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Europe Rewired: A Giant Awakens

EU nations are taking slow steps toward an integrated energy market, but they are many paces ahead of U.S. efforts.
Fortnightly Magazine - February 2004

of continental markets for Statkraft Markets GmbH, Norway's state-owned power marketing company. "No system is 100 percent secure," Amelung explains. "Interconnectivity increases security of supply and provides a backup in the system. When you add two countries together, the needed reserve margin is lower and you increase the number of power plants at your disposal," he adds.

He points to the fact that within individual countries, certain generation resource types might dominate electricity production, as with nuclear power in France, hydroelectric in Norway, coal in Eastern Europe and, increasingly, natural gas-fired plants in Italy and Spain. But taken as a whole, the European mix of power sources is quite diverse (see Map 1). "Interconnection allows you to balance these assets," he says, and it reduces the ability of one or two players to dominate markets or set prices.

The frequency of price spikes in the Netherlands "would go away if a new cable [to Germany] had been built. But it won't because of the economic interests of Dutch generators. There is much less ability of collusion in markets if you have high interconnectivity," Amelung concludes.

Interconnectivity to Modernize Power Plants

Greater interconnectivity also may prove essential to efforts to expand and modernize the generation system across the continent, says an industry analyst. Long-term projections of a 44 percent increase in energy consumption in Europe by 2020 dictate a need for 300 GW of new power plants, approximately the capacity of 750 large power plants, according to another expert. The capital cost of these developments is estimated at 250 billion Euros-and some anticipate that transmission modernization might be equally costly.

The generation development effort is well under way, he notes, with 11 new or repowered power plants with 7,670 MW of added capacity under way in Italy, for instance, and nine in Spain that could add 2,800 MW this year. Without the ability to connect to the expanding market, these stations risk being isolated, "like currants in a bun," he says.

This is a concern that underlies the new European Commission directives on security of energy supply. New investments in power generation have not been accompanied by the construction of additional transmission capacity or interconnections, and that failure will carry adverse implications for both wholesale and retail markets. The commentary that describes the security directive reads: "Unless this happens, customers will remain captive in practice, even if they theoretically have a choice between suppliers."

Guiding the provisions of this directive is a stated goal of "ensuring the highest quality of service" through measures to promote security of electric supply. The directive will:

  • Require member states to have a clearly defined policy to achieve supply/demand balance through adequate reserve margins and demand-side measures;
  • Require defined standards related to security of transmission and distribution networks;
  • Require that all transmission system operators submit multi-year investment plans to their national regulators;
  • Obligate the regulators to summarize these investment plans to the commission, which will consult with the European Regulators Group to make sure that the proposed spending matches previously identified needs; and
  • Give regulators the right to