In March 2019, the UK is due to leave the EU, raising a concern for experts who believe that a “hard Brexit” or “no-deal exit” would also mean that they pull out from the Internal Electricity Market (IEM). The IEM allows electricity to be traded and transmitted seamlessly across national borders.
Current Brexit negotiations should ensure that there is an “agreement to no tariffs on energy trading, efficient trading arrangements across interconnectors, and cooperate on developing markets for shared balancing services”, as said in a missive dated 4 September, signed by CEOs from ten leading energy companies and trade associations.
British politicians understand that “any imposition of tariff or non-tariff barriers to the flows of energy across interconnectors would increase the cost of the low carbon transition and set back action on climate change,” as written further in the same letter. There is a higher chance that, despite Brexit, the UK will remain in the IEM.
As of September, 6 percent of the electricity supply to the UK comes from intercontinental cables (4GW capacity) linking the region to France, the Netherlands, and Ireland. This rate will go up to 20 percent with the installation of new interconnectors adding from 8 to 14GW of capacity; linking the UK to Belgium, Norway, Denmark, and potentially Iceland.
Interconnectors can help the UK become more competitive but could also bring a potential tightness of supply when the UK exports their production. Genscape's PowerRT shows that the UK mainly imports electricity from the continent via France (Figure 1: 2GW IFA cable UK-FR) or the Netherlands (Figure 2: 1GW BritNed cable UK-NL) during baseload hours across the year.
Peak power during the winter in the UK normally has a narrow- to-no-spread with spikes during Q’1 or Q’4 in France, Belgium or the Netherlands. Due to the lack of premium and market-coupling mechanisms, the border flows can flip in favor of Belgian, French or Dutch imports during peak hours, while the UK needs it the most. This causes prices to spike to even higher levels.
On top of challenging the UK system during winter, the flow of cheaper electricity from the continent may pose grid operator, National Grid, to balance problems in the summer. The continent drastically increases its wind and solar capacity, which in turn leads to negative balancing prices in times of low demand. Adding interconnector capacity, such as the 1GW NEMO cable UK-BE, contributes to depressing forward summer contracts.
These are some of the challenges the UK faces ahead of the Brexit. Negotiations are complex and far from finished. Genscape’s analysts will continue to follow the power market impacts as we approach March 2019. Please feel free to click here and request a trial of the PowerRT platform to better understand the changes in aggregated flow levels and overall market dynamics.