Eleclink: what can be learned from this innovative private European interconnector? – GWC Mag

Europe has put in place a specific regime to incentivise private investors to build, own and operate new interconnectors. Jean-Baptiste Vaujour at the Emlyon Business School looks at Eleclink, a private interconnector built to connect the UK with France. It uses the existing Channel Tunnel infrastructure. But the most disruptive side of Eleclink is not its smart use of the tunnel but its innovate business and regulatory model. The 1,000 MW DC cable became commercially operational in May 2022. Vaujour gives the background, the considerable regulatory coordination required, the financing and the revenue streams. He goes on to explain that, though a success, the replicability of the Eleclink business model is unclear. This article is the second of a series of four articles by Vaujour dedicated to the development of electrical interconnectors in Europe. The first article discussed the economics of the sector and its important contribution to security of supply, electricity affordability and emissions reduction in Europe.

At the inception of Eleclink lies a brilliant intuition by Star Capital about the opportunity to build an interconnector between Great Britain and France using the pre-existing infrastructure of the Channel Tunnel. Indeed, a non-trivial part of the CAPEX of any underwater connector is usually absorbed by the actual offshore deployment of the cable. A special-purpose cable-laying boat is required, as well as significant trenching work on both shores. The construction of connecting stations and adaptation of the local high-voltage network are also significant cost elements.

On all these counts, the Channel Tunnel provided unique cost-optimisation potential. For example, the tunnels themselves were already built to accommodate high-voltage current because of the train power supply and the local electrical networks had already been reinforced for the same reason. The reduced time for planning and construction would also significantly reduce development time and associated costs.

Due to the on-going energy transition strategies both in the United Kingdom and in continental Europe, it was also anticipated that the interconnector would come online at a time of increasing pressure on power supply with notably an increasing need to diversify production sites to compensate for local intermittencies in renewable generation. The ability to provide bi-directional flows would allow both sides to benefit from the meteorological discrepancies and ensure security of supply in tight markets.

Star Capital approached Eurotunnel (now Getlink) and in 2011 they launched together a joint venture company operating under the name of Eleclink. Getlink would then purchase Star Capital’s share in 2016 and proceed with the development of the 1,000 MW DC cable that became commercially operational on 23^rd May 2022. The journey from initial idea to commercial completion was rich and eventful as the most disruptive side of Eleclink was not in its smart use of existing assets but in its innovate business and regulatory model.

A private interconnector: a new business and regulatory model

Transmission networks and by extension interconnectors have historically been developed and operated by publicly-owned TSOs. In France, since the nationalisation law of 1949, the networks have been owned and managed by EDF and then its unbundled independent subsidiary, RTE. In the UK, National Grid is managing the electricity transmission network. Both companies already had experience commissioning an interconnector together, the Interconnexion France-Angleterre (IFA 1) in 1986.

Here, however, neither of them was involved in the project. Using the opportunity by European regulation^[1] to create an exemption status, Eleclink was able to build a niche for itself. The core idea behind this regime is that private actors may be allowed to build, own and operate interconnectors, provided that these assets do not impact competition on the electricity market and that they do not benefit from the tariff revenues network operators are being compensated with. Their business plans had to solely rely on user-generated revenues.

Pre-conditions and exemption regime

However, in order to obtain this exemption status, a very complex regulatory procedure had to be undertaken by Eleclink as the company had to obtain approvals and certifications from both regulators CRE (France) and Ofgem (UK), as well as from the European regulatory body ACER. To give a sense of perspective, between 2013 and 2023, the CRE made references to Eleclink in 92 different documents, out of which 36 were regulatory decisions – there are many peripheral decisions beyond the exemption regime that need to be made, such as those relating to the TSO status or technical decisions linked to network connection (access rules, network planning) for example. CRE and Ofgem had to undertake significant coordination work in order to achieve a joint opinion on a partial 25-year exemption.

Simplified decision process on the exemption regime

Sources of income

As a result, Eleclink is now a company that relies on commercial resources to generate its income. It comes from three main streams^[2]:

• Congestion revenues, that is the auctioning of capacity on the interconnector to electricity market participants on both sides of the interconnector who wish to sell / purchase power to / from the other side;
• Revenues from the capacity markets both in France and the UK, as the company is providing capacity resources to these markets. For example, interconnectors are rated at 90% of their capacity on the French capacity market, meaning Eleclink is registered for 900 MW;
• Revenues from ancillary services to TSOs, selling notably reactive power, frequency adjustments, emergency services.

Eleclink began its commercial operations in May 2022, which has been an extremely unusual year on energy markets. Coming online just a few months after the Russian invasion of Ukraine and a few months before the explosion of the Nord Stream pipelines (September 2022), Eleclink significantly contributed to the European security of supply at a critical time. It also benefited from the record scarcity pricing for interconnector capacity and generated €420m of revenues between May and December 2022 and a net profit of nearly €159m (balance sheet size is €1.2bn, long term debt about €800m). Beyond the exceptional situation, this record profitability is first and foremost a resounding validation of the socio-economic utility of interconnectors for the European electricity market and for end-customers down the line.

However, Eleclink cannot keep the entirety of that exceptional profit as a profit-sharing mechanism was part of the exemption regime that was granted: the company is required to share 50% of profits above a threshold IRR – the detailed calculation being confidential^[3]. RTE and National Grid hence stand to receive a significant part of the excess return that was accumulated in 2022 and Eleclink has provisioned €142m to that end.

Financing structure

The initial phases of the project were purely financed on equity and after purchasing Star Capital’s shares, Getlink has become the sole shareholder of Eleclink. The company has financed the construction of the interconnector through debt financing, which comprise direct loans from its shareholder. The exact financing is not public information but it is noteworthy that Getlink raised its first Green Bond financing in September 2018 and that part of the €550m proceeds was used to finance Eleclink^[4].

As per the published financial statements, at the end of 2021, a few months before commissioning, the gearing of Eleclink slightly exceeded 100%, with equity actually being negative (share capital was worth €116). This means the project has been fully debt financed, which is possible in a framework where the shareholder is also providing debt that has been first raised based on its own credit rating.

Conclusion

Eleclink is a one-of-a-kind project both in technical and regulatory terms. Because of its unique position, it is able to generate commercial revenues under the umbrella of a robust parent company that has a vested interest in its success. The replicability of the business model is however questionable.

Regulators have taken stock of the specific difficulties linked to the exemption regime and the lack of certainty that comes with the exclusion of tariff financing. This commercial risk exposure is difficult to combine with long-term construction debt and equity investors have to provide a significantly higher share of the financing (from 20 to 30% depending on the risk level). These considerations led to the development of alternative regulatory models, notably the cap-and-floor regime created by Ofgem that was used by Nemo Link and Viking Link.

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Jean-Baptiste Vaujour is Professor of Practice at the Emlyon Business School

 

NOTES:

1. Currently European Regulation 2019/943 (art. 63) but initially in EU Regulation 714/2009 ↑
2. Eleclink 2022 Full Year Report (source) ↑
3. “NRAs therefore consider it essential that the exemption is accompanied by a mechanism to share the excess profit in case the return actually generated by the project exceeds a certain threshold. The chosen mechanism is to give network users 50 % of the profits exceeding a [redacted] IRR.” – Page 37 of the Ofgem – CRE final joint opinion. ↑
4. Reference here. ↑