The proposed NSN interconnector with Norway

The NSN interconnector between Norway and the UK could, if built, make a major contribution to both the UK’s power deficit and National Grid’s underlying earnings, says Nigel Hawkins.

There remains an abiding concern about the lack of new UK generating plant – and what should be done to incentivise it. One option that is often overlooked is the construction of interconnectors that can enable power to be transferred between countries – preferably those with different climates and plant portfolios.

Clearly, there have to be various trade-offs given that some interconnectors may be extremely long and costly; they also have to be compatible with the generating capacity profiles of the countries involved.

However, the planned NSN interconnector linking Norway with the UK power market could, if built, make a major contribution to the UK’s power deficit from 2020 onwards.

Alan Foster, director of European business development at National Grid, underlines this point – “low-carbon hydropower from Norway could help the UK manage its intermittent renewable generation”, he says.

Within the next three months, it should be clear whether National Grid and Norway’s Stattnet will decide to commission the building of the longest electricity interconnector in history.

The proposed NSN interconnector has a length of 720km and a capacity of 1,400MW – formidable numbers indeed. Construction, it is hoped, will start this summer, with commissioning in 2020. The total cost is budgeted at €2 billion, a substantial part of which would be financed by National Grid.

Both Stattnet and National Grid have considerable experience in building difficult electricity transmission links. Nonetheless, the NSN project would be an extremely challenging engineering assignment, especially since the North Sea can be a very hostile environment under which to lay power cables.

In fact, for National Grid, the NSN project is far from being the only interconnector investment under close scrutiny. It is also shortly set to give the go-ahead to the 1GW capacity Nemo project, which plans a subsea link to Belgium.

Compared with the NSN scheme, Nemo’s length, at 130km, and projected cost, at €700 million, are considerably less ambitious. Nonetheless, the Nemo project will still be a sizeable investment and a significant boost to cross-Channel power capacity.

In 2016, National Grid may well decide to expand its interconnector investment further, with two major projects being evaluated.

First, a further 1GW connection to France is planned; completion, at present, is expected in 2020. Secondly, a subsea link to Denmark has been proposed, also with a 1GW capacity; the length is c600km and a commissioning date of either 2020 or 2021 is envisaged.

At a general level, the EU has been strongly supportive of interconnector projects, partly because they help to create a more integrated energy market. It is offering subsidies for various such projects, including the delayed 2GW trans-Pyrenees line.

For National Grid, interconnector projects have various attractions, although any financial returns will be heavily impacted by the level of use and by the price regulation system. Ideally, however, they should lessen its dependence on the price regulation of its core UK transmission business. A new set of price controls will be prescribed from April 2021, which may be markedly less generous than the 2012/13 final determination.

Importantly, the Norwegian generation market is almost totally dependent on hydropower output and hence, during the winter and spring, Norway often has spare ­capacity, part of which is sold to other Scandinavian countries. There is also comparatively high power consumption per head and a low population.

Consequently, Norway should be able to export substantial surplus electricity to the UK via the NSN link, especially at times when UK capacity margins are very stretched. Since the UK system is very reliant upon fossil-fuel output, there should be good arbitrage opportunities from 2020 onwards.

That said, Norway’s impressive generation capacity is not infallible. Very low rainfall in 2002/03 caused major supply problems as the hydropower plants lacked the necessary water to generate effectively; prices spiked and reached unprecedented levels.

This potential issue aside, before giving any go-ahead, National Grid will also need to finalise, with Ofgem, various technical issues associated with the regulation of electricity interconnectors. UK regulation of the proposed NSN inter­connector is expected to be on a 25-year basis and there is likely to be a price cap and price floor.

With an NSN assumed real post-tax return exceeding 8 per cent, the projected return on equity will be materially higher than National Grid’s UK regulated returns.

The role of the NSN interconnector in future capacity auctions remains unclear but, as a possible participant, it would help to depress wholesale prices during peak demand periods and although National Grid will pay a substantial share of the €2 billion cost of the NSN project, this sum can be comfortably absorbed within its current net debt of c£23 billion (National Grid has a current market capitalisation of c£35 billion).

By 2020, if all goes well, NSN should make a material contribution – along with several other interconnectors – to National Grid’s underlying earnings.

Furthermore, such an arrangement should be good for UK plc as the expansion of interconnectors increases the available capacity on a stretched generation system.

It therefore seems odds-on that National Grid and Stattnet’s forthcoming joint announcement will give the go-ahead for the record-breaking NSN project.

Nigel Hawkins, director, Nigel Hawkins Associates