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Could Interconnector Net Transfer Capacity Restrictions Be Better Allocated via a Market Mechanism?

Evaluating the Merits of Allocating Interconnector Net Transfer Capacity Restrictions Through Market Mechanisms

Interconnectors play an increasingly important role in decarbonising electricity networks by facilitating cross-border trade, allowing intermittent renewable generation to be exported during periods of relative surplus and imported during periods of relative scarcity. This, in turn, can promote security of supply and reduce price volatility for consumers. However, the significant flexibility that interconnectors provide can also present challenges for the onshore network, including through their impact on transmission constraints, margins and system frequency. Electricity system operators therefore require effective tools to manage the impact of interconnector flows and ensure the system operates securely.

FTI Consulting was commissioned by the National Energy System Operator (“NESO”) in Great Britain (“GB”) to examine the merits of its Net Transfer Capacity restriction tool (“NTC”), a non-market-based mechanism it uses to manage interconnectors by limiting the maximum import or export of electricity from GB in a given time period. We also assessed the feasibility of creating an NTC market, through which restrictions on flows would be allocated to the lowest cost interconnectors, contrasting to the current approach where restrictions are allocated without consideration of the cost.

We found that the existing NTC tool is effective in supporting system security, particularly due to its ability to define an envelope of maximum import and export without necessarily impacting actual flows. Similar functionality is not available to NESO through other options (aside from via Intraday Trading/Transfer Limits (“ITL”), a similar tool that pre-dated the introduction of NTCs and still applies to some older interconnectors). However, the non-market nature of NTCs could lead to higher costs than a market-based option and interconnector owners have raised concerns about the transparency of the tool’s usage.

Implementing an NTC market could theoretically generate significant gross benefits relative to the status quo arrangements, which we estimated at between €0.5 million and €4.8 million per year between 2030 and 2040. However, there are significant challenges to implementing the market that could erode these potential benefits in practice. Critically, the system issues that NESO must manage are often highly locational, meaning individual interconnectors are not perfectly substitutable for one another in meeting NESO’s needs. This, in turn, limits the scope for competition within a market and potentially affords the best positioned interconnector a degree of market power.

Given the significant challenges facing market-based allocation, incremental reforms to the existing arrangements appear to be the most appropriate way forward. Consistent with this analysis, NESO has since undertaken a call for stakeholder input on elements of the existing NTC design as part of a review of the tool.

The issues explored within the report highlight that, as the electrification of economies around the globe continues to place greater pressure on electricity networks, it is increasingly important for policy makers and regulators to be mindful of both the benefits and challenges that interconnectors can bring. It is critical for system security that system operators can call on an effective suite of tools to manage flows in and out of their networks, but they must be carefully designed to minimise costs and provide sufficient clarity to stakeholders. Additional focus is also required due to the cross-border nature of interconnectors, which can make designing tools that are both effective and acceptable to each connected market more complex.

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