UK government extends capacity market to cover electricity 'interconnectors' with EU

Out-Law News | 03 Dec 2014 | 3:43 pm | 2 min. read

Developers that have built 'interconnectors' linking the UK to electricity supplies from Europe will be able to bid to supply backup energy supply in exchange for regular payments from the government, the Department of Energy and Climate Change (DECC) has announced.

These projects will be able to participate in the second forward-looking 'capacity market' auction in 2015, under which a diverse range of energy sources will be able to compete to provide guaranteed power in the winter of 2019/20. The first auction, intended to guarantee energy supplies in the winter of 2018/19, is due to take place before the end of this year.

"Including interconnectors in the capacity market from next year shows the strongest signal yet to potential investors – building on the recent announcement of funding for interconnectors that will create new links to Norway, Belgium and France to almost double the power we can source from overseas, particularly from low carbon energy sources such as hydro, wind and nuclear," said Ed Davey, the UK energy secretary.

The European Commission recently announced that it would provide €40 million in funding towards the longest subsea cable in the world, which will link the UK to Norwegian hydropower, as well as two interconnectors between the UK and France. Together, these three projects are expected to almost double the power that the UK is able to receive via interconnectors. Works associated with the Norwegian development was approved this week by the UK's Marine Management Organisation (MMO).

Work is currently progressing at the EU level on an integrated European energy market including a single approach to cross-border participation in capacity mechanisms. DECC's announcement will allow interconnectors through which energy can be supplied to the UK to participate in the UK's capacity market ahead of this agreement being reached.

Introduced under the 2013 Energy Act, the UK government intends to use regular capacity market auctions in order to boost energy security in the medium term until the its electricity market reform (EMR) infrastructure investment strategy begins to take effect. Through the scheme, various energy sources and generators will receive regular payments to ensure that they are able to provide backup power or demand reduction when the need arises.

The first capacity market auction is open to new and existing power stations, electricity storage and capacity provided through voluntary demand reductions. Providers that have pre-qualified for the 2014 auction will be able to bid for a share of a steady, predictable revenue stream four years in advance of that capacity being needed, in return for which they will have to deliver that capacity when required or face penalties.

According to DECC, those interconnector projects currently planned or under development account for around £5 billion in private sector investment and could save consumers up to £9bn by 2040 through the provision of cheaper energy. Improved connections to energy markets in mainland Europe would give UK companies the ability to buy electricity from wherever it is cheapest, with the savings ultimately being reflected in consumer energy bills, Davey said.

The eligible capacity for each interconnector wishing to participate in an auction will be decided on a case by case basis, taking into account both the technical reliability and likely future energy flows of that particular connection. Eligible capacity will then participate in the auction like any other resource, and will be eligible for one-year agreements on the same terms as domestic capacity providers, according to DECC.