The Power Dispatch: (Re)integrating Europe's power market

Daniel: Hello, and welcome to "The Power Dispatch," an Argus Media podcast from the European Electricity Report. I'm Daniel Craig, a senior reporter here at Argus focused on Nordic electricity. On "The Power Dispatch," we'll attempt to step back from the immediate day-to-day fluctuations and fundamentals to take a longer view of the issues, ambitions, and policies shaping the power market today.

With that in mind, resurgent fuel volatility sparked by the conflict in the Middle East has reignited the case for the UK to reintegrate into the EU's internal market for electricity, reversing a decoupling sparked by Brexit. But I'm joined by UK market specialist, Tim Santonastaso, and market reporters, Bea Leverett and Jessamy Guest, to highlight that this new impetus is actually just the latest phase in a broader project to integrate markets across the continent. With that in mind, Tim, given that this is indeed a longer project with a longer history, where does market integration stand today from the UK perspective?

Tim: Thanks, Daniel. So, last month, the EU Council formally authorized the European Commission to open negotiations with the UK on rejoining the internal electricity market. That is a significant step, the first time it has existed in a formal legal mandate. But it's a starting gun. It's not the finish line. So the message from the recoupling is a project. Even if GB was in previously, the system has changed a lot since Brexit, 15-minute market time units, a shared order book, extensions, flow-based methodology changes across the Nordics and Central Europe. So the rules have moved on, and GB would be joining something new. It wouldn't be going back to something as it was before.

Daniel: There was, after Brexit, a sort of alternative idea of what a partial coupling could look like, but I think we've now come to the consensus that that wouldn't work. Just talk us through what that was.

Tim: So, that was the multi-region loose volume coupling, so-called. It was always a halfway house. It was basically GB sharing order books with the EU before the coupling algorithm ran. But that never happened. The welfare gains were deemed to be too small, the implementation too complex, and industry and TSOs on both sides walked away from it.

Daniel: If we're not going to do that, you know, since the consensus is that's not going to work, is there a model out there in Europe today that we could maybe borrow from, copy? Where is British coupling or integration? What are the lessons to be learned?

Tim: Switzerland could be a model. They have already signed a trading agreement, but that has yet to be passed in parliament, if I'm not mistaken. But Bea knows more about that, so I'll pass it on to her.

Bea: Switzerland signed a package of agreements, including an electricity agreement with the EU on the 2nd of March, which was years and years in the making, almost 20 years, I think. Negotiations broke off and restarted and broke off and restarted. So, that's a pretty big milestone for Switzerland, because Switzerland is a bit of an interesting one. Despite being in the middle of Europe, it functions a bit as an island. It's not allowed to fully participate in EU balancing and trading platforms, which means it kind of has a disadvantage to other countries in terms of efficiency, grid efficiency, balancing efficiency, all that kind of stuff. And a lot of people in the Swiss power market are campaigning for this deal to be signed so that Switzerland can participate in EU balancing platforms without joining the EU.

Daniel: Just to get a sense of what the process looks like. So, they've signed these agreements, but how far away are we from realistically Switzerland joining the internal market for electricity, even with these agreements?

Bea: I would say pretty far. They signed it last month. It now has to go through both houses of parliament. And if successful in doing that, it could go to referendum. In Switzerland, you only need 50,000 signatures to bring in a referendum, and that's against a population of, like, 9 million, or 8 cantons have to campaign for it. And in the case of that, it's really unknown which way it will go. It's probably gonna be pretty 50-50 and pretty... I mean, it already proves to be a divisive topic among the industry itself.

Most utilities and the TSO Swissgrid itself are super in support of the agreement being signed, and they've been campaigning for it. But politicians on either side of the spectrum are pretty, pretty strongly against it. And yeah, I think it's gonna end up being up to the general population, to be honest.

Daniel: Britain re-joining the internal market is surely going to be a controversial thing too. Tim, do you get a sense in your discussions with participants and just the general mood music, think that this is something the government can go ahead with and not be drawn into the broader arguments of, you know, European integration, given the referendum in 2016?

Tim: That's difficult to see. So, from my point of view, there are three main political barriers. The first is dynamic alignment, so-called. So, the UK would have to accept EU electricity rules automatically as they evolve without a UK vote. That is politically sensitive at Westminster, but legislatively manageable, given the UK's pre-Brexit familiarity with the body of EU law.

Second would be the cohesion contribution. So, the EU is demanding a permanent, legally binding financial payment as the price of market access, something like the Norway model. That was actually not in the original summit agreement in summer last year. The commission added it at the mandate stage.

And third would be governance, with the EU Court of Justice as the ultimate arbiter on EU law matters. The same model being applied across the wider reset package. So those, I think, are the three main difficulties that the negotiations will come up against.

Daniel: Those are fairly significant barriers to integrating. I know one of the barriers that the UK's, you know, already made attempts to overcome is sort of linking the emissions trading systems or attempt or beginning that process. Is the main reason behind that to make this process of re-joining the internal market easier, or is that really "avoid CBAM" play in your view, or is it both?

Tim: I think it's mainly in avoiding the CBAM liability. Yeah, the CBAM dimension is becoming quite urgent, so EU importers of GB power have been accumulating financial liability since CBAM began in January 2026, with first payments due in '27. So, I think the only clean fix is ETS linkage, and obviously, recoupling would make that much easier, especially for the EU member state that is the main importer of UK power, which is Ireland.

Daniel: I realize we've just used CBAM as an acronym without defining what CBAM is. Would anyone like to give a quick definition of CBAM? I know it's particularly relevant to you and your markets, Jessamy. A loose definition of what CBAM is.

Jessamy: So, the CBAM legislation is basically a tariff on imports coming into the EU based on their carbon emissions. So, it's relevant to the UK and also the Energy Community, which is the countries on the periphery of the European Union that export power into the EU.

Daniel: And it's the Carbon Border Adjustment Mechanism, yes? Is that right?

Tim: That's right.

Daniel: Yes, I'm getting nods from the room. That's a good sign. Okay. So, speaking of integration, you know, we've spoken about Switzerland, we've spoken about the UK. There are other markets, as we've just mentioned, the Energy Community. And CBAM is a big barrier or advantage, or it depends on your perspective, I guess, to those markets integrating with the EU. Where are we with the CBAM delay, CBAM not delay, CBAM on electricity? There seems to be a lot of questions there. What's the story down in Southeastern Europe?

Jessamy: The Energy Community, just to quickly outline it, is a group of nine countries in the Western Balkans, Ukraine, Moldova, and Georgia, that all aim for better energy integration with the EU. And in terms of power markets, this is about market coupling. However, none of the member countries are likely to couple physically with the EU until at least 2028. And in the meantime, the CBAM legislation came into effect on the 1st of January, which is effectively a trade barrier to power exports into the EU, or a step back in terms of integration.

However, in December, to address kind of the uproar that came from power market participants about what the impact of the CBAM was gonna be in terms of a barrier to power market integration, there was a proposed amendment by the European Commission to the CBAM that said that there could be an exemption for countries that reached legislative coupling rather than physical market coupling. However, this is probably not gonna be voted on by the European Commission until probably the end of this year. And so, for the duration of 2026, we're gonna see uncertainty as to whether power exports from the Balkans, especially Ukraine, Moldova, into the EU will be subject to this tariff, which, as Tim said, is calculated retroactively kind of at the end of 2027.

Daniel: One of the interesting things is, we've already seen this briefly, but it probably has recovered, you know, the impact on transit flows because Greece has to send power through this region to reach other EU member states. What sort of trading impact have you seen already, or has that completely gone away?

Jessamy: Greece has an interconnection with North Macedonia, and especially in the summer when solar generation is high, it exports a lot of power through the Balkans to the EU or to EU countries. You also see important flow corridors between Italy and Montenegro and Serbia and Hungary. However, at the beginning... Because this process was kind of rushed and full of uncertainties, the amendment proposal only came out in December for implementation in January. Especially at the beginning of January, you saw, like, a real decrease in transit flows from EU countries to EU countries because no one knew how this was going to be calculated and didn't want to be subject to tariffs in two years' time. However, some people I've spoken to say that if they have a good legal team, they're wishing to trade transit flows now because they feel they can prove at customs that the flows are coming from EU countries to EU countries.

Daniel: A good legal team will get you around CBAM, solving EU market design with lawyers, tale as old as time, I think. But, Tim, we also have a situation where Ireland is on the periphery of the European power market, and until its interconnector with France comes online, it's going to be transiting power or receiving power through the UK. Do we know if there's any CBAM implication there for Ireland, or is it not really that relevant, or is this linkage will solve all these problems, and Ireland doesn't have to worry?

Tim: Well, as a net importer of GB power, I can see Ireland being liable for CBAM payments. Ireland has three interconnectors with GB, each around 500 megawatts. So, the island is very reliant on imported power from GB, especially during winter. The Celtic interconnector, I think one of the main reasons why that project got underway is precisely this issue, is to have a direct link with the EU through this cable, this 700-megawatt cable with France. It is already EU member state, so recoupling would be much easier than it would be for GB. As I said, CBAM charges on flows from GB would push Irish prices even higher, and GB recoupling would fix that problem. So, there is an interest for Ireland as well for GB to recouple.

Daniel: Because that's the interesting thing, is that, you know, Ireland has a lot of prospective power demand. It has limited generation capacity. So, yeah, as you say, Ireland wants the UK to rejoin the European power market, most likely. Is that appetite, do you think, shared across the EU? Do you think that's a sentiment that most people have? You know, are there political barriers within the EU, or is this not really a concern right now?

Tim: I think the main political barrier within the EU, as I say, now that the negotiations have a legal mandate, is simply to agree on the terms of what the relationship would look like. First of all, how to begin recoupling with all of the technical barriers as well. So many people think that because GB was in the internal electricity market before Brexit, it would just be a matter of plugging in a thumb drive.

Daniel: Yeah, cut and paste.

Tim: It would be back to the way it was. But obviously, as I said, the system has moved on a lot since Brexit. One of the main technical barriers, I think, is the fragmentation of the order books between the two exchanges that operate in GB, EPEX and Nord Pool. And that fragmentation, I think, would need some kind of either voluntary or mandated solution before GB can effectively re-enter the day-ahead market architecture.

Daniel: Because there are lingering issues across individual interconnectors, let alone reintegrating split order books. There's the ongoing issue with the North Sea Link with Norway, where, you know, EPEX SPOT don't want to be a part of it. Nord Pool has gone through a renegotiation and been re-awarded the contract. So, there's clearly a range of issues still to be worked out on individual interconnectors, let alone at the whole macro-EU level.

And also, one thing I'm curious across your markets, certainly in the Nordics, getting Norway and Sweden to agree on EU-wide electricity policy is difficult enough, let alone reintegrating the UK. For example, the Power Traders Europe representative body has called for much faster integration of the market by 2028. At the same time, Norway and Sweden have both opposed elements of the grid package designed to make the grids of Europe function better, mainly around the issue of pooling a certain portion of congestion revenues at an EU level and giving that over to sort of a more centralized allocation policy.

We're clearly seeing a situation where, despite, yes, you know, the UK and other markets looking to integrate, that we're still not there between politicians and traders and market participants and how they see the system looking by 2028, '29, 2030. In your markets, what are the clearest separations between market ambitions and political interest? I think Southeastern Europe might be a perfect case for this. I'm sure there are a range of issues where politicians in the market don't see eye to eye.

Jessamy: I guess the idea of the Energy Community is really wrapped up in a sense to the EU. And in certain markets, it's up for debate whether the countries are serious about joining the EU. I mean, the Energy Community was founded in 2005. A lot of these countries have been candidates for the EU for over a decade. However, I do think there is some political will to get the job done, specifically in power markets, because it is in the interest of, for example, the Western Balkan countries to kind of bolster their system.

For example, in summer of 2024, there was a big heatwave in the Western Balkans, and it led to outages in Albania, Montenegro, and Bosnia. And this has really stayed live in the imagination of politicians because outages are quite, like, a visible example to voters of political failure.

Daniel: Yeah. Just as Pedro Sánchez down in Spain, blackouts are bad for business.

Jessamy: Yeah. There definitely is an incentive for these markets to couple. However, it is obviously a mammoth task. The energy integration package, which is the laws that these countries are supposed to transpose in order to align their market structures and their kind of environmental or competition laws with the EU before they can take the step of coupling with markets, was adopted in 2021, I think, and the original deadline to transpose these laws into international legislation was the end of 2023. Not a single Energy Community country transposed this until August 2025.

The gap there is obvious. But yeah, I'd say that the CBAM is genuinely encouraging some progress on this because the countries see kind of a more tangible deadline, and they can't just kick it up the road as much. But there's a great disparity in the progress that's been made in these nine member countries. So, in the report that came out last year by the Energy Community, I think the average market readiness score across the 9 countries was 54% ready, and that went from 74% in Moldova to 26% in Bosnia and Herzegovina.

Daniel: Oh, wow. So, that 54% is hiding a very big brain.

Jessamy: Yeah. I mean, there is genuine progress in some of the, like, front-running countries, Serbia, Montenegro, Moldova, but it's a whole mixed bag.

Daniel: I mean, in Switzerland, as you said, Bea, this is a sort of multi-decade process. So, what is the sentiment of industry looking at the politicians who are beholden to a public that may be coming to a referendum? And how far apart are industry and the politicians on this issue?

Bea: From what I've heard from industry, they very much view it as a good thing because the general consensus is that it will lead to a reduction in power prices, and, obviously, that's great for them as energy-intensive large consumers. However, I think there are also parts of the deal that they aren't in favor of, and the problem is because the deal, it's very all-encompassing and it includes modifications to how the market currently works across areas. You're never going to develop a deal that pleases everyone.

I think the general sort of negativity towards the deal comes from a Swiss distrust of EU policy. So, signing the deal would mean Swiss energy policy has to better align with policy across the EU. And in some people's view, this translates as less autonomy and less decision-making power over their own laws. It's also a question of ownership over the country's natural assets. So, Switzerland views its hydro assets very much as, "This is our property. This is ours. We don't necessarily wanna share it," which, obviously, on the market side, that's completely flipped. It's great to share it because different countries have complementary power mixes, and in different seasons or at different times of day, it's great to have different natural resources which you can share and pool.

It's a very wide-ranging deal. And also, the problem is the electricity package has been pooled with a set of different packages, I think, like healthcare and various other things. So, parliament is voting and the population will probably end up voting on a very comprehensive set of packages, which only a part of that concerns power markets.

Daniel: But taken together would look like a huge block of EU legislation entering Switzerland which, as you've just said, has its disadvantages.

Whereas maybe if the power package had come along by itself and everyone could just look at it as a small modification to some rules around power trading, it would have been fine. But tying it all together, alert.

Bea: Even alone as an electricity package, I think it would spur some pretty fiery debate. I think it's probably the most controversial topic in Switzerland at the moment, and it has been for a while, and it probably will continue to be.

Daniel: It's not because, you know, Switzerland views this as some sort of EU-German plot to shut down its aged nuclear reactor.

Bea: I think some people probably would say that.

Daniel: And that is the issue.

Bea: There's a wide spectrum of reactions to it, which makes it very interesting.

Daniel: CBAM is, obviously, a very complicated piece of legislation. And with complex legislation, there are sometimes unforeseen circumstances or circumstances that are purely derived from the technical elements. Is there anything like that we're seeing in terms of how that's shaping integration?

Jessamy: The CBAM is kind of a paradox for the Energy Community because quite a lot of progress towards market coupling in the last sort of eight or nine months in the lead-up to the CBAM, it's kind of supercharged these processes. So, Serbia, Montenegro, and Moldova, who have all transposed the energy integration package, which is the package of laws that the Energy Community countries have to couple in with the internal market, all three of them have done so in the past eight or nine months.

Serbia, for example, launched both their balancing market and the carbon tax on the 1st of January, at the same time as the CBAM legislation came into effect. However, on the other hand, the CBAM legislation is...well, kind of the ultimate aim of it is to encourage renewable build-out and decarbonization of the power market and of other markets. However, a lot of developers and producers got excited about developing renewables in that region in order to export to the EU. However, now the Western Balkan power prices have seen kind of a decoupling from the EU because of the uncertainty of tariffs and the unwillingness of people to export without knowing exactly how much they're gonna have to pay at the end of two years.

So, I've heard from renewable producers that they're not getting the kind of compensation that they were expecting when they built renewables in these countries. And it's actually leading to more kind of like a fallback onto thermal production. So, unintentionally, it's kind of having the opposite effect of the environmental aims that the CBAM is supposed to espouse.

Daniel: Well, thank you for joining me, Tim, Bea, and Jessamy. And we'll see how things progress given the new enthusiasm from seemingly politicians and the market, and despite those lingering tensions over certain issues and things that never seem to go away, you know, who has control, what that looks like, and so on. But more importantly, thank you for joining us today on "The Power Dispatch." And we'll be back in the future with further episodes down the line.

But in the meantime, we encourage everyone listening to look out for the range of podcasts available across commodities and interests on argusmedia.com. Thank you.