BRUSSELS INSIDER #1 - September 18, 2018
The Aquind case: private interconnector between France and UK hangs in balance as EU refuses to give exemptions
by Sonja van Renssen
European energy regulators (ACER) have refused to give Aquind, a privately-funded electric interconnector from the UK to France the exemptions from EU energy law it says it needs for its business case. Aquind warns of a dangerous precedent: ACER is blocking an official European Project of Common Interest that doesn’t need any subsidies, at a time when the EU is trying to mobilise private investment in energy infrastructure, Director Alexander Temerko tells Energy Post. Temerko, who once served in the government of Boris Yeltsin in Russia, warns that the fate of one of the biggest private energy infrastructure projects in Europe is on the line. Aquind’s problem, he suggests, is French regulator CRE, which “protects its own transmission system.”
On 19 June, the Agency for the Cooperation of Energy Regulators (ACER) ruled that Aquind, a new 2GW interconnector planned for between France and the UK, should not get any exemptions from EU internal energy market law.
Aquind told Energy Post that the decision “creates a serious regulatory risk for any private investment in energy infrastructure in Europe”.
The Aquind interconnector is a European Project of Common Interest (PCI). It features in the third list of PCIs drawn up by the European Commission last November and approved by the European Parliament in March.
Despite Brexit, there are currently a number of new electricity interconnectors being planned between France and the UK, which will serve to further integrate the UK electricity market into the wider EU market: FAB, IFA2, ElecLink and Gridlink.
Only ElecLink has requested – and received – the kinds of exemptions that Aquind wants. ElecLink has “a 25-year regulatory exemption from certain clauses of the Third Energy Package to forward sell under long term contracts up to 80% (800MW) of the interconnector capacity in each direction”, its website explains.
Go ask for subsidies
PCI projects are key infrastructure projects that link up the energy systems of different EU countries. They must increase competition, bolster security of supply and contribute to the EU’s climate and energy goals. In return, they get a suite of regulatory benefits – such as accelerated permitting – intended to speed up their realisation. They also win the right to apply to the Connecting Europe Facility (CEF) for EU funding.
Aquind doesn’t want any EU funding. Nor has it asked for national subsidies. It is an entirely privately funded project that has instead requested exemptions from parts of EU energy market law to make its business case.
The EU’s third energy market liberalisation package from 2009 introduced the opportunity for such exemptions for private projects. The same package, incidentally, created ACER.
The legislation says that national regulatory authorities may grant, upon request, exemptions from requirements on for example unbundling, third party access, and terms and conditions for connection and access (including tariffs), provided that specific conditions are met. In this case, they are not, ACER ruled on 19 June. National regulators CRE and Ofgem had referred the case to ACER in December 2017.
More exactly, the Aquind project does not meet one condition, ACER said. This requires that the risk attached to the investment is such that the project would not be realised unless an exemption were granted.
In a statement, ACER said it was “not able to identify with the required certainty” this level of risk. In fact, the regulators suggested that since Aquind has been labelled a PCI, it should put in an “investment request” to the French and British regulators “that could result in a decision to recover its… costs via regulated tariffs”.
In other words, ACER recommended that the private project go public.
Hinckley Point C but cheaper
Aquind’s Director Alexander Temerko is frustrated. “Europe needs more interconnectors, it wants to mobilise private investment and we want to invest,” he tells me when we meet in Brussels on 6 September. “But we need that exemption. We can’t build the interconnector without it.”
Alexander Temerko visits Downing Street 10
Temerko is one of three men listed as the company’s management on the Aquind website. He’s a “prominent British industrialist” who served as a junior minister and key negotiator in the Boris Yeltsin government before joining Yukos Oil in 2000 and moving to the UK in 2005. Kirill Glukhovskoy, who joined him at our Brussels meeting, is Aquind’s Managing Director. An ex-litigation lawyer for “major Russian energy companies” among others, he has led Aquind since its inception in 2014. Finally, Richard Glasspool, a non-executive director with the project, is a former partner at KPMG Russia. All three ended up working for the Offshore Group Newcastle (OGN), which spun out Aquind as a private company.
The Aquind interconnector is one of the biggest private energy infrastructure projects in Europe and the longest, at 250km. “It’s [of] the same [scale] as Hinckley Point C, but cheaper,” says Temerko. With a price tag of £1 billion, it’s a “mid-scale” investment, he says. The £50 million raised so far has been put up by British private investors like himself.
Getting the rest of the money is not the problem, Temerko continues. The problem is regulatory.
France vs. the EU
Aquind’s problem is France, or more specifically the French regulator CRE. “Each country protects its own transmission system” he explains. “French law requires an exemption for any project that is not carried out by national transmission system operator RTE.”
CRE reportedly voted against granting the exemption along with most of the other national regulators at ACER. Only the UK voted the other way, Energy Post understands.
The Commission has warned France that it is breaking the rules of the third energy package with its preferential treatment of RTE. “The French legislation prevents undertakings other than the national incumbent system operator for electricity from building and operating interconnectors to other EU Member States,” it said in July 2016, when it sent a so-called reasoned opinion to France. This was the second step in an infringement procedure that started with a letter of formal notice in February 2015.
France has sent a reply, but there has been no decision by the Commission since on whether to follow up through the EU Court of Justice. In February 2018, in response to a question from the European Parliament, EU Climate and Energy Commissioner Miguel Arias Cañete said the case is “ongoing”.
“ACER has not enaged with this issue at all,” Temerko complains. Instead, it has indulged in some “creative thinking” about the conditions that merit an exemption. “It has put the threshold very high,” explains Temerko’s colleague Kirill Glukhovskoy, Aquind’s Managing Director. “It is setting up a yardstick to evaluate exemptions that we believe goes beyond the legislation.”
In a press release on 20 August, three days after it appealed the decision, Aquind summed up: “The decision incorrectly disregarded provisions of the French energy code…, wrongly applied and interpreted key EU regulations, and failed to properly assess the project risks.”
It is the first time that ACER has ruled on such exemptions (the ElecLink exemptions were dealt with at national level). Glukhovskoy says the ruling sets a dangerous precedent: ACER is rebuffing a way to build energy infrastructure without increasing tariffs, and a PCI at that. “Regulated returns do not work for a project funded on the market,” he explains. “A private project needs to provide higher returns than tariffs can offer.”
From ACER’s perspective the project can follow a regulated route. It appears to disregard the French legal situation, which receives no mention in its press release on the ruling on 28 June.
A representative for ACER directed Energy Post to this press release in response to a request for comment; he said the Agency could not comment further at this time.
Aquind says it requested the exemption because CRE left it no choice. Aquind potentially could have applied for the “cap and floor” regime created by Ofgem. This aims to encourage investment in electricity interconnectors by moving beyond tariffs to set minimum and maxmum revenue levels. “It strikes a balance between commercial incentives and appropriate risk mitigation,” Ofgem explains in a note.
But CRE refused to countenance such a regulated arrangement, even for one end of the interconnector, Temerko says. It insisted on an exemption for the full project and then referred the decision to ACER on the back of a study suggesting that the interconnector’s benefits were uncertain in light of the uncertainty around Brexit.
Temerko says the study was done because France needed to decide the money that RTE would get for the FAB interconnection.
At the request of CRE and Ofgem, Aquind did its own modelling on the potential impact of Brexit and concluded that: “The Aquind Interconnector benefits remain strong for both countries under any scenario.” Its status as a PCI is testimony to its value, Temerko says. The project’s benefits have been “independently assessed and approved by ENTSO-E, Ofgem and ACER itself”, the company says in its press release of 20 August. As well as being a European PCI, the Aquind interconnector has been named a Nationally Signficant Infrastructure Project in the UK.
A representative for CRE told Energy Post that all interconnector projects with the UK are on hold until after Brexit. The spokesperson pointed out that other private interconnectors have received exemptions of the kind requested by Aquind but said CRE cannot comment on the ACER decision.
Actions not words
For Temerko, there are four years of work and £50 million on the line. Temerko says the European supply chain is almost in place, with benefits especially for France. The project is due to be completed in 2022.
The exemption would be “the simple solution”. A decision on Aquind’s appeal is due within two months i.e. by 20 October. “It’s easier to get the exemption than to change French law,” Temerko estimates. “And anyway, it’s not our job to change French law.”
That’s for the EU to do. Can Brussels break national grips on power and enforce an internal energy market? The ACER decision comes as the organisation’s remit is revisited under the market design talks of the Clean Energy Package and at a time when there is an ever stronger push for more private investment amid a debate on the EU’s next budget.
What is Aquind?
The Aquind interconnector is a new subsea, underground High Voltage Direct Current (HVDC) electric power link planned for between the South Coast of England and Normandy.
It would join the 1.4GW FAB link and 1.4GW GridLink (both also planned), the 1GW ElecLink and 1GW IFA2 (both being built) and the 2GW IFA link (already in use) between the two countries.
The idea is that by linking up the French and British grids, it will make energy markets more efficient, improve security of supply and enable greater flexibility to absorb variable renewables.
With 2GW capacity, Aquind would be able to transmit 16TWh of electricity each year, or 5% and 3% of the total consumption of the UK and France respectively, its backers say. It would be designed as two separate 1GW links to minimise the potential impact of any fault.
Electricity could flow both ways and the interconnector could provide various system services to the TSOs in both countries.
The project could include fibre-optic data transmission cables alongside the electric cables.
In May 2017, Aquind submitted a request for exemptions from EU internal market law to CRE and Ofgem. In December 2017, the national regulators referred the matter to ACER. ACER decided against granting the exemptions in June 2018. That decision is now under appeal, with a response due by 20 October.