In March, Ofgem disappointed many by indicating that it is minded to reject all but one of the seven interconnector projects applying for authorisation under the cap and floor mechanism. The only project which makes the grade being the Tarchon (1.4 GW) between Britain and Germany. Ofgem is consulting on its position, with the consultation closing on 31 May. It is also minded to approve LionLink (1.8 GW), an “Offshore Hybrid Asset” (“OHA”) which would connect GB to both the Dutch power grid, and Dutch wind farms in the North Sea.

The industry has reacted negatively to the news, pointing out that the Government has ambitious targets for the deployment of interconnectors, but Ofgem is concerned that the next phase of interconnector deployment could result in higher electricity prices for GB consumers as there is a risk they will exacerbate grid constraints within the country.

“To reject future projects because we can’t handle it (congestion) now is quite short sighted. They should really consider this very carefully and come to a position ideally that is closely aligned to the 18GW policy objectives,”– Silke Goldberg, Partner, Herbert Smith Freehills

Ofgem says its current work confirms the views formed in its 2021 Interconnector Policy Review, which concluded (among other things) that “the net welfare impact of future GB interconnection is likely to be positive. However, we expect a shift in the allocation of some welfare benefits from consumers to producers, and between GB and the connecting countries.”

This is an interesting statement, because it implies that so far benefits have either been positive for both GB and the connected countries, or GB has benefitted at the expense of the connected countries. Both can be true at different times, but the ability to benefit very much depends on the structure of the connected market. Norway in particular has seen a significant detriment from its interconnectors because its electricity system is dominated by hydro that has little pumping capability which means that if water is used up on exports it is no longer available for domestic consumers unless it rains or there is snow melt. As a result, wholesale prices in the south of Norway where its big interconnectors with Britain and Germany land, have increased substantially since these interconnectors were opened, and water shortages led the Government to enact legislation empowering it to suspend electricity exports if necessary to protect its domestic market.

Supporters argue that interconnectors allow generation assets to be optimised across multiple countries, but the downside is that it has allowed some countries (Britain, Germany, the Netherlands and Denmark in particular) to outsource their generation needs to other countries. This group has focused on large investments in intermittent generation, in particular wind, at the expense of dispatchable generation, and increasingly rely on interconnectors when wind output is low (which die to high weather correlation, can be the case in some or all of these countries at the same time). Countries with mostly dispatchable generation, particularly non-fossil-fuel based such as Norway (hydro) and France (nuclear) disproportionately export electricity to these other countries.

Arguments are made that interconnectors provide welfare on both sides as the exporting countries are able to earn income when otherwise they would not. There is some merit to this argument in the case of France, but less so in Norway where market prices fail to properly take account of the time value of the stocks of water – yes they could earn some money from exports today, but if they kept the water in the reservoir they could make more money exporting in the future, or using it to reduce costs for domestic consumers.

The mood in Norway has turned against interconnection, with some senior members of the Government opposing the replacement if the Skagerrak interconnectors with Denmark which are nearing the end of their lives. In addition, Sweden has recently rejected plans for an interconnector with Germany on tha basis that it would be detrimental to connect the Swedish power market to the “inefficient” German power market.

It is also interesting to note that the countries relying on wind and imports also have some of the most expensive electricity in the world. This is not a coincidence. The arguments that renewables are cheap are deeply flawed – not only should it be self-evident that intermittent forms of generation will be more expensive dur to the need to pay for back-up generation to run when it is not windy or sunny, but the evidence clearly shows that as the penetration of intermittent renewables increases end-user electricity costs also increase. The obsession with low wholesale prices is entirely misleading since there is a larger differential between wholesale and retail prices for renewables than there is for conventional generation. To ignore these costs is to mislead the public and force consumer to pay higher prices.

The obsession with low wholesale prices is entirely misleading since there is a larger differential between wholesale and retail prices for renewables than there is for conventional generation. To ignore these costs is to mislead the public and force consumer to pay higher prices. In Britain, the Government and Ofgem have preferred to blame profiteering suppliers for higher energy prices, but this is not supported by the data – if suppliers were profiteering then they would be profitable, and yet supplier profits have been consistently low, particularly for electricity, for many years.

The impact of intermittency can be inferred from the levels of intermittency. The charts illustrate how variable wind output is. It can be seen from the graphs that low wind is far from unusual despite the large installed base. It also indicates that the levels of over-build that would be needed to meet demand with wind would be enormous, and enormously expensive.

It is interesting that Ofgem is unconvinced that more interconnectors will benefit GB consumers. In my view, they would be a bigger detriment to Norway in particular, and provide countries such as the Netherlands, Denmark and Germany with a false sense of security. Interconnectors may allow for generation to be optimised when there is plenty of it ie wind output is good everywhere, but when wind output is low, they currently allow some countries to outsource investments in dispatchable generation. As Ofgem correctly points out, this results in a value transfer between countries meaning that citizens in one country subsidise citizens in another country. As we see from the growing hostility to interconnection in Norway, this is not something the countries experiencing economic detriment from interconnectors will tolerate for long.

Ofgem’s analysis is another warning that the approach to interconnection so far has been naïve. We need to be more proactive in ensuing direct access to generation for energy security (interconnectors are also vulnerable to physical disruption by accident or deliberate sabotage), and, as I have argued in the context of locational pricing, the best remedy for transmission constraints is to build more transmission capacity.

However, taken together (and with my previous work on the critical mineral requirements for net zero), a more optimal approach to decarbonisation is not to build ever more intermittent generation, and more interconnectors to optimise renewables, it is to build more nuclear power. This is dispatchable, reliable, and its high energy density reduces the need for additional transmission infrastructure. The long-term trend is for electricity to be increasingly expensive, so we cannot afford to waste money on sub-optimal investments. It’s time to ensure proper value for consumers and an honest approach to the true costs of the energy transition.