INTRODUCTION
The UK and Europe are undergoing a green-energy revolution and there has been unprecedented investment across wind and solar in the last decade. The proportion of energy generated from renewable sources is increasing rapidly. However, it is not enough to merely generate this energy, it must also be supplied to where it is needed, when it is needed. This is where HVDC links and interconnectors come in. Electricity interconnectors are high-voltage cables that connect the grids of different countries, allowing them to share and trade surplus energy. HVDC links have the same function but connect the grids of the UK allowing excess energy to be transmitted to where there is demand, eg from Scotland to England, or vice versa. (Note: the term "interconnectors" will be used from hereon for ease but is deemed to include and be transferable with "HVDC links" where required).
Many people will recognise a solar panel or wind turbine and understand its function, they are highly visible, conspicuous symbols of renewable energy. However, few are aware of interconnectors, despite their pivotal role in facilitating the use of green energy that is created by more recognisable technologies.
Interconnectors facilitate a system of international cooperation via energy grids, ultimately serving sustainability goals as well as energy security. The UK’s Office of Gas and Electricity Markets (Ofgem), has reviewed and adapted its regulatory processes to support the proliferation of interconnectors (detailed in the Accelerated Strategic Transmission Investment framework published in December 2022). It is therefore unsurprising that interconnectors are having their day, and understanding the energy grid requires understanding interconnectors.
HOW INTERCONNECTORS FACILITATE A GREENER ENERGY GRID
Interconnectors, specifically high-voltage direct current (HVDC) links, are large infrastructure units in national electricity grids that are technologically capable of connecting the electricity systems of neighbouring countries, even if they are asynchronous or operating at different frequencies.
Ultimately, they allow the grid to supply environmentally sustainable energy to households and businesses, reducing reliance on traditional carbon-intensive fossil fuels. In 2023, research suggested that renewable energy (predominantly wind and bioenergy) accounted for 43%[1] of total energy supplies in the UK.
This is integral to achieving the Government’s ambitious target of reducing carbon emissions by 68% by 2030 against the 1990 baseline. It is predicted that 90% of energy imported via interconnectors will come from zero-carbon energy sources by the 2030 goal date.
THE ROLE OF INTERCONNECTORS IN ENERGY SECURITY
Recent history demonstrates that shifting geopolitical tensions can wreak havoc on energy security, therefore having the ability to pivot energy supplies away from politically unstable territories is paramount. The ongoing conflict in Ukraine is a prime example of this, having forced wholesale prices up to previously unimaginable levels. Since 2004, the UK has been a net importer of energy with net import dependency reaching 38%[2] in 2021, falling slightly to 37.3%[3] in 2022. Russian oil and gas represented 9.6% of imports in 2021, which fell to 2.6% in 2022.
The share of households in England required to spend more than 10% of their income on energy after housing costs was 21% in 2021, which rose to 30% in 2022 following the invasion of Ukraine. The construction industry is also an intensive user of energy, representing circa 3% of the UK's total energy consumption. In light of these statistics the importance of stable energy prices is clear.
Click here to read more on why the UK needs interconnectors to meet its sustainability and energy security goals.
THE STATE OF THE MARKET
The UK will have 7.8GW of interconnector capacity with mainland Europe by 2024, representing a 300% increase from 2010. Additionally, the UK Government has set a target of reaching 18GW by 2030. It was difficult enough to increase interconnector capacity by 5.3GW across a 14-year period, increasing by 10.2GW in six years represents a great challenge. The UK Government may have set ambitious targets, but it is not alone.
It is estimated that over the next 10 years, the global value of manufacturing and installation of subsea cables (used for both HVDC links and connecting offshore generation – such as offshore wind – to the grid) will be over £100 billion. Infrastructure is an important determinant of productivity and therefore economic growth in the wider economy, and investment within this area with be a leading indicator across the rest of the construction industry.
With the macro-economic environment pushing up prices, as well as strong demand for interconnectors at a global level, a new cost baseline is being formed. Figure 1 shows the price differential from projects dating back to over five years ago compared to recent interconnector projects.
Whilst there has been a cost stabilisation across the construction industry in the last few months, it is not expected to fall, at least not in the medium term. With these CAPEX price increases, investors and regulators will need to be convinced that investment remains attractive otherwise projects will stall.
Figure 1 Cost benchmarks for interconnectors (adjusted to 2023 prices)
STATE OF THE SUPPLY CHAIN: A SELLER’S MARKET
G&T has been at the forefront of the interconnector market and is currently supporting major UK and European interconnector schemes in both the private and regulated sectors. In recent years there has been seismic shift in the interconnector contracting market (cables and converters). With strong global demand and few suppliers, it has become a seller’s market, with costs going up.
Based on learnings from several of our recent interconnector projects, we know that suppliers will not simply look for the best price, but also less onerous contract conditions, with key risks allocated back to the developer and avoiding arduous procurement processes and timeframes. Developers are aware of the constrained market and are moving quickly to secure suppliers.
On top of that, the supply chain has been requesting significant upfront payments to secure manufacturing slots. This carries risk as these advance payments are issued prior to obtaining overall planning and regulatory approval for the scheme. Successful procurement therefore requires a good relationship with the supplier and ensuring that suppliers are invested in the development.
The supply chain is only half the battle. Judging from our recent projects, it is clear that the other half is in being able to secure a suitable regulatory deal. For example, the profit that private developers make from interconnector projects is determined by the terms of the cap and floor regime set by Ofgem, which are only confirmed once the interconnector is in operation.
Regulators are also looking for developers to demonstrate that their proposed scheme delivers value for money for consumers, which is not defined simply as low total cost, but also higher efficiency. This can be difficult as suppliers currently have the luxury of choosing which projects to work on, they may even be the only supplier bidding for the scheme.
WHERE TO NEXT?
Interconnector development is gaining traction. New technologies such as 525kV XLPE cables for subsea transmission allow longer cable routes and lower losses, which allows the UK to tap into more markets. The Xlinks[4] Morocco-UK Power Project is a prime example of this. It is currently in the development stage, however if it goes ahead, a solar and wind energy farm with battery storage facilities will be established in Morocco. It will connect exclusively to the UK via a c.3,850km subsea interconnector cable, providing a fully renewable energy source which will supply up to 7.5% of the UK's energy.
Multi-purpose interconnectors are another innovation being considered by the UK Government. These connect multiple countries and/or sources of power generation to a single onshore connection point, reducing overall costs and environmental impact.
CONCLUSION
The benefits of interconnectors are now understood by the Government and regulators, and with the UK’s wider goal to reduce carbon emissions and the regulatory adjustments by Ofgem, interconnector projects have essentially been given a green light.
For our own part, G&T aims to be carbon neutral by 2030 and has switched to a fully renewable energy supply in all our managed office buildings. We also frequently support clients who are part of transforming our economy to support a green future.
We have supported clients at all stages of the interconnector project lifecycle, from project development support (multiple private equity firms, including GridLink connecting France and England), through procurement and regulatory approvals (Eastern Green Link 1 to 4, both connecting Scotland and England) into delivery (NeuConnect connecting England and Germany) through to final account and project closure ( IFA2 between England and France).
Feel free to get in touch with the author of this article to discuss interconnectors further.
Read our 2023 Sustainability report to find out how G&T is reducing its carbon emissions.
