The fire at a converter station on a UK-France electricity interconnector has created additional uncertainty in a market already grappling with record high prices. The 2GW connector with the European mainland is supposed to support the UK network, providing additional capacity to help meet demand, especially in winter when usage is at its peak. Following the fire there are now doubts over whether the cable will be available at all this winter, tightening supply margins and creating a price squeeze that many end users will find unpalatable.
What is the interconnector?
IFA-1 (as it is known in the industry) is one of six cables that connect the UK electricity grid to those of other countries; the cable has a capacity of 2GW and represents a third of the total capacity of all those interconnectors, however, and half of the interconnection with France. This imported electricity helps to keep the UK system supply and demand in balance and is especially important in the winter, when end user demand is at its highest.
For context, 2GW of power represents around 3.5% of National Grid’s expectation of peak demand for this coming winter (based on the Winter Outlook report); however, in the actual peak hours of usage, it does represent nearly 50% of the anticipated margin at those specific hours of the winter.
Why have prices reacted so strongly?
The UK has already been facing uncertainty over gas supplies for the coming months; a lack of imports of LNG (liquefied natural gas) from the Middle East and US, extensive Norwegian maintenance, low gas storage levels, and political concerns regarding flows from Russia have all combined to send gas prices sky high. As gas is still the principal generation fuel for the UK, this has translated into high power prices, exacerbated by the cost of carbon emissions, themselves close to record highs. This all adds up to a perfect storm which has sent power and gas to successive all-time highs over recent days.
Will the market fall?
Only time, and the weather, will tell. If Europe has a mild winter and the gas and electricity systems are untested, then sellers may return to the market and prices could fall. There is also the prospect of a major new pipeline, Nordstream 2, coming online towards the end of the year which could bring higher volumes of gas from Russia.
However, whilst uncertainty persists, prices will undoubtedly retain their strength and markets remain dominated by buyers. This leads to the possibility that prices will worsen further before any improvement is seen, leaving exposed end users worrying about their energy bills.