Footing the bill for a European supergrid

EUROPE: After free movement of people, goods, services and money, Europe now needs free movement of electricity. And that requires a trading and grid system connecting the whole continent.

Arthouros Zervos, president of the European Wind Energy Association (EWEA), says the benefits of this would be substantial. Integrating the anticipated 265GW of wind-generated electricity into Europe's grids by 2020 would mean a saving of EUR41.7 billion a year in the cost of electricity, the association has calculated. This would push down the price of all electricity by EUR11 for every megawatt hour produced. "If our electricity markets are functioning, that is a saving that could be passed on to consumers," says Zervos.

The vision of free movement for electricity applies not only to connections but also to power trading. European and national institutions have now realised that the need for pan-European transmission-grid expansion is urgent. Insufficient transmission capacity could limit the development of wind and other renewables and block electricity trading, all of which are key to lowering power prices.

Two questions follow: what exactly should get built and who should pay? The European Commission's overriding policy principle is that the end consumer, or ratepayer, pays. However, the widely used regulated tariff mechanism, though appropriate to Germany, may not always be applicable to greater European priorities. National and trans-national interests do not always coincide. "Regulation should recognise that sometimes the most efficient approach for a transmission system operator (TSO) ... is to invest in a network outside its national territory," the commission states. Clearly, a new mindset on cost allocation is needed.

Expanding the grid may merely involve extending the existing transmission network or superimposing an overlay network on the existing one. But connection lines linking distant production and storage units to central European networks may be all that is needed.

Achim Zerres from the energy regulation department at Germany's federal network agency points out: "Only when we have an idea of what the new grid is to deliver, who should build it and where the necessary equity and debt should come from, can we find a sensible answer to the question of who should pay."

Network charges

Extending the existing European network was the approach taken in the ten-year development plan presented by the European Network of Transmission System Operators for Electricity (ENTSO-E) in June. This could be paid for by TSOs in the existing way, in that investment costs in each country are rolled over to consumers via network use charges.

But if an overlay grid is superimposed on to the existing networks crossing national borders, the users will be few - only the networks that are linked to it, plus perhaps a few power stations and end consumers. It is doubtful whether the generally conservative TSOs would be prepared to build the part of the overlay network falling in their traditional areas. And now that most TSOs are unbundled energy majors, they may find financing large projects a problem.

Costs of building the overlay network could be divided among the connected networks which, in turn, may roll over the costs to the consumers, suggests Zerres. Existing network operators could set up a joint venture for the investment and get better conditions for private funding than each TSO alone.

Alternatively, a new network operator could be set up with various stakeholders holding shares. Entry and exit fees for the electricity transported could be used to allocate capacity to the connected networks that wish to use the transport opportunity, suggests Zerres.

Other suggestions include funding by taxpayers. This may be cheaper than private funding, but countries would have to be willing to invest the money required and deal with more complex ownership arrangements.

Connecting distant production and storage units with the central European networks is another expansion option. Connections between Norwegian pumped storage power plants and the north-west European network - or between the planned Desertec wind and solar projects in north Africa and southern European networks - would not be a grid, would have no third-party access and represent no improvement in the infrastructure of transit countries. In this case, the energy producers would pay for the grid, "which could make implementation unlikely", according to Zerres.

Yet some such so-called merchant lines have a key role in competition that is recognised by German regulator Bundesnetzagentur (BNetzA). In November, it exempted NorGer, a company planning a cross-border merchant line outside the German or Norwegian transmissions systems, from revenue regulation. Exemptions of this kind are granted when, for instance, the investment improves competition in the electricity market and when the project risk is so high that the cable would not be built without the exemption in place.

The connection between Germany and Norway makes it possible to balance fluctuating German wind generation with hydroelectric power from the Norwegian market using the market-coupling mechanism, through which electricity is traded a day ahead of delivery.

Scheduled for commissioning in 2015 or 2016, the 570-kilometre NorGer high-voltage direct-current cable, with a 1.4GW capacity, will be the first direct link between the grids of Norway and Germany. NorGer is owned by Norwegian companies Statnett, Agder Energi, Lyse and Swiss energy firm EGL.

But this is just one point-to-point merchant project, where a pan-European approach is needed. National regulators have so far aimed at minimising network usage tariffs and tended not to approve the necessary financial rate of return for investment in projects with difficult cost-allocation across borders.

Bold approach

For the future, however, the European Commission is preparing the ground for a bolder approach. In a policy document in November, Energy infrastructure priorities for 2020 and beyond - A Blueprint for an integrated European energy network, the commission outlines a set of tools to combine existing and innovative financial mechanisms that are "different, flexible and tailored towards the specific financial risks and needs" projects face in their lifecycle (Windpower Monthly, December 2010).

Beyond the traditional support mechanisms of grants and interest-rate subsidies, the commission may propose "innovative market solutions" addressing the shortfall in equity and debt financing. Options may include equity participation and support to infrastructure funds, targeted facilities for project bonds and public-private partnership loan guarantees. The commission will focus on four types of projects: those that contribute to meeting Europe's 2020 renewable energy targets, which stipulate that renewables should represent at least 20% of energy supply; those that cross EU member-state borders; those involving the roll-out of new technologies; and those that achieve EU-wide benefits the market alone cannot deliver.

Other preparatory work has already been done. The European Commission's Third Internal Market Package of 2009 required transmission system operators to draw up European ten-year network development plans. ENTSO-E's first plan came out in June and the next is due in 2012. The package also called for rules on how national regulators should cooperate on cross-border investments. The new Agency for the Cooperation of Energy Regulators (Acer), starting work in March 2011, will play a major role here, dovetailing with its task of regulating Europe-wide electricity trading.

Some of the first projects should be identified within the next two years. In its November policy document, the commission identified four EU priority corridors, two of which are to benefit wind energy. Freedom of movement for the transmission and trade of Europe's electricity is, it seems, slowly drawing closer.

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