Licence application Interconnector Licence Applications - interconnectors between Norway and Germany, and Norway and Great Britain May 2013 I DISCLAIMER 15 May 2013 Statnett SF submitted an application for a licence under Section 4-2 of the Norwegian Energy Act to the Ministry of Petroleum and Energy for facilitation of international power trading for two projects. One of the applications relates to power trading with Germany, while the other deals with power trading with the UK. The purpose of this English translation of the application is to provide Statnett partners and the relevant authorities in Germany and the United Kingdom insight into what information this Norwegian application contains. Since this version of the application may contain inaccurate translations, we want to emphasize that it is the Norwegian version of the application which is the official version. Oslo, 28 June 2013 II INTERCONNECTOR LICENSE APPLICATIONS - INTERCONNECTORS BETWEEN NORWAY AND GERMANY, AND NORWAY AND GREAT BRITAIN Statnett SF hereby applies to the Ministry of Petroleum and Energy for a licence under Section 4-2 of the Norwegian Energy Act for facilitation of international power trading for two projects. One of the applications relates to power trading with Germany, while the other deals with power trading with the UK. These are two independent projects and Statnett is applying for a licence pursuant to Section 4-2 of the Energy Act for each individual project. The basis for the two applications is largely identical, and Statnett has therefore opted to compile the applications in a single document. We present the analyses of the socioeconomic benefit from day-ahead trading in a separate report attached to this document. The title of the report is «Cables to Germany and Great Britain – analysis of socioeconomic benefit from day-ahead trading». Statnett is of the opinion that increasing power exchange capacity with other countries by constructing two new interconnectors of 1400 MW each makes good sense for Norwegian society. The planned interconnections to Germany and the UK, which are scheduled for completion in 2018 and 2020 respectively, will: Contribute to increase value creation in Norway while also being socioeconomically profitable Reinforce security of supply, particularly as regards securing access to energy in dry years Contribute to the development of a more climate-friendly energy sector by facilitating the adopted commitment to renewable energy in Norway and Sweden, and by supporting the conversion of energy systems for our trading partners. Oslo, 15 May 2013 Auke Lont Håkon Borgen President and CEO Executive Vice President, Projects Division III CONTENTS DISCLAIMER ..................................................................................................................................... II INTERCONNECTOR LICENSE APPLICATIONS - INTERCONNECTORS BETWEEN NORWAY AND GERMANY, AND NORWAY AND GREAT BRITAIN .......................................................................................................................... III CONTENTS....................................................................................................................................... V SECTION I BASIS ................................................................................................................................................. 1 SECTION II TRADE SOLUTIONS APPLIED FOR ........................................................................................... 8 1 GERMANY .............................................................................................................................. 9 2 THE UK ................................................................................................................................ 11 SECTION III SOCIOECONOMIC PROFITABILITY ............................................................................... 13 3 ABOUT THE PROJECTS .............................................................................................................. 14 4 COMPARISON OF SOCIOECONOMIC EFFECTS IN NORWAY ................................................................ 16 5 EXPECTED BENEFIT FROM DAY-AHEAD TRADING ............................................................................ 22 6 OTHER BENEFIT ...................................................................................................................... 27 7 COST ESTIMATES .................................................................................................................... 33 8 ROBUSTNESS AND SENSITIVITIES ................................................................................................ 38 SECTION IV APPENDICES ........................................................................................................................ 57 1 SOCIOECONOMICS – METHOD AND ASSUMPTIONS ........................................................................ 58 2 CHANGES IN THE TARIFF BASIS ................................................................................................... 65 3 GRID REINFORCEMENTS AND SYSTEM OPERATIONS ........................................................................ 69 4 ORGANISATION OF THE GERMAN POWER SECTOR AND POWER MARKET ............................................ 82 5 ORGANISATION OF THE UK POWER SECTOR AND POWER MARKET .................................................... 85 6 THE GERMANY PROJECT .......................................................................................................... 88 7 THE UK PROJECT .................................................................................................................... 93 V SECTION I BASIS This section briefly explains the significance of interconnectors for Norway. We also explain why Statnett believes it is necessary to expand the power trading capacity by connecting the Norwegian power system to systems with which we have not previously had direct interconnectors. The need for interconnectors has been based on security of supply, efficient resource utilisation and value creation. In particular, trading opportunities contribute to improved resource use for unregulated renewable power production, including unregulated Norwegian hydropower. The interconnectors will make it easier to replace fossil power with renewable power while also maintaining security of supply. Statnett's analyses show that the socioeconomic benefit of increasing trading capacity is both high and robust. The main reason is that the interconnectors contribute to more efficient resource use as power will flow from the country with the lowest price to the country with the highest price. This creates a high socioeconomic benefit within a wide spectrum of potential future development paths. Page 1 of 97 Increased value creation, better security of supply and fewer greenhouse gas emissions By licence, Statnett SF (Statnett) has been assigned the role of Transmission System Operator (TSO) in Norway. As the TSO, Statnett must ensure instantaneous balance between overall production and overall consumption of power, considering the power exchange with associated foreign systems. Statnett is responsible for ensuring efficient operations in a social economy perspective and for developing the main power grid. The company wishes to achieve several objectives by expanding the power trading capacity with surrounding systems. How these objectives are weighted will differ according to the different stakeholders. The three overarching social policy goals are: Ensure increased value creation for Norwegian society by realising socioeconomic values through exchange of power between Norway and surrounding systems Contribute to strengthening security of supply. As TSO, Statnett is responsible for ensuring security of supply in the system. This entails ensuring that a physically robust power system is in place, along with functional market solutions. Security of supply is linked to access to sufficient output so that consumption can be covered at maximum loads, and the ability to cover the demand for energy over the course of a year Facilitate the phase-in of more renewable power in Norway and surrounding systems, thereby contributing to making power production more climate-friendly. The ability to regulate Norwegian hydropower can be utilised both through trading power in the day-ahead market and sale of system and balancing services. Through the interconnectors to Norway, the systems in Germany and the UK will gain access to cheaper and more climate-friendly regulating capacity. This will facilitate the conversion to a more climate-friendly power sector in these countries at a lower cost than would otherwise be the case. The Nordic and Northern European energy systems are undergoing sweeping structural modifications. In Norway, new power stations need grid access and market access to sell their output at prices which make their investments profitable. This sets new requirements for the future main grid, and power trading across national borders will be even more significant than before, for security of supply, efficient resource utilisation and value creation. A vital element of Statnett's strategy for developing the Norwegian main grid is therefore to increase power trading capacity by constructing two new interconnectors to Germany and the UK. These projects are important for the development of the Northern European power grid and are a top priority for all parties involved. The partners have agreed that the goal for completion