Market View: Electricity interconnection, free-flowing energy or high-wire act?

Matthew Brown, energy lawyer at LexisNexis and Andy Compton, director at Compton Energy Associates, discuss the value in interconnection with overseas electricity markets.

The publication of National Grid’s 2018 Future Energy Scenarios (FES) document, together with the latest GB Capacity Market pre-qualification process kicking-off, provide ongoing impetus for debate on the role of electricity interconnection in the GB market.

Unsurprisingly, FES continues to predict significant increases in the proportion of GB’s overall generation capacity which is derived from imported electricity. National Grid models a rise to as much as 19.8 GWs installed interconnection capacity by 2030 as new projects currently at the planning/construction phase are commissioned. By the mid-2020s, FES models that in certain scenarios, GB could be taking up to circa 50 terawatt hours (TWhs ) of its electricity from overseas;  a stark change, representing a potential increase of net imports from circa 6% of GB’s total electricity consumption in 2017 to  high of circa 17% (taking into account National Grid’s assumed changes in total electricity consumption in the relevant scenarios).

Historically, the various limbs of GB’s energy policy have (intentionally or otherwise) offered strong incentives to this increased penetration of interconnection and in many cases heightened the extent to which further interconnection comes instead of domestic generation, rather than as a back-up insurance policy.

Interconnection (both prospective and existing) is of course able to bid for Capacity Market support. As has been widely reported, in recent auction rounds the wider economics of interconnection has enabled it to accept support at a relatively low level. This has contributed to clearing prices being set at too low a level to support the delivery of certain new domestic generation projects (in particular new build gas), meaning interconnection capacity replaces rather than supplements the construction of such generation projects.

Furthermore, the derating methodology (through which the Capacity Market establishes the level of capacity which each technology type can be relied upon to deliver) appears relatively generous for interconnection. This methodology looks to differentials between relevant markets’ power exchange prices together with historic performance (where available), technical factors and National Grid modelling. However, it has been questioned whether this stacks-up with real world interconnection performance during times of system stress. That question of real world performance represents one discrete aspect of a more pervasive concern: how cautious should we be on the likelihood and impact of simultaneous system stress in GB and the domestic systems of overseas generation? The derating methodology for interconnection does allow the government to take into account ‘publically reported concerns about the supply of electricity…in the country or territory’ to which the interconnector connects. However, where domestic generation capacity has not been built, such reactive changes to the Capacity Market approach on interconnection may come after the horse has bolted.

The availability of Ofgem’s cap and floor regime for interconnectors provides price certainty not available to many other forms of GB generating capacity. In addition, while obtaining planning consent and property rights for any major infrastructure project will always be a complex exercise, the planning regime for interconnection can be relatively benign. Key planning requirements (on the GB side) comprise planning permission from the relevant local planning authority for the onshore works where they consist of underground cables and a converter station, a marine licence for the submarine cables and related works within the UK’s territorial waters and exclusive economic zone, and (if the project is designated as a Project of Common Interest) additional requirements for operators during the consenting process.

Policy on carbon emissions is also helpful to interconnection. Overseas fossil fuel generation does not pay the ‘carbon price support’ tax applied to GB generators’ fuel supplies, giving a competitive advantage over domestic generation of this type and suppressing wholesale electricity prices.

National Grid reminds us in FES that ‘electricity imported through interconnectors is counted as zero carbon when calculating GB emissions’. Given parts of mainland Europe still have high levels of  coal-fired generation this exporting of carbon emissions via interconnection jars with the goal of electricity decarbonisation.

Finally, the EU direction of travel has been (and will continue to be) greater interconnection. Along with the EU providing support mechanisms for more interconnection, efficient and reliable trading of electricity across interconnector capacity is inextricably linked with the Directives and Regulations/Codes that underpin the EU Internal Energy Market (IEM). In the context of Brexit, this rings alarm bells. The UK government’s most recent comment on the matter simply states that both ongoing participation in the IEM or leaving the IEM are possibilities, but that  ‘the UK is seeking broad energy cooperation with the EU, including arrangements for trade in electricity and gas, cooperation with EU agencies and bodies, and data sharing to facilitate market operations’. To state the obvious, both approaches appear technically challenging and time consuming, with neither of the obvious precedents provided by Norway or Switzerland particularly encouraging in the context of the UK’s aims.

All of that said, there is no doubt that interconnection with overseas electricity markets provides significant benefits to GB. Free-flowing electricity between different markets helps to reduce electricity prices, provides domestic generation with a wider market to sell to and can improve energy security. However, given the above web of challenges, a similar cohesive and explicit policy debate to that seen for many other forms of electricity generation/capacity may well be overdue. The alternative appears to be a central role for imported electricity within GB’s energy mix without a ‘Plan B’ should such interconnection fail to deliver when needed, and without there having been a conscious policy decision that this is GB’s desired destination.