No Country is an Energy Island: Securing Investment for the EU's Future - European Union Committee Contents

CHAPTER 6: interconnection and energy security

161.  In its November 2012 Communication on making the internal energy market work, the European Commission re-iterated the requirement that, by 2014, cross-border markets for gas and electricity must be up and running across the EU and the implementation of plans to modernise and smarten EU grids should be well under way.[300] The Commission recognised, however, that Member States are not on track to meet the 2014 deadline. An important way in which greater integration of markets can be facilitated is by further developing energy interconnection between Member States.

162.  Most of the evidence that we received on interconnection focused on electricity. The Commission highlighted that, whilst levels of electricity interconnection are evolving,[301] the levels of interconnection between the UK and mainland Europe, and between the Iberian Peninsula and mainland Europe, are much more limited than, for example, the 20-30% of interconnection between Belgium and the Netherlands.[302]

163.  Ofgem confirmed that it is seeking to facilitate greater interconnection between the UK and other countries, noting that it has "consulted on and developed a regime to try to facilitate more interconnection".[303] We heard from ENTSO-E that, for interconnectors, there has been a "soft target" of 10% for interconnectivity across Member States for some time, on which it noted progress has been made.[304] It was noted however, that there have been problems of interconnection within some Member States as well as between them. Ofgem stated that in some countries there are issues relating to congestion, such as is the case in both the south of England and Norway[305], where the existing onshore grid would need strengthening to accommodate major trade flows.[306] The most commonly cited example of interconnection issues within a Member State was Germany, whereby northern German wind energy is transmitted to the south of Germany via neighbouring countries (see paragraph 177).

164.  Greater interconnection, it was argued, could help with the reduction of costs, particularly by making more efficient use of renewable energy. Mr Tindale claimed that increased interconnection would enable the use of the intermittent renewable energy sources that are currently being wasted due to the lack of a grid to take them anywhere.[307] On an EU scale, Mr Tindale suggested that solar energy could be transported from southern Europe to northern Europe, and wind generation from northern Europe to southern Europe.[308] Other witnesses, such as WWF, agreed that increased interconnection could reduce costs and provide opportunities.[309]

165.  The Committee explored the practicality of transferring energy large distances across Europe, and was informed that the current capacity of the EU grid is generally at a maximum of 400 kilovolts (KV).[310] ENTSO-E noted that, in order to transport electricity at the extent required to tackle renewable intermittency, higher voltages will be necessary. National Grid explained that whilst the 400 KV was deemed appropriate for the existing Alternating Current (AC) system—given the size of the UK and other EU Member States—higher voltages would be needed for much longer distances (such as is already the case in countries such as the US or China).[311] If pursued, this would require significantly higher pylons than are currently used.

166.  National Grid noted that High Voltage Direct Current (HVDC) lines can be used to transfer electricity efficiently across such long distances without voltage restrictions. One such example was the new 600 KV underwater HVDC line down the west coast of the UK from Scotland to northern Wales.[312] ABB Limited informed us that it recently completed the East-West interconnector project, enabling the transfer of power between the UK and Ireland, which is the first such interconnector project in the UK to use "innovative HVDC light technology to transfer large amounts of power at low loss levels".[313]

167.  In terms of costs, National Grid informed us that one kilometre of high-capacity 400 KV AC overhead line costs approximately £1.5-2 million, while the cost for placing them underground is around 10 times higher. HVDC, meanwhile, is comparable to AC overground, and cheaper underground, but requires converter stations at each end. A one GW HVDC link, for example, would incur costs of approximately £200 million per station. It was noted that, overall, HVDC was more economical over a long distance.[314]

168.  It is cost-efficient and urgent to develop electricity interconnections between Member States in order to support both the further deployment of renewable energies and attempts to secure the EU's energy supplies. We conclude that the full benefits of interconnection will be derived only from greater deployment of HVDC lines, allowing electricity to be transported over a long distance at an economical cost.

Visions of the future grid

169.  There were alternative visions for future grid development. One suggestion was through a 'supergrid'. National Grid's generic definition of a supergrid was: "a European grid with much interconnection and much more capacity to move power between countries".[315] Others envisioned a future supergrid allowing multiple different energy sources to be drawn on—for example, balancing the biomass in central Europe, hydro in the Nordic regions, offshore wind in the North Sea and solar in southern Europe.[316] This position was recognised by the Commission, who commented that "the bigger the grid, the more likely it is you will be able to manage diversified sources of energy across that grid by different technologies".[317] Although acknowledging political consensus would be required, Mr Zenghelis commented that an integrated and efficient supergrid could allow for more efficient investment.[318]

170.  There was, however, a view expressed that the European grid should be developed incrementally, rather than on the basis of a defined plan, with the proviso that the different spokes could be linked together in the future. The Commission referred to this as being "grid-ready", with the different elements capable of being part of something bigger.[319] There was some support for this option. National Grid mentioned the idea of an 'overlay grid', which it described as a "step along the way" to a supergrid, potentially starting off with one or two large HVDC links.[320] Ofgem also noted that its initial studies suggested that a "radial" (that is, incremental) system would be more effective than "meshing the grid", citing the connection of nine offshore wind farms in 2012, of which six were in the UK.[321]

171.  A different vision was outlined by Mr Froggatt who described a "much more distributed system"[322] that involved more local balancing.[323] National Grid also alluded to similar systems, suggesting a future that might include micro production and domestic generation, indicating less need for a supergrid and more need for "micro-grids", a prospect that was supported by Ofgem.[324] The IET considered that an energy market in distributed generation connected at distribution level "is conceivable" but would require considerable work given the small scale of such generation and the burden of complexity for very small players to engage in a market-based system. Developments in storage and aggregation services could, however, assist with this process.[325]

172.  Several witnesses also discussed the development of a North Sea grid, which is evolving through the North Seas Countries Offshore Grid Initiative and of which Ofgem and the Agency for the Cooperation of Energy Regulators (ACER) (the pan-EU body for energy regulators) were involved in the establishment. National Grid explained that there was significant potential in the North Sea to develop a grid that will allow maximum benefit to be derived from offshore wind.[326] An existing challenge, however, is that interconnectors have one—currently evolving—regulatory regime, whereas offshore transmission has another. Ofgem cited their Integrated Transmission, Planning and Regulation (ITPR) project, which is currently looking at "all of these challenges about how different bits of transmission and interconnection could be co-ordinated".[327]

173.  We agree with our witnesses that an increasingly interconnected grid will need to be developed incrementally, rather than on the basis of a top-down grand plan. Nevertheless a stronger element of network planning—nationally and regionally—could be very beneficial in the transition to a more renewable-based and secure system. The move to greater interconnection is not incompatible with the development of distributed generation, but the potential offered by distributed generation must be recognised more clearly in energy strategies.

Energy Infrastructure Regulation

174.  An important recent development has been the agreement on a new trans-European Energy Infrastructure Regulation[328], which has three key aims: to identify major strategic lines of interconnection (Projects of Common Interest (PCIs)); to reduce planning procedures to three and a half years with a possible extension to four years and three months; and to ensure that national regulators act together to create favourable conditions for PCIs to be financed (through the new Connecting Europe Facility (CEF) and private finance).[329] Several witnesses, including Mr Tindale, Mr Froggatt, Professor Peter Cameron and the Commission, agreed that the proposed planning procedure deadline was a particularly helpful proposal to prevent long delays.[330] The issue of financing was explored in Chapter 2, including through the EIB. We heard support for the use of the new CEF to help finance the PCIs, and witnesses were agreed that overcoming permitting delays was very important.

175.  We welcome recent agreement on the trans-European Energy Infrastructure Regulation, which identifies PCIs and establishes common rules on permit granting procedures. The Regulation must now be implemented with urgency.

Public acceptance

176.  Public acceptance is a major determinant of existing policies and proposals. The Committee noted the abrupt reversal of policy to nuclear production in Germany in line with public concern. Public acceptance can be particularly problematic in relation to the development of infrastructure. The Commission named an example of this as the construction of overland electricity link across the Pyrenees, which has been under discussion and delayed for over 30 years.[331] Given the public opposition, it seems likely that an underground link will now be constructed instead, but at a significantly greater cost.[332] ENTSO-E also recognised that public acceptance was one of the main obstacles to making progress with physical assets, particularly compared to the past, noting that there is perhaps "not the same consensus around the public acceptability of what benefits the investments will bring".[333]

177.  It was therefore considered imperative by witnesses to demonstrate to the public that failure to undertake certain projects would have significantly high costs, highlighting in particular the difference in costs between overground and underground cables. One way suggested to achieve more effective communication was through a long-term strategic plan demonstrating that new lines were linked to overall energy policy goals—namely, climate protection, renewable energy integration, security of supply and market integration.[334] Public resistance could also pose a problem from within Member States. In Germany, for example, more than 30 GW of wind energy from northern Germany must be transported to southern Germany by utilising surrounding networks of neighbouring countries to the east (such as in Poland and the Czech Republic). Despite plans to build north-south lines within the German grid to retain more of that power, public opposition "has delayed this for many years already".[335] In another example of attempts to overcome the issue of public resistance, WWF referred to its involvement in the Renewables Grid Initiative, in which it works with 14 non-governmental organisations and 11 Transmission System Operators (TSOs) (organisations equivalent to the UK's National Grid) to examine ways of overcoming "bottlenecks" in infrastructure development that are also acceptable to the public.[336]

178.  We acknowledge that public concerns can be a significant obstacle to the development of interconnections. In that context, the public awareness dimension of EU energy policy becomes pivotal: a local decision can have significant pan-European implications in terms of energy cost and energy security. The Commission must consider as part of its future policy framework how it and Member States can work together to communicate effectively the benefits of cross-border energy connections. We agree that providing a clear indication that a project is part of a strategic transition towards an increasingly interconnected grid could help overcome local objections to projects. Early engagement and consultation with the public and other interest groups is similarly important. The Renewables Grid Initiative, involving environmental NGOs and TSOs, is a welcome attempt to tackle the public awareness issue.

Regulatory obstacles

179.  The Committee received mixed messages on the extent of regulatory obstacles to the further development and effective management of an interconnected grid. The Commission observed that national regulators can, in some instances, act as an obstacle. Although ACER exists to coordinate national regulators, there are instances where they disagree on the amount of money operators can earn on interconnections. For example, the transfer of cheap gas from Germany to Denmark was restricted by the German regulator because there was insufficient analysis on the impact of such projects on German consumers.[337] There is a need, therefore, for a combined analysis of the costs and benefits to both sides of borders. A further obstacle identified by ENTSO-E related to commercial tensions as, in some Member States, interconnections are the role of national TSOs, whereas the UK regulatory approach is designed for competitive 'merchant' investors, meaning that compatibility between the regulatory systems needs to be found.

180.  ACER, National Grid and Ofgem argued that they were all working to overcome these obstacles. Ofgem pointed to the swifter development of offshore wind in the UK compared to Germany as evidence of the emerging success of a streamlined system. Despite huge ambitions, Germany only had one offshore wind farm fully connected to the grid in 2012, which Ofgem claimed was because of "delays from the incumbent TSOs".[338] ACER, however, observed that whilst its tasks and responsibilities have already been expanded on a number of occasions by the EU institutions, this has occurred without a similar expansion in its budget, leaving ACER insufficiently financed to fulfil all of its tasks effectively.[339]

181.  In line with the third internal energy market package, under which ENTSO-E was created, network codes have been developed to assist the management of interconnection. Network codes are now being applied. These codes will establish common rules to enable network operators, generators, suppliers and consumers to operate more effectively within the market. A further challenge will be the effective integration of retail and wholesale markets, with a smart grid approach.

182.  There remain economic and regulatory obstacles to integrated interconnection and transmission, which are crucial to the completion of the internal energy market. We encourage Member States to support regulators, through ACER, and TSOs, through ENTSO-E, in their efforts to overcome those obstacles. A review of budgetary support to ACER in particular would be helpful to ensure that it has a sufficient budget to allow it to deliver its important role. The ultimate goal of more effective regulatory cooperation must be a pan-EU energy market, working for the benefit of EU consumers.

Gas supply

183.  Interconnection of gas supplies is an important consideration in relation to both Member State and EU energy security. Energy companies using gas pipelines to transport gas often use much less capacity than they have reserved, preventing other parties from using the pipelines efficiently. As a consequence, in 2012, the Commission adopted Congestion Management Procedures to ensure increased efficiency in gas pipeline capacity.[340]

184.  Furthermore, gas corridors are critically important with a view to energy security, as noted by the Commission, which explained that there is continued emphasis "on the development of a pipeline to the Caspian region: Azerbaijan, eventually Turkmenistan, and perhaps southwards towards Iraq".[341] E.ON also pointed to the development of gas corridors to the EU in order to improve security of supply.[342]

185.  In commenting on the role of gas in relation to energy security, Professor Cameron noted how Bulgaria, for example, is 100% dependent on Russia for its gas, and Mr Froggatt agreed that Russian gas dependency was a key issue.[343] Although any suggestion that Russia might hold the EU to ransom was rejected by Professor Stern,[344] such high levels of dependency leave countries vulnerable in the event of other disruptions (such as the Russia-Ukraine dispute over pricing in 2009). DECC noted that, following the disruption of gas supplies from Russia to the EU in 2009 as a result of Russia's dispute with Ukraine, investments in physical infrastructure were being made to enable gas to flow more freely around the EU. This would ensure that, in times of shortage, gas could flow where it was most needed.[345]

186.  The development of liquid natural gas (LNG) was highlighted as a potentially important method to help ensure greater energy security. This technology allows gas to be transported via tankers and does not rely on fixed pipelines, meaning that it can be transported with greater ease; this could therefore result in less dependency on individual countries. Mr Froggatt stated that LNG "brings energy security in a way you do not have just with pipelines", and further noted how the LNG markets in the UK and the Netherlands, for example, were already developing at a quick pace.[346] That said, a possible drawback of LNG is that as the fuel can be transported with increased ease, it can be delivered (or diverted) to countries where the price is more attractive. This is a particular concern with regards to the Asian energy market, where gas commands a higher price than Europe and where demand for gas increased after the Fukushima incident in 2011.[347]

187.  The storage of gas plants was also highlighted as a key issue, notably for the UK, which only has storage capacity of "4% of average annual consumption".[348] This is of particular concern when the UK figure is compared with the capacity of other European countries such as Germany and France, which are 21% and 24% respectively.[349] This point was stressed by Professor Stern, who emphasised "that we do not have nearly enough storage in the UK", either for short-term disruptions or for strategic disruptions, and especially for a market the size of the UK.[350] The House of Commons Energy and Climate Change Committee reported in 2011 that increased storage capacity is necessary if gas is to be used as a transitional fuel.[351]

188.  There are considerable financial and political uncertainties as to the sources and costs of future gas supply. It is clear that a range of sources and methods of transportation are critical. We support the Commission's attempts to improve efficiency in gas pipeline capacity. We urge the UK Government to examine the potential for a regulatory framework to increase gas storage.

Capacity mechanisms

189.  The UK and other Member States are proposing to introduce capacity mechanisms, whereby suppliers would be paid (following a competitive tendering process) to assure a supply of electricity. E.ON highlighted to us that, in addition to the UK, France, Spain and Italy have all introduced (or are introducing) capacity mechanisms of different types, to "ensure sufficient fossil plant remains in operation or is built where generation is increasingly taken up by intermittent wind generation".[352] In the UK case, this would largely be applied through gas-powered generation, and has been proposed in the Energy Bill.

190.  The Commission considered it understandable that Member States would wish to protect their consumers and security of supply, but argued this should be done in a way that takes account of neighbouring countries and exploits the benefits of cooperation with these neighbours.[353] We heard that capacity mechanisms should only be introduced after the consideration of interconnection, storage, grid improvement and policy developments in order to allow for demand-side response.[354] National Grid, for example, argued that interconnection "clearly" has big security of supply benefits.[355]

191.  In their submission to the Commission's consultation about capacity mechanisms, DECC acknowledged that security of supply relates not only to domestic capacity but also to demand-side response and to interconnection. Their view was that capacity mechanisms should not be open-ended and should not, ideally, be required in a functioning single energy market.

192.  UK witnesses were largely convinced that, for the moment, interconnection could not be relied upon to produce power at times of UK shortage. ScottishPower, for example, pointed out that there had been situations when the UK price signals did not work—when the price signals would have suggested import, the interconnectors were exporting. It therefore saw it as "right and proper" to consider a supply security mechanism, which it believed would play a role in "keeping the lights on".[356]

193.  Furthermore, concerns were expressed that current gas prices, compared to those of coal, did not make gas an attractive investment, thus requiring a capacity mechanism.[357] ScottishPower stressed that capacity mechanisms "of one sort or another" have been embedded in the UK privatised electricity market for most of its history—such as free carbon allowances under Phases I and II of the EU Emissions Trading System (ETS) (between January 2005 and December 2012)—and that during the only four year period in which such a system did not exist, a number of power stations hit financial difficulties.[358] ScottishPower observed that despite having planning permission for a number of new gas plants, they were unlikely to continue to invest unless a capacity mechanism was introduced.[359] SSE noted its agreement with ScottishPower, and criticised the timing of the first capacity payments from 2018, which it argued was "rather later" than its (or Ofgem's) analysis suggests would be appropriate.[360]

194.  Whilst generally accepting that there may be a case in support of a capacity mechanism, both National Grid and Ofgem warned that "The devil is in the detail",[361] and checks must be in place to ensure that there was no distortion, a position with which ENTSO-E and E.ON agreed.[362] Professor Stern insisted that there was substantial unused gas capacity. He pointed to the fact that, in 2012, UK Combined Cycle Gas Turbines (CCGTs) were running at 40% load factor. Furthermore, 4 GW of CCGTs are currently mothballed and 10 GW are fully permitted, but not yet built.[363]

195.  In the short-term, we accept the need to introduce legislative powers for a capacity mechanism that seeks to ensure domestic security of energy supply, whether in the UK or elsewhere. The issue will be particularly acute after 2015, as more coal plants are retired under the Large Combustion Plant and Industrial Emissions Directives.

196.  We are concerned that excessive reliance by large numbers of Member States on capacity mechanisms designed to support fossil fuel power station investment will add costs to electricity and may exacerbate the risk of fossil fuel 'lock-in'. For this reason, we consider it important that any capacity mechanism gives at least equal weight, and potentially should prefer, the inclusion of interconnection and of active demand-side response measures as alternate or additional ways of ensuring security of supply.

300   COM(2012) 663 Back

301   See Map of interconnection between EU Member States on provided by ENTSO-E (http://www.entsoe.euBack

302   Q 27 Back

303   Q 341 Back

304   Q 278 Back

305   Norway is not an EU Member State but is a member of the European Economic Area to which the EU's internal energy market legislation applies Back

306   ibidBack

307   Q 20 Back

308   Q 20 Back

309   Q 331 Back

310   Q 296 Back

311   Q 352 Back

312   ibidBack

313   ABB Limited Back

314   Q 346 Back

315   Q 353 Back

316   Q 49 Back

317   Q 62 Back

318   Q 211 Back

319   Q 273 Back

320   Q 353 Back

321   Q 345. See also, The European Offshore Wind Industry-key trends and statistics 2012, European Wind Energy Association, January 2013  Back

322   Distributed energy resource systems are small-scale power generation technologies used to provide an alternative to or an enhancement of the traditional electric power system. It is also known as 'micro-generation' Back

323   Q 49 Back

324   Q 353 Back

325   IET Back

326   Q 344 Back

327   ibidBack

328   COM(2011) 658. At the time of publication, a text had been agreed but was yet to be adopted Back

329   Q 62 Back

330   Q 21, Q 55, Q 62, Q 86 Back

331   Q 20 Back

332   Q 272 Back

333   QQ 278-279 Back

334   Q 280 Back

335   Q 284 Back

336   Q 332 Back

337   Q 62 Back

338   Q 344 Back

339   Q 350 Back

340   Decision 2012/490 Back

341   Q 60 Back

342   E.ON Back

343   Q 51, Q 188 Back

344   Q 144 Back

345   DECC, EDF Back

346   Q 50 Back

347   Gas Tanker Takes Shortcut to Asia, Wall Street Journal, 3 December 2012 Back

348   Plans to increase Britain's gas storage capacity left in tatters by credit crunch, The Guardian, 12 January 2009 Back

349   Plans to increase Britain's gas storage capacity left in tatters by credit crunch, The Guardian, 12 January 2009 Back

350   Q 148 Back

351   Energy and Climate Change Committee, 8th Report (2010-12): The UK's Energy Supply: Security or Independence? (HC 1065) Back

352   E.ON Back

353   Q 60 Back

354   Q 68 Back

355   Q 340 Back

356   Q 192 Back

357   Dr Karsten Neuhoff, ScottishPower Back

358   Q 196 Back

359   QQ 201-202 Back

360   Q 201 Back

361   Q 351 Back

362   Q 300, E.ON Back

363   Q 153 Back

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