Thursday, April 11, 2024

Consciously coupling – why we need to return to efficient electricity trading arrangements with the EU

©John Greasley 22/6/23  Chair of the GB Interconnectors’ Forum

Electricity interconnectors are subsea cables that connect us to neighbouring countries allowing us to share electricity. It is widely recognised that interconnectors are a vital component of a renewables-led electricity system. With increasing amounts of intermittent renewable generation, countries can find themselves in an electricity ‘feast or famine’. In the UK for example, we have an abundance of power when it is windy, but may be in deficit when it is not. Interconnectors help to manage these situations, allowing renewable generation to flow to regions where it is needed, maximising its potential and avoiding curtailment. Interconnectors will help us meet net zero, as well as keeping the lights on and our bills as low as possible. 

UK has participated in the EU internal energy market, and led the way in developing arrangements for efficient trading of electricity across Europe. The centrepiece of these arrangements is known as Single Day Ahead Coupling (SDAC), a system that matches electricity bids and offers across Europe taking into account interconnector capacity. SDAC promotes competition, increases liquidity and enables the efficient use of generation resources.

When we left the EU market, and hence SDAC – we uncoupled. For our borders, SDAC has been replaced by distinct arrangements (known as explicit auctions) to determine interconnector flows. Whilst interconnectors are still flowing and delivering many benefits to UK and EU consumers, a recent Energy UK report[1] estimated that un-coupling was costing consumers hundreds of millions of pounds a year due to higher wholesale prices.

The EU-UK Trade and Cooperation Agreement (TCA) contains a commitment to return to more efficient cross-border electricity trading. Whilst a return to SDAC was not permitted, the TCA set out a system called Multi-Region Loose Volume Coupling (MRLVC). MRLVC is anticipated to deliver some of the benefits we enjoyed in SDAC without the UK participating in the EU market.

It is heartening that the TCA recognises the need for UK and EU to cooperate on energy matters and convened the Specialised Committee on Energy (SCE) to oversee this cooperation. The SCE covers issues such as coordinating offshore renewable energy development as well as the development of MRLVC. However, it has yet to be demonstrated conclusively that MRLVC will be any better than the existing explicit arrangements, and there is a risk that it will spawn a time-consuming and costly IT development project to deliver it.

Efficient cross-border trading arrangements are essential to maximise the utilisation of renewable generation, as well as delivering lower costs to consumers. They are also increasingly required as offshore grids emerge, particularly in the North Sea. Developed properly, the North Sea has the potential to deliver huge volumes of renewable energy into Europe, significantly contributing to the delivery of net zero. But these grids do need efficient trading arrangements to support them.

It is time to recognise the imperative for efficient international trading of electricity in the fight to meet net zero. Instead of developing costly new arrangements that may prove to be no more efficient than existing, the UK Government should work with the EU to find a way for UK borders to be allowed back into SDAC – we need to re-couple. If this is a feasible then the implementation practicalities should be relatively straightforward to reinstate us to where we were before.


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