Brexit and Electricity Interconnectors

Brexit and electricity interconnectors

Jason Mann

12 May 2018 Expansion of UK interconnection capacity driven by strong fundamentals and benign policies - but complicated by Brexit Mounting political pressures seem to go against strong …neither the fundamentals nor the policies seem set to market fundamentals and supportive policies… change immediately after Brexit

Currently operational Regulatory regime In planning Cap and Floor regime has led to Significant price 8 new projects with c 10GW of spreads between GB capacity – albeit varying and neighbouring NorthConnect degrees of progress countries 2 additional interconnectors progressing on a merchant basis NSN Price differentials set Wholesale power market Viking to persist given Moyle GB Capacity Market fundamentally Greenwire increasingly supportive of NeuConnect different generation Greenlink interconnectors (2 GW new portfolios capacity, Nemo, ElecLink and East-West BritNed IFA 2, securing a contract in Nemo GridLink 2018) French regulator CRE IFA FAB Link ElecLink appears to hesitate in Aquind Arguable, other policies are IFA2 approving new ICs… also supportive: ….awaiting ACER decisions Transmission charging arrangements GB carbon tax

2 Post-Brexit options for power market integration range from full IEM to trading tariffs

1 2 3 4 Outside of IEM, no Outside of IEM, but Tariffs on trading tariffs but no market day-ahead market Stay in IEM coupling coupling remains

Tariffs on electricity Loss of market A degree of market Trading continues trading would coupling potentially coupling remains, as per status quo obviously create the reduces market allowing for some Aligned regulations strongest ‘friction’ efficiency joint optimisation with the EU lead Complete absence Trading frictions of dispatch… continue improving of joint dispatch reduce volume of …but no further trading efficiency optimisation efficient trades progress towards through coupling Uncharted territory Flows may go in the deeper integration Potential cost to EU with all the ‘wrong’ direction, No intraday and UK if UK no downsides of being i.e. against price coupling longer has ”seat at outside the IEM signals Market efficiency table” in • However, WTO no longer improves discussions on rules imply Second-order long- evolution of IEM electricity tariffs term impact may would remain at affect IC investment zero

Source: The Observer 3 Market coupling has made European electricity markets more efficient – decoupling of GB could reverse this trend and lead to welfare losses

1 2 3 4 Outside of IEM, no Outside of IEM, but Tariffs on trading tariffs but no market day-ahead market Stay in IEM coupling coupling remains

Coupled markets are generally agreed to have …yet, even revenues for sales of capacity under explicit increased efficiency…. auctions for interconnectors remain high….

Percentage of available capacity in Europe used in the ‘right direction’ has been 1 IFA: Comparison of Auction vs. DA Revenue per MW growing consistently since 2010 (albeit mostly on AC links) 35 40%

30 20%

25 0%

-20%

Euros(EUR) 15 Percentage (%)

-40% 10

-60% 5 Estimated ‘social welfare losses’ in the absence of market coupling, per border

(€ million, 2015–2016) are highest at the GB-Irish and Swiss borders 0 -80%

Jul-14 Jul-15 Jul-16

Jan-15 Jan-16

Jun-14 Jun-15 Jun-16

Oct-14 Oct-15 Oct-16

Apr-14 Apr-15 Apr-16

Feb-14 Sep-14 Feb-15 Sep-15 Feb-16 Sep-16

Dec-14 Dec-15

Aug-14 Aug-15 Aug-16

Nov-14 Nov-15

Mar-14 Mar-15 Mar-16

May-14 May-15 May-16 Month Revenue per MW (LT Auction) Revenue per MW (DA) Difference (%, DA/LT) …indeed, 16% higher • Some loss of efficiency likely as more interconnectors go on line that will inevitably make cross border trading more complex… • …but possible that relying on explicit auctions across GB’s DC links on an explicit basis would not be totally disastrous * Notes: (1) Assessed in the presence of a significant (>€1) price differential. Data for 37 European electricity 4 interconnectors. (2) Based on Chart 2, Moyle interconnector capacity of 500MW and EWIC capacity of 500 MW. Over longer term, as renewables roll continues benefits of near real time co-ordination likely to increase but maybe lost if out of IEM

1 2 3 4 Outside of IEM, no Outside of IEM, but Tariffs on trading tariffs but no market day-ahead market Stay in IEM coupling coupling remains

A loss of intraday and balancing coupling may not …but this is likely to become a more significant issue in currently be as dramatic as the day-ahead coupling… the future due to intermittent renewables Chart 1: Level of efficiency in the use of interconnectors in Europe falls 2016: 99.5GW 2050: 157GW, Slow closer to the real-time delivery 1 Progression scenario

28% 48%

With further market integration, intraday and balancing market coupling will drive future benefits … …lack of coupling in near real time markets likely to be Intermittent renewables (solar + wind) much more detrimental to GB consumers in future Other generation

* Notes: (1) (% use of available commercial capacity in the ‘right economic direction’) – 2016. 5 Sources: ACER and National Grid Future Energy Scenarios 2017 Being outside of IEM might deliver some, probably marginal, benefits….

1 2 3 4 Outside of IEM, no Outside of IEM, but Tariffs on trading tariffs but no market day-ahead market Stay in IEM coupling coupling remains

A …facilitating merchant conditions No longer need to comply with for interconnectors (i.e. less under Article 16(6) of 714/2009… conditions)

Arguably, outside of IEM, B there may new Arguably, new GB policies may …leading to increasingly divergent opportunities for policy- start diverging from the EU… energy mix between UK and EU makers that might change C outlook for interconnectors Potential for LMPs New market design Return of transmission charges on ICs

6 Staying in the IEM might be a likely outcome for GB given the Irish circumstances, yet there is precedent for policies to be disjointed

1 2 3 4 Outside of IEM, no Outside of IEM, but Tariffs on trading tariffs but no market day-ahead market Stay in IEM coupling coupling remains GB GB GB NI 15% 35% 50% 95%

Irish context sets the background Chart 1: IEM and interconnectors: the integration of I-SEM “In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, noin the future, support w or North-South cooperation, the all-island economy With I-SEM due to be and the protection of the 1998 Agreement.” coupled with the EU EU-UK Article 50 negotiations, 8 Dec 2017 markets prior to Brexit taking place… “there are good economic reasons for the all- island market which exist independently of …seems unlikely that European Union law or policy” even the most committed SEM committee (2016) Brexiteer would demand that NI exit the new all- Island arrangements. I-SEM due to go live in October 2018 Key question is whether Integrated Single Electricity Market (I-SEM) GB exits from Northern Source: EirGrid set to be integrated with EU markets Ireland Integration includes intraday continuous market, DAM and intraday auctions and balancing market 7 Any questions?

Jason Mann Senior Managing Director

London, UK [email protected]

Industry Challenges OUR SERVICES AT A GLANCE The electricity sector around the world is undergoing significant changes, often driven by the decarbonisation Interconnector policy and regulation agenda. For most countries, however, security of supply • Design of regulatory regimes remains the number one priority. At the same time, (including Cap and Floor in consumer price also remains a key issue. Interconnectors Great Britain) are uniquely well placed to meet these challenges of • Policy design (e.g. incentives to sustainability, security and affordability. increase interconnection)

Interconnectors are unique transmission • Energy market design (e.g. design assets that enable the flow of electricity of capacity market to incorporate interconnectors) over high voltage cables between different NorthConnect countries or regions. The economic Icelink rationale for interconnectors is driven by Quantitative analysis fundamental differences in the generation mixes in the connecting countries which • Power market fundamentals lead to systematic electricity price NSN modelling spreads over long periods of time. For • Cost-benefit analysis (e.g. example, the generation portfolio in Moyle Viking arbitrage revenues, Capacity Great Britain (primarily thermal and Greenwire Market, ancillary services) renewable generation, with some nuclear) Greenlink BritNed is very different from that in France • Socio-economic impact analysis East-West (predominantly nuclear) or Norway Nemo • Financial analysis (e.g. to support (predominantly hydro). This is beneficial to IFA2 IFA FABLink ElecLink investment decisions) consumers as it allows cheaper electricity Aquind to be imported at times of high local prices and to generators as it allows surplus Strategic support generation to be exported at times of low • Advising on negotiations with Currently operational local prices. Also, by providing access to regulators and policy-makers, In planning additional generation capacity located in a both in the UK (e.g. Ofgem, BEIS), neighbouring country, security of supply is and in other jurisdictions enhanced. • Assistance in applications for regulatory support (e.g. Cap and Our Approach Floor, Capacity Market) We work with interconnector developers, regulators and investors on all aspects of • Assistance in applications for interconnector development lifecycle. We assist developers in understanding the economics regulatory exemptions (e.g. of interconnector projects, through the modelling of the power sector fundamentals, merchant interconnectors) allowing an assessment of the costs, benefits and risks of a project both to the developers and wider energy market stakeholders. We also help the client navigate the relevant regulatory regimes. FTI Consulting Energy Services

We have significant experience in engaging with energy regulators and governments on • Strategy all aspects of regulatory issues, including design, application and refinements of regulatory • Policy & Regulation regimes to help deliver the regulators’ statutory duties. In some cases, we also work with clients to gain an exemption from some aspects of the relevant regulations. • M&A and Due Diligence

We also help investors identify, assess and progress specific investment opportunities in • Disputes (Economic, the interconnector space. commercial, technical)

Our core experience lies in the European market where our experts have worked with a number of interconnectors and investors, including ElecLink, IFA, IFA2, Interconnection France-Spain, Nemo, NorGer, NorthConnect, NSN and Viking Link. We have also advised international clients, most recently an Australian TSO. Interconnector Services

Case studies OUR INPUT Selected EXPERIENCE We have provided ongoing support to National Grid NorthConnect during the application We have a wide range of experience process for the GB Cap and Floor regime by THE CHALLENGE with interconnectors, investors, helping the client to demonstrate to Ofgem Ofgem sought to incentivise the regulators, transmission operators that the project delivers sufficient benefits construction of interconnectors through and energy companies: to GB consumers. We have also advised a new ‘cap and floor’ regulatory regime, NorthConnect on the possible regulatory the detailed arrangements for which still arrangements on the Norwegian side. needed to be worked out. RESULT Our input NorthConnect has successfully submitted We assisted National Grid, as a developer, the Initial Project Assessment application, in evaluating various aspects of the the results of which are expected to proposed regime, including the impacts on become known in May 2017. the owners, developers and GB consumers, the basis for setting cap and floor levels, availability incentives, underlying financial TransGrid models and specific design details of the capacity market. THE CHALLENGE Precipitated by the closure of old coal-fired The result electricity generators, South Australia has Our work enabled National Grid to discuss been experiencing periodic black-outs since and agree with Ofgem a form of regulatory 2016. TransGrid – the TSO in New South regime that was fair to consumers while Wales – thought that an interconnector providing a sufficient return for National between New South Wales and South Grid, thus enabling them to proceed with Australia would be the most effective two interconnector projects – to Belgium solution to the problem. and to Norway. OUR INPUT We assisted TransGrid by deploying our NorthConnect - in-house power modelling expertise Interconnector regulation to assess the likely benefits of such an interconnector. We identified substantial The challenge savings for consumers in the Eastern NorthConnect, a 1.4 GW proposed States of Australia, more than 3-4 times the interconnector between Scotland and expected cost of the interconnector. Norway, sought to operate under a form of GB regulatory support called ‘Cap RESULT and Floor’ regime, and to explore how Our work has enabled TransGrid to Norwegian regulatory framework could proceed to negotiate with State and federal also provide support. governments as it moves forward to obtain regulatory approvals for the investment.

Jason Mann Senior Managing Director T +44 (0) 20 3727 1338 E [email protected]

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