Additional red tape and customs declarations means electricity will no longer flow as smoothly as it used to when the UK was a full member of the European Union, leading to “increased costs of energy trading,” an EU spokesperson told EURACTIV.
When the EU and the UK unveiled their new post-Brexit trade agreement on Christmas Eve, energy traders expressed both relief and anxiety.
The agreement will ensure “at least basic future alignment” of power and gas markets on both sides of the Channel, said the European Federation of Energy Traders (EFET), adding that it was “confident” that power and gas trading “will continue smoothly from 1 January 2021”.
At the same time, energy traders could not hide their fears about the additional red tape caused by Britain’s departure from the EU’s single market, citing “customs declarations and changes in day ahead auction procedures”.
“We trust the deal done now can provide a starting point for yet closer cooperation in the future,” EFET said in a statement.
Indeed, the EU-UK trade agreement “foresees the possibility to develop, over time, separate arrangements for trade over interconnectors, based on a coupling model,” the European Commission said in a 40-page note explaining the different chapters of the new trade deal.
However, any post-Brexit arrangement that will come out of those negotiations will be “less efficient than market coupling used within the EU,” the Commission warns.
Trade continues, but less efficient
And even though electricity keeps flowing seamlessly across the Channel, trading processes have now become more cumbersome.
“Trade across electricity interconnectors with the UK continues, albeit less efficiently,” a European Commission spokesperson said when asked by EURACTIV to comment on post-Brexit energy trade.
As of 1 January, the UK has to trade with the EU on third-country terms. This means trades over electricity interconnectors between the EU and the UK are no longer managed through existing EU single market tools, such as market coupling, which are “reserved to EU member states,” the Commission says.
“For example, EU-UK interconnection capacities is now allocated explicitly,” the spokesperson told EURACTIV in emailed comments.
“This means that market participants who want to flow power over the interconnectors for the next day have to buy transmission capacity from the interconnector operators in a first step. Subsequently, and in a separate process, they have to secure the quantities of electricity they wish to flow over the interconnectors.”
When the UK was still part of the EU energy market, power was traded implicitly, which means these two steps were combined, the official explained.
“In practice, this leads to increased costs of energy trading,” the spokesperson said.
One of the consequences, according to EFET, is that “cross-border capacity may not be optimally used because it will be priced too high or too low” on either side of the border between the UK and the EU.
“This de-optimisation has a cost of its own, and you can add to that the cost of uncertainty that market participants factor in when they book cross-border capacity,” says Jérôme Le Page, director for European electricity markets at EFET.
“All this ends up on consumer bills both in the UK and in the EU,” he told EURACTIV.
Future power trading based on “volume coupling”
Some of those issues could be ironed out when the EU and the UK eventually strike a separate deal on energy trade, foreseen in the EU-UK trade agreement.
The new arrangement would cover power trading over interconnectors based on a “multi-region loose volume coupling model,” the spokesperson indicated.
In such a “volume coupling” arrangement, flows over EU-UK interconnectors “will not anymore be simultaneously determined with the rest of the EU flows” but would instead be determined in “an iterative process using a relevant set of UK and EU market and network data,” the spokesperson explained.
“Data available will in particular be more limited compared to those available for the market coupling within the EU. This will lead to less efficiency when compared to the single system used inside the EU,” the spokesperson said.
In the meantime, it is still unclear what would happen in case of an emergency such as a cold spell that forces the UK to import additional amounts of electricity or gas from its EU neighbours.
The EU’s current internal market rules contain a “solidarity clause” requiring neighbouring countries to help each other in case of a gas or electricity supply crisis.
Imports from the European Union kept UK lights on during the 2018 “Beast from the East” freeze, while exports to France and Belgium helped them weather the precautionary closure of French nuclear stations two years earlier, says Michael Grubb, a professor of energy and climate change at the University College London, in an op-ed published last year.
When asked by EURACTIV, the European Commission declined to comment on whether a similar solidarity clause would apply in the event of a supply crisis in the UK.
Today, the UK is a net importer of energy, with the EU currently providing some 5-10% of its electricity supply and 12% of its gas needs, according to the EU executive.
[Edited by Benjamin Fox]