Beyond Brexit: food, environment, energy and health Contents

Chapter 5: Energy and carbon pricing

Background and context

170.As an EU Member State the UK played a leading role in developing EU energy policies. These in turn shaped how the UK could pursue secure, affordable, and clean energy supplies.

171.The EU Internal Energy Market (IEM) is central to EU energy policy, and has been developed through the closer linking, or integration, of European electricity and gas markets. The IEM includes arrangements for electricity and gas to be traded efficiently over the cables and pipelines between national markets, which have helped to reduce consumer prices. In the case of electricity, the arrangements have also enabled larger amounts of intermittent renewable energy to be accommodated without affecting the stability of electricity systems. See Box 2 for an explanation of the technical terminology relating to cross-border electricity trading which is used throughout this Chapter.

172.Above and beyond integration through the IEM, since 2007 Northern Ireland and Ireland have shared a wholesale electricity market, known as the Single Electricity Market (SEM). The SEM is a single market with a common set of rules, delivering more effective competition than would be possible in two smaller, separate markets, and enabling Northern Ireland and Ireland to rely on each other’s electricity generators—such as power stations—for security of supply. Despite the UK’s withdrawal from the IEM, the SEM is maintained by the Withdrawal Agreement’s Protocol on Ireland/Northern Ireland.

Box 2: Cross-border electricity trading

There are different models for trading electricity over the high-voltage cables between national markets and a number of technical terms used to describe them.

The cables between markets are known as interconnectors, and traders pay to transmit electricity through them by buying capacity. Interconnectors connect Great Britain’s electricity market to continental Europe and to the SEM on the island of Ireland.

Electricity can be traded across the interconnectors explicitly, where the electricity and capacity are bought and sold separately, and implicitly, where these are bought and sold together. Explicit trading tends to be inefficient because traders have access to less information when purchasing the two commodities separately. This results in interconnectors sometimes moving electricity from a more expensive market to a cheaper market, which can contribute to higher consumer electricity prices.

Market coupling is a way to integrate two or more electricity markets where an implicit auction is organised through the cooperation of power exchanges, which are commercial entities who facilitate the trade of electricity. There are different methods. In the case of volume coupling, the power exchanges use an algorithm to determine the flow of electricity between the markets. In the case of price coupling, an algorithm determines the prices of electricity in those markets as well as the flow of electricity between them. Price coupling relies on more information, is the more efficient of the two methods, and is used in the IEM.

Electricity can be traded well in advance of when it is delivered onto the system by a generator, or close to the moment of delivery. The different timescales for electricity trading are known as the forward (or long-term), day-ahead, intraday, and balancing market timeframes. In the IEM, the integration of European markets across these market timeframes has been led by different projects.

173.The UK was part of the IEM’s price coupling arrangements for cross-border electricity trading as an EU Member State, but left the arrangements at the end of the transition period. Great Britain is currently trading electricity with continental Europe and with the SEM through less efficient arrangements.

174.The EU Emissions Trading System (EU ETS, see Box 3) is one of the EU’s main policies for combating climate change, and has been a key lever for reducing carbon dioxide emissions from the generation of electricity and heavy industry. It is a market-based instrument that puts a price on emissions to encourage reductions—an approach known as ‘carbon pricing’.

Box 3: EU Emissions Trading System (EU ETS)

The EU ETS is a ‘cap and trade’ system designed to encourage emissions reductions. There is a cap set on the total amount of greenhouse gases that can be emitted by the sectors covered. Within the cap, companies receive or buy emission allowances, and each year a company must provide enough allowances to cover all its emissions.

Source: European Commission, ‘EU Emissions Trading System (EU ETS)’: https://ec.europa.eu/clima/policies/ets_en [accessed 16 February 2021]

175.The UK participated in the EU ETS while it was an EU Member State, but the 2020 scheme year—which ends on 30 April 2021—will be the last for which UK participants have obligations to the scheme. The Government has announced that the UK’s post-Brexit carbon pricing policy will primarily be delivered through a UK Emissions Trading Scheme (UK ETS). The first auction of allowances for the new scheme is scheduled for 19 May 2021.186

176.The regulation of nuclear power generation is another important aspect of EU energy policy, as many Member States rely on nuclear power to meet their energy needs. The European Atomic Energy Community (Euratom) was founded to contribute to the formation and development of Europe’s nuclear industries, guarantee high safety standards and prevent nuclear materials intended principally for civilian use from being diverted to military use. The UK joined Euratom on 1 January 1973 and since then the UK’s use of civil nuclear material has been regulated through Euratom. Euratom is a distinct legal entity from the EU but they have a shared institutional framework. The UK left Euratom in parallel to leaving the EU.

The Trade and Cooperation Agreement

177.The EU-UK Trade and Cooperation Agreement (TCA)187 includes a Title on energy. There are also provisions which affect the energy sector in other parts of the TCA, and the UK and Euratom concluded a separate Nuclear Cooperation Agreement (NCA).

178.Article ENER.14(1)188 of the TCA provides for new cross-border electricity trading arrangements to be developed for the day-ahead market timeframe—that is, electricity traded one day before it is delivered—based on volume coupling. The TCA sets out a process and timeline for the new arrangements to be developed, with a key role for transmission system operators (TSOs)189 and a deadline of 1 April 2022. Article ENER.14(3) provides for the review and improvement of cross-border electricity trading at the other market timeframes.

179.Article ENER.15 sets out requirements for the efficient use of gas interconnectors. Cross-border trading of gas can continue without significant change to existing arrangements.

180.The TCA also places a number of requirements on both Parties, including that they must:

181.The TCA foresees technical cooperation between the UK and EU on a range of energy issues. A Specialised Committee on Energy is established by Article INST.2, which can take decisions on how certain energy aspects of the TCA should be implemented. Article ENER.23 provides for cooperation on the development of offshore renewable energy with reference to the North Sea.

182.A termination clause in Article ENER.33 means that the energy Title will cease to apply on 30 June 2026, though from then onwards the two Parties can extend the application of the Title: on the first occasion for up to nine months, and then each year but only until 31 March of the following year on each occasion.

183.Article 7.3 of the TCA’s level playing field Title requires both Parties to have effective systems of carbon pricing in place, and to seriously consider linking their respective carbon pricing systems—which at present are the UK and EU ETSs.

184.In addition to the TCA, the UK and Euratom agreed an NCA to replace the shared arrangements that had been in place under Euratom.

Overarching reaction

185.Initial commentary on the TCA’s energy and carbon pricing provisions emphasised the importance of how they are implemented. Ofgem, Great Britain’s gas and electricity regulator, told us: “A lot of the detail relating to energy is still to be determined and the success of the TCA will depend on the ability to resolve these points effectively with our European partners.”191 Chatham House, the University of Warwick and the UK Energy Research Centre (UKERC) agreed, and added that negotiations on replacement regimes for energy and carbon pricing could last “for some years to come”.192

186.Emma Pinchbeck, Chief Executive of Energy UK, raised concerns about the Government’s capacity to implement the TCA: “I am particularly worried about bandwidth in Government to deliver both our domestic priorities and what is in the TCA.”193 She called for implementation timetables to be provided for the TCA’s different energy and carbon pricing commitments: “There is only one bit of the TCA where there is an explicit implementation timetable, which is around the market coupling ideas, but we would like that for other commitments.”194

187.On the NCA agreed between the UK and Euratom, she told us it includes all of the key elements her organisation had originally put forward and confirmed: “We are happy with it. The nuclear industry is happy with it.”195

188.For energy policy especially, success of the TCA depends critically on implementation and further negotiation. The UK and EU should, where possible, jointly set out their ambitions, processes and timetables for delivering the TCA’s energy and carbon pricing commitments. We urge the Parties to proceed with the necessary resources and goodwill to ensure timely and positive outcomes.

189.We welcome the Nuclear Cooperation Agreement agreed between the UK and Euratom, which provides an underpinning for civil nuclear cooperation in the future.

Termination of the energy Title

190.The date specified in the termination clause on energy, 30 June 2026, is the same as that on which the transitional agreement on fisheries will come to an end. This has prompted news reports suggesting that discussions under the termination clause could be linked with future negotiations over fishing rights.196 On the clause, Paul Dawson, Board Member of the European Federation of Energy Traders (EFET), told us “it clearly does not help”,197 and Emma Pinchbeck added: “It is worrying that that termination clause is in there … We are not yet clear on whether that termination clause is just about the articles in the TCA that are to do with energy or whether there is some relationship between that termination clause and others in the TCA for things like fisheries.”198

191.Rt Hon George Eustice MP, Secretary of State for the Environment, Food and Rural Affairs, commented: “We think it is actually highly unlikely that the EU would want to be able to [link negotiations on energy trading and fishing], since that energy trading is also in its interest. While it did introduce that as an additional feature, we think it is highly undesirable to the EU to use that.”199

192.Emma Pinchbeck also told us that “it is not yet clear whether the termination clause is undermining investor confidence in the UK”, but noted that long-term certainty is important for the energy industry.200 Paul Dawson suggested that the best mitigation was to proceed with implementation:

“The best thing that we can do is just to crack on with the cooperation promised and develop these new arrangements, including the cooperation between the regulators and TSOs. Hopefully, in five years’ time, we will have a level of cooperation that is so good that termination becomes unthinkable.”201

193.The Energy Minister, Rt Hon Anne-Marie Trevelyan MP, argued that “it is normal for free trade agreements to have termination clauses”.202 She added: “The agreement on energy is mutually beneficial to the UK and the EU … We are confident that both the UK and the EU will see the benefits of energy cooperation over the next few years.”203

194.We share the energy industry’s concern that the termination clause could undermine investor confidence in large energy projects. It is in the interests of both the UK and EU to maintain close energy cooperation further into the future, and swiftly to implement the TCA’s energy and carbon pricing provisions in the meantime.

195.The Secretary of State’s assertion that the EU was unlikely to link energy and fishing negotiations in the future was somewhat undercut by his acknowledgement that the EU introduced such a linkage into the TCA.

Cross-border electricity and gas trading

Initial effects

196.Ofgem explained how cross-border electricity trading had changed with the end of the transition period: “GB’s electricity interconnectors to continental Europe have switched to less efficient explicit day-ahead trading arrangements. Capacity on GB’s interconnectors to the [SEM] is allocated via implicit intraday auctions only.”204 Energy UK and Chatham House et al highlighted that these initial arrangements would be less efficient,205 as did Matt Hinde, Head of EU Affairs at National Grid, who suggested that the reduced efficiency would have a cost for consumers.206

197.A number of organisations raised concerns that the two power exchanges in Great Britain have also uncoupled following the end of the transition period.207 Energy UK explained:

“Leaving the IEM on 1 January … [led] the legislation that supported the coupling of the Day-Ahead market in GB to fall away. This means GB power exchanges no longer share order books to deliver a single day ahead price. This has led to the two day ahead auctions often clearing at different prices, leading to additional risk for market participants (especially renewable generators) and ultimately additional cost for customers.”208

198.Ofgem noted that cross-border gas trading should continue without significant changes: “The TCA does not lead to a fundamental change in the way GB trades gas with Europe and the island of Ireland. It provides the basis for continued trade in gas with the neighbouring EU Member States.”209

199.We are concerned that consumer electricity prices could increase due to the inefficiency of the initial cross-border electricity trading arrangements between Great Britain and continental Europe and the island of Ireland, and the uncoupling of Great Britain’s two power exchanges. The Government, Ofgem, and Northern Ireland’s Utility Regulator should monitor closely for price rises, and consider taking mitigating actions if necessary.

200.The Government should explore options for recoupling Great Britain’s two power exchanges while the new day-ahead trading arrangements—which should resolve this issue—are being developed.

New day-ahead electricity trading arrangements

201.Ofgem described the new arrangement envisaged in the TCA for cross-border electricity trading at the day-ahead timeframe: “The TCA looks to introduce a new form of implicit coupling in the day-ahead timeframe, in the form of ‘Multi-region loose volume coupling’. This is where the volume traded between bidding zones is calculated, then the prices are calculated separately.”210

202.Witnesses told us that trading based on this model offers some promise, though it will not be as efficient the IEM’s existing trading mechanisms. Professor Silke Goldberg, partner at Herbert Smith Freehills LLP, said that while multi-region loose volume coupling “may be more efficient than no coupling at all, it will nevertheless be less efficient than the price coupling from which the GB electricity market benefited until the end of the transition period”.211 Paul Dawson explained why:

“It is clearly not going to be quite the same as optimising all of the flows across European interconnections at the same time. If you are doing the UK and its interconnected parties first and then doing Europe later, that gives rise to potential inefficiencies and scheduling errors, where you would have sent power in one direction rather than the other.”212

203.Witnesses raised concerns that the reduced efficiency of the arrangements could affect consumers. Paul Dawson told us: “There is no getting away from the fact … that these are not quite as good as the arrangements that we have just left in terms of cost to consumers.”213 Emma Pinchbeck said a precise estimate of the possible impact on consumer bills could not be given because “it is quite difficult to work out”.214

204.We heard that the timeline for developing the new model will be demanding. Emma Pinchbeck urged: “It is challenging, so we need to get going.”215 Which? said: “It is important for consumer prices that this timetable does not slip.”216

205.The Energy Minister told us that the Government issued letters to UK TSOs on 22 January 2021 asking them to develop the draft technical procedures for calculating and allocating capacity to ensure efficient trade over electricity interconnectors. The letters had been supplemented by guidance from the Secretary of State which “provides further details on cost sharing and recovery so that TSOs and power exchanges can enter into appropriate contracts as quickly as possible”.217

206.We welcome the fact that the TCA envisages a return to more efficient day-ahead cross-border electricity trading arrangements. It is disappointing, though perhaps expected, that these will be less efficient than the EU Internal Energy Market’s trading mechanisms and could affect consumer prices. We urge the Government and other involved parties to develop the new arrangements with urgency.

Trading electricity cross-border at other market timeframes

207.Ofgem welcomed the TCA provisions on improving arrangements at two of the other electricity market timeframes: “The TCA also allows for additional harmonisation of trading rules in the long-term and intraday timeframes, which we consider important further developments, and would encourage these to be in place as soon as possible to further enhance today’s arrangements.”218

208.There does, however, appear to be uncertainty over the UK’s position with respect to the EU’s cross-border balancing services. Balancing describes actions taken close in time to the delivery of electricity to ensure that supply and demand match, and national electricity systems remain stable. Ofgem told us: “As it stands, legislation does not block GB participation in the EU standard balancing platforms, but uncertainty over future arrangements is making industry parties unwilling to put resource into continuing development of their systems to be able to participate in them.”219 Ofgem set out possible solutions and stressed that the Specialised Committee on Energy should provide guidance on this issue.220

209.We urge the Government and the EU to focus on improving cross-border electricity trading arrangements across the market timeframes, and to provide guidance through the Specialised Committee on Energy on the current position and future plans for cross-border balancing services.

Linking emissions trading systems

210.Emissions trading systems (ETSs) can be linked to create a bigger market for the trading of emission allowances. Witnesses supported the UK and EU linking ETSs. Paul Dawson told us: “We see linking of the UK and EU schemes as an urgent issue.”221 Emma Pinchbeck explained why: “What makes emissions trading really effective is market liquidity and a stable price. The bigger and more liquid the market, the less volatile and more efficient it is. Industry’s position was always for a linked ETS.”222 Greener UK also expressed support for a UK-EU linking agreement.223

211.Linking ETSs was seen as an opportunity for the UK and EU to show global climate leadership. Paul Dawson argued: “There is a leadership issue there in that link being the signal for more linkage and more international cooperation on carbon pricing. COP26224 is later this year in Glasgow, so this is a great time to do it.”225

212.Ofgem were more cautious and argued that a link could constrain the limit on emissions—otherwise known as the cap—that could be set for the UK ETS: “The UK cap would need to consider the EU market, potentially limiting UK’s ability to quickly decarbonise … In principle, we support linking with other ETS schemes, as long as they have an emissions cap determined by a pathway to net zero.”226 The EU institutions are currently discussing a proposed European Climate Law which would establish a binding ‘net zero’ objective—that is, for union-wide greenhouse gas emissions and removals to be balanced by 2050.227

213.The Government said in its recent Energy White Paper that “the UK is open to linking the UK ETS internationally in principle and we are considering a range of options, but no decision on our preferred linking partners has yet been made”.228 Emma Pinchbeck questioned the logic of linking to a system other than the EU ETS: “To us, that does not make much sense … Carbon markets vary hugely, but the UK ETS was designed to look like the EU ETS, so there is already a degree of similarity that would make linking very easy.”229

214.We share the view of industry and environmental groups that the UK and EU should prioritise linking emissions trading systems, and should jointly set out a timeline for the discussions. This is an opportunity—which the Government should take—to show global leadership on climate change ahead of COP26. We hope that the EU’s proposal for a binding ‘net zero’ objective will be passed, allowing any linkage of the two schemes to be aligned with that objective.

Cooperation on renewable energy in the North Sea

215.Witnesses welcomed the TCA’s provisions regarding cooperation on renewable energy in the North Sea, given the UK and EU’s plans for future development. Energy UK told us:

“The UK government has an ambition of building 40GW of offshore wind generation in the North Seas by 2030 … The EU aims to create over 250GW of renewable energy in the northern seas. Without cooperation platforms in place between TSOs, regulators, standard bodies and energy companies, we are at risk of seeing two gigantic projects being developed in parallel and in exclusion of one another.”230

Matt Hinde agreed: “The scale of the challenge and the opportunity in the North Sea are enormous … That needs coordination.”231

216.Emma Pinchbeck emphasised that the TCA provisions were positive but did not provide for UK participation in the existing North Seas Energy Cooperation initiative (see Box 4): “At the moment, it is a recommendation to start a new forum rather than join the existing body that is seeking to do coordination in the North Sea … It might be better to try to get a seat back at the table of the existing forum, where there are already conversations in progress.”232

Box 4: North Seas Energy Cooperation initiative

The North Seas Energy Cooperation initiative facilitates the development of the offshore electricity network development and the large renewable energy potential in the region. It meets at a ministerial level, but also has working-level support groups focused on:

  • hybrid and joint projects, which connect wind farms to more than one electricity market;
  • maritime spatial planning;
  • support framework and finance; and
  • delivering 2050.

The current members of the initiative include Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden and the European Commission.

Source: European Commission, ‘The North Seas Energy Cooperation’: https://ec.europa.eu/energy/topics/infrastructure/high-level-groups/north-seas-energy-cooperation_en [accessed 16 February 2021] and European Commission, ‘Work programme 2020–2023’: https://ec.europa.eu/energy/sites/default/files/work-programme2020–2023.pdf [accessed 16 Feb 2021]

217.The Energy Minister described the provisions in the TCA as an agreement to “establish a specific forum for cooperation, similar to the previous North Seas Energy Cooperation, that will cover the same workstreams”.233 She added: “We are working closely with the EU to ensure cooperation mechanisms are established as soon as possible.”

218.While the relevant article in the TCA is focused on offshore renewable energy, Matt Hinde said other energy activities in the North Sea will be important in future: “Moving forward, carbon capture and storage, and potentially hydrogen, are part of the North Sea picture as well.”234

219.We welcome the TCA’s provisions on cooperation on renewable energy in the North Sea, given the importance of this area to decarbonisation. We nonetheless regret that the TCA does not provide for UK participation in the existing North Seas Energy Cooperation initiative. We urge the Government to seek such participation, and hope the Parties will cooperate closely in the meantime. We also support close cooperation between the Parties on renewable, sustainable energy beyond the North Sea.


186 Department for Business, Energy and Industrial Strategy, ‘Participating in the UK Emissions Trading Scheme (UK ETS)’: https://www.gov.uk/government/publications/participating-in-the-uk-ets [accessed 2 March 2021]

188 This is Article 14 in the versions of the TCA available at the time of writing, however the preceding and succeeding articles are Article ENER.13 and Article ENER.15 respectively so the omission of ‘ENER.’ appears to be a typographical error.

189 TSOs transmit power from its generation source to local distribution system operators.

190 Non-discrimination is defined in Article ENER.2(2) as: “Treatment under terms and conditions no less favourable than that accorded to any other like entity in like situations”. The same Article also refers to the definition of non-discrimination in Article SERVIN.2.4, which states that investors of the other Party and relevant businesses should be treated no less favourably in relation to establishment and operation in a territory than the treatment given to investors and relevant businesses of a third country by the Party in comparable situations.

191 Written evidence from Ofgem (EEH0022)

192 Written evidence from Chatham House and UKERC (EEH0011)

196 iNews, ‘Brexit deal gives EU right to cut off energy supplies if UK tries to ‘take back control’ of fishing in 2026’, 30 December 2020: https://inews.co.uk/news/brexit/brexit-deal-eu-energy-fishing-rights-take-back-control-812197 [accessed 16 February 2021]

198 Ibid.

201 Ibid.

202 Written evidence from the Department of Business, Energy and Industrial Strategy (EEH0042)

203 Ibid.

204 Written evidence from Ofgem (EEH0022)

205 Written evidence from Energy UK (EEH0009) and Chatham House and UKERC (EEH0011)

207 Q 37 and written evidence from Ofgem (EEH0022)

208 Written evidence from Energy UK (EEH0009)

209 Written evidence from Ofgem (EEH0022)

210 Ibid.

211 Written evidence from Silke Goldberg (EEH0036)

216 Written evidence from Which? (EEH0032)

217 Written evidence from the Department of Business, Energy and Industrial Strategy (EEH0042)

218 Written evidence from Ofgem (EEH0022)

219 Ibid.

220 Ibid.

222 Ibid.

223 Written evidence from Greener UK (EEH0030)

224 COP26 is the 26th meeting of the Parties to the United Nations Framework Convention on Climate Change.

226 Written evidence from Ofgem (EEH0022)

227 European Commission, Proposal for a Regulation of the European Parliament and of the Council establishing the framework for achieving climate neutrality and amending Regulation (EU) 2018/1999 (European Climate Law) COM(2020) 80

228 Department for Business, Energy and Industrial Strategy, Energy White Paper, Powering our Net Zero Future, CP 337, December 2020, p 129: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/945899/201216_BEIS_EWP_Command_Paper_Accessible.pdf [accessed 24 February 2021]

230 Written evidence from Energy UK (EEH0009)

232 Ibid.

233 Written evidence from the Department of Business, Energy and Industrial Strategy (EEH0042)




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