United Kingdom

United Kingdom

Analysis: Price-coupling fails to pass wind benefits to UK

EUROPE: Strong winds in Germany on 16 February 2014 led to plummeting wholesale electricity spot market prices on the German/French spot electricity exchange, giving just EUR 14.5-17.9/MWh for the German region and EUR 20.0-20.7/MWh for France.

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But despite the launch of "price-coupling" on 4 February 2014 for spot trading (for next day delivery) on the wholesale electricity markets in north-west Europe (NWE), the low, wind-related prices had no noticeable impact in the UK. Spot market prices for UK, a high wholesale price region along with Italy and Spain, were still more than three times higher that in Germany, clocking in at EUR 55.8-61.00/MWh that day.

According to the European Power Exchange (Epex Spot), the purpose behind the new price-coupling mechanism is that all electricity transmission interconnectors within and between the NWE countries should be optimally utilised. These countries — Belgium, Denmark, Estonia, Finland, France, Germany, Austria, UK, Latvia, Lithuania, Luxembourg, the Netherlands, Norway, Poland (via the SwePol Link), and Sweden — account for 75% (more than 2,000TWh) of European electricity consumption.

So if these markets are so closely linked, why are UK wholesale prices still way up the scale and not moving down towards continental prices when the wind is blowing strongly?

Limited capacity

"Whether market prices in two regions converge or diverge through market coupling depends on the physical capacity of the transmission cables between the countries. Once this capacity is fully used there can be no further electricity flows and no further price convergence," explained Jacob Soerensen, head of power trading in central-west Europe at energy trading company Danske Commodities.

The UK currently has only two cables to continental Europe, the 2GW INA (Interconnexion France-Angleterre) to France and the 1GW BritNed to the Netherlands. Even if these were operating around the clock at full capacity, they could only deliver 26TWh, or about 8% of UK annual electricity consumption (of around 318TWh in 2012).

Yet if the UK could makes use of the European continent's lower prices in windy periods, it could make substantial savings. In 2013 alone, the UK netted imports of 10.5TWh via the French link and about 5TWh through the Dutch link. Taking the 10.5TWh imports from France alone, equal to about 3% of UK consumption, and calculating the difference between the average 2013 base load price in France (adding in a transmission fee of EUR 1/MWh) and the UK, the latter saved around EUR 138 million by importing rather than using domestic generation.

The saving in one year alone is equivalent to one quarter of the EUR 600 million investment of the newest operating interconnector, the 1GW BritNed, commissioned March 2011.

Preserving the status quo

But the bottleneck on transmission adds volatility to electricity prices, which appeals to electricity traders and maintains high prices in the UK. This supports incumbent generators and is helping to prop up the UK government case underpinning new nuclear generation with the equivalent of EUR 113/MWh for 35 years (more than two and a half times the average German peak price in 2013 of EUR 42/MWh).

Perhaps this explains why no new interconnectors are likely to be commissioned until 2018 when the 1GW Nemo line to Belgium should become operational. Beyond that, the 1GW IFA 2 system to France and the 1.4GW NSN system to Norway are both to go live in 2020, according to UK transmission system operator National Grid.

But doubts over the new interconnector projects are raised by the UK's plans to support 3.26GW of new nuclear at Hinkley Point for 35 years, commissioning slated for around 2023 at the earliest. The European Commission's remarks on the UK's nuclear intentions, released 31st January 2014 include the fear that new interconnection capacity could be "crowded out" by the two new 1.63GW reactors' operation.

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