Brexit temporarily decouples GB’s energy trading from European power exchanges

24

Since the start of the year, as a result of Brexit, Great Britain’s (GB’s) internal and cross-border trading has been temporarily decoupled from European power exchanges. This is expected to result in less efficient trades; interconnector flows and divergent electricity prices between power exchanges.

Research from Cornwall Insight examining the trends observed across exchange platforms at the start of 2021 highlights that prices have started to diverge between the two GB day-ahead exchanges, the N2EX and EPEX platforms.

Key findings

  • Prices at the two power exchanges are diverging, prior to Brexit they would outturn the same.
  • Between 3-10 January, N2EX prices averaged £0.37/MWh above EPEX prices. This was mainly due to several exceptional price events where N2EX prices exceeded EPEX prices by notable amounts.
  • On 6 January between 5pm and 6pm, there was a price differential of £262.59/MWh.
  • In contrast, 68% of all hours in the week saw EPEX prices outturn above N2EX prices.

The below graph shows the volumes traded across both exchanges, and the cleared prices, on the hourly day-ahead auctions in the eight days examined. Nordpool’s N2EX platform has seen the greater volume of trades, with roughly double that of EPEX day-ahead auctions.

Tim Dixon, Wholesale Team Lead at Cornwall Insight, said: “Although the GB market is currently decoupled from the European power exchanges, this does not mean that electricity interconnector flows stop, rather the way flows are allocated and auctioned have now changed. This means that each relevant power exchange will have to run and calculate their day-ahead auction results independently of any cross-border capacity allocation process and each other.

Have you read?
TPIs revenues fall by 18% due to COVID-19
UK’s energy price cap predicted to rise by at least £66/year
Demand for DNO flexibility services predicted to gather pace

“It is expected that this will result in less efficient price-setting and interconnector flows, thus negatively impacting players’ economic welfare. For example, a cheaper generation option may not be used due to its participation in one auction platform over another, or because interconnector capacity has not been allocated appropriately to allow a cheaper alternative to run in a neighbouring market.

“At this stage, it is difficult to know if the lack of coupling resulted in higher overall prices for consumers or not. Arguably the record £1,000.04/MWh price clearing bid seen on the 6 January would have remained the price-setting plant in a coupled auction. Still, alternatively, cheaper options may have been available elsewhere with implicit trading provisions. These differences have caused market participants challenges, with considerable price differences already being observed in some hours.

“One notable example includes renewable generators under the Contracts for Difference (CfD) scheme, which receive top-up (or they pay back) from their pre-agreed strike price to a market reference price (MRP). For intermittent generators, the MRP is the day-ahead hourly auction price. However, with two day-ahead hourly auction prices now emerging, it has become a challenge for CfD generators to sell their electricity on wholesale markets and achieve the precise MRP.

“It will be interesting to see how market participants now react and if the dynamics between the two power exchanges change until more permanent solutions are implemented.

“It should be noted the current arrangements are not an enduring solution and the Free Trade Agreement has outlined what the future trading arrangements will look like, but the operation of these new arrangements are a way off yet.”

Learn more about the report.