutions.
– Neither STAR Capital nor Groupe Eurotunnel has any direct or indirect links
to energy producers or suppliers, except in their capacity as consumers.
2.2. Technical and operational description
3 http://ec.europa.eu/energy/infrastructure/exemptions/exemptions_en.htm.
4 A full list of STAR Capital’s investments can be found at its website www.star-capital.com.
EN 4 EN
(13) The ElecLink project consists of twin HVDC cables in the 51 km Channel Tunnel.
This will result in a capacity for ElecLink of 1000 MW (1050MW with estimated
losses of the link enabling a transfer capacity of 1000MW). ElecLink Limited’s
application states this limitation is based on initial technical advice to ensure
compliance with temperature and space constraints within the Tunnel and available
grid capacity in Q4 2016. This limitation is also based on the ElecLink Limited’s
connection agreements with the respective transmission system operators (hereinafter
"TSOs") of France – Réseau de Transport de l’Electricité (hereinafter “RTE”) and of
Great Britain – National Grid Electricity Transmission (hereinafter “NGET”), included
in the exemption application. According to this information, grid constraints both in
Great Britain and in France limit the maximum capacity available.
(14) ElecLink Limited plans to subcontract the construction of the Project through one or
more construction contracts with suitably qualified contractors following a
competitive tendering process. ElecLink Limited has agreed a framework for access to
the Channel Tunnel with Groupe Eurotunnel for the construction period.
(15) ElecLink will connect with the national grids, respectively, of France at Les
Mandarins substation and of the UK at Sellindge substation. In this respect, ElecLink
Limited has entered into agreements with RTE and NGET for the withdrawal and
injection of 1000MW at Les Mandarins and Sellindge 400kV substations, respectively,
expected to be operational from Q4 2016. The connections are non-firm until planned
reinforcements are carried out.
(16) ElecLink Limited states that it intends to undertake (or sub-contract) all activities
associated with the operation including its physical operation, maintenance, capacity
allocation, client relations, balancing management in conjunction with TSOs, and
accounting and information systems.
(17) ElecLink is a project of common interest within the North Seas Offshore Grid
corridor.5
2.3. Financial and commercial operations
(18) ElecLink Limited’s exemption application estimated its capital (construction) costs to
be approximately [BUSINESS SECRET] million6. ElecLink Limited estimated its
operational costs to be approximately [BUSINESS SECRET]. However, in both cases
the final costs depend on negotiations with contractors and suppliers, and recently
ElecLink Limited has indicated that the initial offers were higher than the estimates
submitted as part of their application.
(19) ElecLink Limited plans to use project finance to support this project based on
approximately [BUSINESS SECRET] leverage. Loan arrangements are not yet in
place. The project finance structure is expected to include debt covering the greater
proportion of the total Project's costs. These debts are to be amortised over a period of
5 Commission Delegated Regulation (EU) No 1391/2013 of 14 October 2013 amending Regulation (EU)
No 347/2013 of the European Parliament and of the Council on guidelines for trans-European energy
infrastructure as regards the Union list of projects of common interest, OJ L 349, 21.12.2013, p. 28–43,
project 1.7.3. 6 ElecLink costs and revenues and associated modelling [BUSINESS SECRET]. The estimates are based
on the information provided in the exemption request. The Commission notes that at the later stage of
the exemption review (on 16 June 2014), ElecLink Limited provided new estimates [BUSINESS
SECRET].
EN 5 EN
20 years. The entire project will be amortised over 25 years. ElecLink Limited’s
application states that the final terms of the financing structure will be dependent on
the long-term contracts negotiated post-receipt of the exemptions requested.
(20) ElecLink Limited indicates that it expects the project to produce an internal rate of
return of [BUSINESS SECRET], and has a target return on equity of [BUSINESS
SECRET], based on [BUSINESS SECRET] leverage.
(21) ElecLink Limited proposes to sell 80% of the capacity through long term contracts
which will underwrite loan agreements and to sell 20% through short term contracts.
(22) ElecLink Limited sets out that it will sell a mix of contract types and durations and
that they are targeting a portfolio of contracts up to 20 years in duration, with an
average duration of 15 years.
(23) ElecLink Limited does not give details on proposed capacity allocation methods or
contracts in the application for an exemption.
(24) ElecLink Limited indicates that they will engage a third party to run the capacity
allocation process.
2.4. ElecLink Limited’s proposed limitations on allocation of capacity
(25) ElecLink Limited proposes that the long term contracts will be subject to use-it-or-
sell-it arrangements. This will be facilitated by ElecLink Limited’s commitment to
implement secondary trading arrangements.
(26) ElecLink Limited commits to putting in place restrictions on the percentage of long-
term capacity rights a potentially dominant player could acquire and, to the extent it is
within their control, preventing such a dominant player from acquiring additional
capacity on the secondary market. This is specified as ensuring that dominant parties
may not own more than 50% of total ElecLink import capacity rights from Great
Britain to France.
3. Description of the notified decision
(27) In their Joint Opinion notified to the Commission, the NRAs set out their decision to
grant an Exemption to ElecLink in their respective jurisdictions for 25 years from the
date that the interconnector commences commercial operation subject to conditions.
(28) The effect of these conditions is that ElecLink has a partial exemption from normal
third party access rules for 20 years, and a partial exemption from normal congestion
revenue rules for a period of 25 years. ElecLink is also exempted from the obligation
to implement full ownership unbundling, but is instead required to implement the
independent transmission operator model.
3.1. Use of congestion revenues
(29) In relation to the application for an exemption from Article 16(6) (i.e. use of
congestion revenues) of the Electricity Regulation, the notified exemption decision
states:
"ElecLink is partly exempted from Article 16(6) of the Regulation. ElecLink is
required to comply with the conditions imposed by the NRAs which are set out in
part [H] of this Exemption Decision."
(30) Part H states:
"ElecLink must comply with the following profit sharing mechanism:
EN 6 EN
If, over the exemption period, the present value of profits, discounted at a nominal
rate of [BUSINESS SECRET], is positive, 50 % of these profits shall be transferred
to the regulated National Electricity Transmission System Operators (NETSOs) –
NGET and RTE – in accordance with the provisions of Article 16(6) of the
Regulation;[…]"
3.2. Unbundling
(31) In relation to the application for an exemption from Article 9 (ownership unbundling)
of the Electricity Directive, the notified exemption decision states:
"ElecLink is partly exempted from Article 9 of the Directive. ElecLink shall comply
with the conditions imposed by the NRAs which are set out in part [I] of this
Exemption Decision."
(32) Part I reads
"ElecLink shall comply with the specific terms and conditions of an “amended OU
model” detailed below:
(a) ElecLink is exempt from Article 9 of the Directive to the extent that:
i For the assessment of Article 9, undertakings that are directly or
indirectly controlled by Star Capital will not be taken into account,
provided that these undertakings are not of a size materially
different to the size of typical investments made by Star Capital
according to ElecLink’s exemption application7. As a consequence,
Star Capital will be allowed to make investments in generation or
supply activities providing this condition is met; and
ii For the assessment of point (b) (i) of paragraph 1 of Article 9, the
same person or persons are authorized to “directly or indirectly
exercise control over an undertaking performing any of the
functions of generation or supply” and to exercise “any right” over
ElecLink, so long as “any right” over ElecLink does not constitute
direct or indirect control.
(b) Because of the investment opportunities in generation or supply allowed
by the above conditions, ElecLink shall also comply with all conditions
set out in chapter V of Directive 2009/72/EC (ITO model) with the
exception of Article 22 of the Directive. […]"
3.3. Third party access (long term contracts)
(33) In relation to Article 32 of the Electricity Directive (third party access), the notified
exemption decision states:
"ElecLink is partly exempted from Article 32 of the Directive for multi-year capacity
allocated through an Open Season. ElecLink shall comply with the conditions
imposed by the NRAs …"
(34) The additional conditions specified by the NRAs include:
7 According to the exemption application, ElecLink Limited states that Star Capital “is looking for the
opportunity to invest in capital-intensive corporate activity that has … an enterprise value in the range
of €100 million to €500 million”. In addition, ElecLink Limited states that “any investment would be
separate from ElecLink and would not result in discrimination in respect of the operation or conflict of
interest given the likely value and nature of the participation in such activities and the likely size and
market share of any such generation and/or supply activities”.
EN 7 EN
3.3.1. General conditions for capacity allocation (Open Season and other capacity)
(35) ElecLink Limited is required to implement use-it-or-sell-it provisions on all capacity
sold. ElecLink Limited is required to participate in market coupling. ElecLink Limited
will transfer remaining capacity after the Intraday allocation available to the National
Electricity Transmission System Operators (NGET and RTE) for balancing purposes.
3.3.2. Multi-annual basis through an open season process (long term contracts)
(36) Up to 80% of capacity may be allocated on a multi-annual basis through an open
season process. Over the whole exemption period, the present value of discounted
revenues from capacity allocated through multi-year products may not exceed a
maximum amount expressed in M€2016 discounted at the nominal rate of
[BUSINESS SECRET]. [BUSINESS SECRET]. Additionally, an open season process
cannot be operated if the revenue sharing arrangements had been activated in the
preceding year.
3.3.3. Open Season approval process for capacity allocated under long term contracts
(37) For the up to 80% of capacity which may be allocated through an open season, NRAs
will approve, and may require modification to, ElecLink’s Access Rules and Charging
Methodology/Tariffs. ElecLink Limited is required to organize a public consultation
on the proposed rules before submitting them for NRA approval. No products are to be
allocated for more than 20 years, and no contracts are to extend beyond the 20th
year
after commissioning. The average contract length may not exceed 15 years.
(38) A range of products of different lengths is to be offered, including products with
duration equal to or shorter than 5 years. Eligibility conditions must allow smaller
players to be eligible at least for smaller and/or shorter capacity products. When multi-
year products allocated through an Open Season reach the same timeframe as
regulated long-term products they are to comply with the same conditions as regulated
long-term products.
(39) The results of the Open Season are to be made public and include at least the name of
the capacity holder as well as volume, duration and price.
3.3.4. Other capacity
(40) For all capacity not allocated on a multi-annual basis through an open season process,
the approval process of the Access Rules and Charging Methodology/Tariffs must
comply with relevant national and European requirements for the approval of terms of
access to interconnectors both in France and Great Britain. That is, this capacity is
subject to all normal regulatory rules
3.3.5. Limit of long term products allocated to undertakings
(41) For long term products allocated through the Open Season, ElecLink must ensure that
no entity holds more than 40% of the total capacity of the interconnection (400 MW)
in either direction.
(42) If an entity holds more than a 40% market share in a relevant geographic market, it
shall not hold, at any time, more than 20% of the total capacity of the interconnector
(i.e. max. 200 MW) in the direction of the import to this market.
3.4. Scope of exemption
(43) The NRAs specifically state that no exemption is given for any other aspects/parts of
applicable current and future national and/or European law, in particular paragraphs 6
EN 8 EN
and 10 of Article 37 of the Electricity Directive. This means that allocation rules
including rules both for an Open Season and the remaining capacity are subject to
regulatory approval by the NRAs.
(44) They also specify that no exemption is given from Article 32 of the Electricity
Directive for capacity that is not allocated through an Open Season. This means that
ElecLink is required to comply with all relevant, current and future provisions of
national and European legislation in respect of the remaining capacity.
3.5. Validity
(45) The notified Exemption Decisions expire if either two years after the date the
Exemption Decision is adopted or amended by the Commission the construction of the
Interconnector has not started or the Interconnector has not become operational after
five years. However, the notified Exemption Decisions also state that they continue to
apply if the Commission decides, pursuant to subparagraph 5 of paragraph 8 of
Article 17 of the Electricity Regulation that any delay is due to major obstacles beyond
the control of ElecLink.
4. Assessment of conformity with the criteria set out in Article 17 of the Electricity
Regulation
4.1. Article 17(1)(a): the investment must enhance competition in electricity supply
4.1.1. Need for additional interconnection
(46) Additional interconnection between Great Britain and Central Western Europe is
undoubtedly needed. The UK as a whole falls short of the 10% interconnection target
established by the European Council in 2002. The need for additional interconnection
is clearly set out in ENTSO-E’s 2012 Ten Year Network Development Plan8, and the
studies submitted by ElecLink Limited (undertaken by Redpoint), as part of their
exemption application, show that “the optimal total interconnection capacity between
France and Great Britain in addition to the capacity of existing IFA and BritNed
interconnectors as well as the planned IFA-2 and Nemo interconnectors is in excess of
5 GW.”
(47) France too stands to benefit from additional capacity. According to the report Cross-
border electricity exchanges: Use and management of interconnections in 2012 by
CRE9, the average capacity available to the market in 2012 was 8 GW for import and
12 GW for export (these commercial quantities are below the physical capacity of the
lines)10
.
4.1.2. Ensuring new investments in interconnectors enhances competition
(48) While investment in new infrastructure is likely to entail positive effects on
competition through increased capacity and a greater scope for cross border
competition, an exemption can counteract these positive effects. This is because access
to the exempted infrastructure is restricted, which is in turn likely to restrict
8 https://www.entsoe.eu/fileadmin/user_upload/_library/SDC/TYNDP/2012/TYNDP_2012_report.pdf
9 http://www.cre.fr/en/documents/publications/thematic-reports/report-on-use-and-management-of-
interconnections-in-2012 10
CRE writes that:
“It is clear that exchanges through French interconnections have a high value and the existing
interconnections are not sufficient to meet all market player’s demand for cross-border exchanges.
Investments are therefore required to increase physical interconnection capacities ; implementing more
efficient mechanisms tailored to generators and consumers’ requirements is also needed to improve
capacities use.”
EN 9 EN
competition, in particular if the capacity is held by players with a significant degree of
market power. Where dominant undertakings can become indirect beneficiaries of an
exemption by securing capacity, a positive competition assessment is unlikely in the
absence of conditions that effectively address the competition concerns.
(49) In particular, long term contracts have the potential to facilitate the foreclosure of the
market and act as a barrier to entry. In the case of electricity interconnection, long term
contracts are of potential concern because interconnection is an important route to
market for new players trying to compete in neighbouring jurisdictions, particularly
where wholesale markets are illiquid.
(50) Therefore, a requirement to reserve capacity for short-term contracts to enable the
development of a spot market and hence facilitate competition and entry of new
players is necessary. It may have been considered that a reservation of capacity for
short-term trading is not fixed as a pre-defined percentage, but could be based on the
respective market demand for short-term capacities indicated in a market demand
evaluation. However, also the defined quota for short term contracts is efficient and
facilitating a solution of potential competition concerns.
4.1.3. Competition on French and British markets
(51) Concerns about effective access to the market apply to both of the national markets in
question.
(52) The French power generation market is highly concentrated. The market share of the
largest generator in the country, EDF, is of 86%11
. Its market share for total installed
capacity was 73% in 2012. The other generators have a market share between 1 and
7%, GDF-Suez having the biggest share (7%), due to its hydropower plants. The
wholesale market in France has low liquidity; with the majority (87% in 2012) of
trading taking place over-the-counter (OTC). Market concentration is very high also at
retail level with only 8%12
of consumers served by alternative suppliers to EDF, the
dominant incumbent. However, for big industrial consumers (annual consumption
higher than 7 GWh), EDF's market share has decreased from 55% in 2012 to 51% in
2013.
(53) In the UK, the market shares of the six largest suppliers in the supply of domestic
electricity range between 11 and 25%. The six largest electricity suppliers directly own
around 70% of generation capacity and all but one own capacity equivalent to their
domestic supply needs.13
Likewise, in the UK, around 85% of power was OTC traded
in 2012 (down from 95% in 2011).
(54) Lack of liquidity in the markets has been a concern for some time, and as a result
Ofgem initiated its liquidity project to ensure that the wholesale electricity market
supports effective competition. Ofgem is concerned that poor liquidity in the
wholesale electricity market is posing a barrier to effective competition and in 2014
intervened in the market to improve liquidity by requiring companies to follow a set of
‘Supplier Market Access’ rules when trading with small independent suppliers
imposing a market making obligation on the six largest vertically integrated
11
Eurostat : http://epp.eurostat.ec.europa.eu/portal/page/portal/energy/data/database. 12
CRE, 2012 National Report to the European Commission,
http://www.ceer.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/NATIONAL_REPORTS/
National%20Reporting%202013/NR_En/C13_NR_France_Summary-EN.pdf. 13
Ofgem, Office of Fair Trading, Competition and Markets Authority State of the Market Assessment
https://www.ofgem.gov.uk/ofgem-publications/86804/assessmentdocumentpublished.pdf.
EN 10 EN
companies (i.e. with generation and supply arms)14
. On 26 June 2014 Ofgem decided
to refer the retail energy market to the Competition and Markets Authority for
investigation.15
(55) The London Economics report on “Impact on Competition and social welfare of the
proposed ElecLink interconnector between Great Britain and France” also indicated
that a single player had the ability to exercise market power, based on the Residual
Supply Index, for flows in both directions on the ElecLink interconnector.16
4.1.4. National regulatory authority restrictions on long term contracts
(56) The NRAs impose a number of conditions, beyond those proposed by ElecLink
Limited in their application, on the allocation of capacity by ElecLink in order not to
undermine competition and minimize potential adverse effects on the British and
French markets.
4.1.4.1. Capacity caps
(57) First of all, to avoid that any holder of capacity could exercise market power, the
proportion of the total capacity of the ElecLink interconnector in either direction
which may be held by a single entity is capped at 40%, reduced to 20% if the entity
holds a market share of over 40% in the destination market.
(58) In practical terms, this has the effect of capping the long term contracts which EDF
may hold for imports to France at 200MW, ensuring that the remaining 800 MW is
available to competitors. In the UK context, this ensures that capacity is available to a
mix of suppliers, and that no single supplier is able to secure the majority of the new
interconnection capacity under long term contracts.
4.1.4.2. Long term products – transparency
(59) The NRAs require that the results of the Open Season are made public and include at
least the name of the capacity holder as well as volume, duration and price, in order to
enhance the transparency of the market and therefore competition.
4.1.4.3. Long term contracts – duration and allocation
(60) The NRAs restrict how long term contracts can be allocated in several important ways.
Firstly, in addition to retaining the average and maximum durations of 15 and 20
years, respectively, proposed by ElecLink Limited in their application, they
specifically require that contracts of shorter duration are offered, of at least 5 years.
Furthermore additional conditions are provided to allow smaller players to be eligible
at least for smaller and/or shorter capacity products.
14 Ofgem November 2013. Wholesale power market liquidity: statutory consultation on the 'Secure and
Promote' licence condition
https://www.ofgem.gov.uk/ofgem-
publications/84508/wholesalepowermarketliquiditystatutoryconsultationonthesecureandpromotelicence
condition.pdf
Wholesale power market liquidity: decision letter 23 January 2014 https://www.ofgem.gov.uk/ofgem-
publications/85716/wholesalepowermarketliquidity-decisionletter.pdf.
15
Ofgem’s final decision can be found at: https://www.ofgem.gov.uk/ofgem-
publications/88435/stateofthemarket-decisiondocumentinofgemtemplate.pdf 16
London Economics report on “Impact on Competition and social welfare of the proposed ElecLink
interconnector between Great Britain and France”, part of the Exemption application.
EN 11 EN
(61) These provisions are enforceable by the NRAs, as ElecLink Limited is obliged to
consult them on its access rules and as the open season allocation procedure for the
long term products is subject to approval by the NRAs.
4.1.5. Commission assessment of the competition criterion
(62) Article 17 of the Electricity Regulation requires that the investment must enhance
competition in electricity supply and that the exemption is not detrimental to
competition. While these two requirements are not identical, they imply that the
project must be pro-competitive and thus create benefits for consumers.
(63) In the Commission staff working document on new Infrastructure Exemption
(SEC(2009)642 final)17
, the Commission Services examined a number of potential
remedies to address competition concerns where exemptions were being granted.
These include inter alia restrictions on the total capacity being held by individual
entities or requirements to ensure a mix of short and long term products to be offered
to the market. The Commission has actually included such obligations and restrictions
in previous exemption decisions18
.
(64) The restrictions proposed by the NRAs on the proportion of capacity held by a single
entity limit the risk of one company booking the entire capacity of the interconnector.
The NRAs also require additional limitations for companies with above 40% market
share in securing access to the capacity of the interconnector. These restrictions serve
to mitigate against the potential of dominant undertakings using access to an
interconnector benefitting from an exemption in order to exercise market power.
(65) Reservation of capacity for short-term trading is ideally not fixed as a pre-defined
percentage but instead based on the respective market demand for short-term
capacities indicated in a market demand evaluation. In this case no such evaluation has
yet taken place. The Commission notes the requirement that products are offered with
duration equal to or shorter than 5 years. The Commission also considers it appropriate
both that ElecLink Limited is required to hold a consultation on its proposed access
rules and that those access rules are then subject to regulatory approval. NRAs will
therefore be able to ensure that the share of shorter term products allocated through the
Open Season process reflects the needs of the market as expressed in the market
testing. The Commission considers this to be an important element of the notified
decision.
(66) The Commission considers that these conditions, combined with the restriction on
average and maximum duration of long term contracts, sufficiently mitigate the
concerns about the effect of the allocation of long term contracts on the positive
benefits of the interconnectors on competition.
(67) The Commission also welcomes the proposed requirements relating the transparency
of the allocation of long term contracts. However, the Commission also notes that this
should only be implemented insofar as it does not itself create concerns about ensuring
effective competition.
17
Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules
for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for
access to the network for cross-border exchanges in electricity SEC(2009)642 final
http://ec.europa.eu/energy/infrastructure/infrastructure/gas/doc/sec_2009-642.pdf. 18
This has applied across all classes of exemptions, including gas interconnectors (e.g. Nabucco, TAP)
and LNG terminals (e.g. Shannon LNG).
EN 12 EN
(68) On the basis of the above and subject to the implementation of the requirements set
out in the joint opinion, the Commission concludes the investment would enhance
competition.
4.2. Article 17(1)(b): the level of risk attached to the investment is such that the
investment would not take place unless an exemption is granted.
(69) ElecLink Limited make the case in their application that this project is to be financed
using project finance, whereby long term contracts will underwrite loan agreements
specific to this particular project. Their application sets out that these long term
capacity agreements require an exemption from the application of the regulated
capacity allocation framework (including the potential for future changes to the
regulatory regime) on the one hand, and that the risks associated with operating
outside the normal regulatory framework justify an exemption from the provisions of
Article 16(6) of the Electricity Regulation on the use of congestion revenues on the
other.
(70) In support of their application, ElecLink Limited submitted financial projections based
on modelling undertaken by Redpoint Energy. This is set out in Exhibits C and E of
the application in particular.
(71) The NRAs commissioned additional analysis from London Economics set out in the
report “Impact on Competition and social welfare of the proposed ElecLink
interconnector between Great Britain and France”. Section 3 of this report is entitled
Revenue and RiskAnalysis, and examines the projections provided by ElecLink.
4.2.1. Project finance
(72) At section 3.3.2 of their application ElecLink Limited explains their need to use
project finance on the following basis:
"ElecLink will be underpinned by a group of agreements and contracts
between lenders, Shareholders, EPC contractors and other interested parties.
This creates a business organisation that will issue a finite amount of debt on
inception; will operate ElecLink as its sole business; and will ask that lenders
look only to the Project to generate cash flow as the sole source of principal,
interest payments and collateral …
We will sell long-term interconnector capacity contracts to generate a stream
of predictable cashflows. An exemption from the provisions of Articles 32 and
37(6) and (10) of the Third Package Electricity Directive … removes the risk of
tariffs and terms and conditions for access being set by and potentially
changed year on year … and will allow us to demonstrate to lenders the
stability of such cashflows despite a changing regulatory environment over the
course of the exemption period."
(73) ElecLink Limited therefore requests to be able to sell up to 80% of the capacity under
long term contracts outside the normal regulatory framework in order to be able to
secure sufficient revenues to underwrite their debt. They based the need for 80%
coverage on their initial discussions with financiers and the experience of the
shareholders, their assessment of likely revenues and the resulting interest cover. The
application proposed that contracts would be of varying duration, on average 15 years
and not longer than 20 years.
(74) London Economics assessed the basis for the request. They state that they consider
[BUSINESS SECRET] gearing, as set out in the ElecLink Limited financial
EN 13 EN
projections, not excessive, and that achieving project finance would involve
conservative assumptions on revenue. London Economics concluded that “the
requirement of 80% LT contract cover is within the norms of our experience for
project financing and levels of gearing up to [BUSINESS SECRET] given the
revenue, cost and modelling predictions of ElecLink … the 80% would fall if higher
revenues were achieved on LT contract sales especially.”
4.2.2. Revenue streams – central scenario
(75) ElecLink Limited’s expected returns according to the documentation submitted with
their application amount to an Internal Rate of Return (IRR) [BUSINESS SECRET]
(nominal pretax). The rate of return for equity is set at [BUSINESS SECRET]. By
comparison Ofgem and CRE informed the Commission that the weighted average cost
of capital (WACC) allowed for the national TSOs was 4.55% ('vanilla')19
for the next
eight years in Great Britain and 7.25% (nominal pre-tax) for the next four years in
France. This means there is approximately a [BUSINESS SECRET]% point
([BUSINESS SECRET] basis point) additional return for the project compared to what
might be expected under a regulated regime. The higher returns are justified by
ElecLink Limited on the basis of the different risks faced by ElecLink compared to a
national TSO supported by regulated tariffs.
(76) The returns submitted by ElecLink Limited are based on forward sales of [BUSINESS
SECRET] of capacity at a capacity price of [BUSINESS SECRET] over the 25 year
exemption period, with the remaining [BUSINESS SECRET] being auctioned on the
short term market for the congestion value. Short term revenues are based on
modelling and inflation-indexed.
(77) The long term contract revenue of [BUSINESS SECRET] value was estimated based
on a [BUSINESS SECRET] discount to the [BUSINESS SECRET] IFA prices.
4.2.3. Risks to projected revenue streams
(78) The Commission considers that the higher revenues could only be justified based on a
different risk profile of the project compared to what would normally be allowed under
the regulated regime.
(79) In the case of this particular investment, there are a number of reasons revenues could
differ from those projected:
4.2.3.1. Construction and operational risk
(80) Incurred capital costs or operational costs could be higher or lower than those
projected. In relation to capital costs, ElecLink Limited, in their application, argues
that there are significant complexities to building an interconnector using the existing
tunnels, relating to safety, access rights etc.
(81) As part of their application, ElecLink Limited indicated that they are carrying out
specific studies on the impact of operating an interconnector as part of a railway
infrastructure. These include in particular the need to ensure that electro-magnetic
fields or heat generation from the interconnector do not have a negative impact on
other equipment, including safety in the tunnel. ElecLink's exposure to outage risk is
potentially enhanced by its specific operating environment as there may be factors
which create outages in the Tunnel which are outside ElecLink Limited's control.
19
Different models of calculating WACC covering different periods are applied in the UK and in France.
The UK WACC was calculated as combination of pre-tax cost of debt and post-tax cost of equity
('vanilla'), while in France the WACC was calculated as nominal pre-tax.
EN 14 EN
(82) Moreover, because this project is first of a kind, it is possible that realised construction
costs will be higher. The submitted application projected costs of approximately €400
million. Information submitted by ElecLink Limited to the Commission during the
consideration of the draft decisions by the NRAs20
, suggested that the submissions by
contractors at the first stage of the procurement process were up [BUSINESS
SECRET] higher. However, the Commission notes that the actual agreed price is still a
matter for negotiation between ElecLink Limited and its contractors (including on how
issues relating to risk associated with the operation of the tunnel are treated).
(83) The connection of ElecLink into the onshore networks of Great Britain and France
will not be firm until NGET and RTE complete reinforcement work.
4.2.3.2. Market risk – long term contracts
(84) The modalities according to which long term contracts are to be allocated are not
elaborated in the exemption application submitted by ElecLink Limited. According to
the decision taken by the NRAs, the procedures will be subject to regulatory approval.
(85) The financial projections provided by ElecLink Limited are based on assumed
revenues in accordance with their assessment of the likely market value of such
contracts. The submission by ElecLink Limited only considers their central scenario
for the revenues received from long term contracts [BUSINESS SECRET]. However,
the price received for the long term capacity could differ from that projected.
(86) As the intention is to enter into long term contracts, an appropriate market test
undertaken by ElecLink Limited could have helped to establish the likely long term
revenues in advance.
(87) In the absence of such information, more recent market information is also relevant. In
this regard London Economics in their report to the NRAs note:
“[BUSINESS SECRET] most recently available IFA yearly capacity auction
prices … [the IFA 2014 annual] average price was €13.77, and with the
[BUSINESS SECRET]. Thus these represent what would clearly be a market-
based informational-estimate, of a very similar product, [BUSINESS
SECRET], where the most up-to-date prices suggest a [BUSINESS SECRET]
price difference on the long-term capacity”.
(88) A related issue is why the long term contracts would be discounted compared to
historical prices rather than projected prices of interconnector capacity. In that
situation the modelled congestion rents (see below) would provide a better starting
point. The modelling of expected congestion revenues provided London Economics
gives a capacity value of about [BUSINESS SECRET]21
.
(89) London Economics do conclude that the [BUSINESS SECRET] discount for a long
term contract is plausible (though without endorsing it)22
. However, from the above it
is clear that there are considerable grounds to question the value of capacity to which
this discount is applied. Overall London Economics conclude that revenue has
significant upside risk and [BUSINESS SECRET].
20
Additional information submitted on 16 June 2014. 21
P.33 of London Economics Report: “If we take the discounted average price as the value of the price
differential, or implicit auction congestion rent, in either direction, we get a capacity value of about
[BUSINESS SECRET]. 22
London Economics also note that the [BUSINESS SECRET] discount could be seen as equating to an
IRR of about [BUSINESS SECRET] when inflation is taken into account. P 32
EN 15 EN
4.2.3.3. Market risk – short term revenues
(90) Short term revenues may be different to those modelled. It is never possible to be
certain about modelling predictions, which inevitably depend on the assumptions
made. London Economics [BUSINESS SECRET] figures for the values of congestion
rent [BUSINESS SECRET] provided by Redpoint on behalf of ElecLink Limited.
(91) ElecLink Limited provided assessments of projected revenues, also undertaken by
Redpoint, under different scenarios based on: Different gas price scenarios; Different
generation mix scenarios in Great Britain and France; Absence of carbon price floor in
UK; Higher interconnection. ElecLink Limited also provided an estimation of the
sensitivity of revenues to higher forced outage rates. The sensitivity analysis provided
shows the impact on the project rate of return of changes in short term congestion
revenues for the 20% of capacity sold on the spot market. In the financial projections
sensitivities congestion revenues do not have any effects on the revenues to ElecLink
from the 80% of capacity assumed to be covered by long term contracts.
(92) The outcomes of the modelling provided by ElecLink Limited are set out below in
Figure 1 Eleclink financial projections – sensitivity analysis. As can be seen, in no
circumstance do these result in a rate of return equal to or below [BUSINESS
SECRET] – though with a lower proportion of long term contracts this sensitivity
would be correspondingly greater23
. Therefore, in all scenarios provided, there is a
significant margin above the likely debt finance costs of the project and a
corresponding positive return on equity. The sensitivity analysis could be different in
case other risks, as discussed above, were taken into account.
[BUSINESS SECRET]
Figure 1 Eleclink financial projections – sensitivity analysis (from application)24
4.2.4. National regulatory authority restrictions on long term contracts
(93) In their joint opinion, the NRAs agree that if all capacity were to be sold through
yearly or shorter-term products, the degree of risk associated with changes in the
electricity markets would likely prevent long-term financing on acceptable terms for
ElecLink Limited. They therefore consider that ElecLink Limited will only be
effectively able to contract for debt if they can sell long term contracts for the
capacity, and that without such products, the project may not be realised. NRAs
therefore consider that ElecLink should be able to allocate capacity in this way.
(94) However, because there is a possibility that the 80% of the capacity allocated through
long term contracts would generate regular cashflows above ElecLink Limited’s
financing requirement, as indicated by the London Economics analysis, the NRAs also
consider that in addition to ElecLink Limited’s proposed limit of 80% of total
capacity, long term contracts for capacity allocation should be subject to a cap based
on the associated revenues. This is designed to ensure that revenues from long term
contracts do not exceed what is necessary to secure project finance.
(95) The associated revenues are calculated by taking the total value of the revenues from
long term contracts, discounted at the nominal rate of [BUSINESS SECRET]. The
associated revenues may not exceed an amount which “takes into account”
23
The impact depends on the actual effect of the restrictions imposed by the national regulatory
authorities. This cannot be seen in advance as they in part depend on the outcome of the capacity
allocation process. 24
ElecLink Limited Exemption application, Exhibit E – Project financial information, p. 8
EN 16 EN
[BUSINESS SECRET] and [BUSINESS SECRET] costs as well as [BUSINESS
SECRET] costs.
4.2.5. National regulatory authority provisions for revenue sharing
(96) Based on the analysis provided by London Economics, the NRAs consider that the
projections submitted by ElecLink Limited as part of their application for an
exemption understate potential revenues from the project. This is not confined to the
potential upside from long term contracts, but also to the revenues from short term
products. Moreover, the NRAs are of the view that the probability of high or low
revenue from interconnector capacity products is not evenly distributed and that very
high revenues are possible, noting that short term volatility of electricity prices may
provide a natural lower bound to the price of interconnector capacity while very high
revenue may result from extreme conditions prevailing (for example extremely cold
weather in France or generation outages).
(97) As there is a strong possibility that the revenues will significantly exceed those set out
in the business plan, which they do not consider to be balanced by countervailing
downside risk, the NRAs consider that a complete exemption could result in ElecLink
Limited earning a disproportionate share of the congestion revenues, which would
otherwise be used either to expand interconnection or to lower transmission tariffs for
network users. It is on this basis that the NRAs consider it essential that the exemption
is accompanied by a mechanism to guard against such congestion rents resulting in
excess profit. The chosen mechanism is to give network users 50 % of the profits
exceeding a [BUSINESS SECRET] IRR.
(98) The NRAs clarified to the Commission that they consider that a hard profit cap (i.e.
without revenue sharing) could dampen (or remove completely) the incentives for the
interconnector operation and availability when the cap is reached and that the sharing
factor provides an incentive for ElecLink to maximise link availability and continue
operating should profits exceed the cap. This they consider is in the interest of
European consumers.
4.2.6. Commission assessment of the risk criterion
(99) In the Staff Working Document, the Commission Services set out that there are two
main risks to determine the assessment where there are sunk costs: the risk of non-use
of the investment and the risk of a change in costs and/or revenues in the future. This
has been reflected in the approach of the Commission in previous exemption
decisions.
(100) The Staff Working Document also recognises, as is the case for this project, that risks
may originate from changes in flows caused by changes elsewhere in the system. In
the present case, the use of the planned interconnector will depend on relative prices in
Great Britain and France (and the wider Central Western Europe region).
(101) The two specific reasons why this risk would not apply are also considered in the Staff
Working Document:
– The lower the risk, the higher the likelihood is of the project in question to
enjoy an unchallenged position;
– The level of risk would tend to be weaker where an integrated energy
company builds a new piece of infrastructure.
EN 17 EN
(102) However, in the present case neither reason applies (directly or indirectly). There are
already alternative interconnectors operational between Great Britain and Central
Western Europe, with several at a more advanced stage of planning. Moreover, Ofgem
has recently proposed a revised approach to interconnectors as part of their Integrated
Transmission Planning and Regulation project25
. This work builds on the work to date
for the proposed new interconnector with Belgium (the Nemo project). This approach
is expected to accelerate the delivery of increased interconnection under the regulated
framework.
(103) ElecLink is not part of an integrated energy company (see section 4.7 below) or of a
wider energy infrastructure company, rather it is the result of a collaboration between
its shareholders to realise the potential benefit of ensuring the maximum benefits from
an existing piece of infrastructure (i.e. the Channel Tunnel). The Commission accepts
that as a result, unless the project is subsumed into the wider regulated system, project
finance will be necessary to ensure these benefits can be realised. The Commission
also accepts that providers of project finance will require a degree of certainty around
the capacity of ElecLink Limited to repay that finance which can be provided by long
term contracts.
(104) The Commission has also recognised in its previous decisions on exemptions that
Long Term Contracts are in principle a legitimate way for to reduce the economic risk
of their investment. While long term contracts do not necessarily require the granting
of an exemption – they may in principle also be concluded for regulated infrastructure
– contracts of the duration envisaged here are so clearly outside normal regulatory
practice in electricity, and the developing European rules on capacity allocation and
congestion management, that in effect an exemption is required to provide regulatory
certainty.
(105) However, precisely because such long term contracts depart so clearly from normal
regulatory practice, and because it is only with great difficulty possible to adapt long
term contracts to reflect new developments, it is critical these be kept to the minimum
necessary to ensure that the investment can take place.
(106) This upside potential for long term contracts is in this case a particular concern as it
could result in more long term contacts than needed to secure financing for the project
Normally the value of demand for such contracts would be established following a
market test. In the Staff Working Paper, the Commission services explained that “As a
general rule, project promoters are required to test market demand before they can
obtain an exemption… Testing market demand is a crucial element to evaluate the
riskiness of a project and to assess to what extent the planned project enhances
competition ...”26
Moreover, Article 17(4) of the Electricity Regulation explicitly
requires that the NRAs while assessing the need for an exemption, should take into
account the results of the capacity allocation procedure.
(107) The absence of such a test is a major shortcoming in the submission presented by
ElecLink Limited where they propose to sell contracts for up to 20 years duration.27
In
the absence of a framework to reveal the valuations placed by market participants on
25
https://www.ofgem.gov.uk/publications-and-updates/regulation-future-electricity-interconnection-
proposal-roll-out-cap-and-floor-regime-near-term-projects 26
Box 3: Testing of market demand 27
This concern would not apply where it is proposed to allocate capacity on a spot or short term basis as
was the case for the Arnoldstein/Tarvisio exemption (SG D(2010)16980) or for that portion of capacity
exempted only from Article 16(6) of the Electricity Regulation on the use of revenues.
EN 18 EN
the long term contracts, an alternative approach is clearly needed before an exemption
could be granted. Such an approach should be clear, robust and related specifically to
likely financing requirements.
(108) The Commission therefore supports the approach proposed by the NRAs,
understanding that the discount of [BUSINESS SECRET] applied to future revenues
should be seen as reflecting the financing costs of ElecLink Limited. Even if an
interest rate of [BUSINESS SECRET] on debt is not achieved in practice, the fact that
the threshold value is set taking into account [BUSINESS SECRET] (i.e. the
[BUSINESS SECRET] discount is applied to [BUSINESS SECRET]) creates some
headroom for ElecLink Limited.
(109) As the remaining capacity will be marketed under normal regulatory rules, this
provision does not affect the potential for ElecLink Limited to benefit from its
investment, subject to the revenue sharing provisions.
(110) The Commission agrees with the assessment of the NRAs that there is a risk of
revenues which would normally be used for the development of the European
transmission system flowing to ElecLink Limited as profit in the event of a complete
exemption from Article 16(6) of the Electricity Regulation.
(111) In this regard, the Commission notes that, unless congestion revenues are being used
to secure or expand interconnection capacity, they would result in lower tariffs for a
transmission system operator28
. In the present case the revenues should therefore be
returned, directly or indirectly, to NGET, RTE or other transmission system operators
in the UK or France for that purpose. This will require detailed arrangements in order
to clarify the treatment of future revenues and the precise timing of receipts, the
operation of revenue smoothing mechanisms etc. in a proportionate way taking
account of the actual cash flows of ElecLink. These arrangements will need to be
subject to the agreement of the NRAs. The Commission also considers that it is
appropriate that the sharing be based upon the realised capital costs of the project,
where these are known. In this regard, the Commission considers that it is for the
NRAs to update – if considered appropriate – projected operational costs to take
account of changes in expected costs which would significantly affect the profitability
of the project. The precise level of the projected operation costs is not essential to the
notified decision (either for the limitation on long term contracts or for the operation
of the revenue sharing mechanism), and the NRAs should be able to take new
information into account while still retaining the desired incentive effects. The
Commission also accepts the judgement of the NRAs in this case that a sharing
mechanism acts as an appropriate incentive scheme. It is open to NRAs to implement
such schemes even within the normal regulatory framework. Indeed, the Commission
has frequently noted the importance of regulators providing tariff incentives and
appropriate economic signals to encourage investments.
(112) The Commission concludes that the level of risk attached to the investment is such that
the investment would not take place unless an exemption is granted, subject to the
application of the conditions set out in the NRAs joint opinion relating to the volume
of long term contracts and revenue sharing.
28
Any interconnection financed using these funds would not be eligible for an exemption as it would
breach the condition set out in Article 17(1)(d) and (e) of the Electricity Regulation.
EN 19 EN
4.3. Article 17(1)(c): the interconnector must be owned by a natural or legal person which
is separate at least in terms of its legal form from the system operators in whose
systems that interconnector will be built
(113) The ElecLink interconnector, connecting the Great Britain and French electricity
systems, will be owned by ElecLink Limited, a legally separate undertaking
established as a joint venture by Star Capital and Groupe Eurotunnel.
(114) Therefore, legal unbundling from existing TSOs is fulfilled as ElecLink Limited is a
separate and independent legal entity from NGET and RTE, the system operators in
whose systems that interconnector will be built.
(115) It follows that ElecLink Limited is separate in its legal form from existing TSOs
within the meaning of Article 17(1)(c) of the Electricity Regulation.
4.4. Article 17(1)(d): Charges are levied on users of that interconnector
(116) Access to the transmission capacity will be granted through long term contracts for up
to 80% of the capacity and shorter term contracts for the remaining capacity. Long
term contracts will be allocated in accordance with an open season procedure subject
to NRA approval. Short term contracts will be concluded with the market players in
accordance with the normal regulatory framework.
(117) The Commission concludes that users of the ElecLink interconnector will be charged
for using the interconnector. It follows that ElecLink charges levies on users within the
meaning of Article 17(1)(d) of the Electricity Regulation.
4.5. Article 17(1)(e): No part of the capital or operating costs of the interconnector has
been recovered from any component of charges made for the use of transmission or
distribution systems linked by the interconnector
(118) According to its exemption application, ElecLink Limited will be financed by project
financing and equity. ElecLink Limited is completely independent of both NGET and
RTE. There is no framework for any cashflows to ElecLink Limited from regulated
transmission charges. Indeed, the absence of such a framework is one of the
justifications put forward by ElecLink Limited in their request for an exemption. The
NRAs, who would be responsible for approving any such transfers, have accepted that
this criterion is met.
(119) The Commission concludes that no part of the capital or operating costs of the
interconnector has been recovered from any component of charges made for the use of
transmission or distribution systems linked by the interconnector. Therefore, the
requirement of Article 17(1)(e) of the Electricity Regulation is met.
4.6. Article 17(1)(f): the exemption must not be to the detriment of competition or the
effective functioning of the internal market in electricity, or the efficient functioning
of the regulated system to which the interconnector is linked
4.6.1. Detriment to competition
(120) This criterion has a different approach to the criterion set out in Article 17(1)(a) of the
Electricity Regulation as discussed in section 4.1 above, because it focuses on the
possible negative effects of the exemption rather than the competitive effect of the
investment itself. The concern is therefore on possible effects of granting an
exemption on other competing projects, whether regulated, exempted or submitted for
exemption. The potential detriment to competition is two-fold: Firstly, it is necessary
to ensure that competing infrastructure projects are able to compete on a fair basis with
EN 20 EN
the beneficiary of the exemption (e.g. on the availability of connection agreements
etc.). Secondly, a negative impact on competing projects from the exemption could
undermine the potential for competition more generally in the internal electricity
market (as increased interconnection will generally enhance competition).
(121) In relation to competing interconnector projects, there are a number of additional
interconnector projects in development between Great Britain and Central Western
Europe. In this context, congestion revenues from ElecLink, which would otherwise
be available to complete these projects, will only be available to support their
completion to the extent that the internal rate of return of ElecLink exceeds
[BUSINESS SECRET] and the revenue sharing mechanism applies. However, Ofgem
has recently developed a new regulatory approach for interconnectors. The
Commission understands that both Nemo (the interconnection between Great Britain
and Belgium) and IFA 2 (a second interconnection between France and Great Britain)
are likely to proceed on this basis. The Commission also understands that there are no
technical reasons why the ElecLink project, completed under an exempted regime,
would restrict either the capacity of feasible alternative interconnection projects, or
cause a delay in their completion.
4.6.2. Effective functioning of the internal market
(122) The effective functioning of the market could be undermined if the exemption
hindered the overall optimisation of the energy network, for example by scheduling
flows on the interconnector regardless of implications for congestion or production
costs in other parts of the network.
(123) In the case of ElecLink this risk is minimised by a number of conditions on the
exemption decision granted by the NRAs:
– The inclusion of a use-it-or-sell-it obligation;
– The inclusion of netting arrangements so that ElecLink maximises the capacity
it makes available to the day-ahead allocation; and
– The obligation on ElecLink to participate in market coupling.
(124) The result of these conditions is that the physical use of the ElecLink interconnector
should be fully integrated with wider capacity allocation and congestion management
methods developed to ensure the effective operation of the internal electricity market.
4.6.3. Efficient functioning of the regulated system
(125) The construction of a new major infrastructure may require the expansion or
reinforcement of the existing regulated infrastructure due to substantially increased
energy flows. It is therefore necessary to consider how the exemption influences the
costs of operating the regulated system if, for example, the users of the regulated
system could be faced with substantially increased higher network tariffs.
(126) In the present case, while some network strengthening is required for ElecLink to be
able to operate fully, until the system is upgraded, ElecLinks connection will be non-
firm (i.e. the import or export capacity can be reduced by NGET or RTE to reflect
internal constraints on the network). This avoids that network users in the regulated
system are faced with increased tariffs as a result of the impact of the operation of the
ElecLink interconnector.
EN 21 EN
(127) The Commission understands that upgrades are not required solely as a result of the
connection of ElecLink, but are also related to the general need to upgrade the network
in both Great Britain and France.
(128) However, and as noted in the Staff Working Document, an exemption may also be
motivated positively by the desire to protect the regulated system and thus customers
against having to underwrite the costs of a project. This second point is relevant in this
case, where the operation of the ElecLink interconnector is complicated by the fact
that it shares infrastructure with the Channel Tunnel. ElecLink describes these risk in
the application as follows:
"There are significant complexities to building an interconnector through the
existing Channel Tunnel infrastructure while maintaining the Channel
Tunnel’s 24 hour a day traffic service. The Service Tunnel’s diameter is 4.8
meters providing enough space for two small cars to pass. Channel Tunnel
maintenance teams are permanently operating in the Service Tunnel … Access
to quadrants of the Running Tunnels can only be made on the basis of agreed
track possessions with Eurotunnel…requiring complex logistical planning …
Specific issues relating to heat levels in the Service Tunnel may push the
outage rate considerably above its expected level. Also, during operation,
ElecLink faces the unique outage risk arising from potential emergencies
occurring in the Running Tunnel."
(129) It can be seen from the above that many of these risks relate to interactions between
the different functions of the tunnel. The management of these risks will require close
cooperation between Eurotunnel and ElecLink. In this regard, at least for the
construction and initial operation, such cooperation is probably most efficiently
ensured by the role of Eurotunnel as a shareholder in both projects. It is appropriate to
protect users of the regulated system from the risks of significant disagreement
between ElecLink and Eurotunnel as to the responsibility for carrying risks.
4.6.4. Commission assessment of detrimental impacts of exemption
(130) Based on the analysis above, the Commission concludes that granting an exemption to
ElecLink Limited as set out in the NRAs joint opinion will not be to the detriment of
competition or the effective functioning of the internal market in electricity or the
efficient functioning of the regulated system to which the interconnector is linked.
4.7. Exemption from Article 9 of the Electricity Directive – Unbundling
(131) The NRAs have granted a partial exemption from the provisions of Article 9 of the
Electricity Directive (i.e. ownership unbundling) for a period of 25 years. The NRAs
have required ElecLink to implement an "amended ownership unbundling model as
described in paragraph (32)". In addition, ElecLink Limited will have to notify the
NRAs of any change to the investment of Star Capital in undertakings performing
functions in generation and supply.
(132) As part of the "amended ownership unbundling model", the NRAs require ElecLink
Limited to comply with the independent transmission operator (ITO) model as set out
in Chapter V of the Electricity Directive, with the exception of Article 22 (network
development and powers to make investment decisions). The NRAs specify that
ElecLink Limited will need to be certified in both countries before the start of the
operation of the interconnector.
EN 22 EN
(133) The Commission notes that the possible granting of exemptions under Article 17 of
the Electricity Regulation should not unnecessarily hinder the implementation of the
ownership unbundling rules.
(134) The Commission acknowledges the concerns of ElecLink Limited as regards the
investment strategy of Star Capital, one of its two shareholders. However, the
Commission does not consider that this necessarily implies that the requirements of
Article 9(1) of the Electricity Directive are not met.
(135) Indeed, the Commission considers, on the basis of the information provided by the
NRAs and ElecLink Limited itself that it is not clear that ElecLink Limited could not
meet the ownership unbundling model as set out in Article 9(1) and the following of
the Electricity Directive.
(136) Therefore, the Commission is of the view that before ElecLink Limited is allowed to
implement other unbundling models, it should first be established that it is not in fact
able to meet the requirements of Article 9 of the Electricity Directive. A certification
process gives the appropriate context for such an assessment.
(137) The Commission is consequently of the opinion that ElecLink Limited should firstly
apply for certification under the ownership unbundling model under Article 9 of the
Electricity Directive. The NRAs should then assess, amongst others, the current
portfolio of participations of Star Capital and decide whether or not it gives rise to an
obstacle for the certification of ElecLink Limited under the ownership unbundling
model.
(138) As regards potential future changes in the portfolio of participations of Star Capital,
taking place after an eventual certification under the ownership unbundling model, the
Commission notes that not every investment in generation and or supply would
necessarily entail an infringement of Article 9(1) of the Directive. In this regard, the
Commission services have provided guidance on how the investment strategy of
financial investors in TSOs should be assessed in the Staff Working Document on the
Commission's practice in assessing the presence of a conflict of interest in the context
of ownership unbundling, which includes participations by financial investors.29
The
Commission has also set out its views on the application of the principle of
proportionality where certain shareholders in a TSO have interests in production or
supply which do not constitute a risk of discrimination in the operation of the networks
or to adequate investment in the networks in several certification opinions.30
(139) In light of the above, the Commission considers that only if, based on the assessment
conducted by the NRAs in the context of certification for ownership undulling, it is
concluded that ElecLink Limited does not meet the requirements of Article 9 of the
Electricity Directive, ElecLink Limited may apply for certification under the ITO
model set out in Chapter V of the Electricity Directive. The Commission also
considers that the independent system operator model described in Articles 13 and 14
29
Ownership unbundling - The Commission's practice in assessing the presence of a conflict of interest
including in case of financial investors [SWD(2013) 177, 08/05/2013]. 30
See the opinions on the so-called offshore transmission operators in the UK: Commission's Opinion on
Ofgem's draft certification decisions for OFTOs (TC Robin Rigg OFTO Limited, TC Gunfleet Sands
OFTO Limited, TC Barrow OFTO Limited and TC Ormonde OFTO Limited C(2012)3006;
Commission's Opinion on Ofgem's draft certification decision for Walney 1 C(2013)979; Commission's
Opinion on Ofgem's draft certification decision for Walney 2, Sheringham and London Array
C(2013)2030; Commission's Opinion on Ofgem's draft certification decision for Thanet C(2013)2566;
Commission's Opinion on Ofgem's draft certification decision for GG – Greater Gabbard C(2013)3705.
EN 23 EN
of the Electricity Directive presents an alternative to the ITO model in this case as it
could facilitate the integrated operation of the ElecLink interconnector and the national
transmission systems. Therefore this option should also be open to ElecLink Limited.
5. Conclusion
(140) The Commission is of the view that the ElecLink project meets the criteria set down in
Article 17(1) of the Electricity Regulation and that an exemption could be granted to
the ElecLink project from Article 16(6) of the Electricity Regulation and Articles 9
and 32 of the Electricity Directive, provided that the Joint Opinion and the Exemption
Decisions are amended in the manner as set out in the operative part of the present
Decision.
HAS ADOPTED THIS DECISION:
Article 1
The European Commission requests the British and French Regulatory Autorities (Gas and
Electricity Markets Authority and the Commission de la Regulation de l’Energie) to amend in
accordance with Article 17(8) of Regulation (EC) No 714/2009 their Joint Opinion and their
Exemption Decisions notified to the Commission 20 March 2014, as set out in the subsequent
articles.
Article 2
The Joint Opinion and the Exemption Decisions shall be amended so as to provide that the
exemption from the application of the rules on ownership unbundling in Article 9 of Directive
2009/72/EC shall be granted only if:
– ElecLink Limited first applies for certification pursuant to the ownership unbundling
model in Article 9 of Directive 2009/72/EC; and
– CRE and Ofgem conclude that ElecLink Limited does not meet the requirements of
ownership unbundling in Article 9 of Directive 2009/72/EC.
Article 3
The Joint Opinion and Exemption Decisions shall be amended so as to require that, in case an
exemption from the application of the rules on ownership unbundling in Article 9 of Directive
2009/72/EC is granted in accordance with Article 2 of the present decisison, compliance with
the provisions of Articles 13 and 14 of Directive 2009/72/EC or of Chapter V of Directive
2009/72/EC as a condition for the exemption from ownership unbundling.
Article 4
In line with Article 17(8) of Regulation (EC) No 714/2009, the Commission's approval of the
Exemption Decisions shall expire 2 years after the date of adoption of the present Decision in
the event that construction of the ElecLink interconnector has not started by that date and 5
years after the date of adoption of the present Decision if the ElecLink interconnector has not
become operational by that date, unless the Commission decides that the delay is due to major
obstacles beyond the control of ElecLink Limited.
EN 24 EN
Article 5
This Decision is addressed to the Gas and Electricity Markets Authority and the Commission
de la Regulation de l’Energie.
Done at Brussels, 28.7.2014
For the Commission
Ferdinando NELLI FEROCI
Member of the Commission