Why interconnectivity is key for Europe’s power market

Thomas DalsgårdMarket uncertainty and a lack of coherence between national and European policy are said to be blocking access to capital in Europe, such that ENEL president Fulvio Conti described the power sector recently as being ‘uninvestable’. Thomas Dalsgaard, Executive Vice President of DONG Energy and member of the POWER-GEN Europe advisory board, is the first in our series of guest blogs for 2013 examining the factors shaping policy and investment strategy in the European power market.

The investment situation in the power sector is complex. On the one hand, there is a patchwork of national initiatives and subsidies promoting mainly renewables, and on the other, market-based power production – such as combined cycle plant, coal-fired plant, and traditional thermal capacity – is not being incentivised and is therefore uninvestable. Meanwhile, the CO2 scheme has basically collapsed, with prices now at a level where they are not driving investment at all.

With regards to the progress made over the last 12 months towards the creation of an open, interconnected, and integrated European electricity market, it’s fair to say that currently, we don’t have an internal market for power in the EU. There has been progress in terms of market design, with coupling mechanisms connecting Southern and Northern Europe that work much better than before. There are also some regional initiatives to establish appropriate design rules.

However, the biggest issue today is the lack of transmission infrastructure for physical interconnectivity. I believe that this is also one of the biggest impediments to realising a more efficient market and better investment signals. Without the necessary interconnects, the faster build out of intermittent sources in some countries will not be sustainable in the long run.

Indeed, a much more proactive and decision-oriented approach is required to trigger the necessary investments in interconnectors and related infrastructure. The problem is that the political focus for initiatives such as the 2050 low carbon energy objective has been on renewables build out and meeting targets for each country, whereas the infrastructure necessary to sustain it is lagging behind. This is manifest in the pressures on internal balances within individual countries.

The situation is becoming critical as more intermittent power comes on stream. With intermittent power, you don’t have control over when to dispatch it. At the same time, traditional thermal plants are closing down because they are not competitive. So in that sense, you end up with more renewables and less thermal capacity as backup. This is a pressing challenge for TSOs and policy makers and is why it’s not enough to simply set objectives.

A question of sovereign rights

As with taxation, it’s really difficult to convince countries to relinquish their sovereign rights where energy policy is concerned. Nevertheless, there needs to be a decision taken at EU level to increase the CO2 price, as currently it’s just too low to drive any kind of transformation. Again, this is where I believe TSOs and regulators should be working more closely to develop the critical physical interconnects between countries and taking a more proactive role.

A bigger physical interconnection system could possibly trigger, or at least put more political focus on aligning the fragmented subsidy schemes and systems within Europe. Given Europe’s aims to transform its power market through a more climate-friendly energy policy and more renewables, harmonising policy at EU level is critical because the steps necessary to make this happen in a cost-efficient way have yet to be taken.

If you want a cost-efficient transformation, you need better interconnectivity so that there are the right price signals. You also need to have a common CO2 system that works, and a single market for power. At Dong Energy for example, we are looking to bring down the cost of energy from offshore wind so that within a few years, it will be as competitive as fossil fuels. To do this, we need an appropriate price on CO2, and a single market by interconnectivity, by design, and by incentive scheme harmonisation.

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