Think tank fears over UK interconnector dependency

Centre for Policy Studies calls for Competition and Markets Authority inquiry into subsea links

The Centre for Policy Studies (CPS) has raised fears that a growing reliance on interconnectors could leave Britain exposed to supply disruptions and price shocks.

In a new report, the free market think tank has called on the Competition and Markets Authority (CMA) to launch an inquiry into the role of the interconnectors, which it argues have an “unfair competitive advantage” over domestic generation due to transmission charges and the Carbon Price Floor.

The report notes that interconnector capacity is set to nearly quadruple by 2030, enabling up to a fifth of the UK’s electricity to be imported from Europe. According to the Clean Growth Strategy, there is already 4GW of interconnectors in operation, 4.4GW under construction and a further 9.5GW expected to be operational by the early-to-mid 2020s.

CPS says although interconnectors can be a useful way to deliver secure and cheap electricity supplies, there is “increasingly one-way traffic” through cross-channel links. Government projections for interconnector imports in 2030 have risen from just 6TWh in 2012 to 67TWh in 2016.

A key driver behind this predicted growth is the “unfair advantage” they have over domestic generation due to exemptions from the Carbon Price Floor and transmission charges. The think tank cites analysis by Aurora Energy Research which found these exemptions are worth around £10/MWh.  

Rather than cutting carbon emissions, the report argues that Britain is to some degree “offshoring them”, as much of the power imported through interconnectors will be generated by coal and gas-fired power stations in the rest of Europe.

CPS says the rise of interconnectors is coming at the expense of domestic gas-fired generation. Back in 2012, the government expected gas generation to reach 123.9TWh by 2030, but in 2016 put the figure at just 68TWh. It says interconnectors have supressed prices in the capacity market, putting the brakes on investment in new combined-cycle gas turbines.

The think tank warns that a growing reliance on imports will leave Britain exposed to supply disruptions and price spikes led by developments on the continent, where capacity margins are likely to tighten in coming years due to planned closures of nuclear power stations in France and Germany, and perhaps also coal plants in the case of the latter.

It claims the UK is also facing “very narrow margins” despite National Grid’s latest Winter Outlook projecting a de-rated capacity margin for the coming winter of 10.3 per cent – a substantial rise over the equivalent figure for last winter.

“At a time when spare electricity generating margins across Europe are falling, it does not make sense to build an infrastructure which risks making the UK over-dependent on imports,” said CPS research fellow and the report’s lead author, Tony Lodge.

“There are significant supply, cost and market distortion implications of doing this at a time when the government should be looking to strengthen energy security and reduce bills.  It would make much more sense for the UK to build up a safe electricity supply surplus from generators in Britain on a fair and level playing field.”

Recommendations

To address the concerns, the report calls on the CMA to launch an investigation into the role of interconnectors within Britain’s power system.

It says the Carbon Price Floor should be scrapped to allow British generators to compete on a level playing field with European generators, particularly as the mechanism will soon become “irrelevant” due to the decline of coal generation, being left to “primarily penalise gas fired generation”.

The government should instead consider tightening carbon emission limits for coal-fired power stations with a new emissions performance standard, “which would increase year on year and provide a phased reduction in coal capacity but, crucially, not pose any sudden risk on security of supply”.

To further encourage investment in new gas generation, the government should also freeze renewable energy subsidies from 2020/21 onwards and introduce legislation to ensure the Levy Control Framework is not breached.

“Efforts should, instead, be ploughed into making storage technology economically viable, which would eliminate the need for further subsidies for renewables while allowing many gas plants to remain operational for longer periods,” the report adds.

Furthermore, the government should “urgently consider” the eligibility of interconnectors to participate in the capacity market and address “the growing conflict of interest relating to National Grid” which has a “vested interest” in increasing interconnector capacity.

The report says expansion of interconnector capacity should be delayed until a “much later stage” to enable the UK to “overcome its domestic energy challenges” in the meantime.

“Today they are being used and supported to cover failing domestic policies,” it concludes.

Responding to the report, a spokesperson for National Grid said: “Interconnection links us to countries like Norway and France that will supply us with renewable and low-carbon electricity. Analysis shows that GB could unlock up to £1bn/year of benefits to energy consumers through doubling interconnector capacity by 2020.

“National Grid’s different businesses operate under strict business separation rules overseen by Ofgem. We take very seriously the need to provide confidence that any potential conflicts of interest are properly managed and have a lot of experience operating in an environment where this is a key part of what we do.”

Speaking at Energy UK’s annual conference last week, RWE Supply and Trading chief commercial officer Tom Glover told delegates that the Carbon Price Floor “doesn’t make any sense,” remarking that “when I turn down my gas station in the UK, we turn on a coal station in Europe because of the carbon tax.”