The Iberian grid meltdown imperils electricity trade

Linking up electricity grids exposes European countries to each other's energy policy decisions. But the meltdown of Spain and Portugal's grids on Tuesday, which spread to France, will lead to renewed scrutiny on interconnectors being a potential way for troubles in one country to spread to another.

More electricity trade is urgently needed to curtail Europe’s risky dependence on gas imports – from Russia, the US and the Gulf – and to speed the transition to net zero. During the gas crisis and the curtailment of France’s nuclear fleet in 2022-3, the integrated European grid kept a lid on prices by allowing electricity to flow to countries with power shortages. And as intermittent renewables rise in the power mix, more cables will have to be built to allow power to flow from sunny, windy areas to cloudy, becalmed ones.

By allowing electricity to flow, wind and solar plants do not have to be turned off – at high cost – when supply exceeds demand locally. With an optimised grid, there is less need for back-up power in the form of expensive gas plants with carbon capture and storage, or hydrogen energy. There would be more abundant power and prices would fall.

But there are drawbacks to trading electricity, which is why governments are too slowly building interconnections (the cables linking electricity markets) between national and regional grids.

A third more need to be built than are currently planned by 2030 to optimise the European electricity system. Interconnectors allow electricity to flow from countries – or regional wholesale markets – where generation is abundant and prices are low, to countries and regions where generation is not sufficient to meet demand and prices are high, reducing the costs of the system as a whole.

We still don't know the cause of the Iberian blackout, it could be a failure to a maintain constant frequency in the grid. But the interconnector with France was tripped and a French power plant was also affected. Despite the overall improvement in security of supply that interconnection provides, failures in one country can spread to another.

Norway has seen prices rise substantially as it exports hydropower to Britain, Denmark and Germany in periods of Dunkelflaute – cloudy, windless days in winter, when renewables generation collapses. Norwegian political parties have started to compete on the issue, with Labour and the Centre party saying they want to turn off the interconnector with Denmark when it comes up for renewal in 2026, and to renegotiate contracts for new interconnectors with Germany and the UK.

A big part of the problem is strained domestic grids. Stronger rules and information-sharing to ensure problems in one country do not spread to another, and more certain redress for failures to meet them, would help.

Germany is unlikely to meet the EU rule that 70% of transmission capacity is given over to electricity trading by the end of the year, because of its strained grid. The EU – and neighbouring states that are affected by Germany's policy decisions – have limited power over German decision-making, which weakens the incentive to strengthen interconnection.

Wind power is abundant in Germany's northern Laender, while most demand is in the southern and western industrial heartland. Germany has a single wholesale market with one price determined by supply and demand across the entire country. That means that when demand is high and renewables production low, electricity is sucked in via interconnectors, raising prices in neighbouring markets.

One solution is to break up large national markets into smaller, regional ones, as ENTSO-E recommended this week. Northern German Laender would see prices fall, because they have more wind. That would allow cheaper electricity to flow more often to Norway and Denmark, reducing prices there, and raising export revenues for regions with surplus power.

Southern regions would have more powerful incentives to overcome NIMBY opposition to building solar and interconnectors to cheaper markets, both internally and across national borders, consumers to shift demand to periods of low prices, and industries to improve energy efficiency or locate production in low price regions. In the long run, that would reduce prices for everyone.

Inevitably there would be a backlash to the break-up of national wholesale markets, as the angry UK debate on local pricing has shown (the country’s energy ministry is consulting on the issue). But the costs to high demand, low production regions can be contained. Solar plants and domestic and international interconnectors can be fast-tracked; at present it takes a decade for the latter to go through the planning and construction process. Interconnector profits can be capped for a period with excess revenues flowing back to consumers to reduce bills. The EU could fund more of the cost of interconnector construction through its budget.

The price mechanism is a powerful thing. By exposing consumers and industries to prices that better reflect the geography of electricity production, European countries would create powerful incentives to improve the efficiency of the entire system.

John Springford is an associate fellow at the Centre for European Reform, and the author of ‘Power losses: What’s holding back European electricity trade?’