The other single market

What is Brexit going to mean for the UK? That’s a question everyone is grappling with from the prime minister down. The single market that includes goods and services is central to the debate.

However – another important element in the debate is the single electricity market; a market which been developing largely unnoticed for the last 25 years.

The single electricity market exists to achieve three principle objectives: it aims to minimise the cost of electricity to the consumer, to help decarbonise the electricity networks cost effectively and to maintain security of supply. Importantly it enables a free market in generation and because prices on the continent have been lower than in the UK, it has helped lower UK electricity costs to consumers.

The electricity single market requires physical connection between the various national electricity networks and for the UK this is achieved through interconnectors. The UK has two interconnectors to continental Europe via France and Holland; and one each to Northern and Southern Ireland, giving a total connected capacity of 4GW — more than the generation capacity of Hinkley Point (3.2GW).

It will be in the interests of UK consumers for the UK to try and maintain access to, and influence over the rules of, the single electricity market

The government acknowledged in 2013 that interconnectors were beneficial, particularly with respect to consumer affordability, security and decarbonisation. The Department of Energy & Climate Change (DECC) estimated that the present value benefit of interconnectors for UK consumers would be in excess of £9bn by 2040. The closure of the UK’s coal fired power stations means that we need find more generation capacity. There is a clear economic case to use existing capacity in the EU, hence there is new dash for interconnection.

A further seven new interconnectors are planned over the next six years adding a further 7.3GW of capacity. There are even plans to connect the UK to Iceland with a 1000km cable.

The electricity market itself is governed by a range of rules and protocols that enable energy to be traded between different European networks. The market uses a pricing method that calculates power prices and cross-border capacities at the same time, ensuring that electricity flows from cheaper to more expensive areas.

These rules are relatively new and will inevitably develop over the next decades as the market matures. Unless we manage to build new power capacity capable of providing cheaper electricity than the EU, it will be in the interests of UK consumers for the UK to try and maintain access to, and influence over the rules of, the single electricity market.

While prices in the UK remain higher than the continent, the UK will tend to import power. However, the UK has some of the best wind and tidal energy resources and a connection to the European market would encourage further investment.

The recent drop in the value of sterling may change the case for building more interconnectors but fortunately the long lead times means little change in the near future.

The EU and UK both benefit from the interconnectors, so let’s hope that this single electricity free market can continue operating largely unnoticed so that we can all benefit.

Nick Cullen is a partner at Hoare Lea