UK Winter Interconnectors and Security of Supply | Arshpreet Dhatt, Timera Energy

Hello everyone, can you hear me okay? Perfect, great, yeah, as we've already said, my name is Osprey, I'm a principal at Tamera Energy and I'll be going through this quick presentation of interconnectors in a tight GB winter. So just before I start, I'll do a quick two minutes on who Tamera are for those who aren't aware. So we are a consultancy in energy and we work across both power and gas markets, so we're experts in both. And most of you will probably know us through our blogs, so we post regularly, twice a week, so if you aren't already subscribed, please do, there's always some interesting content being posted. And we've worked across most of the industry to be honest, so yeah, good industry experience. And in terms of our offering, I'm afraid the, yeah, the formatting is not great here, but yeah, we do everything from transaction support, power market analysis, flexible asset analysis such as interconnectors, route to market support, and we have a lot of subscription services as well, batteries in GB, Benlarks in Italy. Yeah, it appears like most of the slides have had some sort of formatting issues, but that's fine, we can work through this. So starting off with the GB interconnector state of play at the moment, so currently there's just over 10 gigawatts of interconnectors live in GB, and there's around 8 to 10 gigawatts potentially going live in the next 10 years who have one cap and floor preliminary agreement. So there's a lot of interconnector capacity around GB. And crucially, it's around lots of different countries, and each country and market has its own different dynamic with GB. So if we start off with Ireland, Ireland is a very structurally tight market. It's had a lot of data center demand growth over the past few years, and it's also had a retirement of its key kind of thermal fleet. So it's peat plants or oil and coal, which generally sit in reserve now. Ireland was tight enough that loss of load expectations in winter went pretty high to over 20 hours, and the government also had to build out emergency gas engines to make sure that the system didn't end up in a bad place. So generally, GB, we're going to be exporting power to Ireland through most settlement periods over 90%. France, on the other hand, has a lot of cheap nuclear generation. And what that means is that most of the time, so around 90% of settlement periods, we're actually importing power from France. So it helps support our own margins. Obviously, that's not always the case. There can be outages on IFER, IFER 2, which we've seen recently. And there can also be outages on the NUQ fleet. Generally, France helps support our power system. Norway is an interesting one. So Norway has a lot of hydro stocks, which is cheap power, which generally means that they're exporting power to GB. But if we have the summer like we've had recently, where there's been lots of dry spells, not of rain, hydro stocks can be depleted. And actually, it can be a bit of a wild card in terms of will we be able to rely on Norway for imports, or will we end up having to support them and exporting power? And then we have Belgium and Netherlands, which are more balanced countries. We do tend to import power from them in the middle of the day. These are very solar-dominated countries. But then overnight, when it's windy, we export power across to them. So a lot of different dynamics to keep in play. And it all gets quite complicated because you'll be channeling power through France into GB and into Ireland. So yeah, very interesting to keep on top of how these flows are evolving over time as well. And what we can see on this slide is a chart of the NISOs winter forecasts in terms of their early looks and what they see as the derated margin on the system, as well as these assumed interconnector imports that make up that margin as well. And what we can see is that over time, derated margins in GB have fallen for winters. And this is because we've seen our coal fleet retire. We've seen large nuclear plants like Dungeness retire. So we're losing some of that backbone of baseload thermal generation that has supported our power system for a long time and been crucial for keeping margins secure in winter. Instead, because we've had such a big growth in interconnected capacities, we're increasingly reliant on countries, markets like France, Benelux, and Norway for our margins over winters. Just to note that, of course, NISO's modelling methodology has changed as well over time. So take this chart with a pinch of salt. But generally what NISO is assuming is that we have imports from Europe which support our margins over winter. And it's an important role in terms of keeping the system secure over tight periods in winter. But what can happen in winter is obviously we might have a scarcity event, but so can other countries at the same time. So this is an example of a tight day in January of 2026. So this was the 5th or 6th of January. And there was a dry and still period across GB and also wider Europe. What you can see on the chart on the left -hand side is their head power prices in GB, Belgium, Netherlands, and France. And you can see that they're pretty tightly correlated. When prices in the continent spike to over €200 per megawatt hour, they also do the same in GB. So we're effectively competing for the same interconnected flows between different countries because we're all seeing scarcity at the same time. In situations like this, the way NISO respond is typically to flip the flow and that's done through trading. So NISO will go out to market and carry out auctions to counterparties like your Shells, your Danskers, etc. People who trade on these interconnectors and request volume to flip the flow or increase imports, whichever it might be. On this day in particular, NISO paid around €19 million on interconnected trades to balance the GB system, procuring around 62 gigawatt hours of volume. And prices were pretty high, spiking to around €200 per megawatt hour. This is an example from last winter, but we've seen the same happen this winter as well. More recently on Friday when we had the start of this dunkel flutter period and NISO were spending around £2.5 per megawatt hour on increasing imports into GB as the GB system started to get tight. And some of this situation arises from the fact that a lot of these interconnectors are also explicitly traded, not implicitly. So there isn't kind of a market-wide algorithm solving the flows for these interconnectors because we've decoupled from these markets due to Brexit. But instead it will be traders who nominate the flows. That can also cause some inefficiencies in flows. So one thing to note is I've talked about days where interconnectors can be a bit sticky and it's a bit hard and we're competing for flows, but fundamentally interconnectors are good for market efficiency. They get power to where it's needed, from where prices are lower to where prices are higher, and they're good for system welfare. And I know there'll be a talk later on about how they supported the system during kind of the heat waves in summer. But there is also concerns during this really small percentage of periods where the system gets really tight not only in GB but also in other markets. So the charts here show correlation in demand and wind between GB, Belgium, Netherlands and France. And what you can see is that the correlation in demand is very strong. So if there's going to be a high demand day in GB, so cold, winter's day. Similarly, it's going to be happening in Belgium, it's going to be happening in France, it's going to be happening in Netherlands. And that happens quite often. Wind, obviously far less correlated. Ultimately wind is a little bit more random. But you can have the same thing happen where still period hits multiple markets all at once. And the problem for interconnectors comes when those two red sections of the chart coincide and you end up with all markets in the scarce condition. That can happen in winter, it can also happen in summer over the heat waves. And this poses a question around security of supplies. So, of course, recently net zero is the big push for most European markets and we're going towards a res dominated system and electrification. But there's also increasingly concerns about self-sufficiency of markets, on being able to provide their own power and have enough domestic flex to support their systems. So this has caused some sort of some markets such as the Nordics in particular to be a little bit more wary of how much interconnection they have to different markets. So Norway, for example, decided to cancel the North Connect project into Scotland because southern Nordic zones were worried about how prices were going up in their zones due to the interconnection to markets like GB and other Nordics. We've also seen similar from Sweden who refused to connect to Germany recently because they're worried about the market being a national market rather than a zonal market and price signals being distorted in such a way that cheap power from Sweden flows into Germany but they don't necessarily see the benefits the other way. So it can be quite a controversial topic. But like I said, the vast majority of the time, these things are good for system welfare and they support the GB market. There's also questions around capacity market. These interconnectors, like the ones in France and Ireland, participate in both sides of both GB, Ireland or French capacity markets. So you hold contracts in either side. What happens in a situation when there's a correlated stress event in both or there's a CM event in both? It can be a point of contention for some people who don't like the fact that potentially there's a conflict of interest there given it's not a domestic source of flex that you know you can rely upon more easily. And then national pricing as it comes into most discussion of the GB power system also plays a role here. Scottish wind obviously lowers the national price and that can meet some of the price signals that we want to get flows into GB. And that's often where we can see NISA having to intervene to kind of keep margin secure. On the security of supply risk point, it's also around having some level of contingency of the system. You ultimately don't want to be running the power system with only a few hundred megawatts spare in a tight one today. So you're going to keep these duties online and you're going to make sure that the interconnectors are also flowing into the right market. Here we have a few charts showing historical and forecast interconnector flows from our power models between GB and Belgium on the left and GB and Netherlands on the right. And what we can see is that winters increasingly, as they have done in the past, see this big spike in imports of power into GB, which is when markets are tighter in the GB side because of general demand increases. So this is a trend that we see continuing into the future and potentially also being exacerbated. And that's because we're not the only market which are losing our thermal flex. It's happening in a lot of other markets as well. And they're also increasing their res penetration. So we end up in this situation where there can be quite a lot of scarcity periods arising in winter, not just for us and also for neighboring markets. A good example of this is the Netherlands. So Tenet recently forecast a loss of load expectation of between 36 and 45 hours by the time they get to the mid 2030s because of how much of their fleet is shifting towards renewable dominated and they're losing their thermal fleet. And as a result of that, they're now going to be launching a capacity market in the coming years to help firm up their system. So winters will become tight and interconnectors will play a really important role in balancing continental Europe as well as GB. Next question comes on, well, how do we model these interconnector flows then? Because the problems we're talking about or the really tight days, they're not the average day. They're the day when, you know, low wind coincides with high demand. So if we're modeling the power system with here's an average view of the weather across the next 30 years, I'll take, let's say, 2020's weather and just forecast it forward or demand profiles from 2020 and forecast it forward. We're not going to capture those really tight extreme days when the system is under stress in winters. So another approach that Tamera uses to try and quantify this is stochastic modeling. So what we do is we take different correlated parts of renewable output, so wind and solar, as well as commodity price volatility layered on and fluctuations in demand profile. And that means we can capture those really tight days and understand how the system will behave in periods of stress, which is when flexible assets like engines, batteries make them money as well. And this is the sort of outputs we'll get in terms of prices. So here's a chart of GB prices. It's price distribution, price duration curve. And you can see the mean line in the middle. But what really matters is the distribution around that and how those prices evolve in different situations, which is ultimately what drives the interconnector flows under different market conditions. And just to quickly wrap up on this presentation. So, yeah, we've done quite a lot of work with interconnectors. So some of the recent projects that we've worked on, worked with CPP investments on the Tarkon interconnector and also on the Greenlink interconnector with Equitix. So if anyone does have any questions around the investment case of interconnectors, how we've gone about valuing them and how they behave under different market conditions, please feel free to reach out to myself or anyone from the Tamera team. Excellent. Ashpreet, thank you very much indeed. No problem. An excellent overview of the importance of interconnectors in the GB, Irish and also the continental markets. If I can ask a question, you mentioned explicit, implicit trading. There is a UK-EU summit coming up very soon. Do you see a return to the UK into the internal energy markets, a return to implicit trading? Is that feasible, Ashpreet? Yeah, I would say so, definitely. I mean, it makes sense to ultimately go implicit because explicit allocation is inefficient at the end of the day. You're relying on people, traders, algorithms who aren't seeing the whole order book into the darehead market to decide where the flows should go. So if you looked at kind of charts of how flows used to be pre-Brexit on some of these interconnectors, it would very much be import-export. Now you get kind of this middle ground where it's obviously different people forecasting the market slightly differently, and it just creates inefficiencies at the end of the day. So it makes sense to return to a place where, you know, we're all under euphemia, we're all under one algorithm, and the interconnectors are allocated in the most efficient way. And obviously you can take it a step further with things like flow -based market coupling to not only purely think about economics of cheap to expensive, but also about the system congestion as well to completely maximize system welfare. So from our side, it makes sense. And it's something that when we've worked with kind of on the TARCON interconnector project, especially was a big area of how do they manage that? Will it be all the way fully coupled again? Or will they do a middle ground, some sort of a multi-level kind of loose volume coupling? So there's lots of different angles. But I think ultimately for system welfare, it makes sense to go back to implicit. Is it even on the agenda though, would you say? I mean, is it something that the EU is in their interests? It's on the agenda, but loosely more. The bigger topic item or the big ticket item is probably more linking the carbon markets rather than the full electricity market. So the discussions on linking have been more to do with, like, what option do we go down? Do we go all the way back in or not? So those talks aren't as advanced as they are for things like reuniting the carbon markets, which feels like the easier win at this stage. Any questions for us? Over here, Mark. Mark Merrick, Ecatricity. I was very interested about the security of supply point you're making. Can you talk a bit about how firm day -ahead contracts are on the interconnector? Because of all the hoo-ha that happened with the BritNet interconnector on June the 24th. I mean, I never quite understood who had done what and how firm things should have been. Maybe you can throw a bit of light on that. I mean, overall, how interconnector trading works is whoever owns interconnector, quite often National Grid, whoever it might be, will sell the capacity at year ahead, month ahead, season ahead, etc. So at that point, you have the right to hold the capacity, but not necessarily exercise the nomination. Once you get to day-ahead stage, that's when you'll decide, right, I've got my 50 megawatts, I'm going to nominate a flow down the direction I have it in. Great. Everyone does that. After that, we get to a stage called use it or sell it. So let's say I have 50 megawatts of capacity. At that point, I either have to nominate a flow or it goes into an intraday auction. And at intraday is when people will bid again for the capacity. Again, if you're still holding capacity at intraday and you haven't nominated, now it's a use it or lose it. So it gets taken away from you and then it will be sold around again. So you basically, at day ahead stage, people have nominated the flows, but there is still opportunity at intraday to then buy more capacity and re-nominate in a different direction if you want to, depending on how the prices are moving. And that's what NISO effectively does. So NISO are going out to people who can nominate flows and saying, look, can you please buy me 50 megawatts and nominate it that way, please? Because I'd quite like the flows to go towards GB, not the other way. And you'll pay them a premium to do so. So yeah, day ahead, the flows have a direction, but they ultimately can be changed by either people like NISO or traders themselves if prices are moving a lot. Like if GB prices spike all of a sudden, you can buy capacity in the intraday and flip the flow. So yeah, day ahead is kind of set, but you can see big swings in the intraday as well, depending on what's happening in terms of prices. I'm not sure about the exact day and what happened, so I'd have to look that up, to be honest. We'll hear about that day in more detail later in the last session of this. There we go. The last presentation of this session. So Ashpreet, once again, a warm round of applause for Ashpreet, please. And here's a little present from us. Thank you. Thank you. Thank you, thank you.