Cross border trading – Electricity interconnectors and Offshore Hybrid Assets
In simple terms, cross border trading allows the international trade of electricity from one electricity grid to another.
Since 1986, Great Britain and Europe have shared electricity across their borders though high-voltage cables called electricity interconnectors. This sees electricity flowing to the market that has higher prices. This includes selling low-cost generation to high-cost demand centre which determines flow direction. To date, we have nine electricity interconnectors between GB to continental Europe, Ireland, Northern Ireland and Norway.
Offshore Hybrid Assets (OHA) also referred to as Multi-Purpose Interconnectors allows clusters of offshore wind farms to connect directly to the electricity interconnector itself and essentially plug into the electricity grid of neighbouring countries.
OHAs also aims to connect the GB and Europe to clusters of wind farms in the North Sea; thereby, unlocking the potential of the North Sea ‘powerhouse’ whilst minimising the infrastructure required to do. LionLink is the unique project being developed to connect offshore wind between GB and Netherlands.
Benefits of Cross Border Trading
Cross border trading can offer considerable benefits in light of the energy trilemma. With a focus on benefits for neighbouring countries and consumers, cross border trading can help with the following:
- Lower electricity prices for consumers
- Lower the cost of delivering security of supply during months of winter
- Support the Net Zero and decarbonisation of energy supplies with the move away from natural gas
Notably, electricity interconnectors can be used to deliver the smart and flexible services required to manage the system more efficiently. These include frequency response and reactive power reserve.
How does cross border trading take place?
Customers of electricity interconnectors who want to buy capacity can include energy companies, banks, and traders. Customers have different reasons for using interconnector services. For example, an energy company may wish to get the rights to flow their own power across the border between GB and France. An energy broker or trader may wish to simply make money by speculating on the value of the capacity across the different auctions.
Capacity products are offered in three different timeframes where a customer can buy or sell. These include:
- Forward and Futures Market – Long Term Auctions are held for Annual, Quarterly and Monthly capacity
- Day-Ahead Market – Customers can buy or sell daily electricity for the 24h of the next day in (hourly) blocks
- Intra-day Market – After the day-ahead market is cleared, the intraday market opens. This allows customers to buy and sell capacity on the same day
Pre and Post Brexit Trading
Prior to the 1st of January 2021, the GB electricity market was part of the EU Internal Energy Market, where customers used interconnector services to buy or sell a bundled product of energy and capacity known as implicit arrangements. These arrangements also allowed a single GB day-ahead clearing price was created; ensuring interconnector flows were efficiently calculated.
Enter post-Brexit arrangements. There is now a de-coupling of GB market and the loss of a single GB Day-ahead clearing price. As electricity is no longer traded through the EU market coupling regime, the channel interconnectors have reverted to explicit capacity allocation. This means customers use interconnector services to buy or sell capacity and energy separately, and they are required to choose a specific interconnector and flow direction.
The Single Energy Market-Great Britain (SEM-GB) interconnectors across the Irish Sea use a form of market coupling (implicit capacity allocation) based on intraday auctions. The North Sea Link interconnector between GB and Norway uses day-ahead market coupling (implicit auctions) which operates alongside, but not as a part of, the EU market coupling regime.
The Power Exchanges operating in GB, EPEX Spot and Nord Pool, are now fully operating separated day-ahead markets, settling, and clearing at prices independent of each other.
Current Developments and Future Outlook
Trade and Cooperation Agreement & North Seas Energy Cooperation
Following Brexit, the Trade and Cooperation Agreement (TCA) obliges the UK and EU to ensure the most effective use of electricity interconnectors by the implementation of new trading arrangements. This is based on implicit arrangements on the concept of Multi-Region Loose Volume Coupling (MRLVC) with the objective of maximising the benefits of energy trade. The agreement requires reliable and effective outcomes for all relevant timescales of timescales forward, day-ahead, intraday, and balancing. The TCA lays out the framework for these new arrangements, and it prioritises day-ahead timeframe for the trade of electricity based on MRLVC.
The December 2022 agreement of Memorandum of Understanding on renewable energy development in the North Sea region between the UK and North Seas Energy Cooperation (NSEC) countries is a key milestone for net zero and energy security. This sees the need for UK and EU to develop efficient cross-border trading arrangements with a focus on renewables in the North Sea region, drive low-carbon investment. Therefore, it expected to see further development of OHAs in North Seas area.
Net Zero Market Reform – locational pricing assessment
As part of the assessment of locational wholesale electricity market design options, the operational impact on flexibility resources under nodal pricing are being processed[1]. To date, the cost benefit analysis assumes nodal pricing option would change interconnector flows between GB and neighbouring countries. The outcome of the market design options (national, zonal or nodal pricing) for electricity market design in GB is expected to change electricity interconnector behaviours in the future.
Conclusion
Electricity interconnectors and OHAs are key to achieving our Net Zero 2050 and energy security targets. Our challenge as the CBMA team in Ofgem is to work with Transmission System Operators, market participants, and UK and EU institutions to ensure that the market arrangements used by these assets support competition, security of supply and Net Zero.
About the Author
Mertcan Agir is a Senior Policy Lead on Cross-border Market Arrangements at Ofgem over the past four years.
His experience includes a key focus on policy development and delivery for cross border market arrangements, along with previous experience of the offshore regime and smart meter compliance. He is a lead champion for diversity, inclusion and well-being at Ofgem.
