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U.K.-Dutch Power Link to Cut Spread: Energy Markets

First U.K. Dutch powerling to narrow price gap
Electricity cables for the BritNed project are laid from a barge in the area of Maasvlakte, near the port of Rotterdam. Source: BritNed via Bloomberg

The gap between electricity prices in the U.K. and the Netherlands is set to narrow next year as utilities complete the first cable linking the two nations.

Network operators National Grid Plc and TenneT Holding BV will start to lay the U.K. section of a cable today as part of the 500 million-pound ($725 million) BritNed project. The 1,000-megawatt conduit, a similar capacity to an average power station, will allow electricity to move in either direction to wherever prices are highest.

Power for day-ahead delivery in the U.K. rose 4.1 percent in London to 43 pounds a megawatt-hour, a 65 pence discount to the equivalent Netherlands contract, according to broker data compiled by Bloomberg. Over the past 12 months, the difference has averaged 1.37 pounds and has exceeded 10 pounds on several occasions, the data show.

BritNed will “help reduce price volatility in both the U.K. and Dutch markets and bring prices closer together,” Glenn Rickson, a senior analyst at Eclipse Energy Group AS in London, said by e-mail yesterday. Eclipse provides market analysis to more than 70 companies across Europe.

North Sea Cable

A cable laying barge has begun submerging cables to connect the British and Dutch grids. Low winds and calm seas meant work could start today on burying two 500 megawatt links under the seabed about 400 meters off the Isle of Grain estuary, which sits next to a rusting World War II sea fort.

The 260-kilometer (162-mile) cable, stretching from Grain in southeast England to Maasvlakte, near Rotterdam, will be the first for so-called market coupling in the U.K. It allows traders to buy transmission capacity and electricity at the same time in one trade. The grid operators expect BritNed to even out European power supplies and limit price swings for power companies and consumers when it starts in April 2011.

The first market coupling project started in November 2006 between the Dutch, Belgian and French markets. Last year, day-ahead prices in the three countries converged 58 percent of the time, according to data from Amsterdam-based energy exchange APX BV, which runs day-ahead auctions in the Netherlands and U.K.

“Price differences between each spot market is minimized, with a common price at times when there is sufficient capacity,” Andrew Claxton, APX’s business services director, said on May 26 at a presentation in London.

The trilateral market coupling is scheduled to be extended in September in Germany and Luxembourg after testing.

One Transaction

The U.K. already has a 49-year-old power link with France that can carry 2,000 megawatts, though capacity rights and electricity supply can’t be bought in one transaction for that link. The new cable will make power transfer easier, especially after APX won the right in 2007 to set up a market for BritNed day-ahead capacity through daily auctions.

The bigger the price differences between countries, the higher is demand for sending power across cables, Graham Edwards, BritNed cable contract manager, said at Grain today.

Half of the BritNed link has been placed from the Dutch side. The line will be tested in December and will be ready for commercial flows in April, BritNed Director Bill Russell said in an e-mailed statement.

The additional 1,000 megawatts of power able to flow across BritNed will give the U.K. market a “notch more capacity and flexibility,” Angelos Anastasiou, a London-based analyst at Ambrian Partners said by e-mail today.

‘Modest Opportunity’

“When Euro prices are lower than U.K. ones, it will act like a U.K. power station and vice versa when the reverse is true,” he said.

Total generation capacity in the U.K. is 76,000 megawatts so BritNed only gives a “modest opportunity” for arbitrage trading, he said. It may also reduce the need to use dirtier, oil- and coal-fired units when demand peaks, Anastasiou said.

The BritNed link has more potential to iron out price differences than an undersea natural gas pipeline, in part because it allows energy to flow in both directions.

The four-year-old BBL gas pipeline allows gas to flow from the Netherlands to the U.K., delivering up to 42 million cubic meters of gas a day to the British grid.

U.K. gas for delivery tomorrow rose 3.9 percent to 42.50 pence a therm, the equivalent of $6.12 a million British thermal units. A therm is 100,000 Btu.

New Investors

The BritNed cable may boost power trading in the U.K., where the energy regulator Ofgem has said it wants to attract new investors and reduce price volatility.

The U.K. market is dominated by six utilities, Centrica Plc, Scottish & Southern Energy Plc, Electricite de France SA, E.ON AG’s U.K business, RWE AG’s Npower and Iberdrola SA’s Scottish Power.

BritNed said it will allow only a portion of the cable’s capacity to be traded via market coupling, with the remainder traded separately from actual power flows.

Should demand for market coupling be low, BritNed may ask regulators for approval to sell capacity only, Russell said today at Grain.

“I’d like to see it operating for at least 12 months, to find out what the traders prefer,” he said.

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