UK power trade 'less efficient' if no Brexit deal

The UK will leave the Internal Energy Market (IEM) if there is no deal in place when it exits the EU, and cross border trade will be "less efficient", the UK government said in its Brexit guidance published today.

Cross border power trade will no longer be governed by UK law and the UK and European regulators will need to agree new access rules. The guidance said there are no plans to change the domestic approval process or requirements for access rules in the UK but there will be considerable scepticism that all the regulators involved — UK, France, Netherlands, Ireland and Belgium — could come to an agreement in time. This would provide a maximum of five months for agreements to be made, with the UK due to exit the EU at the end of March.

The UK's interconnectors with France and the Netherlands were due to go live with the XBID intraday and day ahead coupling schemes in the second quarter of 2019. But a no deal Brexit makes this increasingly unlikely.

Implicit allocation of cross border capacity — which is considered to be more efficient — looks difficult to implement if the UK remains outside the IEM. Switzerland is not a member of the IEM and has explicit trading of capacity on its borders. Negotiations on a bilateral agreement for Switzerland to join the IEM as part of an electricity regulation deal were halted after a Swiss referendum in 2013 was in favour of ending the right to freedom of movement. The European Federation of Energy Traders (Efet) has previously warned that isolating Switzerland from IEM could reduce liquidity in its power market by creating a barrier to entry. It could also prevent optimal hedging of long term positions in the case that cross border capacity is curtailed.

UK firms would need to register with an EU regulatory authority to be able to trade within the EU or IEM and participate in the EU's REMIT market monitoring. The UK would maintain the existing REMIT regulation governing transparency and market integrity rules as part of its domestic regulation. This is likely to be a considerable burden for small companies, while the largest utilities and trading firms in the UK are arms of international companies that already operate across many European countries and will be better placed to adapt.

The UK's power industry codes will also need to change, as will some aspects of licensing, with regulator Ofgem managing this process.