Commission for Regulation of Utilities Greenlink ...

An Coimisi?n um Rial?il F?ntas Commission for Regulation of Utilities

An Coimisi?n um Rial?il F?ntas Commission for Regulation of Utilities

Greenlink Electricity Interconnector Determination

Determination Paper

Reference: CRU/18/216

Date Published:

18/10/2018

cru.ie

Closing Date: N/A

An Coimisi?n um Rial?il F?ntas Commission for Regulation of Utilities

Executive Summary

The Greenlink Interconnector is a proposed 500 MW HVDC electricity interconnector, which is being developed by Element Power, linking the power grid in Ireland and GB. It is anticipated that the link will provide a new grid connection between the Great Island transmission substation in Wexford and Pembroke transmission substation in South Wales.

Figure 0: Graphical Illustration of Greenlink (Image source: Element Power)

In December 2017, Element Power submitted an interconnector application under Section 2A of the Electricity Regulation Act 1999. In its application Element Power requested the CRU to:

1. determine if the construction of the Greenlink interconnector is in the public interest for the project to be considered to be part of the transmission system for the purposes of calculating and imposing charges for the use of the transmission system; and

2. approve the proposed charging methodology for Greenlink pursuant to section 35 of the Act which is based on a 25 year Cap and Floor regime.

In June 2018, the CRU published Element Power's application and a CRU consultation paper (CRU18119) requesting views on the initial assessment of Greenlink by the CRU. The CRU noted in the consultation paper that the assessment of Greenlink involves two stages:

1. testing the public interest case of the proposed interconnector by reviewing a Cost Benefit Analysis (CBA) of the project; and

2. determine the best approach on a Cap and Floor mechanism. This determination paper focuses on the first stage, i.e. the public interest test. The precise details of any cap and floor regime would need to be consulted upon and determined at a later stage. The CRU has reviewed the consultation responses and considered the points raised by respondents. In addition, the CRU has conducted its own CBA of Greenlink to test the boundaries of Element Power's CBA and the key inputs and assumptions which may drive better or worse outcomes for Irish consumers and other stakeholders. The CRU has

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An Coimisi?n um Rial?il F?ntas Commission for Regulation of Utilities

modelled ENTSO-E TYNDP scenarios and compared the CBA results to those of Element Power.1

The consultation paper noted that if the CRU CBA revealed that Greenlink would generate overall (net) benefits to Irish consumers then the CRU would go on to consider the appropriate regulatory regime that is justified by public interest.

The focus of this paper is to set out CRU's determination that the Greenlink application meets the public interest. The results of the CRU CBA2 of Greenlink are summarised below:

? Although there are differences between CBA modelling scenarios and assumptions adopted by the CRU and Element Power, overall the CRU CBA results are consistent with the findings of Element Power. They show that Greenlink has the potential to deliver benefits for Irish consumers where significant decarbonisation of electricity generation occurs.

? The CRU modelling indicates that in relatively conservative scenarios of decarbonisation of electricity generation in Europe, Greenlink does not drive benefits for Irish consumers.

? In a scenario where another new interconnector is added alongside Greenlink, e.g. another interconnector to France, consumer benefits from Greenlink appear to be significantly reduced.

? There are potential security of supply benefits for the Single Electricity Market (SEM) with the introduction of Greenlink.

? The CRU Brexit sensitivity3 assumes that there would be trading frictions4 between GB and the countries it is connected to via an interconnector. Trading frictions between countries would result in less efficient trading, less efficient interconnector usage, greater price divergence, and hence potentially higher cost for consumers. As a consequence of these frictions, the overall net benefits in SEM are lower under the Brexit sensitivity than under a no Brexit scenario. Because of the underlying inefficiencies, introducing a new interconnector may unlock more benefits to Irish consumers compared to a no Brexit scenario where no trading frictions are present.

? The addition of Greenlink would have a small negative impact on annual power sector gas demand and an even smaller corresponding impact on total annual gas demand.

? Both CRU's CBA and Element Power's CBA show that Greenlink reduces RES curtailment and improves captured electricity prices for Irish consumers, i.e. average annual electricity prices are expected to be lower in the SEM when Greenlink is in service compared to prices that would be captured without Greenlink.

1 The CRU has been supported by independent economic and technical advisors. 2CRU modelled Vision 1 from the ENTSO-E TYNDP 2016 scenarios and Sustainable Transition and Global Climate Action from the ENTSO-E TYNDP 2018 scenarios. At the time of conducting the CBA study, the TYNDP 2018 scenarios were still in draft form. 3 See Section 3.5 for a description of the Brexit sensitivity. 4 Trading frictions were modelled as a transmission cost on all GB electricity interconnectors. 2

An Coimisi?n um Rial?il F?ntas Commission for Regulation of Utilities

The CRU CBA of Greenlink indicates that, at the time of assessing the Greenlink application, Greenlink has the potential to provide a net benefit to Irish consumers and Ireland as a whole. As such, the CRU is minded to determine, at this early stage, the Greenlink interconnector application passes the public interest test. The CRU notes that this paper outlines the CRU determination if the Greenlink interconnector is in the public interest. The CRU does not require any further comments on this determination paper. The precise details of any Cap and Floor regime will be consulted upon and determined at the next stage, after sufficiently detailed financial and technical submissions provided by the Greenlink developers to the CRU for a detailed assessment. The CRU notes that in the next stage the CRU will engage with the Ofgem to explore the potential for a Final Project Assessment process that takes both the Irish and GB regulatory separate decision-making processes into account. Notwithstanding this determination on the public interest test, if any subsequent information is given to the CRU before making its final decision would lead the CRU to consider that the basis of its public interest test decision has materially changed, then the CRU may revisit this determination. In this case, the CRU may re-run its analysis in order to confirm whether or not the project continues to be in the public interest. Greenlink developers are required to regularly update the CRU on progress against their key development milestones. Furthermore, the CRU expects the Greenlink developers to give formal written notice of any material change to the project design.

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An Coimisi?n um Rial?il F?ntas Commission for Regulation of Utilities

Public Impact Statement

Electricity interconnectors are physical links which allow the transfer of electricity across borders. New interconnectors should be built only to the extent that they benefit the public at large. That is, as long as the benefits of adding interconnection capacity outweigh or equal the costs. Therefore, the CRU's assessment of each electricity interconnection application will balance potential benefits of a new interconnector to the Irish consumers against its costs.

Generally, new electricity interconnectors can offer multiple potential benefits:

? lowering costs for consumers if power can be generated abroad and imported to Ireland at a lower price (lower prices);

? reducing emissions by facilitating the integration of renewable power into the energy system (renewable energy integration); and

? providing an additional layer of security (security of supply).

In relation to lower prices, interconnectors can transport power in both directions, i.e. import and export. This allows them to utilise differences in the power systems, and electricity prices, between countries. Electricity between interconnected markets flows from the lowerpriced market to the higher-priced one. For instance, at times of high electricity price in Ireland, interconnectors can allow cheaper electricity from another country to be imported into Ireland, thereby raising the supply of electricity and lowering its price. Conversely, if Ireland was the lower-priced market, export of its (cheaper) electricity to a higher-priced market would increase the price in Ireland and bring the price down for the consumers abroad.

In summary, a new interconnector tends to increase prices in the lower-priced market and decrease prices in the higher-priced market. As prices converge, consumers in the higherpriced market will benefit from lower prices, while the lower-priced market consumers will have to pay a higher price. Therefore, whether a new interconnector lowers electricity prices for Irish consumers would depend on whether it connects to a country where electricity prices are typically lower than in Ireland.

Regarding renewable energy, on very windy or sunny days there can be more renewable power available than the electricity system can accept. When this happens, renewable generators are dispatched down or "curtailed off", that is, blocked from supply, and a large volume of renewable energy goes unused. This is because, at present, renewable energy cannot displace conventional power plants below the minimum level needed for certain grid stability services. Additional interconnection could reduce this effect and allow more renewable energy onto the electricity system (as it can safely be exported).

Finally, regarding security of supply, interconnectors allow physical imports of electricity to meet domestic demand. As such, a new interconnector would give Ireland yet another potential import route for electricity, diversifying Ireland's energy supply. This diversification can have various dimensions. First, a new interconnector can provide geographic diversification if it links Ireland with a new country or supplies power to a new (different) point on the Irish electricity system. A new interconnector can also provide economic

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An Coimisi?n um Rial?il F?ntas Commission for Regulation of Utilities

diversification, as it supplies electricity according to the price dynamics between the two interconnected countries. Finally, a new interconnector also provides technological diversification in that it links markets with different technology choices or having different natural resources determining their energy mix. Each of these dimensions enables security of supply risks to be spread and reduced. Building a new interconnector can be costly for the Irish consumers, depending on the way it is regulated and funded. Interconnectors derive their revenues from sales of interconnection capacity to users who wish to move electricity between markets with different prices (congestion revenues). There are various approaches to regulate interconnectors and determine who bears the risk of the interconnector being able to earn congestion revenues. In a merchant model, which is exceptional in Europe, the interconnector is fully reliant on its congestion revenues and bears all the risks of not being able to recover its investment. In a fully regulated model, which is most common in Europe, investment costs are recovered through network tariffs. In this model, it is the end consumer that pays the investment costs in full and receives all the revenues from sales of interconnection capacity. Interconnectors can also be partly regulated, and therefore partly funded by the tariffs. For instance, in a so-called cap and floor model, an interconnector's sales revenues that are below the floor are topped up by network tariffs and its sales revenues above the cap are returned to the end consumer. Hence, regulated and partially regulated interconnectors can have a positive or negative impact on network tariffs, and ultimately on end consumers, depending on their performance. If interconnectors underperform financially, then this can translate into a cost to electricity consumers by increasing network tariffs. In contrast, if electricity interconnectors overperform financially they can reduce electricity network tariffs. Therefore, the risk of underperformance and its potential cost to Irish consumers must be balanced against the potential benefits that a new interconnector may bring in the medium to long term.

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An Coimisi?n um Rial?il F?ntas Commission for Regulation of Utilities

Table of Contents

Table of Contents ...................................................................................................... 6 1. Introduction ...................................................................................................... 10

1.1. Commission for Regulation of Utilities...........................................................................10 1.2. Background........................................................................................................................10 1.3. Greenlink Project ? PCI 1.9.1............................................................................................11 1.4. Purpose of this Paper .......................................................................................................11 1.5. Legal and Policy Context..................................................................................................11 1.5.1. Electricity Regulation Act 1999, Section 2A................................................................12 1.5.2. Electricity Regulation Act 1999, Section 9 ..................................................................12 1.5.3. Electricity Regulation Act 1999, Section 16A..............................................................12 1.5.4. ENTSO-E's TYNDP .........................................................................................................13 1.5.5. ENTSO-E's CBA Guideline ............................................................................................13 1.5.6. CRU's policy to date ......................................................................................................14 1.5.7. Government's Policy on Electricity Interconnection .................................................15 1.6. Structure of this Paper......................................................................................................15

2. Summary of Responses Received..................................................................16

2.1. Are there any other specific factors that the CRU should consider in assessing the Greenlink CBA? ........................................................................................................................16 2.2. Is there any additional information the CRU should consider when determining whether the Greenlink interconnector is in the public interest or not? .............................18 2.3. Are there any other specific factors that the CRU should consider in assessing the Greenlink technical overview report? ....................................................................................19 2.4. Are there other specific factors that the CRU should consider in selecting the appropriate regulatory approach? .........................................................................................20 2.5. Other comments ................................................................................................................21

3. CRU CBA of Greenlink.....................................................................................23

3.1. Methodology and Modelling Approach...........................................................................23 3.2. CRU CBA Results of Greenlink........................................................................................26 3.3. CRU CBA Results Across all Scenarios .........................................................................27 3.3.1. TYNDP 2018 ST vs Element Power Reference Case ..................................................28 3.3.2. TYNDP 2016 V1 vs Element Power Low Case.............................................................30 3.3.3. TYNDP 2018 GCA vs Element Power High Case ........................................................31 3.4. RES Integration..................................................................................................................32 3.5. Impact of Greenlink on Security of Supply ....................................................................32

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An Coimisi?n um Rial?il F?ntas Commission for Regulation of Utilities

3.6. Impact of Brexit on Greenlink ..........................................................................................34 3.7. Impact of Greenlink on Gas Transmission Tariffs.........................................................38

4. CRU CBA Summary ......................................................................................... 40 5. CRU's Determination ....................................................................................... 42 6. Next Steps ........................................................................................................ 43

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