National Grid has claimed interconnectors are being undervalued in the capacity market due to overly pessimistic assumptions about their reliability.
Interconnectors regulation manager Mark Duffield said the current method for calculating their de-rating factors gives too much weight to their performance during periods when there is plenty of spare capacity on the system.
Participants in the capacity market bid, and are paid, according to their de-rated capacity. The de-rating factors are intended to reflect their expected availability during stress events.
As they are reliant on the availability of spare generation capacity in neighbouring markets, interconnectors are de-rated individually based mainly on historic flows.
After three new-build projects won contracts for 2.1GW of de-rated capacity in the most recent four-year-ahead (T-4) auction – elbowing out new gas and helping to push the clearing price to a record low of £8.40/kW – the market intelligence firm Aurora Energy Research published a report warning that an overreliance on interconnectors could jeopardise security of supply.
The study, sponsored by a number of major generators including RWE, Drax and Uniper, said interconnectors had underperformed their de-rating factors during recent winter peaks.
It also highlighted “saturation” and “compound” risks, whereby each new link contributes less and less to security of supply as they expand access to the same underlying generation capacity in interconnected countries.
Aurora said it is difficult to predict the future availability of interconnectors as stress events are rare and historical data is limited, and therefore urged the government to err on the side of caution by lowering their de-rating factors.
In July, energy and clean growth minister Claire Perry announced large cuts to the de-rating factors for Nemo, BritNed and East West interconnectors for the upcoming T-4 auction for delivery starting in 2022/23.
From 63 per cent in the most recent T-4 auction in February, the average de-rating factor across all eligible interconnectors fell to 56 per cent.
The BritNed interconnector operated by National Grid through a joint venture with the Dutch transmission system operator TenneT saw its de-rating factor drop from 76 per cent to just 43 per cent.
Speaking on behalf of National Grid Ventures – National Grid’s business division for “less regulated” activities – Duffield said the de-rating factor was already too conservative before the change and is now even more so.
“There’s actually quite a lot of evidence out there that we provide capacity when Britain needs it,” he remarked. “We believe that our contribution is undervalued at the moment based on how it is calculated. And that undervaluation costs consumers a chunk of cash every year”.
Duffield said the calculation focuses too much on the performance of interconnectors during periods when supply margins in Great Britain are wide and they are therefore more likely to be exporting to neighbouring markets where margins are tighter. He said this gives a misleading impression of their likely reliability during stress events.
He highlighted the example of the IFA interconnector operated by a joint venture between National Grid and the French transmission system operator RTE.
In April, a report produced by Imperial College London and commissioned by Drax said the “Beast from the East” had exposed the unreliable nature of interconnector capacity during bad weather. It noted that the IFA link was a net exporter of power over two of six days during cold snap in late February and early March.
However, Duffield claimed this merely reflects the fact there was enough spare generation capacity in Great Britain at the time to allow for exports to France. He said once the gas system operator at National Grid issued a gas deficit warning on 1 March and generators began selling their fuel to take advantage of the resulting price spike, flows quickly swung the other way.
Along similar lines, Duffield said fears of market saturation undermining the reliability of interconnectors are overblown.
He said their analysis found that price spreads between the UK and neighbouring markets are slow to respond to growth in interconnector capacity, so long as margins are tight. He said prices are much more elastic during the “normal” periods which provide the vast majority of their revenues.
“You’d never build too much interconnection from a security of supply perspective because you would stop building it on raw economics before you got to that point,” he explained.
“The market gives you a very strong signal to import when the UK market is stressed, and the signal to stop building for normal conditions kicks in first.”
He said undervaluing interconnectors on this basis costs consumers ten of millions of pounds each year in higher capacity market payments.
Duffield made the comments at a media briefing at the UK converter station for the BritNed interconnector. He also gave assurances that there will be no legal barriers to the continued operation of interconnectors in the event of a no-deal Brexit.
Alongside various European partners, National Grid is currently building or developing four new interconnectors to Belgium, Norway, France and Denmark with a combined capacity of 4.8GW.