Draft Electricity Trading (Development of Technical Procedures) (Day-Ahead Market Timeframe) Regulations 2021

Alan Whitehead Excerpts

Tuesday 18th May 2021 General Committees

[Dr Alan Whitehead (Southampton, Test) (Lab)]

We have no issue with the thrust of the proposals in the draft SI. They are sensible in terms of the regulation and ordering of the passage of electricity both ways through interconnectors, so that the UK can trade across interconnectors, and all the countries associated with them, coherently. I might add that, of course, not all UK interconnectors go to EU countries. Although the arrangements are essentially a partnership between the UK and EU countries, one interconnector goes to Norway, which is not a member of the EU. I understand, however, that it falls within these rules as they stand for the purpose of its end of interconnectors for the future.

This SI, however, is shrouded in such a huge mosquito cloud of acronyms that it is difficult to understand exactly what is going on. I think I understand what the proposals purport to do overall, and I want to ask the Minister a couple of questions, on the basis of my understanding, about how other actions the UK may now be undertaking fit in with this particular proposal. To give hon. Members a brief example of what I am talking about, I shall take a paragraph at random from the explanatory memorandum, which states:

“Ahead of this, the United Kingdom secured the TCA with the European Union. Title VIII (Energy) and Annex ENER-4 of the TCA set out requirements for the development of new cross-border electricity trading arrangements at the day-ahead market timeframe that are distinct and separate from those established under CACM.”

I am sure we are all clear about that, are we not. What I take from that paragraph, and the rest of the explanatory memorandum, is that this SI is about cross-border trading. It is about ensuring that cross-border trading is regulated and organised in a way that is not only advantageous for prices, but is advantageous for the judicious use of capacity in interconnectors. It organises the day-ahead market in a much better way than would be possible were, for example, people to be auctioning both capacity and flow on different occasions.

As I am sure hon. Members will be aware, if a flow is secured, but not capacity, and capacity is then squeezed as the day-ahead market comes to closing point, the prices will go up substantially; what seemed to be a good deal from an arbitrage point of view then turns out to not be the case. In the long term, that can lead to the production of electricity at disadvantageous prices as an alternative in-country, when an interconnector arrangement would have been better, all things considered.

In those terms, the regulations seem a very sensible and wise move to take, as they essentially align the UK with arrangements across the EU, both in terms of its capacity considerations and arrangements for electricity flow. I think that is a good thing, and clearly the Government do as well. However, we need to understand that that means that interconnector traffic will now not simply be a question of deciding how much capacity—how much flow they can get down it—someone can use in their interconnector, possibly at the cost of other interconnectors in operation, but will actually be subject to a co-operative arrangement, so far as interconnector practice is concerned.

Assuming that is the case, I am concerned about what the UK will do about its interconnector exemptions policy. As I am sure hon. Members will know, someone could avoid the obligations that came along with the previous interconnector cap and floor regime, or those sort of regimes, by proposing to exempt an interconnector from all those rules and regulations and joint trading arrangements. In the instance of cap and floor, interconnector operators get a minimum amount of income for their capacity and flow, but they have to give income back beyond a certain point, so they have a stable investment environment; but if they want to make a lot of money out of an interconnector and wish to take the downsides with the upsides, they may apply for an exemption in order to—so they may think—make their interconnector work to their advantage.

The exemptions regime, which was previously conducted on both sides of the interconnector end jointly, has now come to an end, obviously, with the UK leaving the EU. Previous hearings on exemptions, which were carried out jointly by the UK and its EU partner states, have now come to an end, but the UK has not yet established its own exemptions regime, so far as I understand it. That is potentially important, because what a UK exemption regime will look like could be very important to the extent to which interconnector operators consider that they should reasonably be bound by the provisions outlined in the draft regulations—regulations which, as the Minister said, are subject to a number of detailed, technical further considerations to work out exactly how the scheme will operate and what its ins and outs are likely to be. I would be grateful if the Minister could confirm that, although a specific UK exemptions regime is not in place at the moment, work is under way to put one in place in the not too distant future. I assume that to be case.

That question is not academic, because at present, there are no fewer than four interconnectors either operating or proposed to operate between the UK and France, the total capacity of which actually comes to more than the total amount of interconnection that the UK has at present with all other EU states. One might say that the passage of interconnection between the UK and France is very crowded. We are potentially in a position in which the only way to make money out of an interconnector between the UK and France is to, as it were, eat the lunch of other interconnectors, rather than by actually operating according to the sort of rational arrangements set out in the draft regulations. Two of the interconnectors that are either operational or proposed between the UK and France are either applying to be exempt or are exempt, and two are not. Depending on the UK’s exemption regime, those non-exempt interconnectors could have their lunch eaten much more efficiently by those exempt interconnectors in the future. Alternatively, they may even work together at a lower possible income level, but nevertheless under a organised and co-operative arrangement that actually secures the two-way traffic in the most felicitous way for both countries—not necessarily in the interest of any one interconnected company, but in the interests of those countries.

Can the Minister tell us what progress is being made on the UK exemption regime? Will it be aligned with the provisions in the SI, or does the Minister have plans to make it far less collaborative and co-operative than the regulations before the Committee suggest?