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Increased inter-connector capacities lower the volatility

Balancing systems with high level penetration of wind energy will require increased inter-connector capacities, as shown in a 2008 ECON study, focusing on Northern Europe.

The study investigates the implications of large volumes of wind power in the power market through various scenarios, and points out that in models run with large-scale wind investments in place, the congestion rent (i.e. the cable income) increases on most transmission lines. With more volatility in the system, further interconnection is required in order to balance the system more effectively.

In order to simulate the effect of further interconnection, the study ran the same model, but with a 1000 MW inter-connector between Norway and Germany in place, the so-called NorGer Cable. Results showed that the congestion rent on such a cable would be around €160 million in the year 2020 in the Reference Scenario, and around €200 million in the Wind Scenario.

Such a cable would have a significant effect on the average prices in the system, not only in Norway and Germany, but also the other countries in the model. This is illustrated by Figure 7.2 below. In the Nordic area, the average prices increase, while in Germany (and The Netherlands) they decrease, since, during peak price hours, power flows from Norway to German. This reduces the peak prices in Germany, and increases the water values in Norway. In the off-peak, low price hours, the flow reverses, with Germany exporting to Norway during the hours when prices in Germany are very low. This increases off-peak prices in Germany, and decreases water values.

However, the overall effect means higher prices in Norway and lower prices in Germany (compared to the situation without a cable).  

Figure 7.2: Average Prices in the Wind Scenario with and without the NorGer Cable – ECON study

As a result of using Norwegian hydro as peak capacity in Germany, and using cheap German off-peak power as imports into Norway, the volatility of prices in Germany reduces considerably. Surprisingly, volatility in Norway increases to some extent, showing that the hydro system Norway would struggle to keep non-volatile prices when connected to Germany. This is illustrated in Figure 7.3, showing a more volatile price profile in the Wind Scenario with the NorGer cable in place.

Figure 7.3: Norwegian Prices with the NorGer Cable in Place – ECON study