Ofgem extends NESO's C1.17 derogation on NTC restrictions to 2030, mandates fresh reviews of NTC Calculation Policy and Commercial Compensation Methodology by 2027
DecisionOn 21 September 2026 Ofgem published its decision to grant NESO an extension to the ESO Licence Condition C1.17 derogation (previously C28.4(h)(i)), which permits NESO to apply Net Transfer Capacity (NTC) restrictions on interconnectors without procuring them via market-based mechanisms. The extended derogation period now runs to 30 September 2030, replacing the prior 30 September 2026 expiry. Alongside the extension, Ofgem issued NESO two specific directions to be completed by 30 September 2027: a consulted review of the NTC Calculation Policy (including its Principles of Use) and a further consulted review of the Commercial Compensation Methodology (CCM). This followed NESO's 2026 CCM review, its March/April 2026 industry consultation on proposed CCM updates, and submission of the consultation report plus a derogation extension request to Ofgem in July 2026.
The C1.17 derogation and its underlying Commercial Compensation Methodology determine how NESO can restrict Net Transfer Capacity on GB interconnectors without triggering market-based procurement, and how affected parties are compensated for those restrictions. Extending the derogation for four years while attaching binding review deadlines signals continued reliance on administrative (non-market) capacity restriction tools for interconnector congestion management, with compensation methodology design directly affecting cost allocation, interconnector revenue certainty, and incentives for capacity utilisation. The mandated NTC Calculation Policy review also has implications for how cross-border capacity is calculated and made available, directly affecting liquidity and price convergence on GB-EU interconnector trading.
This is a regulatory governance event with direct market design consequences for cross-border capacity allocation on GB interconnectors. The derogation mechanism effectively allows NESO to bypass market-based NTC restriction procurement, substituting a compensation methodology (CCM) as the economic signal/offset instead of market mechanisms. Ofgem's conditional extension - granting four more years of derogation but demanding two further consulted methodology reviews within one year - indicates regulatory scrutiny of whether the current non-market approach adequately reflects system needs and stakeholder interests. The NTC Calculation Policy review is particularly consequential: NTC methodology changes affect the quantity of tradable cross-border capacity presented to day-ahead, intraday and forward interconnector auctions, directly influencing liquidity and price convergence with EU markets. The CCM review outcome will determine compensation flows to interconnector capacity holders affected by restrictions, shaping investment and bidding incentives. Because this process runs through the JESG stakeholder forum (harmonising GB arrangements with EU Network Codes), the upcoming consultations on both reviews will involve formal external stakeholder engagement, with NESO expected to share review timelines in due course. The dual deadline structure (reviews by Sept 2027, derogation itself to Sept 2030) creates a clear two-stage design process: near-term methodological consultation followed by a multi-year implementation/monitoring period under the extended derogation.
ESO Licence Condition C1.17 (formerly C28.4(h)(i)); Ofgem regulatory directions; JESG stakeholder governance process
Completion of consulted NTC Calculation Policy and Commercial Compensation Methodology reviews · 30 Sept 2027