By Gerard Wynn
LONDON Aug 1 An elusive dream of a single
European market in electricity will get a boost from growing
deployment of intermittent renewable energy, but will still
depend on some underwriting by already stretched consumers.
Vast differences in wholesale power prices remain across the
European Union, illustrating grid congestion.
Price disparities cut aggregate welfare for both consumers
and generators, by effectively limiting supply and demand and so
failing to find a clearing price across borders.
Now growing use of intermittent renewable power is forcing
EU countries to increase cross-border capacity, to reinforce and
balance their grids, in a rollout of new interconnectors where
revenue shortfalls will be plugged by levies on consumers.
Thomson Reuters data show day ahead wholesale power prices
ranging this week from a low of around 40 euros per megawatt
hour in Austria to twice that in Italy, with Britain and Ireland
somewhere in between.
The notable exception is central western Europe (CWE), where
Germany, France, Belgium and the Netherlands have more
integrated grids and automated market coupling since 2010 where
power auctions and prices track each other more closely.
A so-called Energy Liberalisation Package of gas and
electricity transmission laws is aiming for a single electricity
market by around 2014, for a less congested, more efficient
That will be achieved through a wider rollout of market
coupling beyond the CWE region.
Market coupling uses computing algorithms to process
cross-border power bids and transmission capacities between
national energy exchanges, to calculate the optimal price and
flow at any given time, meaning the entire capacity is used up
and electricity flows from cheaper to more expensive markets.
That is an advance on the alternative where trades are
lumpy, made at various prices, and sometimes send electricity
the wrong way into over-supplied, cheaper markets and leave some
spare transmission capacity unused.
The trading opportunity from improved efficiency and price
visibility is illustrated by the record auction volume reported
by the APX ENDEX exchange this week across the latest
UK-Netherlands interconnector, the UK's first sub-sea cable
coupled to the CWE.
But market coupling on its own cannot create a single
market, it only increases the efficiency of existing
A remaining problem is the amount of transmission capacity.
The UK-Netherlands BritNed interconnector made a loss in its
inaugural year, said joint operator National Grid, hinting at
the commercial risks in building new capacity.
The EU is helping drive a single power market through
regulation, drafting binding, uniform codes for cross border
In a rapidly developing programme, the Nordic region
including Norway, Sweden, Denmark and Finland will couple with
CWE and Britain in the next six months, creating a pan-north
western European (NWE) electricity market.
Further market coupling is planning to join this hub with
southern and eastern Europe.
But more interconnectors are needed.
For example, the CWE already links to Britain via the
sub-sea BritNed interconnector, but in practice the link
accounts for less than 3 percent of UK average daily power
Building more interconnectors is a necessary extra step, but
entails certain risks.
Operators make money from auctioning transmission capacity
(the right to use the cable), which is partly a function of the
power price difference between the two countries.
It is difficult to predict the size of that arbitrage,
making users reluctant to bid far ahead and leaving
interconnector with uncertain revenues.
As a result, most European interconnectors are built by grid
operators using an EU-regulated approach, which limits how much
money they can make, but also allows them to plug shortfalls by
levying power consumers.
BritNed took the alternative, commercial (or "merchant")
option, but that entails risks and still faces some regulatory
control. Partly as a result, the next UK link, to Belgium, will
follow the regulated model.
An additional, third option, for increasing transmission
capacity is mooted.
Two weeks ago, private equity-backed Element Power proposed
to sell power directly from wind farms in central Ireland to
Britain through two massive submarine cables totalling 3,000
megawatts under the north and south Irish Sea.
Rather than auctioning power over exchanges it would
contract directly with the operator of green energy tariffs in
Britain and as such would have perfect visibility of revenues,
removing that important commercial risk.
There are hurdles, however, and not least that Britain has
not yet said at what rate it would contract to buy the
electricity: clearly that would have to be at a higher price
than UK onshore wind farms, to help fund the sub-sea cables.
The Element Power proposal is experimental, but has a couple
of important advantages: by contracting to buy power from Irish
wind farms, Britain would avoid planting its own wind turbines
which some rural communities say blight their landscape.
In addition, by building cables across the Irish Sea it
would reinforce Britain's grid, expanding transmission options
from north to south England by routing through Ireland, again
without digging up the English countryside, and again avoiding
complaints of those who cry "not in my back yard" (NIMBYs).
Britain is way behind on its binding EU target to get 15
percent of its energy from renewable sources by 2020, but those
EU rules do allow a trading solution where countries meet the
target by importing renewable power from its neighbours.
The Element Power proposal is a first, interesting attempt
to exploit that facility, and could even be a template as 2020
draws closer and the relative cost of alternatives including
offshore wind and solar power become clearer.