Brussels’ blinkered energy Brexit

19 July 2018

Brexit continues to lead the news on a near daily basis, with a number of headlines being generated by European Commission briefings on the economic impact in Britain following withdrawal from the EU. A recent briefing proclaims that British businesses could face higher energy costs once the UK has left the EU, with the Commission briefing explaining that following withdrawal “UK-based operators will cease to participate in the single allocation platform for forward interconnection capacity, the European balancing platforms and the single day-ahead and intraday coupling. The UK-based Nemos [Nominated Electricity Market Operators) that facilitates the effective functioning of the market will become third country operators and will no longer be entitled to carry out market coupling services in the EU.”

This is not really news. It is generally accepted that if the UK leaves the single market the exit would also apply to other areas of joint participation, including the single EU energy market. This is certainly the interpretation of the Commission, which maintains the UK cannot cherry pick the EU elements it wants to retain.

Yet if this is the case, why did the Commission not say that following Brexit in March 2019 the UK would have to exit the EU ETS? The answer is that if the UK left the ETS in the middle of the current third compliance period there would be unnecessary disruption to both UK and EU companies. Indeed the UK government’s confirmation that it would remain in the ETS until the compliance period ends on 31 December 2020 was not challenged by Brussels and provided bullish support to allowance prices. It is likely this briefing on the single energy market is based on a judgement that the UK will be poorer for leaving. And given the increasingly toxic internal debate in the UK between the so-called ‘remainers’ and ‘leavers’, this briefing adds yet another topic to the debate.

While market coupling, which forms the basis of cross-border electricity trading in the EU, has been an undoubted success in reducing costs, the main beneficiaries have been the mainland EU member states. This is because the UK is less interconnected with mainland EU countries than these countries are with each other. The UK currently has 4 GW of interconnector capacity; 2 GW with France (IFA), 1 GW with the Netherlands (BritNed), 0.5 GW with Northern Ireland (Moyle) and 0.5 GW with the Republic of Ireland (East West). The France interconnector switches between import and export mode depending on supply balances and costs, the Dutch interconnector is largely in UK import mode, while the UK generally exports to the Republic of Ireland.

... the irony is that it was the UK that pushed for the development of a single energy market that is now benefiting European businesses and households ... 

While the UK is not supply dependent on these imports, as there is sufficient surplus installed capacity, the imports provide lower price supply flexibility and, during periods of lower demand, enable the UK to call on less coal-fired capacity. Imports account for less than 10% of UK electricity supply. Also, there is little correlation between the UK and northwest Europe electricity prices, with UK prices mainly driven by the gas price, while German prices are driven by coal and French prices by nuclear availability.

If the UK leaves the electricity coupling market it is expected that the cost impact will correlate with a call on coal-fired plant to replace the lost import volume, with this call also moderated by the level of wind production. Given that the UK went three consecutive days without any coal-fired generation at the end of April, when imports from France and the Netherlands averaged 1.6 GW (equivalent to around 5% of supply) it is clear that the cost impact will be minimal.

As UK coal plant is progressively decommissioned to 2025, new renewable s added, and Hinkley Point C scheduled online around 2027 the UK could potentially target energy independence over the next decade. And if the government needed any incentive to accelerate policy towards energy independence, this latest ‘anti UK’ briefing from Brussels should be sufficient.

While the lack of UK electricity exports to Europe (with the exception of the Republic of Ireland) should have an almost zero direct cost impact on EU businesses, there could be an indirect cost through higher gas prices.

The UK has two gas interconnectors with northwest Europe – InterconnectorUK (IUK) and the Balgzand Bacton Line (BBL) that link Bacton gas terminal with Zeebrugge and Balgzand in The Netherlands. IUK has a UK export capacity of 20 bcm/year (55 mcm/ day) and an import capacity of 25.5 bcm/year with the import/export mode determined by the relative strength of the prompt NBP and Zeebrugge hub prices. BBL has a capacity of 19.2 bcm/year and has a regulatory exemption to UK imports until October 2018.

While the UK benefits from diverse gas supplies (UK Continental Shelf production, Norway imports and LNG), imports are a valuable source of flexible supply and can accountforasmuchas20%ofsupplyduring peak demand periods. But unlike electricity, where UK and Continental European prices are poorly correlated, there is appreciably more interdependence between the UK and European gas markets. The relative strength of the NBP is a major price driver of the key Zeebrugge and TTF (Title Transfer Facility) hubs in Belgium and the Netherlands as it determines UK export flows, while Norwegian exports to Europe can be redirected to NBP when the NBP price is comparatively strong. This gas interdependence is expected to increase in the medium to longer-term with a growing gas-for-power demand as coal plant is displaced, and as indigenous gas resources are depleted and replaced by increasing pipeline natural gas and LNG imports.

Consequently, any regulatory restrictions placed on UK electricity imports from France and Netherlands could increase the call on gas-fired generation, with higher gas for power demand supporting NBP gas prices which in turn would support TTF gas prices.

The irony is that it was the UK that pushed for the development of a single energy market that is now benefiting European businesses and households, with this Brussels’ briefing displaying a worrying blinkered arrogance that could have greater cost implications on EU businesses. But there is no black and white solution; both sides need to compromise to achieve reciprocal benefits. This is particularly true of the energy sector which underpins economic growth. 

Author information: Jeremy Wilcox is managing director of the Energy Partnership*, an independent Thailand-based energy and environment consulting firm 

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