Will cross-nation power sharing bring down prices?
This week, Ofgem announced plans to boost the number of electricity-sharing interconnectors the UK has with neighbouring countries. It believes increasing the volume of power that can be imported or exported, as demand requirements dictate, could reduce the wholesale price for consumers.
Currently, the UK has four such pipelines with a capacity of 4GW, providing a two-way link between our power grid and those of France, the Netherlands, Ireland and Northern Ireland. Ofgem is keen to see more as it believes this will not only lower costs but also increase security of supply and reduce emissions.
National Grid estimates that each 1GW of new interconnector capacity could deliver savings of 1-2% on UK wholesale prices. The question I’m keen to know the answer to, however, is will this truly deliver savings to UK consumers?
Incentives to boost investment
Ofgem has just launched a consultation to see how the interconnector ‘cap and floor’ scheme it’s proposing is received by the industry. It accepts that the current market-led approach has failed to deliver sufficient development in the interconnector sector. So the hope is providing a financial support mechanism will stimulate investment.
The proposed cap and floor framework will place a limit on the profits any developer can earn from an individual interconnector project (with any excess revenues paid to the government) – but in return will guarantee a minimum ‘floor’ price they can receive. This, of course, transfers some of the investment risk to the government. And in all likelihood, the consumer.
Unsurprisingly, our neighbours on the Continent already make greater use of interconnectors. The European benchmark for this form of power sharing is 10% of generation capacity.
Connecting to overseas energy storage
Certainly, as our wind power capacity increases, being able to link to countries where there is greater potential for energy storage could be beneficial. Norway, for example, has half of Europe’s reservoir capacity and a ready network of hydro-pumping stations. Until new storage technology is developed, this system of stowing energy for later use remains the most effective.
But as an island, we have the rather costly challenge of traversing ocean beds to increase such power-sharing connections. So I wonder, with far higher upfront infrastructure costs, will interconnector developers be able to get the returns they need – even with a guaranteed floor price? I guess the outcome to Ofgem’s current consultation will provide an indication of appetite.