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What are interconnectors and why are they the key to the renewable energy revolution?

As renewable energy production increases, grid improvements are required to deliver that energy to consumers. Interconnectors will play a crucial role, as our experts explain.

22/09/2023
Photo of offshore wind turbines

Authors

Ashley Thomas
Fund manager, Equities
Sanjay Patel
Research Analyst (Industrials)

What is an interconnector?

Ashley Thomas (AT), Fund Manager, Equities: Interconnectors are high voltage cables that run across land and under the sea between neighbouring countries (and states in the US) allowing the two-way exchange of electricity.

They enable more effective use of renewable energy, access to sustainable electricity generation and provide improved security of electricity supplies.

Earlier this year I visited the UK section of Viking Link, which will become the world’s longest electricity interconnector at around 765km in length when completed later this year.

Viking Link is a 1.4 GW interconnector link connecting the east coast of England with Denmark. It is a 50/50 joint venture between National Grid (UK) and Energinet (Denmark).

How much interconnector capacity does the UK need?

AT: Last year the UK became a net exporter of power for the first time in more than 40 years (5 TWh net imports vs record net imports of 25 TWh in 2021).

Chart showing UK electricity interconnector flows

Completion of Viking Link will take National Grid’s interconnector capacity to 7.8 GW and the total British capacity to 9.8 GW - representing 13% of total GB power generation capacity. There is a project pipeline which could potentially add a further 16 GW of capacity by 2035.

As UK renewable capacity increases, British net power exports are expected to grow even further, potentially increasing to 64 TWh in 2030 and 104 TWh in 2050 (source: National Grid Future Energy Scenarios 2023 - Leading the Way).

The environmental and consumer benefits of interconnectors are clear. By 2030, National Grid’s portfolio of interconnectors is expected to deliver 90% carbon free electricity and will have saved the UK around 100mt of CO2.

Interconnectors are vital as the role of renewables in the system expands. When there is excess power produced (for example, on a windy day) interconnectors enable this to be exported rather than curtailed. Curtailment is when output from a renewable resource is reduced below what could otherwise be produced, whether through lack of demand or lack of transmission capacity.

In 2018 National Grid estimated that an additional 9.5 GW of interconnector capacity could deliver £11bn of benefit to British consumers. This is compared to a scenario where additional power stations are built to provide the same level of flexibility (helping to balance the grid when wind is curtailed) and security of supply.

How much interconnector capacity does Europe need?

AT: Europe’s electricity system currently has more than 400 interconnectors and is the world’s largest interconnected grid. Currently Europe has around 93 GW of cross-border transmission capacity with a further 23 GW in construction/advanced permitting by 2025.

The European electricity association ENTSO-E estimates that an additional 64 GW (+55%) of interconnector capacity is needed between 2025 and 2030. This would cost around €10bn in total but should save €5bn p.a. in generation/consumer costs and reduce emissions by 14mt. The ENTSO-E modelling also points to the need for a 120% increase in current interconnector capacity by 2040.

However, current planned expansion falls well short of this target. Given the lead time for an interconnector is typically around nine years (according to the IEA), the importance of planning to address the shortfall should not be underestimated.

Why is there an urgent need for more capacity in the US?

AT: The need for interconnectors is if anything more pressing in the US, with just 7 GW of large scale intraregional transmission constructed since 2014 compared with 44 GW in Europe and 260 GW in China (source: Macro Grids in the Mainstream: An International Survey of Plans and Progress 2020). Despite the growth in renewable capacity in the US over the past five years, only 675 miles of high voltage transmission line was constructed last year – a decline of 50% from 2021 levels and a record low.

The Inflation Reduction Act is stimulating a dramatic increase in renewable investment. But a 2022 Princeton report estimates that over 80% of the potential emissions reductions delivered by the IRA in 2030 would be lost if transmission expansion is limited to the recent historical pace of 1% p.a.

The US Department of Energy (Grid Deployment Office) also identify “a pressing need for new transmission infrastructure” with interregional transmission producing the greatest benefit. For example, the interregional (interconnector) capacity requirement for the MidWest is estimated to be more than 2-3x current capacity by 2035.

And when Winter Storm Uri hit Texas in February 2021 (knocking out 34GW for two days), the lack of interconnector capacity meant only around 800 MW of power could be imported (vs 13 GW of imports by neighbouring MISO grid). A report by Grid Strategies estimated that 1 GW of interconnector capacity between Texas and the Southeast could have saved $1bn in costs during Storm Uri.

How feasible are ultra-long distance interconnectors?

AT: While Viking Link will shortly become the longest interconnector at 765km, across the globe much longer interconnector projects are being planned. However, the technical and financing issues of these larger scale projects should not be underestimated.

Longer distance subsea cables are being planned although the ultra-far projects are still very much in concept phase. Their economics need to accommodate the typical energy losses of around 3% per 1,000km.

For example, at 3,800km long, the proposed X-Links Morocco-UK Power Project would be five times longer than Viking Link. The project is still in development phase.

Interconnectors – point-to-point or multi-purpose?

AT: So far, we have been largely discussing 'point to point' interconnectors. These run directly from one location in one country to another, while individual wind farms have to connect one by one to the shore.

It is clear that as offshore wind capacity increases, the structure of point to point connections becomes sub-optimal.

Multi-purpose interconnectors (MPIs) are therefore being planned. These connect both the host country to neighbouring markets as well as connecting offshore generation to shore.

MPIs have a number of benefits. In the UK, it is estimated that an integrated approach to connecting offshore wind, including the use of MPIs, could reduce UK consumer costs by £3bn - £6bn, depending on how soon it is implemented, and could reduce the number of onshore landing points by up to 50% (source: National Grid ESO).

In 2022 Belgium, Denmark, Germany and the Netherlands signed the Esbjerg Declaration to deliver a coordinated approach to connecting 65 GW of offshore wind by 2030. This would involve establishing interconnected energy hubs in the North Sea to facilitate the production of green hydrogen using surplus offshore wind generation.

This integrated approach, combining hybrid/multi-purpose interconnectors with hydrogen producing/storing energy islands, is expected to create synergies and achieve a higher utilisation of offshore wind yields. It will also deliver renewable power to multiple markets.

What will rising interconnector demand mean for cable manufacturers?

Sanjay Patel (SP): The strong demand for interconnection projects, and the move towards larger and more complex projects, is likely to lead to a lack of production capacity from the main companies that service the industry. In Europe and North America, the supplier market share is controlled by three main players: Prysmian, Nexans and NKT.  

Industry reports suggest a 6.6x increase in cable demand from 13,000 kms in 2010 to 85,000 kms in 2030. If this demand is met, the cable industry will require interconnected cables that are over twice the circumference of the earth in the decade ahead.

Chart showing kms of planned interconnector projects

The main cable players have been increasing capital expenditure and installation vessel capacity to meet this demand. All three have recently announced the commissioning of new cable laying vessels that will come on stream later in this decade. Installation capacity is extremely important. Customers will only trust experienced  players because these multi-year projects carry significant execution risk.

Project awards in high voltage are increasing and could rise to €12bn in 2023 vs €9bn in 2022 and €2bn in 2019. We believe even with new capacity additions, there will be insufficient supply of HV cables to satisfy this demand, putting the cable companies in a strong position on new project tenders.

It is therefore important that the appropriate regulatory and planning frameworks are put in place for the network operators to have enough certainty to place orders with the cable manufacturers to enable them to build sufficient capacity. Without this greater certainty, capacity constraints are likely to result in delays in project pipelines, resulting in increased consumer costs or a slowdown in renewable deployment.

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Authors

Ashley Thomas
Fund manager, Equities
Sanjay Patel
Research Analyst (Industrials)

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