This post is by Jonathan Bosch, research postgraduate at the Grantham Institute, Imperial College London.
The internal electricity market (IEM) is one of the major achievements of the European single market, allowing electricity to be traded and transmitted seamlessly across national borders. The UK has played a crucial role in the IEM’s development, working with EU energy regulatory agencies to help achieve ‘market coupling’, whereby power station operation and interconnection capacity are allocated simultaneously to achieve more efficient outcomes. The IEM relies on the physical interconnection infrastructure across the continent, and current plans see an expansion of interconnection between the UK and the European mainland in the coming years.
Britain currently has 4GW of interconnection capacity to Europe, linking us with France, the Netherlands, Ireland and Northern Ireland. The level of interconnection is set to triple in the next few years, reaching 12GW by the early 2020s, with connections to Belgium, Norway, Denmark and potentially Iceland.
More interconnection makes sense
The benefits to the UK of expanded interconnection are two fold. First, interconnection is essential for the UK to achieve its carbon budgets, whereby an increasing share of energy is generated by renewables. Flexibility will become more important as the share of intermittent renewable energy grows, giving interconnection an equally important role to play. Interconnection also facilitates power transmission for British offshore wind, which has seen an unprecedented reduction in costs, to sell its excess generation to our European neighbours.
Second, UK consumers benefit too. Interconnectors are cost competitive with electricity generation. Because electricity prices are lower in mainland Europe, utilities are able to send cheap electricity to the UK, bringing electricity prices down with them. Vivid Economics has costed these benefits at around £500 million per year by 2020.
The flip side of this is that, as a result of cheaper prices in interconnected countries, the UK has increased its dependence on European electricity imports by a factor of four since 2011. By the same token, British generators now face increased competition from abroad.
So, by increasing our interconnection capacity, have we inadvertently created an incentive for European utilities to export cheap yet dirty coal-generated electricity to the UK?
The answer is no, because the EU’s energy mix is changing. EU directives implemented in recent years have made a positive impact on reducing the use of coal across Europe. Since 2016, the Large Combustion Plant Directive (LCPD) has led to the removal of 8GW of coal capacity in the UK, with seven further plants set to come offline by 2025. By the time the next generation of interconnectors are operating, coal will play an insignificant role in Europe’s energy mix. Interconnectors from Norway and France sell electricity from sources that have significantly lower carbon intensity that Britain, eliminating the risk of importing dirty electricity.
A second challenge is that interconnectors may make UK suppliers uncompetitive because of their free transmission of electricity. All utilities in the UK pay transmission charges, and offshore wind projects situated far away from the national grid are disadvantaged as they need to raise large finance to build transmission lines. But imported electricity is exempted from such charges. Generation capacity built in the UK may, therefore, begin its life on an uneven playing field if the costs of transmission are higher than those of European generators. Imported electricity is also exempted from the £18/tCO2 carbon price floor that has been successful in decarbonising Britain’s electricity.
Interconnection can help the UK become more competitive
Tackling this problem may turn out to be a double-edged sword. If we were to limit our future interconnection capacity for fear of dirty imports and unfair prices, the UK could be inadvertently protecting our own incumbent, inefficient energy suppliers, while damaging the potential for lower energy bills for UK consumers.
This leaves only two options: either applying tariffs (£/kWh levied on generators) to interconnector imports, or removing charges from UK generators. The first option comes with the difficulty in calculating the flows of electricity, which are dependent on the market prices, and whether European regulators would be likely to allow it in the first place. The second would bring the UK more into line with other EU countries, but would mean infrastructure investment would have to be funded differently.
One way for UK generated electricity to become truly competitive is actually to ensure that our current and future renewable energy has access to interconnector capacity. This will not only enable surplus electricity generation to be sent to where energy demand is highest, but also it would mitigate the huge investment costs currently required for large scale electricity storage.
Reasons to stay in the IEM
Upcoming interconnector construction plans are an important way for the UK to meet its legally binding carbon budgets, set 12 years ahead to allow policy makers, businesses and individuals enough time to prepare.
Leaving the IEM wouldn’t mean pulling up the interconnection drawbridge to European electricity. But, without access to the near real-time pricing mechanism to allocate capacity and electricity prices simultaneously, capacity would have to be booked in advance. With market participants less able to predict prices ahead of time, power will flow from expensive markets to cheap ones between ten and 20 per cent of the time, and trades will suffer from being uneven. Proposed interconnection projects are also likely to need reviewing, and could be knocked down the list of priorities. Infrastructure investments could also be delayed as investors reassess the effects of exchange rate fluctuations, import costs, financial regulation and the cost of finance.
The UK would be wise to fulfil its interconnection projects on time by maintaining membership of the IEM and its main governing institutions, the Agency for the Co-operation of Energy Regulators (ACER) and the Energy Transmission System Operators for Electricity (ENTSO-E).
Industry stakeholders also unequivocally support staying within the IEM, for the benefit of energy operators and consumers alike. Of course, a number of electricity market inefficiencies will still have to be solved. But at least, outside EU jurisdiction, the government could gain some wiggle room in supporting its own energy sector, and craft its transition to a low carbon energy system on its own terms.
[Image: Pylons by Andrew Gustar from Flickr Creative Commons]