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COLUMN-EU grid project needs feat of organisation: Wynn
October 18, 2012 / 8:46 AM / 5 years ago

COLUMN-EU grid project needs feat of organisation: Wynn

(The author is a Reuters market analyst. The views expressed are his own.)

By Gerard Wynn

LONDON, Oct 18 (Reuters) - A European Union strategy to expand power transmission across borders and seas requires closer coordination of operators and regulators to mobilise investors.

More cross-border transmission is important to balance intermittent renewable energy, narrow national price differences and improve market resilience through pooled liquidity and greater competition.

Historically regulators have struggled to coordinate cross-border transmission projects and faced planning hurdles and a funding squeeze.

Now the EU has a strategy for upgrading and developing transmission which targets priority routes for grant funding and expedited permitting.

The European Network of Transmission System Operators (ENTSO) estimates that the strategy will require the grid to grow by 4,000 km a year.

The total required investment is about 104 billion euros ($136.46 billion) from 2012-2022, according to the European Commission.

Meeting the goal will also need a massive ramp-up in organisation, where at present there are no EU-wide rules for how much regulators should pay investors, while grid operators have no obligation to cooperate to build the required cross-border capacity.

FUNDING GAP

The EU’s four priority zones are: a “northern seas” grid linking offshore wind farms; north-south connections in western Europe; similar connections in eastern and southeast Europe; and a Baltic energy grid linking countries including Finland, Lithuania, Sweden and Poland.

Fine-tuning these, the Commission lists a non-exhaustive list of 24 large, new and upgraded interconnection routes as potential “projects of common interest” (PCIs), which it is easy to see swamping member state resources.

Earlier this year it estimated the greatest funding gap was in eastern/southeastern Europe, which was short of about 12 billion euros, followed by the offshore wind grid (8 billion euros), western Europe (5 billion euros), and then the Baltic zone (3 billion euros).

The Commission has now introduced a Connecting Europe Facility to help plug those gaps, allocating 9.1 billion euros for energy infrastructure to co-fund alongside private investors from 2014.

The attraction of priority status has spurred 283 applications to be considered as electricity PCIs, with most (151) in the under-supplied eastern and south-eastern Europe, the Commission reported in July.

However, the funds are limited, planning hurdles remain, as well as a lack of coordination of regulators and operators.

REGULATED

The present organisation of the network allows for publicly or privately funded interconnectors, referred to as regulated and merchant.

To date most have followed a regulated approach, given the high upfront capital and doubts over long-term returns which depend on uncertain cross-border price arbitrage over decades.

Under its new plan for priority routes, the European Commission obliges national grid operators to provide developers with an income the costs of which is passed on to energy consumers and which assures investors of “appropriate risk-related incentives.”

But there is no definition of “appropriate.”

The EU’s Agency for the Cooperation of Energy Regulators (ACER) is meant to ensure consistency, but in its latest “2013 Work Programme” it lists “rules regarding harmonised transmission tariff structures” as a priority for next year.

The ACER programme makes a deadline to make recommendations on tariffs by December 2013, but describes “No activity yet” and assigns two staff.

More urgency is needed to clarify rules for investors, who can be enticed by rather low but predictable long-term returns.

In Britain, for example, the operator National Grid has successfully designed a competitive tendering process for the ownership of national offshore wind transmission assets.

In a hybrid regulated-merchant approach, third party private sector companies are invited to bid for a regulated income.

The winner gets an “allowed revenue”, ultimately passed to consumer fuel bills, which is based on the amount needed to cover the capital, operating and maintenance costs of the transmission asset.

The National Grid calculates the allowed income on a 9 percent annual return on investment, and that has attracted investors including a consortium comprising Macquarie Capital Group Limited, Barclays Infrastructure Funds Management Limited, Mitsubishi Corporation and Frontier Power Limited, in the latest tender for the London Array offshore wind transmission tender.

COORDINATION

In addition to clearer pan-EU rules for investors, cross-border arrangements are needed to drive cooperation.

The energy consultancy Redpoint reports that concrete interconnector plans are focused on north and western Europe, and especially France, the UK and Ireland whose regulators (“FUI”) have cooperated closely.

But there are no rules requiring cooperation of energy regulators or grid operators.

The EU’s 2009 electricity directive simply makes operators responsible for “providing the operator of any other system with which its system is interconnected with sufficient information to ensure the secure and efficient operation.”

That is a pointed difference with the gas directive which, by contrast, states: “Each transmission system operator shall build sufficient cross-border capacity to integrate European transmission infrastructure.”

Electricity transmission is just one of many massive energy projects facing the EU, also including gas pipeline projects and renewable energy, just as it wallows in the centre of a continuing global economic slowdown.

Funding is not the only delivery problem, where it will take a huge task in organisation to make its strategy clear to investors.

$1 = 0.7621 euros Reporting by Gerard Wynn

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