Interconnection: driving down costs as well as improving security

Ofgem has given the green light to three new interconnectors with Europe, two to France and one to Denmark. This is a clear signal that the industry is looking to increase interconnector capacity which will improve security of supply. But could prices also move down as capacity rises?

The European Commission has set a non-binding minimum capacity target of 10 per cent by 2020, and is looking to increase this to 15 per cent, approximately 22.6GW, by 2030. Greater interconnection will be “key to getting the energy union to work”, says CBI business environment director Rhian Kelly, by “allowing power to flow across the EU and enabling a more efficient and cost-effective market”.

A more integrated European electricity market seems the obvious way to improve energy security, and the argument for increasing interconnection has been rumbling on for years, with former energy secretary Ed Davey last year championing increased interconnection as a way to help “reduce consumer bills and add to Britain’s energy security”. It looks as though his successor Amber Rudd echoes the same sentiments, stating in a recent select committee inquiry that “interconnectors are an important part of making sure that we keep the price of gas down and have security of supply”.

UK interconnector capacity currently stands at 4GW, with 2GW to France, 1GW to the Netherlands and 1GW to Ireland, representing about 5 per cent of the country’s total electricity generation capacity. In its recent Future Energy Scenarios report, Grid suggests UK interconnector capacity could more than double to reach 10.8GW by 2020 and triple to reach 17.7GW by 2030.

The industry and Government are set on increasing interconnection and, with very few drawbacks, it seems like the UK is primed for a rapid increase in the near future. With the regulator’s recent go-ahead for three new interconnectors under the cap and floor regime, this is a way of increasing capacity which looks to be taking off.

Future changes in the energy mix, such as increased renewable generation capacity, will “drive the need for additional reserve” and “frequency response to cater for the variability and intermittency of generation sources”, says energy regulator Ofgem. There are several interconnector projects in the pipeline, including links to Norway and Belgium, which Ofgem says could lead to investment of up to £6 billion and provide up to 7.5GW of additional electricity capacity in the UK, if built.

High voltage electricity interconnectors can provide ‘black start’ capability, as they are able to access generators in an area which is not blacked out. They can also enable quicker restoration times for the transmission system, and provide access to a greater diversity of fuel sources, improving overall resilience.

“We think interconnection is necessary to deal with the security of supply challenges that the UK faces in generating its power, particularly when we see so many aging generation plants coming to the end of their life,” Energy and Utilities Alliance (EUA) chief executive Mike Foster tells Utility Week. “Interconnectors can be quite a cost-effective way of giving us that extra capacity.”

“Certainly the theory is that that will also help give a more stable price to the market, and stability is the key to so many decisions in UK business,” he adds.

Essentially the argument for increasing interconnection should be about driving down wholesale prices which will ultimately cut costs for consumers.

National Grid insists that if UK capacity were to double by 2020, the savings to consumers could be substantial, as much as £1 billion per year, as savings on wholesale prices could be passed on, resulting in lower energy bills for domestic consumers and industry.

Moody’s rating agency agrees. Analysts say the new interconnectors with continental Europe, where average wholesale prices are more than £12 per MWh cheaper, will help “significantly bring down UK power prices” in 2020 and beyond which, senior analyst Graham Taylor suggests, would have a “significant impact” on average prices.

And Ofgem recognises the need to keep prices fair. In May last year, the regulator introduced the ‘cap and floor’ regime, meaning that, once an interconnector is operating, if revenues exceed the cap, the surplus will be paid back to consumers, and if revenues fall below the floor, consumers will pay for a top-up to the level of the floor.

This, Ofgem senior partner on transmission Martin Crouch said, would deliver “crucial energy infrastructure at a fair price for consumers”, and National Grid director of European business development Peter Boreham said at the time that it was the “step change we have been waiting for”. “It sends a strong message about the importance of interconnectors in the future of the UK energy market and will unlock new investment in the next generation of cross-border infrastructure,” he added.

Grid says the UK may miss the EU’s 15 per cent interconnector target because of a shortage of projects in the pipeline. With interconnectors allowed to participate in the capacity market auction for the first time in December, will enough projects enter to help bring down future energy costs? The industry will have to watch this space.