Profit Beats Brexit in Biggest Race for Power Cables to U.K.

Updated on
  • At least 12 projects plan to entwine Britain to Europe
  • Interconnectors to help fill gap as nuclear stations replaced

Nobody seems to have told Europe’s power industry about Brexit. 

Even as Britain begins its exit from the European Union, there are at least 12 projects worth more than 10 billion euros ($11 billion) combined in the works to expand the island nation’s connection to the surplus generating capacity on the continent. That’s because of the potential for profit in Britain, where a levy on carbon emissions and a lack of new generators to replace old plants means wholesale prices are a third higher than in France and as much as 80 percent above the Nordic market.

The size of the investments in subsea power lines is unprecedented, with projects planned from places including Iceland, Denmark and France. If built, high-voltage links would boost U.K. electricity capacity by the equivalent of all its nuclear reactors. The country already imports power as capacity has been squeezed amid coal plant closures, while wind and solar power fluctuates.

“The U.K. really needs more interconnectors,” Magnus Hall, chief executive officer of Vattenfall AB, the Swedish utility that’s part of a group that plans a cable from Norway, said in an interview from Stockholm. “They can partly supply the flexibility that’s needed to make the whole system balanced.”

Developers include grid companies, utilities and closely held investors. They’ll charge traders a commission for using the cables. How much typically depends on the arbitrage between the markets. Infrastructure funds are also keen to invest because of the relatively stable returns, according to Baringa Partners Ltd., a consultant in London.

The U.K. move to quit the EU, known as Brexit, isn’t without risk for the ventures. But there’s only a small chance there’ll be fees imposed on the new cables, because politicians on both sides of the English Channel and beyond probably recognize they can keep costs low by expanding the marketplace, said Martin Callanan, a non-executive director of Aquind Ltd., which plans a link from France that’s the largest of those proposed.

Exiting Coal

Britain, a net importer of power in 2015 and 2016, already has links with France, the Netherlands and Ireland. The first of the new cables is slated for 2019.

They are needed because the U.K. supply margin has dropped near the lowest in a decade as old coal plants retire. The government will spend more than 3 billion pounds on future back-up programs. Electricite de France SA’s new nuclear plant at Hinkley Point is already delayed by at least seven years from its original start date and some think it may take even longer to get the 18-billion-pound ($23 billion) project up and running.

“We’re still 15 years away from new reactors in Great Britain,” said Torsten Amelung, managing director of the markets unit of Statkraft AS which owns Baltic Cable interconnector between Sweden and Germany. “You always have to ask, what will happen in the meantime? That’s why you need cables.”

EDF Energy plans to complete the first new atomic generation unit at Hinkley Point in England by 2025, Gordon Bell, a company spokesman, said Thursday by phone.

“There are real supply and demand differences between Germany, France, Nordics and the U.K., which create price differentials,” said Baringa’s Patel. Continental power will be mainly exported to Britain for five-to-seven years before flows become more even, he said.

Before the Brexit vote in June last year, then U.K. Energy Secretary Amber Rudd warned leaving the EU might boost the nation’s energy costs by 500 million pounds ($644 million pounds), providing “a massive electric shock.”

The U.K. government declined to comment.

Now that leaving is a reality, the government is keen to keep costs down. The interconnectors are important for diversifying supply, Energy Secretary Greg Clark told lawmakers last month at a hearing in parliament.

But there is still no guarantee they’ll be fully used, even if exports make financial sense. Capacity to Germany from Denmark was cut by 89 percent last year because Europe’s biggest economy has a grid that gets overloaded when renewables surge. And this winter, Balkan nations were seen hoarding power during a cold snap in January, rather than sending it to neighbors.

Shrinking Premium

Profitability of the cables may also shrink as each new link will narrow the price premium, even if it’s a distant scenario, said Didier Zone, head of development and engineering at French grid Reseau de Transport d’Electricite SA, a subsidy to EDF, which plans to invest in two of the new links.

Front-month U.K. power closed Wednesday at 46.67 euros per megawatt-hour, while Nordic prices were at 24.35 euros.

The immediate focus among developers is to get into position to take advantage of the higher British prices. Construction of the Eleclink from France started in February, while Norwegian grid operator Statnett is blasting its way through a mountain as it begins the first of two projects from the nation.

“The interest of an interconnection is mainly tied to the energy mix and to consumption habits, and Brexit won’t change that much,” Zone said in an interview. “We don’t see a strong impact.”

ProjectDevelopersCountryCapacity Estimated Commission 
ElecLinkStar Capital, Groupe EurotunnelFrance1GW2019
NemoNational Grid Interconnector Holdings, EliaBelgium1GW2019
IFA2NGIH, RTEFrance1GW2020
North Sea LinkNGIH, StatnettNorway1.4GW2021
FAB LinkTransmission Investment, RTEFrance1.4GW2022
Aquind-France2GW2022
VikingNGIH, Energinet.dkDenmark1GW2022
NorthConnectAgder Energi. E-CO, Lyse, VattenfallNorway1.4GW2022
GreenlinkElement PowerRepublic of Ireland500MW2022
NeuConnectFrontier Power, Meridiam, GreenageGermany1.4GW2022
GridLink-France1GW2022
IceLinkNGIH, Landsvirkjun, LandsnetIceland1GW2027
Source: Ofgem, Baringa Partners, Bloomberg

— With assistance by Marine Strauss, Weixin Zha, and Jess Shankleman

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