The changing role of electricity interconnectors

The changing role of electricity interconnectors

Interconnectors typically connect two distinct electricity markets and, assuming efficient operation, will generally flow based on price differentials between these markets thereby generating arbitrage revenues for the owner.

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The principal value of interconnectors is derived from their ability to exploit these price arbitrage opportunities between markets across macro (annual, quarterly, seasonal or monthly) and micro-timescales (day-ahead, intra-day). In economic terms, interconnectors can be thought of as an option to trade between two markets allowing owners to capture extrinsic and intrinsic value.

Australian energy market

The Australian energy market is in a period of significant and unprecedented transition. Over the next decade a diverse set of policy, consumer choice and market factors will cause significant increases in renewable energy deployment. The Australian Government has committed to reducing greenhouse gas emissions to 26-28 per cent below 2005 levels, by 2030.

This deployment, when combined with ageing fossil fuel generation infrastructure, will necessitate policy makers to focus on the operation of the network infrastructure, energy stability and certainty of supply.

Interconnectors and Australia's energy future

Interconnectors will play an increasing role in Australia’s energy future.

From a socio-economic perspective, the value of interconnectors is derived from their ability to both lower the cost of meeting demand, and to achieve policy objectives, such as improving security of supply and facilitating more efficient renewable energy integration, for example. In addition, value from some interconnectors can be derived from their ability to provide capacity contribution in one or both markets to which they connect, and from their ability to provide balancing and ancillary services to system operators.

The significance of each source of value will differ between markets and may also alter over time, subject to the deployment of renewable technology and smart grid development.

From a socio-economic perspective, the value of interconnectors is derived from their ability to both lower the cost of meeting demand, and to achieve policy objectives, such as improving security of supply and facilitating more efficient renewable energy integration, for example. In addition, value from some interconnectors can be derived from their ability to provide capacity contribution in one or both markets to which they connect, and from their ability to provide balancing and ancillary services to system operators.

The significance of each source of value will differ between markets and may also alter over time, subject to the deployment of renewable technology and smart grid development.

Factors causing change in interconnectors

The factors causing a change in the role of interconnectors in Australia are expected to be:

  • Concern over energy security – Uncertainty about future generation investment and increased local intermittency could heighten energy security concerns. Interconnection can be used to mitigate energy security risks. 
  • Potential for greater price differentials – Price differentials between States within the National Electricity Market (NEM) are material. Changes in the generation mix will create greater potential for price differential between States, and therefore greater benefits from inter-regional flows. This is reinforced by the existing oversupply in the NEM, uncertainty around retirement of fossil fuel generation, deployment of renewable energy to meet the Renewable Energy Target (RET) and various rebate and energy efficiency schemes. 
  • Geographic separation of renewable energy supply and energy demand – Interconnection could be needed to maximise the value of renewable potential in some jurisdictions with low energy demand and a compelling energy resource, for example Tasmania. 
  • Greater price volatility – Increasing the share of renewable energy in the generation mix will lead to greater short-term wholesale price volatility. Greater volatility in wholesale prices increases the benefits from interconnection. 
  • Increased demand for ancillary services – The value of ancillary services (i.e. services to mitigate imbalances) will increase due to increased intermittency of generation. Interconnectors can play a key role in delivering system security across the national grid.

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