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In the wake of Brexit, Europe is understandably loathe to see Britain have its cake and eat it when it comes to trade arrangements. In the case of the electricity market, such caution risks leaving both sides worse off.
There are good reasons to favour a simple trading agreement. At the peak of the 2022 European energy crisis, electricity traded between the UK and European Union helped keep Europe’s lights on. But Brexit has created inefficiencies that cost the UK an estimated £250mn in 2021.
Roughly speaking, when the UK was in the EU internal energy market, a computer algorithm determined the most cost-efficient way to trade electricity. This still happens in the EU. But traders in Britain now use a more complex system called “explicit trading”, where capacity on subsea cables and electricity generation are auctioned separately — like buying a product but booking delivery apart.
An alternative known as “multi-region loose volume coupling” has proved as complex as its name suggests. A recent European working paper acknowledged this replacement system may not be ready before June 2026, when the EU-UK Trade and Cooperation (TCA) Agreement expires and energy relations must be reviewed.
Renewable energy raises the stakes. A group of countries around the North Sea — as well as companies including the UK’s National Grid and Belgium’s Elia Group — want to expand power trading across Europe through an offshore “green energy hub”. This would link wind farms in the North Sea via subsea cables not just to one country (as at present) but several so their output could flow to where demand, and prices, were higher.
But the imperfections of post-Brexit electricity market arrangements are making some potential investors behind the green energy hub nervous, owing to the difficulties they create in forecasting possible revenues. It’s a prime example of where pragmatism should trump politics in this year’s UK-EU “reset” talks.
The mood music is not encouraging. Brussels is advising member states not to allow the UK deeper access to the bloc’s electricity markets, the Financial Times reported in December. This is despite an earlier plea by electricity companies and trade organisations for the rewriting of the “suboptimal” post-Brexit arrangements.
Of course there is always much posturing before negotiations. But some investors believe there are possible commercial agreements that could let UK parties access the algorithms that enable smoother trade, without overstepping either the UK or EU’s post-Brexit comfort zones.
These should at least be explored by policymakers if both sides want investors to stump up to meet decarbonisation goals. Principles matter; keeping the lights on — sustainably — matters more.
