Interconnection Power Capacity in Europe

There is a shortfall in investment in interconnection capacity in Europe. New investment is needed, yet existing capacity is not allocated on a market basis. Datamonitor research shows a very weak relationship between power prices, interconnector capacity prices and the volume of booked capacity on most European interconnectors.



Report Highlights
A dynamic view of the relationship between power prices, interconnection capacity prices and the volume of reserved interconnection capacity shows that European capacity auctions are not yet functioning on a truly transparent, market basis. Interconnection volumes from Spain to France do not demonstrate a consistent responsiveness to arbitrage margins. There is in fact no statistical correlation between arbitrage margins and capacity prices or the volume of capacity reservations. There are 24 European interconnections that do not exhibit any consistent relationship (no statistical correlation) between interconnection capacity volume and capacity prices. These random relationships highlight the absence of an efficient market dynamic in the pricing and allocation of interconnection capacity across Europe.


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CATALYST 1
SUMMARY 1
ANALYSIS 2
Increased interconnection is key to EU energy market integration 2
Interconnection restrictions and system balancing needs mean actual power flows do not exactly match country trade balances 3
Market integration is seriously hampered by the lack of interconnection 4
Investment in new interconnection capacity is insufficient 4
A significant increase in annual interconnection capacity investment is needed 5
Power price arbitrage between markets does not drive interconnection capacity volumes and prices 6
Interconnectors operate largely outside the scope of competitive power markets 6
Reserved British-French interconnection capacity does not respond effectively to arbitrage opportunities 7
German-French arbitrage margins affect interconnection capacity prices 8
Most interconnection capacity auctions are not determined by market factors 9
Only five interconnections show a relationship between capacity volume and prices 9
There are very few interconnection capacity auctions that function on a purely market basis 9
Several European interconnections operate on a completely non-market basis 11
For most European interconnections there is no consistent relationship between capacity prices and capacity volumes 12
In some cases overall capacity prices do serve as an effective price signal for investment 13
Not all EU high priority interconnection projects have high capacity prices that serve as a price signal for new investment 13
There are eight significant power interconnections for which high capacity prices currently signal an investment need 14
In some instances, interconnector capacity prices serve as an investment signal 15
Interconnection capacity prices to and from France highlight where new infrastructure investment is needed 16
The Czech Republic requires an expansion of interconnection capacity to support its role as a regional power exporter 17
Capacity price signals indicate Dutch and Danish interconnections with Germany should be expanded 18
Well-functioning interconnectors require full energy market liberalisation and improved EU-wide regulatory frameworks 18
APPENDIX 19
Definitions 19
Methodology 19
Datamonitor Consultancy 19
Ask the Analyst 19

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Figure 1: 2006 Net power trade requirements across Europe 2
Figure 2: 2006 Net annual cross-border power flows in Europe 3
Figure 3: Total EU interconnection investment with a low (5%) and high (29%) annual investment growth scenario 5
Figure 4: Impact of baseload price arbitrage on UK to France interconnection capacity prices and volumes 7
Figure 5: Impact of baseload price arbitrage on Germany to France interconnection capacity prices and volumes 8
Figure 6: Positive relationships between interconnection capacity volume and capacity prices 9
Figure 7: Negative relationships between interconnection capacity volume and capacity prices 11
Figure 8: Random relationships between interconnection capacity volume and capacity prices 12
Figure 9: EU high-priority interconnection projects 13
Figure 10: Average monthly interconnection capacity price in 2006 15
Figure 11: 2007 French interconnection capacity prices 16
Figure 12: 2007 Czech interconnection capacity prices 17
Figure 13: 2007 German interconnection capacity prices 18

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