Shock recoupling
The deal to re-integrate Great Britain into the EU’s internal electricity market took the industry by surprise. It has largely been heralded as a triumph for both markets, but will the EU-UK agreement live up to its billing?
By David Blackman, policy correspondent
Shock recoupling
The deal to re-integrate Great Britain into the EU’s internal electricity market took the industry by surprise. It has largely been heralded as a triumph for both markets, but will the EU-UK agreement live up to its billing?
By David Blackman, policy correspondent
Throughout the long and fraught post-Brexit negotiations, the European Commission has remained steadfast that there will be “no cherry picking”, as the UK Government attempted to retain some of the benefits of the EU’s single market without going all in. It was a mantra repeated as recently as December 2024 by European Commission President Ursula van der Leyen.
The Commission’s hard line meant that the UK, apart from Northern Ireland due to the latter’s close links to the electricity market south of the border, was ostracised from the European Internal Energy Market (IEM).
However, the EU-UK agreement announced last month shows that the Commission is now willing to soften its hard-nosed stance – in energy at least.
A joint statement, published following the conclusion of the 19 May joint summit in London to reset post-Brexit trading relations, included commitments to explore Great Britain’s re-integration into the IEM and to work towards establishing a linkage between the EU and UK carbon pricing markets. The move to re-admit Great Britain to the IEM went beyond what many in the industry expected to come out of the talks.
Simon Ludlum, chair of the GB Interconnectors Forum, believes the mutual benefits closer energy co-operation delivers meant that this was an area where progress made sense: “It felt that something had to happen, everybody wins out of this.”
But while the industry has been “very vocal” about the problems surrounding the UK’s post-Brexit electricity trading arrangements, moves to re-integrate into the IEM were “never on the table” during the discussions that the industry and its partners in the EU’s capital Brussels have had in the run-up to the summit, an industry insider says.
“It felt that something had to happen, everybody wins out of this.”
Simon Ludlum, chairm GB Interconnectors Forum
Better together
A further fillip for the sector, buried in the agreement’s annex, is the de-linking of energy from the politically fraught topic of fisheries in future trade negotiations. Frictions resulting from current trading arrangements already means UK consumers are out of pocket to the tune of hundreds of millions of pounds per annum, according to analysis carried out by Energy UK.
“This [sum] would have been well over a billion this parliament and considerably more in the next parliament. As we become a net electricity exporter, you're going to see that number go up very significantly. Participation in the IEM would completely remove that at a moment's notice,” says Adam Berman, Energy UK’s director of policy and advocacy.
IEM participation will result in an estimated 5% improvement in interconnector trading efficiencies, says Ludlum. While this improvement may sound marginal, it means interconnectors will be used more frequently, he says: “As the price of this infrastructure is so expensive, we can't afford to be 5% inefficient, we must be efficient 100% of the time to make sure that we sweat the asset and protect consumers.”
Simon Skillings, senior specialist in the energy transition at consultancy E3G, says the EU-UK agreement crosses “a big political Rubicon”, opening up important opportunities.
Stephen Woodhouse, director at energy consultancy AFRY, agrees. “Investing in a grid that is fully locked into the European system has to be a plus from anybody's point of view. Being part of the Internal Energy Market is very good for regulatory stability and investor confidence.”
Sonya Twohig, secretary- general of ENTSO-E, told Utility Week that she is “very hopeful” that the UK will rejoin the Europe-wide regulator’s umbrella body, adding that “together is better, especially where we're trying to find common solutions and solve certain challenges. GB is very interconnected; it has many relationships with many parts of Europe so to not be sitting around the table to discuss those aspects together is certainly an opportunity missed".
Meanwhile, Pranav Menon, GB power and renewables lead at Aurora, acknowledges that the IEM may deliver some efficiency gains vis-a-vis the current “slightly clunky system” where traders have to book capacity in an interconnector before executing their positions. “If you integrated it into a single market, those decisions would be made in the wholesale (market) directly so there are some efficiency gains,” he says.
However, pointing to the existing “strong pipeline” of interconnector investment, Menon is sceptical that rejoining the IEM will result in a “huge change” in the volume of electricity traded between GB and its European neighbours.
He adds: “The UK is already integrated with the European markets through our interconnectors, so we are able to tap into generation from Europe and export excess renewables. Ultimately, the biggest barrier to coupling markets will always be the network capacity between them. Simply changing the way the market settles through integration isn't going to move price differentials too much because they would still depend on the network capacity and interconnectors you have available.”
“Being part of the Internal Energy Market is very good for regulatory stability and investor confidence.”
Stephen Woodhouse, director, AFRY
Cutting curtailment
The 19 May agreement does, though, open up the prospect of deeper co-operation on tapping the North Sea’s vast renewable power potential, says Skillings: “Making the most of the North Sea's renewable energy resources requires a deeper degree of cooperation between the UK and the EU. If we're going to access a very large amount of offshore wind in the North Sea, it will require a massive grid under the current system.
“Without lots of interconnections into Europe, there will be a lot of curtailment of that resource but if the EU and the UK work together and create an efficient meshed grid in the North Sea, they can access far more resources at far lower costs and help to reduce the various balancing and integration costs on either side. It really opens up the opportunity for this much bigger prize.”
Participation in the IEM also means that development of ‘hybrid’ interconnectors, which would enable offshore wind farms to plug directly into multiple countries’ grids, becomes economically viable, says Berman: “Trying to get the business case to stack up for hybrid interconnectors is essentially impossible without highly efficient trading arrangements. It will make it economically viable, which is not true today.”
Removing a layer of regulatory uncertainty will accelerate investment in hybrid, otherwise known as multi-purpose interconnectors, agrees Ludlum, whose company Etchea Energy is managing the development of the 750MW MaresConnect interconnector planned between Ireland and Great Britain.
Steps to mesh the GB grid more closely into those of its North Sea neighbours could also limit build out of the transmission network, which is currently proving controversial along the east of England coast, says Skillings: “You can be much more strategic about where you will need to land onshore in the UK.”
Using hybrid interconnectors to build a more meshed North Sea grid could cut out the future need to develop offshore ‘bootstrap’ connections off the east coast of the UK from Scotland to the southeast of England too, he says.
The UK formally left the North Seas Energy Cooperation (NSEC), which is designed to create a framework for joint work on developing renewables across the basin, following Brexit. But a conference next January bringing together the heads of states of the countries involved in the NSEC offers a “very good opportunity” to bring the UK formally back into the framework’s fold, says Skilling.
IEM participation would also enable the UK to become involved in establishing offshore bidding zones (OBZs), incorporating offshore wind farms and cross-border interconnectors, Ludlum says: “Unless you're part of market coupling in some form that is agreed across all of us and our neighbours, we won't come to a common pricing of that OBZ. It’s important that we have commonality of pricing. We can see a way forward now to pricing those (OBZs) correctly.”
“Making the most of the North Sea's renewable energy resources requires a deeper degree of cooperation between the UK and the EU.”
Simon Skillings, senior specialist at E3G
Eliminating investor concerns
In addition to potential re-integration with the IEM, the agreement also heralds the prospect of realignment between the EU and UK emissions trading systems (ETSs). This is particularly pressing with the introduction of the EU’s Carbon Border Adjustment Mechanism (CBAM), which will impose a tariff on the import of goods into the trading bloc from countries with less onerous emissions rules, at the beginning of next year.
The calculation for UK electricity’s CBAM is due to be based on emissions from generation plants over the previous five years, including those from the UK’s now closed coal plants pushing up the price of all UK power exports, says Woodhouse: “We would have been totally hammered.”
Alignment of the EU and UK ETS regimes would “completely eliminate” this additional compliance burden faced by the UK when the EU CBAM comes into effect next year, says Menon: “Given that both the EU and the UK have such ambitious decarbonisation targets, it was a no-brainer.”
This removes a “top ten red list” of issues for investors, says Berman: “It was never a deal breaker but removing anything off that list will have an impact on cost of capital and investor appetite and you create that larger export market.”
There will though be teething problems realigning the UK and EU energy systems, given that they have been separate for nearly half a decade. Woodhouse admits that his “heart leapt” when he heard the announcement but he still worries it could prove a “false dawn”. Details are scant beyond the agreement’s commitment to explore IEM and ETS joint working.
Rachel Armstrong, the Department for Energy Security and Net Zero’s industrial decarbonisation and emissions trading director, has been appointed the senior official leading the UK government’s negotiations. There is “every indication” that these talks could start soon, says Berman: “The UK will certainly want to proceed as quickly as possible because you've got the EU CBAM kicking in on 1 January next year.”
Completing ETS negotiations within a year is “eminently doable”, he says, adding that he expects the commission will grant the UK a “very time limited” exemption from the EU CBAM if they are heading towards a conclusion. However, negotiations on re-entering the IEM are likely to take longer because it covers more areas, says Berman.
In the meantime, any negotiations are bound to foster uncertainty in the minds of investors at a time when there is acute pressure to deliver clean power, says Menon: “It's quite important to make sure you're balancing the rewards of doing this with the risks. It feels like a fair amount of uncertainty for not too much upside.”
However, the process will be smoothed by the UK Government’s acceptance of dynamic alignment, which will mean following the EU’s IEM rules, albeit with the ability to contribute to shaping decisions, Berman says: “They [the government] are willing to recognise that where you have areas where there generally is quite a high level of alignment, there's no point diverging. If the UK wanted to actively do something different in electricity markets, that would be one thing, but that's clearly not the case: we don't have radically different views.”
The 19 May announcement certainly came as a surprise. But on the whole it appears to be a welcome one. Realising the promised benefits would also seem achievable. Now is the time to get on and deliver it.
“The UK will certainly want to proceed as quickly as possible because you've got the EU Carbon Border Adjustment Mechanism kicking in on 1 January next year.”
Adam Berman, Energy UK director of policy and advocacy
