On 1 December, the lights on the famous spruce tree from Norway will be switched on in London’s Trafalgar Square. The tree has been an annual gift from the people of Oslo – in gratitude for British support during the Second World War – and it serves to underline the close friendship between the two countries.
Importantly, Norway, despite currently low energy prices, remains one of the world’s richest economies, being both long on resources – especially of oil and gas – and short on population.
Historically, in the exploitation of the extensive North Sea energy resources from the 1970s onwards, the UK has enjoyed a highly successful commercial relationship with Norway.
For several decades, the UK has been importing substantial volumes of oil and gas from the Norwegian sector of the North Sea, including the asset-rich Sleipner field.
But, with abiding concerns about future European gas supplies – and especially Russia’s perceived unreliability – it is hardly surprising that many buyers have made a bee-line to Norway to negotiate energy deals.
In the UK, dwindling North Sea energy resources necessitate more gas imports. After all, the UK still has many thirsty combined cycle gas turbine (CCGT) plants that need fuelling, while leading domestic energy supplier Centrica, owner of British Gas, has been expanding its portfolio of imported gas contracts.
In recent years, deepening capacity concerns have also strengthened the case for the construction of more interconnectors, which have formidable up-front costs but are also relatively cheap to operate.
Historically, the UK/France interconnector link has been the key electricity importing facility. However, in recent years, more interconnectors have been built, both to transfer electricity and to trade in natural gas, with National Grid being the pivotal player.
In particular, the Low Countries of the Netherlands and Belgium are very suitable for the ‘wheeling’ of electricity, in the same way that Zeebrugge has become the gas hub.
Several proposed links, such as the NEMO project with Belgium, are at various stages of development; they are likely to become an increasingly important part of the European energy landscape.
Importantly, the UK/Norway energy relationship has taken a major step forward with last year’s confirmation of the North Sea Link (NSL) plan – backed by National Grid and Norway’s Statnett – to build the world’s longest under-sea interconnector. The length is a staggering 450 miles – a genuine record-breaker.
The two-way 1,400MW electricity cable will run from Blyth in Northumberland to Kvilldal on the southwest coast of Norway.
It is expected that completion will take place in 2021, with the cost probably being close to £2 billion, once allowance is made for the weaker sterling.
The engineering challenges will be formidable, given both the planned length of the interconnector and the often rough conditions of the North Sea; however, both UK and Norwegian engineers have extensive experience of operating there.
When commissioned, this interconnector will improve UK energy security, especially when the wind does not blow; it should also drive down prices for UK households.
Former energy secretary Sir Ed Davey pointed out that “it won’t be all one-way traffic. In the future, we would expect that there will be times when our generation exceeds our demand and we are able to export clean power to Norway in return”.
While part of the deal’s attraction is security of supply, it is very relevant that Norway’s generation portfolio is markedly different from that of the UK. It is almost exclusively reliant on hydro plant, with high levels of domestic demand because of the prevailing cold climate.
When UK demand is high and wind-generated output is low, it will be possible to import some 1,400MW of capacity from Norway at short notice.
Conversely, when the UK has low demand and high wind-generated output, it will be feasible to export up to 1,400MW of capacity from the UK, thereby allowing water volumes in Norway’s reservoirs to be conserved.
Since Norway is currently a large supplier of electricity to neighbouring Scandinavian countries, notably Sweden, its export strategy is not totally UK-focused.
Given the UK’s ultra-low plant capacity margins and the disinclination for various reasons of the ‘big six’ energy companies to invest in new CCGT plant, it is hardly surprising that National Grid is taking up the slack by investing in interconnector projects.
For National Grid, this strategy has added dividends in that it reduces its dependence on regulated earnings from its core UK electricity and gas transmission business – its core profit driver.
While some financial regulation is being imposed on its new interconnector income, these measures are widely seen as being benign; otherwise, National Grid’s enthusiasm would be far less pronounced.
Also on the drawing board, although far less advanced, is the NorthConnect project to build a second electricity interconnector link from Boddam in Scotland to Eidfjord in Norway; this proposed 354-mile link recently received a licence from Ofgem.
Its key shareholders are Scandinavian, led by Sweden’s state-owned Vattenfall; significantly, SSE withdrew from this consortium in 2013.
Even so, there may well be a Christmas from 2021 when the Norwegian spruce tree in Trafalgar Square is lit up using electricity imported via a UK/Norwegian interconnector.