LinkedOut | Ofgem caution on interconnectors imperils 18GW target

Ofgem’s decision to provisionally reject funding for six interconnector projects has been described as baffling by developers and industry observers alike. What’s behind the regulator’s caution and what does it mean for the target of 18GW of interconnector capacity by the end of the decade?

It’s pretty much accepted wisdom within the energy sector that electricity interconnectors are a vital tool for maintaining the stability of a grid being rapidly decarbonised.

The UK’s potentially huge offshore wind generation reserves mean that interconnectors could also offer the conduit for valuable future export earnings.

“Interconnectors play a huge role in helping to balance the system and bring in cheaper electricity,” says Silke Goldberg, a partner at solicitors Herbert Smith Freehills, a specialist in cross-border energy projects.

However, this particular memo doesn’t appear to have trickled through to Ofgem, which in March provisionally vetoed six electricity interconnector projects for support under the latest phase of its cap & floor support regime for the power links. The end of this month will see the close of a consultation on Ofgem’s conclusions, which will pave the way for a final project assessment of the interconnectors later this year.

Under the cap & floor mechanism, which has supported the roll out of the UK’s burgeoning interconnector fleet, backers are guaranteed a minimum level of revenue to reflect the projects’ construction and debt costs – with the quid pro quo that profits are also capped.

Just one interconnector, the 1.4GW Tarchon link between Germany and the UK, passed March’s initial project assessment (IPA), which vetted the suitability of the third window of projects coming forward for a cap & floor contract. A further six projects, with a total capacity of 7.5GW (see table) were rejected in the IPA.

Grid constraints in the south of England, where most of the mooted interconnectors are planned, were the chief factor behind the provisional refusal, the Ofgem document makes clear.

“As the bulk of GB’s wind resource sits in the north, the proposed location of most of the applicant interconnectors in the south means that most Window 3 interconnectors will substantially increase transmission system costs because of network bottlenecks,” it says.

The regulator took the view that these constraint factors outweighed the Europe-wide carbon savings, which the interconnectors could contribute through exports of UK renewable energy, as well as the route to market they could provide for surplus wind power that would otherwise have to be curtailed. The regulator’s report adds that constraint costs “often overshadow” the system operability benefits that the projects could deliver.

High constraint costs across the GB network’s various boundaries and within the local areas, which they are connected to, mean the projects are “not in the most suitable locations” to maximise overall value, it says.

For example, the increased flows the interconnectors would cause in “typically constrained” parts of the south of England network would require up to £3.6 billion worth of grid reinforcement work.

Crossed wires

Simon Ludlum, incoming chair of the GB Interconnectors Forum, says Ofgem’s March decision left the sector “genuinely disappointed and somewhat surprised”.

“Everyone was a bit baffled,” he says, adding that Ofgem had not raised the issue of network constraints with the interconnector projects until March’s IPA decision.

In the two years running up to the IPA’s publication, interconnector backers had been hearing supportive noises about the need for their projects from government, Ofgem itself and advisory bodies, such as the National infrastructure Commission and the Climate Change Committee.

The government’s British Energy Security Strategy, which was published only a couple of years ago, set a target of 18GW of interconnector capacity by 2030.

Ofgem has led interconnector developers “up the garden path”, says Goldberg, who describes the regulator’s March decisions as “quite bizarre” from a policy perspective.

Each would-be interconnector developer has probably spent getting on for £10 million to get to the current stage, says Ludlum:” The best part of £100 million has been spent to then find that only a tiny fraction is taken forward, just at a time when generally everybody feels that we should be doing more.”

He believes this sends a “very negative message to private capital”, which the UK will rely on to procure interconnectors due to the trans-national nature of such projects.

The decisions feels “regressive” and particularly head scratching given how “acutely important it is to be able to secure low carbon energy from friendly states”, says Ashutosh Padelkar, senior associate at consultancy Aurora Energy.

An energy policy source agrees. “It’s quite a strange decision to make when you consider that most of the modelling that’s been done suggests that the UK is going to be a net exporter of energy.

They add: “On the continent and in the UK, we’re going to have largely renewable based energy systems and interconnectors present a really great opportunity both in terms of sharing low carbon flows of electricity but also security of supply.

“It’s odd in that we still very much need these interconnectors and we’re increasingly going to be dependent on each other in Europe.”

It is true that interconnectors can exacerbate congestion on the transmission network, says Padelkar. Within the single GB national price area, it is possible for interconnectors at one end of the country to be importing, while those at the other end are exporting, due to constraints on the network, he says. And the system operator only has limited tools to balance these flows, which can only deployed vis-a-vis interconnectors in “emergency” scenarios, he adds.

“Interconnectors are part of the reason why you don’t get efficient dispatch in today’s market,” says Stephen Woodhouse, director at consultancy AFRY.

But the government’s 18GW by 2030 target won’t be met if Ofgem doesn’t reverse its position on the cap and floor contracts, experts agree.

Adam Bell, head of policy at Stonehaven, says: “If Ofgem knocks back all these projects there’s absolutely no way of meeting the 18GW by 2030 targets that the government set out.”

Ludlum, whose company EtcheaEnergy is developing the 750MW MaresConnect interconnector to the Republic of Ireland – one of the six provisionally turned down in March – says the UK currently has 8.4GW of operational interconnection capacity.

Another two projects – his company’s Greenlink with Ireland and Neuconnect with Germany – are currently under construction and will provide another 1.9GW to take that total up to 10.3 GW, he says: “Heading towards 2030, we’re just not seeing how that gap is going to be filled and we’re concerned that there’ll be a huge hiatus in the development of interconnectors if more projects are not pushed through.”

Goldberg agrees. “If you only take one of those projects further out of the seven, by definition, you will fall short of that (target).”

Some contingency must be built into the interconnector process in case individual projects cannot be delivered, adds Ludlum: “Just because a project gets IPA status, it doesn’t automatically mean that it will get constructed in the timelines that everybody hopes.”

Seeing the big picture

Padelkar believes the regulator should have carried out a more system-wide analysis of the projects: “A more comprehensive cost benefit analysis would have led to more of those interconnectors being approved.”

The remit of the Ofgem study was too narrow, says Bell: “The team has been charged with looking at the evidence available but they hadn’t been asked to look at what we could do if we wanted to maximise interconnector deployment.”

The market will only bring forward a sufficient volume of interconnectors if it gets the right signals, he adds.

Goldberg agrees. “To reject future projects because we can’t handle it (congestion) now is quite short sighted.

“They should really consider this very carefully and come to a position ideally that is closely aligned to the 18GW policy objectives.”

This should probably also involve a fresh look at the electricity system operator and National Grid’s existing incentives to carry out transmission network reinforcement works for interconnectors.

Arguing that interconnectors can resolve as well as create constraints, Ludlum says the scale of the “huge” costs identified by Ofgem justifies this kind of targeted investment, which will be required anyway to ready the grid for more renewable energy.

Appearing before the energy security select committee this week, Ofgem chief executive Jonathan Brearley said that weighing up the value for money of interconnectors for consumers had been “easier” when the UK had been primarily using them to import cheaper electricity from Continental Europe.

The network congestion issues thrown up by interconnectors are one of the arguments put forward for replacing the existing national wholesale market with local marginal pricing, which is still on the table as part of the government’s review of electricity market arrangements (REMA).

But in the absence of the wider-ranging shake-up to wholesale prices envisaged under the REMA process, interconnectors should be enabled to participate more easily in the balancing market so that they can more easily to reverse flow if required, says Bell: “If Ofgem wants to deliver this volume of assets by 2030, which is the government’s target, then it will need to make some changes to the market to enable them interconnectors to play in the balancing mechanism more effectively.”

There is still another round of assessment, says AFRY’s Woodhouse: “This was a holding position by Ofgem and there are lots of studies still to be done.”

And even if projects fail to reverse March’s ‘minded to’ verdicts, the affected companies could judicially review the regulator’s decisions, says Goldberg: “It’s not over yet.”

But given that Ofgem’s exercise is only an initial and not the final project assessment, Padelkar wonders why the regulator was not prepared to allow greater leeway at this relatively early stage. “They will still have opportunities to reject it in the future so it’s quite puzzling to not even give them (the interconnectors) the chance,” he says.

Ludlum agrees: “There’s numerous opportunities to bite at the cherry. Ofgem’s not really engaging very much by letting more people through the gate at this point.”

Brearley told the energy committee that Ofgem would ensure the wider benefits of interconnectors are taken into account as part of the second stage consultation which will lead to the final project assessment.

“We are in the process of examining other benefits of interconnectors which include security of supply,” he said, adding that this may lead to more projects being identified for support.

“Cost doesn’t trump other objectives in the market”, he said.

However, Ludlum stresses: “This is a moment for action and definitely to send very positive signals to the market that we need more interconnection and we need private capital to come in.

“There seems a huge gap between policy and where we are: something needs to give here.”

This article first appeared in an edition of Utility Week’s Digital Weekly. Click here to read the issue in full.