1. Introduction

Electricity interconnectors are transmission links connecting the electricity systems of two countries or market areas. They allow electricity to flow across borders, improve market integration, diversify sources of supply, facilitate renewable-energy trading and potentially strengthen security of supply.

However, interconnector projects are extremely capital-intensive. They may involve subsea cables, converter stations, substations, land connections and long development periods. Their revenues can also be uncertain because they depend on electricity-price differences, congestion, market design and regulatory conditions. Consequently, interconnector investment incentives are legal and regulatory mechanisms designed to make investment sufficiently attractive while protecting consumers from excessive returns or unnecessary costs.

A central example is Great Britain's cap-and-floor regime, under which Ofgem regulates interconnector revenues by establishing a minimum "floor" and maximum "cap". Ofgem describes the regime as a regulated route intended to limit developers' exposure to electricity-market risk while encouraging delivery of interconnector capacity. (Ofgem)

2. Why Investment Incentives Are Necessary

Interconnectors present a distinctive investment problem.

A. High capital expenditure

An interconnector may require billions in infrastructure investment before generating revenue. The investor must commit capital years before the commercial benefits become certain.

B. Revenue uncertainty

Unlike conventional regulated transmission infrastructure, an interconnector may derive significant revenue from differences between electricity prices in connected markets. If price differences are smaller than expected, revenues can fall substantially.

C. Regulatory risk

Changes to:

transmission charging,

congestion management,

market coupling,

renewable-energy policy,

network-access rules,

capacity allocation,

environmental requirements, and

cross-border regulation

may materially affect expected returns.

D. Cross-border coordination

Two jurisdictions may regulate different parts of the same physical project. This creates risks concerning licensing, cost recovery, ownership, revenue allocation and regulatory approval.

Thus, investment incentives attempt to create a balance:

sufficient certainty for investors + competition and efficiency + protection of consumers.

3. Principal Forms of Interconnector Investment Incentives

3.1 Cap-and-Floor Regulation

The most important example is the GB cap-and-floor model.

Under this mechanism:

the floor establishes a minimum regulated revenue level;

the cap establishes a maximum revenue level;

revenues below the floor can result in a regulated top-up;

revenues above the cap are returned to consumers.

Ofgem's current framework provides for revenue assessments over a 25-year regime period, with periodic assessments. In the Nemo Link assessment, for example, revenues below the floor resulted in a top-up mechanism, while revenues above the cap were payable back for consumer benefit. (Ofgem)

This is effectively a risk-sharing mechanism.

Investment effect

Without a floor, an investor bears most of the downside risk.

With an unlimited revenue stream, consumers bear excessive upside risk.

The cap-and-floor mechanism therefore seeks to distribute risk between the developer and consumers.

4. The Floor as an Investment Incentive

The floor is particularly important because it reduces downside revenue risk.

Suppose an interconnector requires £1 billion of investment.

If projected market revenues are highly uncertain, an investor may demand a very high return to compensate for the possibility of poor revenues.

A regulated floor can reduce this risk.

Conceptually:

Investment → regulated revenue protection → lower downside risk → improved financing conditions → greater investment probability

This does not mean that the investor is guaranteed a profit in every circumstance. Instead, the regulatory framework establishes a mechanism for supporting revenue when the interconnector's market earnings fall below the prescribed level.

Ofgem states that the cap-and-floor regime was introduced to unlock beneficial investment by reducing risks and that it was designed to incentivise timely delivery of additional interconnector capacity. (Ofgem)

5. The Cap as a Consumer-Protection Mechanism

The opposite side of the incentive structure is the cap.

If an interconnector performs exceptionally well and earns revenues above the regulated cap, the excess is returned for consumer benefit.

This is important because interconnectors can sometimes benefit from large price differences between connected markets.

The cap therefore prevents the investment incentive from becoming an unrestricted profit guarantee.

The regulatory philosophy can be expressed as:

Floor = protection against excessive downside

Cap = protection against excessive upside

Between cap and floor = commercial incentive

Ofgem's third-window framework expressly describes the arrangement as providing a minimum revenue level while requiring revenues above the cap to be returned to consumers. (Ofgem)

6. Congestion Revenues as an Investment Incentive

Another important source of economic value is congestion income.

Where transmission capacity between two markets is scarce, differences in electricity prices can create congestion revenues.

EU electricity-market law places restrictions on the use of congestion income. Article 19 of Regulation (EU) 2019/943 gives priority to:

guaranteeing the availability of allocated capacity;

maintaining or increasing cross-zonal capacity; and

covering relevant network investments that reduce interconnector congestion.

Only after those priorities have been adequately fulfilled can residual revenues be treated as income in the network-tariff framework. (EUR-Lex)

This is significant because congestion income can indirectly support infrastructure investment.

The law therefore attempts to prevent congestion revenues from becoming merely an unrestricted source of private profit while allowing them to contribute to network development.

7. Regulatory Exemptions for New Interconnectors

Another major investment incentive historically available under EU law was exemption from certain regulated-access and revenue rules.

Under the former Article 17 of Regulation (EC) No 714/2009, new interconnectors could, subject to conditions, obtain exemptions where the investment involved sufficient risk that it would not otherwise take place.

This mechanism is particularly important because it recognises a basic investment principle:

If regulation makes a risky infrastructure project commercially unattractive, limited regulatory relief may be necessary to make construction possible.

The Aquind litigation provides an important illustration.

8. Case Law: ACER v Aquind Ltd, C-46/21 P

Facts

Aquind proposed an electricity interconnector between the United Kingdom and France.

The project sought an exemption under Article 17 of Regulation 714/2009.

ACER rejected the exemption request, finding that the necessary investment-risk condition had not been satisfied.

The dispute ultimately reached the Court of Justice of the European Union.

The case is reported as ACER v Aquind Ltd, Case C-46/21 P, EU:C:2023:182. (InfoCuria)

Legal significance

The case demonstrates that an investment incentive based upon regulatory exemption is not automatic.

An applicant must demonstrate that the statutory conditions for exemption are actually satisfied.

The investment-risk requirement is particularly important: the exemption mechanism was designed for projects where the regulatory framework itself could prevent investment unless special treatment were granted.

The litigation also addressed the intensity of review by ACER's Board of Appeal and the courts. The Court of Justice's judgment therefore illustrates the importance of properly assessing the economic and regulatory circumstances surrounding an interconnector investment. (InfoCuria)

Principle

The case can be used to establish the following proposition:

Interconnector investment incentives must remain within the statutory conditions established by EU energy law; commercial risk alone does not automatically create an entitlement to regulatory exemption.

9. Aquind v ACER, T-735/18

The earlier General Court proceedings are equally significant.

In Aquind v ACER, T-735/18, the General Court considered ACER's refusal of Aquind's exemption request.

The case concerned the interpretation of Article 17 of Regulation 714/2009 and the role of investment risk in determining whether an exemption should be granted. (InfoCuria)

The litigation illustrates an important aspect of investment-incentive law: the regulator must distinguish between ordinary commercial risk and regulatory/investment risk of the kind contemplated by the exemption regime.

The case subsequently formed part of the procedural history leading to the Court of Justice's judgment in ACER v Aquind.

10. Case Law: Baltic Cable AB v Energimarknadsinspektionen, C-454/18

Another important authority is Baltic Cable AB v Energimarknadsinspektionen, C-454/18, EU:C:2020:189.

The case concerned an electricity interconnector between national transmission systems and the treatment of revenues resulting from the allocation of interconnection capacity. (InfoCuria)

The significance of the case for investment incentives is that the legal treatment of interconnector revenue cannot be considered independently from the EU framework governing cross-border transmission.

The case demonstrates that:

interconnector operators are subject to EU electricity-market rules;

congestion revenues have a regulated legal purpose;

revenue-generation mechanisms must be considered alongside network-development obligations; and

regulatory treatment of interconnector revenues can affect the economic incentives associated with investment.

Thus, revenue regulation is itself an important component of investment law.

11. UK Approach: Ofgem's Cap-and-Floor Regime

The British model provides one of the clearest modern examples of interconnector investment incentives.

Ofgem introduced the cap-and-floor regime in 2014. Before that, several interconnectors had predominantly been developed on a merchant basis. Ofgem subsequently developed the regulated model to reduce investment risk and attract additional interconnector investment. (Ofgem)

The regime has been applied to projects including:

Nemo Link;

GridLink;

NeuConnect;

FAB Link;

Viking Link;

Greenlink; and

other projects assessed under subsequent application windows.

For example, Ofgem decided in 2018 to grant GridLink, NeuConnect and NorthConnect a cap-and-floor regime in principle because the projects were considered likely to be in the interests of GB consumers. (Ofgem)

12. Nemo Link as a Practical Example

Nemo Link, connecting Great Britain and Belgium, was the pilot project for the GB cap-and-floor regime.

Ofgem's 2014 decision expressly described the regime as seeking to balance investment incentives with appropriate allocation of risks and rewards. (Ofgem)

Nemo Link subsequently became an important practical example of how the mechanism operates.

In Ofgem's first End of Period Assessment, covering 2019–2023:

revenues were compared with the applicable cap and floor;

the regulatory adjustment was calculated;

the resulting adjustment was divided between GB and Belgian consumers because the project is jointly regulated. (Ofgem)

This demonstrates an important feature of cross-border infrastructure:

investment incentives may have to be coordinated between multiple regulators.

13. Investment Incentives and Timely Project Delivery

An incentive system should not merely encourage investment; it should also encourage timely and efficient construction.

Ofgem has therefore developed additional incentives concerning project delays.

Its 2023 decision introduced measures including:

a modified Regime Start Date;

a Payback Mechanism for Delays;

a modified Backstop Date; and

treatment of Reasonable Delay Events. (Ofgem)

The underlying regulatory problem is straightforward.

If an investor receives regulatory protection regardless of when the project is delivered, the incentive could become asymmetric.

Therefore:

Investment incentive + delivery obligation = stronger regulatory incentive structure.

This approach attempts to ensure that consumers do not bear the consequences of unnecessary project delays.

14. Investment Approval and Consumer Interest

Investment incentives must also be linked to a needs case.

Ofgem's 2024 assessment of its third cap-and-floor application window considered whether individual projects were likely to be in the interests of GB consumers.

Seven projects were assessed, and Ofgem decided in principle to grant a cap-and-floor regime to MaresConnect, LirIC and Tarchon. (Ofgem)

This demonstrates that investment incentives are not simply a subsidy mechanism.

The regulator generally asks whether the proposed infrastructure produces sufficient system value, considering issues such as:

electricity-market integration;

security of supply;

system benefits;

network constraints;

consumer impacts;

costs;

timing; and

interaction with other infrastructure.

15. Cross-Border Cost Allocation

Interconnector investment frequently creates benefits in more than one jurisdiction.

For example:

Country A may obtain:

access to cheaper electricity;

increased export opportunities;

improved security of supply.

Country B may obtain:

access to renewable electricity;

greater competition;

additional balancing resources.

This creates a fundamental legal question:

Who should pay for the infrastructure when the benefits cross national borders?

EU electricity law addresses cross-border network costs through mechanisms including inter-transmission-system-operator compensation. Regulation 2019/943 provides for compensation for costs associated with hosting cross-border electricity flows and expressly takes account of investment in new infrastructure. (EUR-Lex)

Thus, cross-border cost allocation can itself operate as an investment-support mechanism.

16. Regulatory Certainty as an Investment Incentive

Not every investment incentive is a direct financial payment.

Regulatory certainty can be equally important.

Investors need to know:

how revenues will be calculated;

how congestion income will be treated;

how access rights will operate;

how costs will be recovered;

how regulatory reviews will occur;

what happens when projects are delayed; and

which regulator has authority over particular matters.

A stable regulatory methodology reduces the risk premium demanded by investors.

Consequently:

Predictability of regulation is itself an economic incentive for infrastructure investment.

Ofgem's cap-and-floor handbook expressly sets out the regulatory framework, including certification, access rules and charging methodologies, thereby providing developers with a structured regulatory environment. (Ofgem)

17. Multiple-Purpose Interconnectors

Modern investment incentives are increasingly relevant to multiple-purpose interconnectors (MPIs).

An MPI may combine:

cross-border electricity transmission;

offshore wind connections;

transmission-network functions; and

potentially multiple electricity markets.

This creates new questions about:

revenue allocation;

cost allocation;

ownership;

offshore generation;

network charging;

congestion revenue;

regulatory jurisdiction; and

investment risk.

Ofgem's 2021 interconnector policy review specifically contemplated a pilot scheme for multiple-purpose interconnectors under an adjusted cap-and-floor framework. (Ofgem)

18. Legal Principles Governing Investment Incentives

Several broad legal principles emerge.

1. Proportionality

The incentive should be sufficient to attract investment without unnecessarily transferring excessive risk to consumers.

2. Transparency

The methodology for calculating incentives, caps, floors and adjustments should be clearly established.

3. Non-discrimination

Comparable interconnector projects should generally be treated consistently unless there is an objective regulatory reason for differentiation.

4. Consumer protection

Investment incentives should not become unlimited guarantees of private returns.

5. Regulatory independence

Investment decisions should be made by competent regulatory authorities according to established statutory criteria.

6. Cross-border coordination

Because an interconnector physically connects two markets, investment regulation must accommodate the legal systems of both jurisdictions.

7. Efficient investment

The objective is not simply to increase the number of interconnectors. Investment should be economically justified and appropriately timed.

19. Difference Between Merchant and Regulated Investment

Ofgem's historical explanation confirms that earlier projects such as IFA, Moyle, BritNed and East West were predominantly developed on a merchant basis, while Nemo Link became the pilot for the cap-and-floor regime. (Ofgem)

20. Relationship Between Investment Incentives and Energy Transition

Interconnector investment is increasingly connected to renewable-energy integration.

Interconnectors can help:

transfer renewable electricity across borders;

reduce dependence on individual generation systems;

balance variable renewable generation;

increase market liquidity;

improve system resilience;

facilitate offshore renewable development; and

integrate geographically diverse electricity resources.

Consequently, investment incentives can serve broader energy-transition objectives.

However, regulators must ensure that the incentive mechanism does not cause consumers to finance infrastructure whose benefits are insufficient to justify its cost.

21. Key Case-Law Principles

The UK Aquind v BEIS litigation concerned the proposed France–UK interconnector and illustrates that investment viability can depend not only on energy-market regulation but also on planning and infrastructure-consent decisions. (Courts and Tribunals Judiciary)

22. Critical Legal Issues

Despite the advantages of investment incentives, several difficulties remain.

A. Moral hazard

If a floor guarantees too much revenue, developers may have weaker incentives to control costs.

B. Overinvestment

Poorly designed incentives can encourage projects whose social benefits do not justify their costs.

C. Regulatory capture

Strong investor participation in regulatory processes can create concerns about whether consumer interests are adequately protected.

D. Cross-border inconsistency

Different national regulators may apply different approaches to risk, revenue and cost recovery.

E. Changing electricity markets

Electricity prices, renewable penetration, storage and demand patterns can change substantially over a 20–30-year infrastructure life.

F. Stranded-asset risk

An interconnector that was economically justified at the time of approval may become less valuable following changes in generation, demand or network architecture.

23. Conclusion

Interconnector investment incentives are a central component of modern electricity-market law because interconnectors combine high capital costs, long development periods, cross-border regulation and uncertain market revenues.

The principal legal mechanisms include:

cap-and-floor revenue regulation;

regulatory exemptions for qualifying high-risk projects;

congestion-revenue rules;

cross-border cost-compensation mechanisms;

timely-delivery incentives;

regulated cost recovery; and

transparent and predictable regulatory frameworks.

The GB cap-and-floor regime demonstrates how regulation can share investment risk while protecting consumers from excessive returns. Ofgem states that the regime has been successful in attracting investment in additional interconnector capacity, while its more recent reforms attempt to maintain the balance between investor incentives, project delivery and consumer protection. (Ofgem)

The Aquind cases demonstrate the other side of the principle: regulatory incentives and exemptions are not unconditional rights. An investor seeking special treatment must satisfy the legal criteria established by the applicable energy legislation. (InfoCuria)

Accordingly, the modern legal approach can be summarised as:

Investment incentives should make socially valuable interconnector projects financeable, while allocating risks between developers and consumers in a transparent, proportionate and legally accountable manner.