(The author is a Reuters columnist. The opinions expressed are
By Gerard Wynn
LONDON, Sept 17 Power prices in Europe have
diverged further this year than at any time since markets were
linked three years ago, showing how interconnector capacity is
failing to keep up with expanding German wind and solar
The European Commission views power price convergence as one
of its main energy goals. The overall aim is to raise net social
welfare by cutting power prices in isolated regions and smooth
peaks and troughs in demand and supply across the bloc.
Until last year, the project was going well with results
achieved by the increased physical capacity of interconnectors
(high voltage, cross-border cables) and market coupling.
The latter uses computer programmes to bundle cross-border
power trades with the required interconnector capacity, rather
than forcing market participants to trade power and cable
capacity separately, to ensure electricity always flows from
cheaper to more expensive markets.
But the trend started to reverse last year and has worsened
this year, with spreads between Germany and France and with the
Netherlands peaking in April and May.
The main solution is for countries to continue expanding
interconnector capacity, offering grid operators incentives such
as clear processes for recouping costs from energy consumers.
The Commission noted in its quarterly market report in June
there had been a marked divergence of power prices in the
Central West European (CWE) market-coupled area in the first
quarter of 2013.
The CWE region is the standard-bearer for market coupling,
launched in November 2010 in a deal between national grid
operators in France, Belgium, the Netherlands and Germany.
The Commission identified a range of contributing factors
for the recent divergence.
"Germany benefited from low power generation costs due to
significant wind and solar generation, cheap coal and falling
carbon prices during most of the quarter," it said.
"In Belgium, significant nuclear capacities were still off
the grid and in France nuclear availability was lower than
expected. A decrease in power imports from the Nordic region
also contributed to the significant Belgian, Dutch and French
price premiums to the German market."
The divergence then widened further before narrowing in the
last two months.
The spread between day-ahead, baseload German and
Netherlands power prices peaked at 24.9 euros on May 20.
That is a wider spread than at any time since 2008. (See
The spread between Germany and France peaked at 23.7 euros
on April 2, also the highest level in five years. (Chart 2)
Chart 1: link.reuters.com/pur23v
Chart 2: link.reuters.com/qur23v
Chart 3: (page 7) goo.gl/gHy54G
Given how closely these power markets have tracked each
other over the past five years, and in particular the
Netherlands and Germany, it seems unlikely that isolated events
are responsible. It is more probable that rising renewable power
in Germany is a new, systemic factor.
Rising installed capacity of wind and solar power has caused
a slump in German day-ahead power prices, now at their lowest
since 2004, in constant 2010 euros, according to the Fraunhofer
Institute. (Chart 3)
German renewables are subsidised and have zero fuel costs
and so push out other sources of generation when they are
available, leading to a drop in wholesale prices, which are
increasingly negative during periods of low demand and high
renewable power availability.
The chief executive of the German, Netherlands-based grid
operator TenneT, Mel Kroon, is in no doubt that subsidised
German renewables are the cause.
Kroon announced on Monday that TenneT planned to upgrade
interconnection capacity between Germany and the Netherlands to
exploit the price difference.
"Over the past few years TenneT has made significant
progress in minimizing price differences between national
markets. We have done so by building interconnectors," he said.
"The massive and fluctuating supply of subsidized German
electricity available on the market today has drastically
changed the situation. The capacity of our existing eight
interconnectors is no longer sufficient, even though the total
interconnection capacity of the Netherlands is significantly
larger than that of other European countries."
"The Netherlands is importing Germany's national energy
policy. And this is having a major impact. Today, electricity
prices on the Dutch market are identical to those on the German
market for just 30 percent of the time, down from 90 percent in
MERCHANT VS REGULATED
The problem for grid operators is finding the cash to
upgrade transmission capacity.
The EU grid operator body, the European Network of
Transmission System Operators for Electricity, puts the bill for
priority transmission upgrade projects across Europe by 2020 at
104 billion euros ($138.87 billion).
Grid operators have two options for financing
Under a regulated route, the interconnector owner passes
construction costs to the consumer; Germany is in the process of
revising its energy laws to pass such costs onto consumers
including industry and perhaps renewable energy generators.
Under a merchant route, the interconnector owner is allowed
to profit directly from a cross-border power price spread. But
that may lead to under-investment by producing a disincentive to
allow cross-border prices to converge too closely.
Either way, these are added costs from renewable power which
were not properly drawn attention to or prepared for by national
governments or the European Commission at the outset of their
grand project to boost renewable energy.
($1 = 0.7489 euros)
(Reporting by Gerard Wynn; editing by David Evans)