the double edge of electrical interconnection in Europe

the double edge of electrical interconnection in Europe
the double edge of electrical interconnection in Europe

The growing interconnection of European electricity markets, a fundamental pillar of the European Union’s energy policy, presents both opportunities and challenges for the integration of renewable energy. A recent study carried out by Clemens Stiewe, Alice Lixuan Xu, Anselm Eicke and Lion Hirth, through the Center for Sustainability of the Hertie School and Neon Neue Energiekonomik, highlights the phenomenon known as “cross-border cannibalization”, which could negatively affect the market value of wind and solar energy as their share and electrical interconnections between countries increase.

Cross-border cannibalization refers to the reduction in the market value of renewable energy due to the simultaneous increase in its supply both locally and in neighboring markets. “Given that wind and solar energy have almost zero marginal cost, their abundance on windy and sunny days can lead to a drop in electricity prices,” the analysts point out, adding that “this reduction in prices, although beneficial for consumers, results in lower income for renewable energy generatorsnegatively affecting the profitability of their investments.”

Impact

The study, which analyzes market data from 2015 to 2023 from 30 European tender zones, shows how electrical interconnection affects the value of renewable energies. The ability to export surplus renewable energy is a clear benefit of interconnection, however, experts identify that the spatial correlation of solar and wind radiation means that the abundance of supply in one country can be added to that of its neighbors, depressing domestic prices.

In this way, the authors found that a 1% increase in domestic wind market penetration reduces its market value by 0.62 percentage points. If penetration increases in neighboring markets, the reduction is 0.48 percentage points. For the solar energy, They emphasize that these effects are even more significant: a drop of 1.39 percentage points due to the domestic increase and 2.38 percentage points due to the increase in neighbors.

Therefore, they conclude that “while interconnection mitigates the negative effect of domestic penetration, the impact of cross-border penetration is amplified, this effect being more pronounced in solar energy than in wind energy.”

Challenges and opportunities

The paradox of electrical interconnection is that, although it improves the efficiency and resilience of the system, it can also decrease the profitability of renewable energy. To meet this challenge, the report highlights that it is essential increase the flexibility of the electrical system and it is explained that technologies such as storage of energy and demand management They can help absorb excess renewable generation and thus stabilize generators’ income.

The EU has seen a notable increase in renewable deployment, with wind and solar energy reaching a combined market share of 23% in 2022. At the same time, cross-border interconnection capacity has increased significantly. However, to ensure that this expansion does not harm the market value of renewables, “it is essential balance interconnection with specific support measures” assert the authors of the report and argue that “policymakers must consider these effects when designing strategies that promote both the environmental sustainability and economic viability of renewable energy.”

 
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