Utility Week

16 | FEBRUARY 2021 | UTILITY WEEK Policy & Regulation Analysis Will UK energy go it alone? The UK has formally left the EU's internal energy market, but will it seek to reestablish close links? And what are the long-term consequences of not doing so? David Blackman reports. B oris Johnson claimed that Brexit was "over" following last month's rushed implementation by parliament of the EU-UK trade deal. The chaos surrounding shipments of food from the UK mainland to Northern Ireland suggests that the prime minister's confidence was a tad premature. The good news for utilities, though, is that the UK and the EU were able to reach agreement before the end of 2020, when "no deal" would have kicked in otherwise. Little changed practically on 1 January when the UK finally departed the EU's inter- nal energy market (IEM) with the end of the Brexit transition arrangements. "Prepa- rations stood us in good stead: the inter- connectors are flowing and customers are happy," says Zac Richardson, head of inter- connectors at National Grid. The absence of tariffs in the deal is wel- come, says Marta Krajewska, deputy director of power at Energy UK. "Importantly, given the scale of investment ahead of us to deliver our net zero targets, there are no tariffs. That will support delivery of low-cost energy sup- plies and deployment of new renewable infrastructure. Anybody who wants to build and is reliant on parts from elsewhere should welcome that." However, the energy section of what is known formally as the EU-UK Trade and Co- operation Agreement is "thin", literally, says Silke Goldberg, a partner at solicitors Her- bert Smith Freehills. The agreement's energy chapter runs to about 40 pages, which she points out is about the same length as the EU's energy directive. Many of the details about how the EU and UK will replace the IEM's existing market coupling arrangements are still be resolved. The UK's ambition is for this process to be concluded by April next year, meaning it will be up to 15 months before the new arrangements bed down, says Shane Tom- linson, deputy chief executive officer of consultancy E3G. "The ambition is obviously welcome but it's a big task and we don't know the exact arrangements to deliver that and who will be leading," says Krajewska. Perhaps most crucially, the agreement means trading continues across the intercon- nectors that provide an ever-increasing share of UK electricity supplies. The new arrangements mean this trading has become "slightly less efficient", says Kra- jewska: "We are losing some efficiency but not to such an extent to prevent trading from happening. Trade is happening and flows were uninterrupted." Departure from the IEM means that trad- ing over the electricity interconnectors has reverted from what is termed implicit to explicit arrangements. Under implicit trad- ing, an algorithm allocates capacity on the interconnector when a request is submitted: now it has to be booked. Goldberg says: "Previously if you wanted to trade electricity across the interconnector, you could send a request at a press of a but- ton. Now you have to explicitly book capac- ity on the interconnector." This means reverting to the pre-market coupling trade arrangements last used in 2013, says Krajewska. Goldberg says it is "too early to say" what the pricing impact of these less efficient trad- ing arrangements will be, given that any effect so far is likely to have been masked by the bigger mid-winter seasonal factors influ- encing the market. Utility Week understands that all current proposals for interconnectors between the EU and the UK are going ahead. Uncertain investment landscape However, with the entire EU-UK trade deal due to be reviewed in five years, the lack of regulatory certainty is still a headache for would-be interconnector developers, Kra- jewska says: "The potential review of the arrangements definitely adds uncertainty, although the actual impact on potential future projects between the UK and the EU is difficult to assess at this stage." A source says: "If you want to build a new cable with the Continent, you need to know how you are going to make money on it and that will rely on new trading arrangements." Maintaining the confidence of intercon- nector investors is especially crucial for helping to deliver the government's bold

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