Monday 6 August 2012
Last Update 6 August 2012 8:32 am
LONDON: An elusive dream of a single European market in electricity will get a boost from growing deployment of intermittent renewable energy, but will still depend on some underwriting by already stretched consumers.
Vast differences in wholesale power prices remain across the European Union, illustrating grid congestion.
Price disparities cut aggregate welfare for both consumers and generators, by effectively limiting supply and demand and so failing to find a clearing price across borders.
Now growing use of intermittent renewable power is forcing EU countries to increase cross-border capacity, to reinforce and balance their grids, in a rollout of new interconnectors where revenue shortfalls will be plugged by levies on consumers.
Thomson Reuters data show day ahead wholesale power prices ranging this week from a low of around 40 euros per megawatt hour in Austria to twice that in Italy, with Britain and Ireland somewhere in between.
The notable exception is Central Western Europe (CWE), where Germany, France, Belgium and the Netherlands have more integrated grids and automated market coupling since 2010 where power auctions and prices track each other more closely.
A so-called Energy Liberalization Package of gas and electricity transmission laws is aiming for a single electricity market by around 2014, for a less congested, more efficient international grid.
That will be achieved through a wider rollout of market coupling beyond the CWE region.
Market coupling uses computing algorithms to process cross-border power bids and transmission capacities between national energy exchanges, to calculate the optimal price and flow at any given time, meaning the entire capacity is used up and electricity flows from cheaper to more expensive markets.
That is an advance on the alternative where trades are lumpy, made at various prices, and sometimes send electricity the wrong way into over-supplied, cheaper markets and leave some spare transmission capacity unused.
The trading opportunity from improved efficiency and price visibility is illustrated by the record auction volume reported by the APX ENDEX exchange this week across the latest UK-Netherlands interconnector, the UK's first sub-sea cable coupled to the CWE.
But market coupling on its own cannot create a single market, it only increases the efficiency of existing interconnectors.
A remaining problem is the amount of transmission capacity.
The UK-Netherlands BritNed interconnector made a loss in its inaugural year, said joint operator National Grid, hinting at the commercial risks in building new capacity.
The EU is helping drive a single power market through regulation, drafting binding, uniform codes for cross border trading.
In a rapidly developing program, the Nordic region including Norway, Sweden, Denmark and Finland will couple with CWE and Britain in the next six months, creating a pan-North Western European (NWE) electricity market.
Further market coupling is planning to join this hub with southern and eastern Europe. But more interconnectors are needed.
For example, the CWE already links to Britain via the sub-sea BritNed interconnector, but in practice the link accounts for less than 3 percent of UK average daily power consumption.
Building more interconnectors is a necessary extra step, but entails certain risks.
Operators make money from auctioning transmission capacity (the right to use the cable), which is partly a function of the power price difference between the two countries.
It is difficult to predict the size of that arbitrage, making users reluctant to bid far ahead and leaving interconnector with uncertain revenues.
As a result, most European interconnectors are built by grid operators using an EU-regulated approach, which limits how much money they can make, but also allows them to plug shortfalls by levying power consumers.
BritNed took the alternative, commercial (or "merchant") option, but that entails risks and still faces some regulatory control. Partly as a result, the next UK link, to Belgium, will follow the regulated model.
An additional, third option, for increasing transmission capacity is mooted.
Two weeks ago, private equity-backed Element Power proposed to sell power directly from wind farms in central Ireland to Britain through two massive submarine cables totaling 3,000 megawatts under the north and south Irish Sea.
Rather than auctioning power over exchanges it would contract directly with the operator of green energy tariffs in Britain and as such would have perfect visibility of revenues, removing that important commercial risk.
There are hurdles, however, and not least that Britain has not yet said at what rate it would contract to buy the electricity: Clearly that would have to be at a higher price than UK onshore wind farms, to help fund the sub-sea cables.
The Element Power proposal is experimental, but has a couple of important advantages: By contracting to buy power from Irish wind farms, Britain would avoid planting its own wind turbines which some rural communities say blight their landscape.
In addition, by building cables across the Irish Sea it would reinforce Britain's grid, expanding transmission options from north to south England by routing through Ireland, again without digging up the English countryside, and again avoiding complaints of those who cry "not in my back yard" (NIMBYs).
Britain is way behind on its binding EU target to get 15 percent of its energy from renewable sources by 2020, but those EU rules do allow a trading solution where countries meet the target by importing renewable power from its neighbors.
The Element Power proposal is a first, interesting attempt to exploit that facility, and could even be a template as 2020 draws closer and the relative cost of alternatives including offshore wind and solar power become clearer.
— Gerard Wynn is a Reuters market analyst. The views expressed are his own.
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