‘Brexit got done but Europe hasn’t disappeared’

Boris 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 internal energy market (IEM) with the end of the Brexit transition arrangements.

“Preparations stood us in good stead: the interconnectors are flowing and customers are happy,” says Zac Richardson, head of interconnectors at National Grid.

The absence of tariffs in the deal is welcome, 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 supplies 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 Herbert 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 that it will be up to 15 months before the new arrangements bed down, says Shane Tomlinson, 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.

Interconnectors

Perhaps most crucially, the agreement means trading continues across the interconnectors that provide an ever-increasing share of UK electricity supplies.

The new arrangements means this trading has becomes “slightly less efficient”, says Krajewska: “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 trading over the electricity interconnectors has reverted from what is termed implicit to explicit arrangements.

Under implicit trading, 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 button. Now you have to explicitly book capacity 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 trading arrangements will be, given that any effect so far is likely to have been masked by the bigger mid-winter seasonal factors influencing the market. Utility Week understands that all current proposals for interconnectors between the EU and the UK are going ahead.

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, Krajewska 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 interconnector investors is especially crucial for helping to deliver the government’s bold ambitions to tap the North Sea’s offshore wind resources.

New connections between the grids of the UK and its North Sea neighbours are a pre-requisite for enabling surplus electricity from this inevitably intermittent source of power to be exported.

Josh Buckland, former energy advisor to ex-business secretary Greg Clark, says: “There is a huge amount of infrastructure that needs to be built in the North Sea between now and 2050. That creates huge environmental challenges.”

Goldberg agrees. “Given North Sea ambitions, it is hard to see how this could be done without co-operation with others.”

Working together

The agreement says new arrangements will be created to facilitate co-operation on the common challenges the UK and EU member states face developing renewable energy in the North Sea.

However, the lack of a common regulatory framework across the North Sea could still prove to be a sticking point, says Buckland, who is now a director at public affairs company Flint Global.

He says: “Without direct membership of regulatory bodies and direct alignment, it will be interesting to see how that develops over time and whether that body makes clear and effective investment decisions or if it’s becomes a talking shop that doesn’t really lead to much.”

Any reluctance to co-operate will be more than offset though by the scale of the North Sea’s potential contribution to helping both the EU and the UK to cut emissions, says National Grid’s Richardson: “The UK has lot of that coastline so we are central to that.

“It is early days for the North Sea arrangements but discussions are under way about how they may work.”

It is also positive is that the UK’s regulators will be able to keep participating in the EU’s energy regulatory umbrella bodies, says Buckland: “The deal as a whole serves as a basis for potential future co-operation.

“If the political mood allows, you could have a stronger and more co-ordinated approach coming together over the next 18 months through sensible negotiations in those areas.”

However, the prospects of closer alignment are dim in the current economic environment, within which the UK appears keen to use its regained sovereignty to go it alone on the economy, he adds: “If the government changes regulatory structures in areas completely unconnected with energy that might undermine co-operation in other areas and potentially make it more difficult to have a more collaborative arrangement.”

It looks though as if UK civil servants will still be spending a lot of time on the Eurostar to Brussels when foreign train travel is once again smiled upon.

Goldberg says: “Given the architecture of the agreement, we will be in semi-permanent discussions with the EU about particular protocols: Brexit got done but Europe hasn’t disappeared.”