Re-wiring – interconnectors to face increased policy scrutiny

This week Will Gardiner, CEO of Drax Group, reignited the debate on the role of interconnectors within the Capacity Market (CM) and whether their treatment fairly assesses how they contribute to system security. In an interview with The Guardian on 20 May, Gardiner stated that increasing levels of interconnection would do little to improve security of supply and ran the risk of increased carbon emission imports as UK carbon prices are higher than those on the mainland. He noted that the low price of £8.40/kW achieved in the last CM auction resulted in two of Drax’s gas peaking plants not securing an agreement, and that de-rating interconnectors further in future CM auctions would deliver greater security of supply benefits as GB plant would more likely be available to provide power than interconnectors at times of system stress.

This is an opening salvo ahead of the government review of the CM commencing this summer. Possible delays in new nuclear commissioning, the desire to offset supply risk of outages in existing nuclear and the 2025 target for closing remaining coal stations will influence deliberations throughout this review. There will also be a debate about whether capacity being brought forward in substitution is fit for purpose, as much of the new build capacity will result in an increasing volume of renewables on the system, not just in GB but also across interconnected markets. The relative merits of using new interconnectors to meet future system challenges, and to lower emissions, compared to other forms of generation or storage flexibility will be a key component of the debate.  We anticipate that the de-rating of interconnectors will closely scrutinised because of the depressing impact on capacity prices from new build interconnectors in the last T-4 auction and the substantial pipeline of new interconnectors to follow.

A few weeks before the Drax intervention, the European Commission published a memorandum detailing its view of the practical impact on the Internal Energy Market (IEM) if a ratified withdrawal agreement is not reached before Brexit, and the UK becomes a “third country”. A key consideration is regarding third country flows of electricity through interconnectors, where current EU rules stipulate that a transmission system use fee is to be paid on all scheduled imports and exports from third countries which have not adopted an agreement whereby they are applying Union law. The House of Lords European Union Committee wrote a letter to Business and Energy Secretary Greg Clark on 9 May, within which the Committee seeks a response on the level of the fee and the impact on businesses and consumers.

Most new interconnectors are in the process of securing revenue stabilisation under Ofgem’s cap and floor regime. This makes them generally agnostic to the level of capacity market prices. But the impact of an effective third country tariff on interconnector flows under Brexit could change the socio-economic welfare assessment used to determine support for certain interconnectors under cap and floor. If so, the net consumer benefit case for cap and floor support for some of the proposed interconnectors might need to be revisited or final decisions deferred until clarity emerges on the precise nature of our energy relationship with the EU post-Brexit.

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