UK-Dutch Britned cable may import power price shocks

LONDON Tue Aug 24, 2010 9:44am BST

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LONDON (Reuters) - The upcoming UK-Dutch electricity interconnector is expected to link Britain to European power markets, which could result in additional supply at the right, but sometimes wrong, times.

With commercial operation to start next year on April 1, the one gigawatt (GW) Britned cable can import or export power between the two countries and could smooth out demand peaks if one market has extra supply, but could also import price spikes when both markets are tight.

"If UK margins were very tight then it could help to control major price spikes (by importing power)," Ian Parrett, market analyst at consultancy Inenco, said.

But because Dutch power prices are coupled with the French market, and when the two GW UK-France power interconnector is also factored into the equation, the UK prices could rise suddenly when supply margins on both sides are struggling.

"It could be that we import spikes into our own system," a UK-based power trader at a bank said.

"If we're not doing that great, and the Continent suddenly has massive supply issues and pulls three GW from us... that's about six power plants and you know how the market gets worried when that number of plants go offline."

But others question if the UK grid would be set up to create such a situation.

"It is certainly a possibility - I'm not sure how the systems would have to interact to result in a three GW call on the UK grid though," Craig Lowrey, consultant at analysts JCRA Energy, said.

Traders also agreed that Britned's capacity was significant enough to make a difference, if not price setting.

"Smoothing out the peak is what's envisioned and people will be looking at the arbitrage opportunities. It's a gigawatt coming into the UK so it will have some effect, but not a massive amount," a UK power trader at a utility said.

Britned -- a 600 million euro (493 million pound) joint venture between UK and Dutch grid operators National Grid and TenneT -- is a small part in a larger European super grid ambition, which would link the major power markets across northwest Europe.

AUCTION ATTRACTION

Another aspect of Britned would be the capacity auction, which analysts believe could improve liquidity and bring new players to the over-the-counter (OTC) UK wholesale power market.

"By bringing the auction model to the UK market it could lend weight for calls for greater transparency and increased volumes on the wholesale markets," Inenco's Parrett said.

"More volume means greater liquidity which means more participants and should lead to more competitive pricing."

The OTC UK power market is dominated by six big players and has been beset by low levels of trading for a number of years, with energy regulator Ofgem considering an intervention to try and fix this problem.

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