May 15, 2012 / 12:15 PM / 5 years ago

COLUMN-UK's cheapest new power source? A cable: Gerard Wynn

5 Min Read

By Gerard Wynn

LONDON, May 15 (Reuters) - Laying more cables to Europe will be an important complement to new power plants as Britain navigates the cheapest route to replace ageing generation assets and makes difficult choices between gas, wind or nuclear power.

The usefulness of more cross-border interconnectors applies equally to other European Union countries with high wholesale power prices, notably Italy.

Linking grids has other advantages in a Europe with growing renewable energy resources, widening potential power sources come wind or shine.

But for countries like Britain there is a more basic rationale: key forward wholesale power prices are presently trading at a premium of about 15 euros, or a third, above Germany's, the European benchmark.

Italian wholesale power prices are about half again above German baseload.

The British premium results from older, less efficient fossil fuel power plants plus less renewable power: Germany's growing wind and solar farms, for example, cream off demand at the more lucrative peak load rates (the sun shines more when people run air conditioning), cutting prices.

Britain, like many developed countries, is now mulling a strategic re-think with a fifth to a quarter of its generating capacity due to close in the next eight years.

It is on the brink of announcing a new support framework for nuclear power and carbon capture and storage, for example, to help plug the gap.

The country is also planning "capacity payments" to motivate new gas plant capacity - gas power is barely economic even at Britain's higher power prices.

All of these measures are likely to raise consumer bills, at least initially, as the cost of support payments are passed to consumers.

Laying a cable to France, Denmark or Germany would have the opposite effect, and provide a useful complement.

It may not suit the likes of France's EDF, which is planning a new fleet of British nuclear power plants on even more perilous economics than gas, as cutting UK wholesale prices would dent their business case even further.

But if the government's concern is to cut consumer bills, as it laid out in recent initiatives, then it may make more sense.

Cost

Britain recently laid a 1,000 megawatt (MW) interconnector to mainland Europe, via the Netherlands, and has another, 2,000 MW, interconnector to France.

This is the equivalent capacity of three nuclear power plants or 5-10 percent of Britain's daily power demand and leaves the grid relatively isolated compared with continental European standards.

Britain is considering new links with Norway, Iceland, Denmark and France, according to energy minister Charles Hendry. But long-running plans for Norway and Ireland have not made headway.

A comparison of costs suggest why it makes sense.

Consultants Parsons Brinckerhoff last year detailed the capital cost of various power generation options, for Britain's department for energy and climate change.

That can be compared with the recently commissioned UK-Netherlands interconnector, the 260 km BritNed cable, which cost 600 million euros or 600 euros ($770) per kilowatt (KW).

That works out cheaper than the upfront capital cost of new power plants, based on estimates of so-called "overnight" costs, excluding interest payments on borrowing.

Parsons Brinckerhoff found gas to be the cheapest power plant at 670 pounds ($1,100) capital cost per KW, followed by advanced coal (1,600 pounds) and nuclear (3,000 pounds).

Adding renewable energy technologies, consultants Mott MacDonald last year estimated the capital cost of onshore wind at 1,400 pounds/ KW, solar power at 2,600 pounds and offshore wind 3,100 pounds.

In addition to capital costs, there are ongoing operating costs to think of. In the case of a cable to Europe, that would be the offered power price, somewhere between that in mainland Europe (at present as little as 49 euros per megawatt hour) and in Britain (around 65 euros).

In the case of a domestic new-build gas plant, it would be the combined fuel, operating and carbon costs, at around 50 euros per MWh.

Advantage

These numbers underscore how interconnectors are a real economic option.

They have additional advantages in smoothing volatility, for example in times of local scarcity, increasing the chance of tapping a wind or solar farm elsewhere, where the wind is blowing or sun shining. In times of local glut, they reduce costly power transmission congestion.

Of course there are cons: cables work both ways, and if your neighbours' prices rise that could increase local bills.

Nevertheless, they show that the full suite of options must be considered in the energy mix, to cut costs.

Besides new power plants, that will include interconnectors, plus efficiency measures to curb demand.

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