Vice president and senior analyst at Moody’s rating agency, Graham Taylor, suggested new interconnection with continental Europe, where average wholesale prices are more than £12 per MWh cheaper, “could grow from 3 GW to 7.4 GW by 2020”.
This, he said, would result in a drop in UK power prices towards European levels in periods of low demand, which would have a “significant impact” on average prices.
Taylor said he expects average power prices to remain significantly above those in mainland Europe, “largely as a result of UK carbon taxes”.
However, this differential will “drive significant growth in interconnection” and, by 2020, interconnectors will “set lower overnight prices” in the UK.
The firm also predicted that the “explosion” of distribution-connected solar, including 1.3 GW installed in the first quarter of 2015, will “lead to a larger fall in transmission demand”.
Taylor said: “More distributed generation will create ongoing investment opportunities for distribution network operators, which will need to reinforce their networks.”
“Underlying demand reduction, which we estimate at 1.5 per cent per year, and the growth of embedded solar (which bypasses the transmission network) will nudge the demand distribution to the left – closer to the cliff edge,” he continued. “At the same time, growth in subsidised offshore wind, and from 2020 an explosion in low-cost interconnection, will erode the coal/gas plateau – shifting the cliff edge to the right.”
Yesterday, the Department of Energy and Climate Change confirmed that interconnectors will be eligible to participate in the second capacity market auction despite opposition from big energy companies.
Eon argued that interconnectors should not be included in the capacity market because they are transmission not generation assets, while RWE said it thought the current arrangements for including interconnectors in the mechanism on the basis of their ownership is “flawed”.
Centrica said it had “concerns” about interconnectors being allowed to take part in the capacity auction, although it would be “wrong to completely exclude them”.
The UK currently has 4GW interconnection to Europe and the government says it has a “clear policy” of “at least 5 GW of extra interconnection”. Read Utility Week’s analysis of UK interconnection here.