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.

Related thinking

Announcement

Energy market and net zero transition learning and development: Role-relevant career development training

We’re well over halfway through the calendar year and are now beginning to see more of the government’s thinking and policy-shaping around what needs to change to meet the 2050 net zero target. For example, the flurry of documents issued towards the end of 2020, including the Energy White Paper...

Commercial and market outlook

Evaluating the benefits of local coordination mechanisms in power supply

In March, Cornwall Insight launched its new Energy Spectrum Europe publication in collaboration with the Institute of Energy Economics at the University of Cologne (EWI). Below is an extract of our Energy Perspective article from our latest issue, written by Konstantin Gruber and Nils Namockel from EWI. Local forms of coordination are...

Regulation and policy

How will consumers take to Market-wide Half Hourly Settlement?

Ofgem published its decision to implement the move to Market-wide Half Hourly Settlement (MHHS) on 20 April. This confirms plans to move to new settlement arrangements over a four and a half year time period, with the Elexon-led Design Working Group’s Target Operating Model to be used as the blueprint. Meters...

Regulation and policy

Ofgem raises modifications ahead of RCC and new switching arrangements

The latest edition of our Faster Switching Service Report due to be issued this week includes the latest developments in Ofgem’s Switching Programme and the associated Retail Energy Code (REC). Launched in November 2019, the Retail Code Consolidation (RCC) Significant Code Review (SCR) set out Ofgem’s intention to amalgamate the...

Regulation and policy

Calm before the storm? 2021 energy supplier compliance developments

The latest update to our Energy Supplier Compliance Portal went live on 4 May and includes changes to the compliance landscape during February to April 2021. While the previous quarter’s update reflected new principles resulting from Ofgem’s Supplier Licensing Review (SLR) and protections for prepayment meter customers facing self-disconnection, Q121...

Regulation and policy

Electricity transmission charging reform – overtaken by changing priorities?

Charging for the transmission network is never out of the development process for long. From major reviews, such as that initiated under Project Transmit in 2010, to significant reforms such as removing the triad benefit from distributed generation in 2018, and a host of smaller developments, change seems the only...

Energy storage and flexibility

How nuclear energy can help the UK reach its net zero goals

This article was originally written in Energy Spectrum on 21 March 2021. To find out more about a subscription to Energy Spectrum, please contact Nick on n.palmer@cornwall-insight.com. There are several challenges to reaching net zero, where its proponents believe nuclear could add value. Some of tomorrow’s main issues concern: How to provide low...

Commercial and market outlook

April showers bring DUoS for every half hour

Almost two years ago, Ofgem approved DCP268 DUoS Charging Using HH Settlement Data, which will move existing non-Half Hourly (NHH) settled demand customers onto time-based Half Hourly (HH) Distribution Use of System (DUoS) unit rate charges. With the modification to be implemented in the DCUSA on 1 April, we revisit...

This site is registered on wpml.org as a development site.