(The author is a Reuters columnist. The opinions expressed are his own)
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 generation.
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 Chart 1)
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 2011."
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 interconnectors.
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)