Better off connected?

Phil Hewitt takes a look at what trends we can expect in the energy sector next year

Britain’s nuclear industry was dealt a blow recently by Toshiba’s decision to scrap plans for a new nuclear power station in Moorside, Cumbria. Tim Yeo, the chair of pro-nuclear lobby group New Nuclear Watch Institute and a former Tory MP, described the news as a “huge disappointment, a crushing blow to hopes of a revival of the UK nuclear energy industry”.

Although this is possibly an overstatement – nuclear will continue to make a significant contribution to Britain’s power mix in 2019 and beyond – the Toshiba decision does highlight the unattractiveness of current funding models for nuclear new-builds and the vast amounts of capital required to get these projects off the ground.

Bringing new renewable projects on stream is now seen as a more attractive option – both financially for investors and politically for ministers hoping to create a low-carbon economy. In recent times, one of the stand-out features of Britain’s electricity market is the increasing contribution that renewable energy makes to the country’s overall power mix.

Back in 2010 renewables were only generating 5.5TWh of electricity (or seven per cent of the total). Fast forward to the third quarter of 2018, and this figure rose to 18.2TWh (or 28 per cent of the total). In contrast, fossil fuel’s share of Britain’s power mix fell to a record low of 41 per cent.

Looking ahead to 2019, it’s likely that this trend will continue. While there is still a role for nuclear power (and in the short term, even dirty fuels such as coal) further investment in wind and solar farms will push up the proportion of energy generated by low-carbon sources. That said, there is still a long way to go if the UK is to meet its mandatory target of cutting emissions on 1990 levels by 57 per cent by 2032 (and by 80 per cent by 2050). Specifically, much more progress will be needed on decarbonising transport and heating if this goal is to be achieved.

Building more wind and solar farms is only part of the solution, however. Significant additional investment is being made in Britain’s electricity network to boost capacity, secure energy supplies and strengthen connections with parts of mainland Europe.

Increased interconnection
England already benefits from a new 2.3GW (gigawatt) interconnector (the Western Link) that provides electricity from Scotland when needed, and the NEMO interconnector with Belgium is set to come on stream over the new year. This is in addition to interconnectors already in operation between England and France, Republic of Ireland, Northern Ireland and the Netherlands.

As an example of such an interconnector, NEMO is important for Britain and Belgium. For the latter, the temporary shutdown of six of the seven nuclear reactors responsible for supplying 40 per cent of the country’s electricity has prompted fears of winter blackouts should electricity demand outstrip limited supplies. The interconnector should, in theory, alleviate some of these concerns. For Britain, NEMO adds to the 4GW of interconnector capacity currently in operation and could provide a vital source of energy during periods when the wind doesn’t blow or the sun doesn’t shine and when Belgium has active nuclear plants able to export any excess power.

Another notable development is the Integrated Single Electricity Market (I-SEM), a new wholesale electricity market arrangement which strengthens connections between Northern Ireland and the Republic of Ireland. The aim of this arrangement is to move towards a model already adopted in other parts of Europe, where a focus on trading in the day-ahead, intra-day and balancing markets has improved access to cheaper sources of electricity, produced greater transparency on pricing and resulted in lower bills for consumers. It’s also part of a wider drive to create a single European market for electricity.

Being a part of this market is important for Britain – and not just because it increases security of supplies. More often than not, energy can flow around Europe to meet localised issues and it is very rare that a country cannot be helped out by being connected to its neighbours.

The general benefits of interconnectors are undermined when there are asymmetries in market arrangements due to differing regulatory regimes or political priorities. The carbon floor price introduced by the UK government makes it more cost-effective to import cheaper electricity from mainland Europe. Differences in how transmission charges are allocated between the demand and generation markets also benefits continental generation over UK generation. Both of these effects are a downside of the current arrangements, but otherwise the gains from increased interconnection are positive.

The positive benefits of interconnection can only occur when the policy regimes are aligned and nondistortive. Interconnectors are at their most useful when managing localised peaks and troughs in levels of renewable generation as these move across Europe with the weather that drives them.

Enough capacity
A stronger, better connected network that links Britain with the rest of Europe – and within itself – should therefore be a key feature of the market in 2019. There are many uncertainties surrounding Brexit but whatever form the final deal takes, it should not isolate Britain completely from an integrated European electricity market.

Even if a no-deal scenario happens, there should still be enough capacity within Britain to prevent the lights from going out. Carbon price rises will push up the cost of fossil fuel projects and make investment in renewables (and to a lesser extent, nuclear) more attractive. Gas-fired stations will remain a significant contributor to Britain’s power mix, while coal will continue to be phased out but remain an important back-up option during periods when extra power is needed to meet demand.

The breaking news of the suspension of the Capacity Market does create a concern as this translates into reduced market confidence, which could pose a serious risk to security of supply in the worst future scenarios. However, if a fix to this issue can be found, our local interconnectors should see us use more of the wind we produce and be able to profit from the low-carbon generation of neighbouring markets without putting our own market at risk.

Phil Hewitt is director of energy market data analyst EnAppSys, a highly respected provider of consultancy and information services. These services now include market monitoring products covering GB and new markets such as NBP gas and the Netherlands and the SEM on the Island of Ireland. These services are used by generators, stakeholders, suppliers and traders to improve their understanding and to maximise the value they are able to extract from the market.

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