Increased Germany-Nordics power links will have muted price impact

Source: Heren

2015/06/23

Planned Germany-Norway and Germany-Denmark interconnectors will not have a big impact on average wholesale power price levels, but they will enhance price stability and supply security, said experts.

Interconnector capacity between Germany and the Nordics will be boosted at the end of this decade. In 2019-2020, the first interconnector between Germany and Norway, the 1.4GW NordLink, is expected to become operational. The 2.5GW expansion of Germany-Denmark interconnector capacity is due to be completed at the same time (see EDEM 8 April 2015).

A megawatt-hour of electricity is on average several euros cheaper in Norwegian and Danish wholesale market zones compared to the German market. However, experts do not consider the planned additional interconnector capacity big enough to have a significant impact on prices in the three countries.

The NordLink cable will probably increase average Norwegian prices in the range of €1.00/MWh, said Janos Hethey, an expert at the Danish consultancy Ea Energy Analyses. The impact on German prices will be smaller as it is a bigger market and is more closely integrated to other markets, he noted.

“[The] impact will probably be lower in [the] case of Denmark,” Hethey added. This is because the discount of Danish prices are closer to the German rate, while Norwegian prices tend to have a larger discount.

Lennart Larsson, senior advisor at the Swedish consultancy Pilekon, said that the two projects are unlikely to have a big impact on average prices and Nordic prices are expected to remain low in the coming years despite deeper integration with the German market.

Both experts also pointed out that Germany needs to increase transmission capacity between its north and south in order to be able to use the full capacity of the planned interconnectors with the Nordics. Germany intends to increase domestic transmission capacity to bring more electricity to the south, which is threatened by supply shortages in the future due to the phase-out of nuclear generation, but the construction of new lines is lagging behind (see EDEM 25 March 2015).

Supply security

Even though additional German-Nordic interconnectors are expected to have only a small impact on prices, experts consider them beneficial for supply security.

Wider opportunities to use Nordic hydro storage plants will reduce concerns the high share of volatile wind and solar power in the German electricity mix may lead to occasional supply shortages and price spikes in the country.

“Because it stabilises our [power] system, it’s not a bad thing,” said Josef Auer, analyst at the banking group Deutsche Bank about plans to construct more interconnectors between Germany and the Nordics. Additional interconnectors enhance the flexibility of the German power market and help the country cope with its increasing share of renewables without capacity measures, he noted.

Christian Tode, a power market expert at the institute of energy economics at University of Cologne, agreed. “More interconnectors are a cost efficient way for flexibility,” he said.

Additional interconnectors would increase supply security also in the Nordics, Tode said. German electricity stored in Nordic pumped hydro plants could come in handy for the region during drier periods. The small support that the integration with the German market gives to Nordic prices will at least increase a little the incentive to invest in non-subsidised power generation capacities. laura.raus@icis.com