AN FTI CONSULTING REPORT – UPDATED JUNE 2021 Electricity interconnection: The role of cross-border transmission in the European transition to Net Zero JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 2

Many European countries have expressed an ambition to pursue a “green recovery” strategy to achieve Net Zero emissions targets by 2050. These strategies are underpinned by a fundamental transition in the electricity generation mix towards low-carbon and mostly renewable and intermittent generation. However, a rapid deployment of non-dispatchable renewables can pose significant challenges to the need to continuously balance supply and demand for electricity.

To mitigate these challenges, additional sources of flexibility – either to increase supply or reduce demand – will be increasingly required to help balance the system. are widely recognised to play a critical role in providing such flexibility over the long term. In this report, we survey recent announcements and publications and examine the contribution that electricity interconnectors are likely to play in the transition to Net Zero. We also examine how electricity interconnectors help address the ‘energy trilemma’ of improving security of supply, reducing costs of meeting demand and reducing carbon emissions.

In recent years, governments across Europe have at least 55% below 1990 levels by 2030”, endorsed by announced ambitious decarbonisation policies, the European Council in December 2020.5 In Germany, committing to reaching net zero carbon emissions by 2050 the Federal Climate Change Act “pursues the long-term (often referred to as ‘Net Zero’). goal of greenhouse gas neutrality by 2050”, while in France, For example, in June 2019 the UK Government introduced the Energy Code aims to “achieve carbon neutrality by 2050 legislation that requires it to “bring all greenhouse gas by dividing greenhouse gas emissions by a factor greater 6 emissions to net zero by 2050” and “end its contribution than six”. to global warming”. 1 The Government’s recent ‘Ten Achieving such targets will be challenging and complex, as Point Plan for a Green Industrial Revolution’ places a recently highlighted by Ofgem: “the scale of the challenge particular reliance on increasing renewable generation, is immense… (requiring) a concerted effort together with aiming for Britain to have 40GW of offshore wind capacity industry… governments, and consumers... To develop operating by 2030.2 Building on these developments, the new infrastructure and fundamentally change the way UK Government has also recently published an Energy consumers interact with energy, we need urgent action”. 7 White Paper, which “presents a vision of how we make In addition, taking steps to meet these ambitious the transition to clean energy by 2050”, thus outlining decarbonisation targets is only one part of the challenge; 3 a pathway for the UK to meet its commitments. achieving security of supply and cost efficiency also The European Commission (“EC”) has published its ‘Vision remain critical, as a net zero carbon economy should be for a Clean Planet for All’, presenting its “vision to achieve delivered at least cost to consumers, while maintaining climate neutrality by 2050” and reflecting upon the “deep a reliable supply of electricity at all times. societal and economic transformations” required within In this context, and following the recent commitment in 4 the coming generation. the UK Energy White Paper to “realise at least 18 GW of While the target has not been formalised in legislation capacity by 2030”, 8 which has also been (as has been the case in the UK), the EC Vision presents reflected in the more recent ‘Balanced Pathway’ scenario a number of “pathways for achieving a climate neutral developed by the (“CCC”),9 net-zero greenhouse gas emissions” by 2050, while FTI Consulting (“FTI”) has been commissioned by AQUIND encouraging Member States to develop individual to review the recent evidence on the role that electricity National Climate and Energy Pans to “deliver on the EU’s interconnectors are expected to play in the European contribution to reduce emissions by at least 40% by 2030 transition to Net Zero, and how interconnectors can compared to 1990”. In September 2020, the European help achieve these targets more quickly and more cost Commission’s 2030 Climate Target Plan proposed “to raise efficiently, drawing primarily on third party reports the EU’s ambition on reducing greenhouse gas emissions to and publications. JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 3

In the remainder of this report, we: FIGURE 2: GB GENERATION MIX, 2009-2019 (TWH) 400 30% Set out the key challenges posed by the rapid — 350 25% deployment of intermittent renewable energy and how 300 20% these challenges lead to a growing need for flexibility 250

of the power system; 200 15% TWh 150 — Identify different sources of flexibility, all of which 10% 100 face specific constraints and limitations in terms of 5% 50

mitigating increasing power system volatility; Intermittent share of generation (%) 0 0% — Present the integral role of interconnectors in 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 delivering system flexibility, for the benefit of Coal Gas Nuclear Wind consumers; and Solar Other Imports% Intermittent Source: NG ESO, FTI analysis. — Describe the contribution that interconnectors make towards addressing the so-called ‘energy trilemma’. Such a shift in the generation mix is unprecedented and is widely expected to pose significant challenges to the Growing need for flexibility operation of the system. This is likely to be particularly The share of power generation produced by intermittent acute in terms of balancing supply and demand: growth renewable sources is expected to increase dramatically in (mostly) intermittent renewable generation is expected in the period to 2050, in order to meet the Net Zero to lead to increasingly frequent periods with either “too goals. Across the EU as a whole, the share of renewable much” or “too little” generation relative to demand. This generation from onshore wind, offshore wind and solar increase in the overall system volatility is illustrated – is expected to increase from around 12% in 2015 to 35% using GB historical data – in Figures 3 and 4 below. by 2050, while in GB, wind and solar output has aready FIGURE 3: IMBALANCES BETWEEN SUPPLY AND DEMAND, increased from 1% to 28% of annual generation (between GB, WEEK COMMENCING 27/09/2015 2009 and 2019) as illustrated in Figures 1 and 2 below. Nuclear Wind Solar Coal Swing in 45 Residual Demand volatility: 19 GW FIGURE 1: PROJECTIONS OF ELECTRICITY GENERATION IN EU28 40 31 GW (TWH/YEAR, 2°C SCENARIO) 35 6000 60% 30

5000 50% 25 12 GW GW 20 4000 40% 15

3000 30% 10 TWh 5 2000 20% 0 Solar and wind share Week starting 27/9/2015 1000 10% Sources: National Grid ESO; Elexon Balancing Mechanism Reports, FTI analysis. 0 0% 2020 2025 2030 2035 2040 2045 2050 FIGURE 4: IMBALANCES BETWEEN SUPPLY AND DEMAND, Coal + Oil Gas Nuclear GB, WEEK COMMENCING 27/09/2019 Wind Solar Biomass Hydro + Other Solar and wind share Nuclear Wind Solar 45 Source: Joint Research Centre (2020)10 and FTI analysis. Coal Residual Demand 40 Swing in 27 GW 35 volatility: 25 GW 30 2 GW 25

GW 20 15 10 5 0 Week starting 27/9/2019

Sources: National Grid ESO; Elexon Balancing Mechanism Reports, FTI analysis. JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 4

Figures 3 and 4 above illustrate the increasing challenge of Sources of flexibility balancing supply and demand of electricity in recent years There are different sources of flexibility that can help in GB. As shown in the dark blue area, nuclear generation mitigate the growing system volatility, described in the provides a stable supply of power for baseload generation, following paragraphs and also in Table 1 below: while coal plants – traditional providers of despatchable power supply – have seen a significant decline in output — Additional flexible generation can meet shortfalls in due to rising carbon prices. Meanwhile, intermittent renewable generation. This can come from low-carbon renewable output has been growing rapidly – for example sources such as hydro or from more carbon-intensive the volume of wind generation has doubled from 29 TWh/ sources such as fast-response thermal generation year in 2015 to 58 TWh/year in 2019, and the impact of this (e.g. CCGTs, OCGTs or gas reciprocating engines). difference on total GB supply can be seen in Figures 3 — Demand-side response (“DSR”) resources can reduce and 4 above. the volume of demand when supply is short. DSR has Intermittent renewable output, such as from wind farms, a long and established tradition in the industrial sector can fluctuate significantly and often does not correlate (e.g. through interruptible supply contracts), and new with peaks in demand. This leads to large variations in models are emerging to harness the potential of DSR residual demand (i.e. the difference between total demand in commercial and residential sectors. This could be and supply provided by non-dispatchable resources such particularly important in the context of a widespread as renewables, shown as the grey area in the diagrams) uptake of electric vehicles. within or between days, and this variation must be met — Storage assets can provide support both in absorbing by flexible supply sources. excess supply (e.g. at times of high renewables As illustrated with the left arrow in Figure 4, there may be generation), and injecting power at times of high times when high wind and solar generation coincides with demand. Traditional storage in the form of pumped relatively low demand, such that together these resources hydro currently provides the bulk of storage capacity meet the vast bulk of the total demand. Conversely, as in Europe. However, the costs of newer forms of illustrated with the arrow in the middle of Figure 4, there storage, such as batteries, compressed air, liquid air may be periods when the majority of demand must be and flywheels, have been declining in recent years and met by flexible supply sources, for example, when very they are expected to provide a significant contribution 12 low wind and solar output coincide with a time of high to the overall system flexibility in the long run. demand. The variations in this volatility have increased — Interconnectors enable resources to be shared across over time – in the illustrative week in 2015, the difference wider geographic footprints, which enables excess between the highest and lowest supply-demand gap was supply from one region to contribute to meeting 19GW; but this increased to 25GW by 2019, and the trend demand in another, connected, region, and thus reduce is likely to continue. the overall cost of the system. This is likely to become Historically, the mismatch between less controllable increasingly valuable as renewables penetration grows, sources of supply and demand over particular periods as there may be periods of excess renewable generation of time could be managed through the dispatch of in one region (e.g. when it is windy) and insufficient conventional thermal (often CCGT) or hydro generation, renewable generation in another region. In those which could be increased or reduced in response to periods, interconnectors help low-carbon electricity changing demand. However, with conventional thermal to be shared efficiently across multiple regions. generation steadily retiring from the system on the pathway to Net Zero, it will become less and less feasible to manage the increase in the system volatility in this way. Additional sources of flexibility will need to be identified and drawn upon in order to maintain overall system balance. Indeed, the Sixth Carbon Budget published recently by the CCC highlights the need for “an increasingly flexible electricity system… [to] help offset the intermittency impacts, and associated system costs, of variable renewables generation”. 11 JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 5

TABLE 1: SOURCES OF FLEXIBILITY, THEIR CHALLENGES, TECHNOLOGY READINESS AND ENERGY EFFICIENCY

Energy Technology Constraints and challenges Technology readiness level (“TRL”)14 efficiency Flexible Long lead times, long payback periods TRL 9: Conventional technology, fully generation - and often subject to geographical and 90%+15 operational for decades. hydro environmental constraints.13

Flexible Not a priori compatible with the Net Zero generation – TRL 9: Conventional technology, fully 34% (OCGT) - targets (unless combined with Carbon thermal carbon- operational for a number of years. 53% (CCGT)16 Capture and Storage). intensive

Consumer behavioural patterns need TRL 6 – 9: Time-of-use tariffs and price visibility to change significantly to broaden the already provide incentives for industrial scope of DSR (this would likely need to be consumers to adjust demand (TRL 9), but these DSR underpinned through changes to the market --- are less developed (and often unavailable) in design to provide consumers (or energy the residential sector. Aggregation of small- supplies) with sufficiently granular price scale demand is still developing (TRL 6 – 8). signals.

Currently the most mature and widespread source of electricity storage, accounting for 97% of the EU’s existing storage capacity.17 Existing reservoir storage may be re- Storage – purposed to become pumped storage.18 In TRL 9: Conventional technology, fully 70-85%20 pumped hydro some countries, there may be limitations operational for a number of years. on further deployment of pumped hydro – for example in the UK the pumped hydro capacity has remained constant at 2.7GW since 2007.19

Batteries operate on a charge-discharge cycle, which means that they cannot provide electricity continuously, to the same TRL 5 – 8: Varies based on battery type and extent as generators or interconnectors. application: batteries can provide a range Batteries also vary in terms of the speed Storage - of ancillary services (frequency, voltage and and duration of their response: for example, 60-98%22 batteries constraint management) to system operators National Grid, in evaluating the role of (TRL 8), but are less well suited to maintain batteries in contributing to security of reliability of supply (TRL 5). supply, differentiates between batteries with duration of 0.5 hours through to over 5.5 hours.21

Operate subject to commercial signals, such TRL 9 (for Monopole and Bipole VSC): that a region under a system stress event Interconnectors under construction (e.g. NSL may – in extreme circumstances – find itself Interconnectors and ElecLink) are deploying VSC technology, >95%23 exporting power to a neighbouring region if and this is currently the preferred HVDC the latter experiences an even more severe technology for applications in Europe. system stress event.

In addition to the technologies described above, However, none of the flexibility resources listed above are, hydrogen is increasingly recognised as likely to also play on their own, likely to be sufficient to meet the volatility a significant role as well in reaching Net Zero across the challenges associated with Net Zero. As summarised wider economy. The use of hydrogen currently appears in Table 1 above, all types of flexibility resources face to be most attractive in sectors such as industry, heating specific challenges in addressing the supply and demand and transport, but hydrogen seems unlikely to have a key mismatch. role in the electricity sector in the near future (although it may play a growing role even in the power sector as we approach 2050).24,25 Similarly, National Grid’s Future Energy Scenarios do not appear to envisage a significant role for hydrogen demand in the power sector.26 JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 6

These challenges are widely understood and recognised There is also evidence that the benefits of increasing the in the industry, and the prevailing view is that multiple system flexibility are estimated to be significant: different sources of flexibility will need to be developed: — Imperial College and identified that the — The EC’s ‘Vision of a Clean Planet for All’ argues that UK “could save £17-40 bn across the electricity system “the transition towards a largely decentralised power from now to 2050 by deploying flexibility technologies”. 32 system based on renewables will require a smarter and — The CCC identified that improvements in the UK’s flexible system, building on consumers’ involvement, system flexibility “have potential to bring electricity increased interconnectivity, improved energy storage system costs down by £3-8 billion/year by 2030 and £16 deployed on a large scale, demand side response and billion/year by 2050”. 33 management through digitalisation”. 27 Among the different sources of flexibility, the role of — Imperial College and Carbon Trust identify cross-border transmission is likely to be particularly “three key sources of value” from DSR, storage and important, and the following sections focus on the role interconnectors, explaining that “they reduce the of interconnectors in the transition to Net Zero. capacity of low carbon generation needed to achieve carbon reduction targets by improving the utilisation of Importance of electricity interconnectors intermittent low carbon generation; they enable system in the transition to Net Zero balancing at a lower cost by displacing more expensive Electricity interconnectors, cross-border transmission flexibility options; and they improve the utilisation of links that enable electricity to flow between two regions, existing conventional generation, (deferring) are one specific type of system flexibility, which is likely to investments in… network reinforcement”. 28 play an integral role alongside other flexibility resources. — The Committee on Climate Change (CCC) contends This is fundamentally because interconnectors support that “[r]educing electricity emissions close to zero the integration of renewables across the European energy will require sustained and increased deployment system, by allowing low-carbon electricity to be imported of renewables and possibly nuclear power and the or exported between regions more easily. decarbonisation of back-up generation. Improvements This benefit arises in the context of the transition to in system flexibility - such as battery storage, Net Zero because the output from variable renewable interconnection and flexible demands - can help generation is not entirely correlated between countries. accommodate large volumes of variable renewables For instance, “Europe is large enough to be impacted in the system at low cost”. 29 by multiple weather systems at any one time and as — ENTSO-E note that, with non-controllable RES a consequence, absolute values and time patterns of forming an increasing proportion of electricity wind power generation are different in each European generation, “new flexibility sources will be necessary country”. 34 This means that the production of low-cost both from the generation, storage and demand side… renewable energy in one country can often be exported (with) new roles for thermal plats, RES participation, to benefit its neighbours, particularly when the importing demand side response and storage… (while) strong country happens to generate relatively little renewables interconnection between areas of production and at the same time, ‘complementing’ power generation in consumption will be essential to enable the power neighbouring countries. flows from flexible sources”. 30 Indeed, “there are several cases of countries potentially — The Aldersgate Group, an alliance of businesses, providing wind power well complementary to the EU academic institutions, professional institutes, and civil production [i.e. generating when RES output is low society organisations, recommended in a recent report elsewhere in the EU] being little or very little interconnected that policy makers should “[g]row the market for flexible with neighbour countries”, including Spain, the UK and options, such as increased power storage capacity, Ireland, where “plans… to increase interconnection increased interconnection and greater use of demand levels to 10% minimum… could benefit the whole side response to create a reliable and low carbon power system stability”. 35 network as more renewable energy is deployed”. 31 JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 7

Interconnectors have been widely recognised for their FIGURE 5: MAP OF TYNDP 2020 TRANSMISSION PROJECTS specific contribution to the Net Zero transition: — In its recent Energy White Paper, BEIS estimates that “a higher level of interconnector capacity could decrease cumulative emissions in Great Britain by up to 199 MtCO2 by 2050, as well as reducing total system costs”. Supporting analysis to the report predicts that “meeting carbon emission targets for the power sector will be increasingly influenced by interconnector activity” and estimates that a higher level of interconnector capacity could decrease cumulative CO2 emissions in the rest of the EU by an additional 134 Mt by 2050, with “thermal generation across the EU decreasing with more interconnection between EU and GB”. 36 — In its latest assessment of the Future Energy Scenarios in Great Britain, the system operator explained that in the scenarios that reach Net Zero by 2050, “interconnectors help balance supply and demand with flows responding to price differences between countries that are increasingly driven by variable renewable generation output” and that thanks to “their flexibility, interconnectors will become increasingly important as renewable energy increases. Interconnection and Legend: Areas indicate projects for which the route is not yet known. Green: project under construction, Yellow: project in permitting; Red: Project planned but not yet in imports reduce the need for storage”. On this basis, the permitting, Blue: project under consideration. system operator identified the need for interconnection Source: ENTSO-E (2020), TYNDP 2020. capacity to increase by a factor of 3 to 4, from 5 GW — In terms of quantifying those benefits, ENTSO-E also in 2020 to 16-21 GW by 2030.37 found that addressing system needs of “50GW… in — ENTSO-E’s Ten-Year Network Development Plan 2030 and 43 additional GW… in 2040” would lead to “a (“TYNDP”) 2020 similarly found that interconnectors reduction in costs for Europeans of about 3 bn € / year in “help to maintain the adequacy by allowing countries to 2030 and 10 bn € / year in 2040… [which] far outweigh import electricity during stressful times. With the increase the cost of building the grid, of €17 bn for the SEW-based of variable RES generation across Europe, the electricity Needs 2030 and €45bn for 2024… [due to] a better use of system could lack flexibility. New interconnectors will the European generation mix.” ENTSO-E also estimate bring geographical flexibility by taking advantage of the investment would lead to “110 TWh of curtailed the difference of climate conditions across Europe”. The energy saved each year and 55 Mt of CO2 emissions report also identified that “additionally to the 35 GW of avoided each year until 2040” but recognise that “other new cross-border reinforcements expected to be built technologies such as storage could also address these 39 by 2025 in addition to the 2020 grid, 50 additional GW needs”. of cross-border reinforcements would be cost-efficient — In its ‘Net Zero Technical Report’, the CCC argued to support the electric system in its path towards that “decarbonising the UK’s electricity system whilst decarbonisation”. 38 meeting additional electricity demands will place increasing burdens on the UK’s electricity networks, requiring investment in transmission and distribution networks and making use of increased interconnection to other countries. Building long-distance high voltage interconnectors to other countries can also help share electricity system resources and improve system flexibility.” 40 JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 8

In addition to the contribution that interconnectors are Interconnectors help alleviate this challenge by expected to make towards the system flexibility, they diversifying the electricity sources that individual are also widely recognised for being able to address the European energy systems are reliant on. This means “energy trilemma” of enhancing the security of supply, interconnectors provide GB greater access to other energy reducing the total costs of meeting electricity demand resources, particularly during times when the GB energy while simultaneously helping to reduce carbon emissions, system is facing “system stress”, i.e. periods when GB as illustrated in Figure 6 below. might have insufficient generation available to meet the country’s needs.44 This risk is likely to increase as several FIGURE 6: ENERGY TRILEMMA ageing coal and nuclear plants in GB close over the next few years. Security In the EU context, the contribution of interconnectors of supply to maintaining security of supply is recognised by the European Commission target for each Member State to achieve interconnection capacity equal to 15% of installed generation capacity by 2030.45 Indeed, the European Decarbonisation Affordability Commission’s Expert Group on electricity interconnection Energy trilemma targets concluded that “in countries where the nominal [interconnector] transmission capacity is below 30% of their peak load… [or] below 30% of their renewable installed generation capacity, options for further interconnectors Indeed, in its recent assessment prospective GB should be urgently investigated” (emphasis added), in interconnectors, Ofgem argues that electricity order to ensure that “electricity demand… can be met in interconnectors contribute to all three elements of all conditions… [and enable] export potential of excess the energy trilemma: they “have potentially significant renewable production”. 46 Given that this recommendation benefits for consumers: lowering electricity bills by allowing was made in 2017, before the increased ambition to access to cheaper generation, providing more efficient achieve Net Zero targets both in the EU and the UK, ways to deliver security of supply and supporting the there is likely to be an even stronger case for such an decarbonisation of energy supplies.” 41 investigation to be performed now. In the remaining sections of this report we consider each In 2017, the Commission’s Expert Group assessed each of the three legs of the trilemma in turn. Member State’s projected interconnection capacity relative to estimated domestic peak load in 2030 under Interconnectors enhance the security of supply the ENTSO-E TYNDP 2016 ‘Vision 3’ scenario, the results of One of the ways in which the benefits of interconnectors which are presented in Figure 7 below.47 The Commission’s manifest themselves is through enhancing the security Expert Group found that the UK lagged significantly of supply for the connected regions. As described earlier behind other Member States in reaching its 30% threshold, in this report, one of the key challenges in the transition with its 4.5 GW of interconnection capacity covering only to a low carbon energy system is the need to maintain 7% of the 2030 peak load. Although GB interconnection energy security, i.e. having access to sufficient sources of capacity is already 5 GW as of 2020, with three additional electricity to meet customer demand in all time periods. links due to be completed shortly (ElecLink, IFA2 and With a growing deployment of intermittent generation NSL, with a combined capacity of 3.4 GW), and the recent in GB as the system transitions to Net Zero, such as the Energy White Paper committed to achieve 18 GW by recently announced target to quadruple offshore wind 2030, the UK would still most likely fail to reach the 30% generation capacity to 40GW by 2030, the energy system threshold under the Commission Expert Group’s analysis. needs to be able to manage an increasingly volatile supply National Grid’s Network Options Assessment concluded 42 and demand balance. that interconnection capacity of 18 GW to 23 GW between Indeed, the CCC’s recently released Sixth Carbon Budget GB and European markets by 2032 “would provide the finds that “to balance the system and ensure security maximum benefit for GB consumers”, highlighting the of supply, there will be a need for dispatchable low- significant amount of new capacity required over the carbon generation”, with the need for “at least 50TWh coming decade.48 of dispatchable and flexible generation”. 43 JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 9

FIGURE 7: MEMBER STATES BY INTERCONNECTION LEVEL, RELATIVE TO ESTIMATED In the GB context, one proxy measure of an asset’s ability 2030 PEAK LOAD, VISION 3 SCENARIO IN TYNDP 2016 to contribute to security of supply is its Capacity Market de-rating factor – an estimate of the “realistic long- run expectation of imports at times of system stress.” 52 De-rating factors determine the share of capacity that generation and interconnector assets can be committed to be available at times of system stress, in return for capacity payments, with more reliable assets receiving higher de-rating factors. The latest modelling from National Grid, summarised in Table 2 below, suggests that existing and proposed GB interconnectors can provide a similarly secure supply of power to the coal and combined cycle gas turbine plants that have traditionally maintained security, although reliability depends on the source country of imports and technical availability of the asset.

TABLE 2: CAPACITY MARKET DE-RATING FACTOR BY SUPPLY SOURCE

Supply source De-rating factor Coal 87%

CCGT 90%

DSR 84% Legend: Orange areas indicate interconnection levels equal or below 30% of peak load in 2030; blue areas have interconnection levels between 30 and 60%; and green areas France (multiple interconnectors) 69-75% have interconnection levels above 60%. Source: European Commission’s Expert Group on electricity interconnection Belgium (NEMO) 68% targets (2017). (BritNed) 61%

Ofgem has identified security of supply benefits both for a Norway ( Link 90% wide range of recently evaluated interconnectors: – due to be opened in 2021)

— In 2015, Ofgem found that FABLink “can provide security Source: National Grid ESO (2019), Electricity Capacity Report; National Grid ESO (2020), of supply benefits by diversifying energy resources in GB”; Interconnector De-Rating Analysis. Note: The de-rating factors are re-estimated annually, and interconnector de-rating that IFA2 can “also deliver additional security of supply factors in particular have varied from year to year. and strategic benefits”; and that Viking Link “would Indeed, Policy Exchange, a UK-based think-tank agrees offer additional security of supply benefit by connecting that “existing interconnectors have demonstrated a greater to a new market, further increasing the diversity and level of reliability than Ofgem assumes for almost all forms resilience of GB’s .” 49 of generation. They are very reliable.” 53 — In 2017, Ofgem found that “all three projects [GridLink, Additionally, with Europe progressing towards Net Zero, NeuConnect and NorthConnect] can also provide security a higher penetration of renewables is likely to increase of supply and sustainability benefits by providing access the pressure on the electricity grid by, for example, to alternative generation and increasing GB capacity causing larger or more frequent disturbances to the of supply.” 50 frequency, or by reducing inertia. This is likely to increase This is consistent with previous FTI analysis, which found the need for SOs to procure ancillary services to ensure that “in each connected country, there is a considerable that the system operates in a stable and secure manner. amount of excess capacity when GB (capacity) margins Interconnectors can play an important role in this kind of are low… (which) means that new interconnectors would system balancing by providing a range of services to the be able to facilitate substantial additional electricity SOs, such as frequency response, black start or reactive flows into GB during periods of GB system stress”, as power. By expanding the potential options open to the well as “facilitating electricity flows to GB from countries SO and therefore increasing competition in the provision neighbouring the connected country”. 51 of these services, this in turn, is likely to exert downward JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 10

pressure on the overall cost the SOs pay for ancillary Meanwhile, Policy Exchange estimates that “from an extra services to maintain system stability and security which GW of interconnection capacity, the UK could expect to are ultimately borne by electricity consumers. Indeed, this reduce the costs of meeting carbon targets by up to £115m 58 has been confirmed recently by NG ESO in GB: although per year, assuming a carbon price of £30/tCO2”. the monetary value of these services is not publicly Results are driven by the carbon intensity of marginal available (due to commercial confidentiality reasons), the power generation in the country the new capacity system operator confirmed that its assessment identified connects to, with an additional GW of interconnection with “monetary benefits from services that the [GridLink, Ireland, Belgium, France or Norway respectively estimated NeuConnect and NorthConnect] projects and Aquind could to save £11m, £19m, £1.5m and £115m per year. provide which in turn will benefit the GB consumer”. 54 This is supported by recent modelling conducted Interconnectors improve the cost efficiency by FTI Consulting, which estimates that the AQUIND of meeting demand Interconnector, a proposed 2 GW electricity transmission By enabling generation resources to be shared across cable connecting Great Britain and France, is expected to wider geographical footprints, cross-border transmission deliver over £2.3bn in savings for GB electricity consumers assets enable total electricity demand to be met at a between 2020 and 2050 by enabling imports of cheaper lower overall cost than would otherwise be the case. electricity, while also improving security of supply in both 59 The mechanism for this is well known and understood: GB and France. by enabling electricity to be exported from a lower-price Among the different borders between GB and continental region to meet (a portion of) the demand in a higher-price Europe, connections to France are highly beneficial for GB region, the resources in the former region effectively consumers due to the wide wholesale price differentials displace more expensive sources of supply. In total, the between the two regions, as illustrated in Figure 8 below. cost of meeting the demand in the two connected regions is therefore reduced. FIGURE 8: AVERAGE ABSOLUTE POWER PRICE DIFFERENTIALS ACROSS GB-EU BORDERS (EUR/MWH) This is critical since it means that interconnectors can help 20 achieve the Net Zero targets more cost efficiently than 2018 2019 would be the case if each European country were to serve 15 its domestic demand through local resources.

Indeed, a number of reports indicate that, historically, 10

interconnectors have been seen as a relatively cost- EUR/MWh efficient way of reducing GB electricity costs (and also 5 reducing emissions, as discussed in the next section). Ofgem highlights the ability of interconnectors to “lower 0 GB-FR GB-NL GB-IE overall cost by making full use of the existing resources Border in the European network and displacing construction of Source: ACER (2020), Market Monitoring Report 2019 – Wholesale Markets Volume; more domestic capacity at a potentially significant cost” FTI analysis. Note: ACER provides only data for borders with interconnection is already operational and “provide a route for spare capacity in neighbouring (hence Belgium and other European countries are not included). countries to deliver power for GB consumers”. 55 As presented in Figure 8 above, historical data of power Similarly, National Grid, the UK System Operator, price differentials across European borders, published estimates that “each 1GW of new electricity interconnector by the European Union Agency for the Cooperation of capacity could reduce Britain’s wholesale power prices Energy Regulators (“ACER”), shows that GB-France has the up to 1-2%. In total, 4-5GW of new electricity links built to greatest average price ‘spread’ of GB-EU borders over the mainland Europe could unlock up to £1 billion of benefits year, and indeed one of the highest across all assessed 56 to energy consumers per year”. European borders. This indicates that, of the GB-EU The CCC finds that additional interconnection could borders assessed, interconnection between GB and France also help reduce the need for investment in new power offers one of the greatest potentials to displace more generation assets, concluding that “an additional 9 GW expensive sources of supply with exported power from of interconnectors in our scenarios would reduce the need a lower-priced region. This makes the GB-France border for 4-7 GW of offshore wind capacity”. 57 likely (but not necessarily) to be highly beneficial to GB consumers. JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 11

Interconnectors help reduce total carbon emissions power will displace GB thermal” and for NorthConnect “high level of imports of renewable hydro generation will Finally, interconnectors can also help reduce aggregate displace GB thermal”. 61 European carbon emissions from the power sector. Similarly to the cost efficiency described in the previous Supporting analysis to the recent Energy White sub-section, interconnectors can help renewable Paper estimates that in a Net Zero scenario, a ‘high electricity to be exported towards neighbouring regions interconnection’ scenario would lead to 63% less where they can displace more carbon intensive resources curtailment than in a ‘low interconnection’ scenario, (such as thermal generation, e.g. CCGTs). with excess generation “transferred through interconnectors to undersupplied countries”. 62 In practice, exports of renewables could happen in two different ways: In its recent analysis, National Grid Ventures, the operator of GB’s three existing interconnectors, estimates — In some periods of time, renewable generation in that current GB electricity interconnection has saved a given region may be so high that the wholesale 1.13MtCO2 in the twelve months leading to December electricity prices fall significantly, potentially close to 2020, with low-carbon imported electricity displacing zero. In such periods, it would be economically very carbon-intensive marginal domestic generation. In advantageous for some of the domestically generated particular, imports from France and Belgium via IFA electricity to be exported, for example towards regions and NEMO respectively have contributed to an emissions where the renewable generation is lower. reduction of 1.6MtCO2 and 0.16 MtCO2 across the — In addition, during some periods, non-dispatchable time period.63 resources (e.g. intermittent generators such as wind Furthermore, for many prospective interconnector and solar) in a given region may generate electricity projects, ENTSO-E has assessed both the extent to which that cannot be used to meet the domestic demand.60 each proposed asset reduces carbon emissions against When this occurs, system operators may take action to its National Trends 2025 and 2030 scenarios, and the prevent such resources from dispatching their output annual avoided curtailment of renewable resources, onto the network, in order to balance the overall system as summarised in Table 3 below. demand and supply. This is known as ‘curtailment’.

When such curtailment of renewable generation occurs, TABLE 3: ANNUAL CARBON ABATEMENT AND AVOIDED CURTAILMENT it reduces the volume of low-carbon electricity that FOR SELECTED PROPOSED INTERCONNECTORS. is being dispatched on the system, and this remains Annual Annual CO2 abated unused. Interconnectors, by allowing a portion of avoided curtailment (ktonnes/year) domestic renewable generation to be exported, can Asset (GWh/year) help reduce curtailment of renewable resources and NT2025 NT2030 NT2025 NT2030 thus improve the utilisation of such resources. FABLink (1.4GW) -371 -1,390 30 308 NorthConnect In both cases, the increased renewable generation (Norway-GB, -405 -1,324 75 467 – which is low carbon – can displace more carbon- 1.4GW) intensive generation in the importing country. This is Biscay Gulf (Spain- -523 -1,225 541 7,431 not always the case (as there may be situations where France, 1.9GW) Portugal-Spain both the marginal power generator in both countries is -128 -150 130 293 (1.9GW) a low-carbon resource). However, to the extent that the AQUIND (France- -463 -1,949 36 423 exports of additional renewable electricity help displace GB, 2GW) the marginal – and carbon-intensive – generation in the Source: ENTSO-E TYNDP 2020 Project Sheets. importing country, the overall carbon emissions would be reduced. In recent (2017) Cap and Floor analysis, Ofgem found that all three projects - GridLink, NeuConnect and NorthConnect – provide significant carbon reduction benefits. Ofgem explained that for GridLink “high mix of imported low-carbon generation will displace GB thermal”, for NeuConnect the “[l]ower carbon intensity of German JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 12

Conclusion Notes and sources Many European countries have expressed an ambition 1 BEIS (2019), UK becomes first major economy to pass net to achieve Net Zero emissions by 2050 or earlier, with zero emissions law. strategies underpinned by a rapid deployment of low- 2 HM Government (2020), The Ten Point Plan for a Green carbon and mostly intermittent renewable generation Industrial Revolution. as part of a fundamental transition in the electricity 3 generation mix. However, an increasing reliance on BEIS (2020), Energy White Paper: Powering our Net Zero non-dispatchable renewables will likely pose significant Future, page 3. challenges to system operation, particularly in terms of 4 European Commission (2018), Our Vision for a Clean balancing supply and demand. As conventional thermal Planet for All. generation steadily retires from the system on the pathway 5 European Commission (2020), Stepping up Europe’s 2030 to Net Zero, additional sources of flexibility will be climate ambition; European Council (2020), EUCO 22/20. required to maintain overall system balance. 6 German Federal Ministry of Justice and Consumer Interconnectors are a key (although not the only) source Protection and Federal Office of Justice (2019), Federal of flexibility and they can help mitigate increasing system Climate Protection Act; French National Assembly and volatility by enabling resources to be shared across wider Senate (2019), France Energy Code. geographical footprints. In this way, interconnectors can 7 Ofgem (2020), Decarbonisation Action Plan. support the integration of renewables across the European energy system by allowing low-carbon electricity to be 8 BEIS (2020), Energy White Paper: Powering our Net Zero imported or exported between regions more easily. Future, page 80. In addition, interconnectors are also widely recognised for 9 CCC (2020), The Sixth Carbon Budget. their ability to address the ‘energy trilemma’. Increased 10 Joint Research Centre (2020), Global Energy and interconnection capacity can enhance security of supply Climate Outlook 2019: Electrification for the low-carbon by diversifying the electricity sources an energy system transition. is reliant on, providing access to alternative sources 11 CCC (2020), The Sixth Carbon Budget. of generation during system stress events, as well as 12 providing a range of valuable balancing services for Mott MacDonald research prepared for BEIS (2018), System Operators. Interconnectors also improve the cost Storage cost and technical assumptions for BEIS; efficiency of meeting demand, by enabling electricity to National Grid Future Energy Scenarios (2020). be exported from lower-price regions to meet demand in 13 International Renewable Energy Agency identifies higher-price regions, displacing more expensive sources of several barriers to the development of hydropower, marginal supply. Where imported power displaces more including high investment costs, long payback periods, carbon-intensive generation in the importing country, environmental and social concerns due to changes in interconnectors can also reduce total carbon emissions. water availability as well as stringent environmental standards for water management. Source: IRENA (2015) Hydropower technology brief. 14 ENTSO-E ranks the technology readiness levels from 1 to 9, with higher TRL corresponding to a greater technology maturity. For TRL 1, only basic research and principles are observed and reported; whereas for TRL 9, the technology is ready for full-scale deployment. ENTSO-E Technopedia (link); National Academies of Sciences, Engineering, and Medicine (2016), The Power of Change: Innovation for Development and Deployment of Increasingly Clean Electric Power Technologies. 15 BEIS (2013), Harnessing hydroelectric power. JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 13

16 BEIS (2020), Electricity Generation Costs. However, the hydrogen for transportation and 56-79% for power to lower efficiency of OCGTs compared to CCGTs needs to hydrogen for residential heating, but only 22-29% for be considered against their lower capex. Depending on power to storage for electricity production. (Source: the expected load factor of the plant (e.g. whether it is Maroufmashat, and Fowler (2017), Transition of Future used as a peaking plant or not), it may be more cost- Energy System Infrastructure; through Power-to-Gas efficient to build an OCGT than a CCGT. Pathways. Energies 2017, 10, 1089.) 17 European Parliament, Plenary sitting, A9-0130/2020, 26 National Grid ESO (2020) Future Energy Scenarios. July 2020. 27 EC (2018), A Clean Planet for all – A European strategic 18 “The costs of new Pumped Storage Plants (PSPs) can be long-term vision for a prosperous, modern, competitive even lower… by upgrading already existing hydropower and climate neutral economy. plants into PSPs”, which can be done “by installing 28 Imperial College and Carbon Trust (2016), An analysis reversible pump turbines to pump water between two of electricity system flexibility for Great Britain. reservoirs… preferably achieved by constructing new 29 tunnels parallel to existing ones”, with a number of CCC (2019), Net Zero Technical Report. potential sites identified in Norway, such as the Tonstad 30 ENTSO-E (2020), TYNDP 2020: System, dynamic and power station. Pitorac et. al (2020), Technical Review operational challenges. of Existing Norwegian Pumped Storage Plants; SINTEF 31 Aldersgate Group (October 2020), Building a Net Zero Energy Research (2012), Increasing balance power Emissions Economy: Next Steps for Government and capacity in Norwegian hydroelectric power stations. Business. 19 BEIS (2019), Digest of Energy Statistics. 32 Imperial College and Carbon Trust (2016), An analysis 20 National Academies of Sciences, Engineering, and of electricity system flexibility for Great Britain. Medicine (2016), The Power of Change: Innovation for 33 CCC (2019), Net Zero Technical Report. Development and Deployment of Increasingly Clean 34 Monforti et. al (2016), How synchronous is wind energy Electric Power Technologies. production among European countries? 21 National Grid ESO (2020), Electricity Capacity Report. 35 Monforti et. al (2016), How synchronous is wind energy 22 The range corresponds to 60-85% efficiency for flow production among European countries? batteries and 85-98% for Li-ion batteries. World Energy 36 BEIS (2020), Energy White Paper: Powering our Net Council (2019), Energy Storage Monitor: Latest trends Zero Future. in energy storage. 37 NG ESO (2020), National Grid Future Energy Scenarios. 23 Estimate from AQUIND’s engineering advisors. This is a conservative value compared to AQUIND’s estimated 38 ENTSO-E (2020), TYNDP 2020. technical losses of 3.6% using Voltage Sourced 39 ENTSO-E (2020), TYNDP 2020: Completing the map - Converter technology. Energy efficiency dependent Power system needs in 2030 and 2040. on cable length and other configuration elements. 40 CCC (2019), Net Zero Technical Report. 24 FTI Consulting (2020) HYDROGEN: A realistic plan 41 Ofgem (2017) Cap and floor regime: Initial Project to deliver on Europe’s ambitious strategy, Assessment of the GridLink, NeuConnect and December 2020. NorthConnect Interconnectors. 25 The current expectations are that the role of 42 HM Government (2020), The Ten Point Plan for a Green hydrogen in the transition to Net Zero will be primarily Industrial Revolution; BEIS (2020), Energy Trends. in helping to decarbonise the industry, heating and transport sectors. The use of hydrogen as a form of 43 CCC (2020), The Sixth Carbon Budget - Electricity storage, to be later used in gas power plants, is less Generation. cost-competitive compared to alternative uses. See 44 National Grid ESO (2020), Winter Outlook. FTI (2020) HYDROGEN: A realistic plan to deliver on 45 European Commission (2014), European Energy Security Europe’s ambitious strategy, December 2020. See also Strategy. Maroufmashat and Fowler (2017), which estimates a long-term energy efficiency of 54-82% for power to JUNE 2021 – THE ROLE OF CROSS-BORDER TRANSMISSION IN THE EUROPEAN TRANSITION TO NET ZERO FTI Consulting LLP 14

46 Commission Expert Group on electricity interconnection 54 National Grid (2017), SO Submission to Cap and Floor. targets (2017), Towards a sustainable and integrated 55 Ofgem (2017), BES0025 (evidence provided to the House Europe. of Lords ‘Brexit: Energy Security’ Report) 47 Commission Expert Group on electricity interconnection 56 National Grid (2017), BES0043 (evidence provided to the targets (2017), Towards a sustainable and integrated House of Lords ‘Brexit: Energy Security’ Report). Europe; ENTSO-E (2016), TYNDP 2016. To FTI’s 57 knowledge, this analysis has not been repeated for CCC (2020), The Sixth Carbon Budget - Electricity TYNDP 2018 or TYNDP 2020. Generation. 58 48 National Grid ESO (2020), Network Options Assessment. Policy Exchange (2014), Getting Interconnected: How can interconnectors compete to help lower bills and 49 Ofgem (2015) Cap and floor regime: Initial Project cut carbon? Assessment of the FAB Link, IFA2, Viking Link and 59 Greenlink interconnectors. FTI (2020), Reducing the cost of transition to Net Zero for GB consumers. 50 Ofgem (2017) Cap and floor regime: Initial Project 60 Assessment of the GridLink, NeuConnect and This could be due to insufficient demand or due to NorthConnect Interconnectors. transmission constraints. 61 501 FTI (2019), Securely connected: An assessment of the Ofgem (2017) Cap and floor regime: Initial Project contribution of interconnectors to security of supply Assessment of the GridLink, NeuConnect and in Great Britain. NorthConnect Interconnectors. 62 52 DECC (2015), Announcement of de-rating methodology Aurora Energy Research prepared for BEIS (2020), for interconnectors in the Capacity Market. The impact of interconnectors on decarbonisation. 63 53 Policy Exchange (2014) Getting Interconnected: How can National Grid – The Power of Now dashboard (link), interconnectors compete to help lower bills and accessed on 3 December 2020. cut carbon?

MARTINA LINDOVSKA JASON MANN Senior Director Senior Managing Director [email protected] [email protected]

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