British energy markets could be re-integrated into Europe’s Internal Energy Market (IEM) under the new deal signed by the UK and European Union on 19 May.
Brexit included the separation of the GB energy market from that of the EU. One outcome was that trading across interconnectors with European countries was no longer a ‘frictionless’ process. Instead GB trades across interconnectors have to be made ahead of time and interconnector capacity has to be separately secured, rather than being automatically allocated (ie ‘implicit’ trades). The cost of this friction was projected to be £170 million annually in 2021 (see further discussion here) but since then more interconnectors have been planned and built.
In other anomalies, the electricity market in the Republic of Ireland is within the IEM but it currently has no direct interconnectors with EU countries – instead it is connected via GB links (see further https://www.newpower.info/2018/07/a-brexit-conundrum-for-the-electricity-sector/). The UK’s Northern Ireland electricity market and the Republic of Ireland market meanwhile operate a single electricity market for the island that overlaps with the IEM.
Now the new ‘common understanding’ between the UK and European Commission says they “share the view that close cooperation on electricity is in the interest of both the European Union and the United Kingdom”. It says they should “explore in detail the necessary parameters for the United Kingdom’s possible participation in the European Union’s internal electricity market, including participation in the European Union’s trading platforms in all timeframes”. A new agreement “should define the relationship between the United Kingdom and European Union rules on the electricity market, as well as on State aid, the promotion of renewables and the protection of the environment, in so far as they relate to the electricity sector”. Until then, current electricity trading arrangements will continue to apply.
The Common Understanding also included “continued technical regulatory exchanges on new energy technologies such as hydrogen, carbon capture, utilisation and storage and biomethane”. The energy industry is also likely to welcome “dedicated dialogues on the implementation of the Trade and Cooperation Agreement, as regards entry and temporary stay of natural persons for business purposes, including the sponsorship scheme, and the recognition of professional qualifications”.
The EC and UK promised to working towards linking their Emission Trading Systems. They said “The sectors falling in the scope of the ETS linking agreement should be clearly defined to avoid risks of carbon leakage and competitive distortions. Among others, this scope should include the sectors of electricity generation, industrial heat generation (excluding the individual heating of houses), industry, domestic and international maritime transport and domestic and international aviation. The agreement should provide for a procedure to further expand the list of sectors to be covered by the linking agreement”.
That would require alignment of the United Kingdom with the relevant European Union rules underpinning the functioning of the ETS link and would also require the UK’s decarbonisation pathway to be “at least as ambitious as the European Union cap and the European Union reduction pathway”.