UK resets power trading relationship with the EU

Power trading in northwest Europe is set to change thanks to recharged relations between the UK and EU, announced at a summit last month. Like electricity surging through a low-resistance cable, frictionless power trading allows energy to flow faster, cheaper and more efficiently. The reconnection of these power markets could do just that – reducing waste and smoothing the path for a more integrated, lower-cost energy future. In the long run, this should cut consumer costs on both sides of the interconnectors, but it could spell losses for traders who have profited from cross-border trade in the wake of Brexit.

Since leaving the European Union Internal Energy Market (EU IEM) at the end of 2020, the British power market has had less efficient trading arrangements with Ireland and the continent. As we can see from the chart below, power flows predominantly go from the European continent and Norway into GB and then to Ireland.

Fig.1 - positive power flows from interconnectors into GB. Image: Montel Analytics

The majority of interconnector flows between Britain, Ireland and mainland Europe operate on “explicit allocation” – traders buy interconnector capacity and then trade power on either side. In contrast, the EU IEM uses “implicit allocation”, where the allocation of capacity is taken care of by a single day-ahead coupling algorithm, reducing costs and increasing efficiency.

This means moving power from the continent into GB is more expensive than for the rest of Europe, which has added significantly to consumer costs in Britain. During the 2022 energy crisis, Energy UK estimated that British consumers collectively paid up to GBP 350m extra per year because of inefficient arrangements. The chart below shows the extrapolated extra cost over the past four years, based on a 2023 report by the trade association that explicit allocation adds 0.25-0.70% to wholesale energy prices.

volume of solar generation by month in Europe — Fig.2 - annual cost of explicit interconnection to consumers. Image: Montel Analytics

UK energy policy: realigning with the EU

With the UK government that was elected in 2024 keen to reset ties with the EU, May’s summit brought two key developments. The first: a deal to align the UK and EU emissions trading systems, removing the threat of carbon levies on cross-border trade. The second: a commitment to “explore UK participation in the EU’s electricity trading platforms” – signalling a possible return to market coupling in the EU IEM.

At present, most GB interconnectors still use legacy arrangements put in place in the 1990s and 2000s. The switch back to market coupling, especially for the day-ahead market, would simplify trading, bring down prices and benefit consumers on both sides.

Gains and losses

In the short term, GB consumers stand to gain from re-entry. Over time, EU consumers will benefit as well – especially with the UK investing heavily in renewables and new nuclear to deliver a clean power system by 2030. The charts below show how this will change the relationship between GB and its continental neighbours.

Fig.3 - Medium case interconnector buildout into GB market. Image: Montel Analytics

Fig. 4 - Renewable buildout for Clean Power under UK 2030 plan (source Neso). Image: Montel Analytics

As GB’s renewable output surges, it will increasingly export surplus power to the continent. Efficient market coupling will allow European consumers to access this surplus at a lower cost.

But not everyone wins. Much of the volume on these interconnectors is traded by specialist traders in Denmark, Germany and the Netherlands, as seen in the chart below. Traders who currently exploit pricing differences across interconnectors could see their profits reduced. Interconnector operators may also lose out, as market coupling algorithms allocate capacity more efficiently.

Fig.5 - Volume on explicit UK interconnectors

Complex transition

Fully rejoining the IEM will not be quick or simple. Alongside integrating with the single day-ahead auction, the systems would need to harmonise intraday auctions, continuous trading and balancing platforms such as TERRE, MARI and Picasso. Differences in market resolution – with GB operating on 30-minute products and the EU moving to quarter-hourly – add another layer of complexity. Day-ahead trading is likely to be the first milestone, as most volume is traded here. However, further steps will take time, involve changes to interconnector access rules, and need extensive technical development and market consultation.

There are political hurdles too. If the UK rejoins the IEM, this may mean that Switzerland has legitimate questions about why they are excluded. With the UK and EU only committing to exploring options for now, substantial negotiation lies ahead. Given all this, the start of a phased return of the GB market to the EU IEM is unlikely to be faster than a couple of years away.

The politics will be interesting and the reintegration process could yet provide plenty of twists. But with the right agreements, both consumers and the energy system stand to gain in the long run – even if a few winners from the post-Brexit trading era find the road ahead a little bumpier. Just as an electrical system functions best when resistance is minimised, Europe’s power system thrives when energy flows unhindered across borders – efficiently, economically, and in sync with shared goals.

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This article originally appeared as a column on montelnews.com