Electricity interconnectors
– next generation
Martin Crouch
Future Energy Strategies seminar
3 July 2012
Agenda
• Ofgem’s role
• How much interconnection?
• Regulatory framework
• Is interconnection a good thing?
2
Interconnection from Great Britain: the
context
2012
figure:
4.8%
Average total import capacity relative to installed generation capacity by
percentage, 2004
(Source, DG Competition Report on Energy Sector Inquiry, 2007)
3
Policy context – an electrical island
But less so in future
Existing
Construction
Planned/
possible
4
Energy Infrastructure Package:
Interconnection capacity to
support 2020 RES targets
2020
(Source: Imperial College & KEMA, study for EIP communication, 2010)
5
ECF 2050 Pathways:
Interconnection capacity to
support 80% RES by 2050
2050
Source: ECF – Roadmap to 2050 (www.roadmap2050.eu)
6
Agenda
• Ofgem’s role
• How much interconnection?
• Regulatory framework
• Is interconnection a good thing?
7
Drivers for change
• Potential for commercially viable interconnection
– But pure merchant financing of projects less viable …
– We want to see timely development of new infrastructure to
contribute to the delivery of internal energy market
• Financing gap- greater need for 3rd party investors?
• Need for a common / coordinated approach to regulation of
shared assets
• Challenges with merchant-exempt regime:
– Regulated “risk” of exemptions, which are seen as the
exception not the rule
– European model, national TSOs deliver interconnector
investment
Need to develop a regulatory regime to remove regulatory barriers and
facilitate investment
8
Regime principles
•
The regulatory framework will take into account the commercial viability of a
project as well as considering the wider benefits efficient levels of
interconnection can offer to consumers for example: security of supply,
integration of renewable energy sources, competition and market integration
across Europe,
•
Consumers should be protected from the cost implications of excessive returns
or market power that might accrue to interconnector owners,
•
Developers should be able to earn returns that are commensurate with the
levels of risk they are exposed to under the regulatory framework,
•
Regulatory treatment of developers should be coordinated between NRAs at
either end of the shared asset and
•
(For GB and new interconnector developments) Regulatory treatment should
allow third party developers and should be impartial and unbiased between
TSOs and non-TSO developers, existing and future developers
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The Cap and Floor approach
•
•
•
•
•
•
•
Inetrconnectors derive their revenues
(congestion rents) from auctioning
capacity at different time horizons
Recoup returns within bounds of preset cap and floor
Returns over cap – paid back to
consumers
Returns fall below floor – triggers
payment from consumers
Allows revenue regulation, protects
consumers from market power
Maintains element of market valuation
of interconnection
Within the regulated regime favoured
by Third Package
10
Agenda
• Ofgem’s role
• How much interconnection?
• Regulatory framework
• Is interconnection a good thing?
11
Two real examples that demonstrate the benefits
of interconnection
Example 1: Interconnectors can reduce
the cost for National Grid to manage the
system
The Moyle
Interconnector was
offline between June
2011 and Feb 2012
This resulted in an
additional £20 million
constraint costs for
National Grid in
Scotland (excess wind
power in Scotland
could not be exported
to N Ireland)
X
Example 2: National Grid can call on
interconnectors to assist in emergency
situations
The IFA Interconnector
provided 30% of the
emergency assistance
used by National Grid to
meet a 3.5 GW shortfall in
Feb 2012 – this helped
avoiding problems in GB
12
Hypothetical concerns...
40
48
50
13
Hypothetical concerns...
40
38
52
50
14
Benefits of interconnectors are likely to be
higher if...
1. Interconnected countries have different generation and
demand patterns – asymmetric shocks + access to diversity of
generation sources and reserve
2. The GB price respects and reflects the physical
constraints of the GB transmission system as well as
scarcity – our price needs to signal when we need more energy
and where we need it
3. Good cooperation between neighbouring TSOs and full
implementation of internal market rules
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