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

Volume 812: debated on Tuesday 18 May 2021

Considered in Grand Committee

Moved by

My Lords, the regulations were laid before the House on 22 March. This instrument is brought forward using powers under the European Union (Future Relationship) Act 2020.

The trade and co-operation agreement that we have secured with the European Union provides for co-operation on a range of energy matters to support and strengthen the UK’s and EU’s shared energy objectives. The agreement requires that new, efficient cross-border electricity trading arrangements be developed between connected UK and EU markets. The UK and the EU are committed to co-operating closely on efficient trading developed in accordance with the process and timeline set out in the agreement.

These new arrangements were a key objective for the UK during the negotiations on the agreement. Efficient cross-border trade can lower bills for UK consumers, as well as support our decarbonisation and security-of-supply objectives. The new arrangements will be based on the concept of multi-region loose volume coupling, where cross-border transmission capacity on an interconnector and electricity are auctioned together. This will ensure that Great Britain can import energy from areas of lower price or export energy to areas of higher price more readily than under current interim arrangements. This will be achieved while the energy market in Great Britain maintains independence from EU regulations.

While the agreement sets out the principles for the design of the new trading arrangements, the detailed technical procedures still need to be developed by transmission system operators. These are, collectively, the companies that own and operate electricity interconnectors that connect the UK to neighbouring markets, and the electricity system operator that runs our onshore electricity network. The development of these new arrangements will need to take place in co-operation with relevant electricity market operators, which are organisations that operate marketplaces for the buying and selling of electricity.

The agreement details the timeframes for transmission system operators to develop technical procedures for the new arrangements, noting that new arrangements should be made operational by April 2022. It is therefore important that development of the new arrangements takes place quickly and efficiently. To support this development, this instrument imposes duties on electricity transmission system operators in Great Britain, with co-operation from relevant electricity market operators, to develop the new cross-border electricity trading arrangements for the day-ahead market period.

The instrument also grants Ofgem the ability to regulate transmission system operators and relevant electricity market operators in their development of the new trading arrangements to ensure that they meet their obligations under the regulations. The instrument further enables Ofgem to make decisions on the allocation and recovery of costs incurred in the development of the new arrangements. It is estimated that these new, efficient trading arrangements could bring significant economic benefits to UK consumers. Any delay in implementation will come at a cost to them. Therefore, it is important that this instrument is approved to ensure that transmission system operators develop the new arrangements within the timeframes set by the agreement and that the benefits can be realised as early as possible.

The new arrangements will also be used for trade between Great Britain and the single electricity market on the island of Ireland. While energy is largely a devolved matter in Northern Ireland, my department has developed this instrument in close collaboration with officials in the Northern Ireland Department for the Economy and the Northern Ireland Authority for Utility Regulation. Input from our colleagues in Northern Ireland has ensured that this instrument supports a UK-wide approach to the development of the new arrangements. The process continues to be underpinned by extensive engagement with UK industry and stakeholders, including Ofgem and the Northern Ireland Utility Regulator, to ensure they can prepare for the development and implementation of new arrangements. My department has regular conversations with the transmission system operators and is pleased with the progress they are making.

The instrument is one part of a programme of work to deliver the new arrangements. On 3 February, the Secretary of State for Business, Energy and Industrial Strategy provided guidance to those organisations to encourage early action to support implementation of the agreement while the regulations were being prepared. This instrument follows on from this guidance, providing a regulatory underpinning for the initial development of the new cross-border electricity trading arrangements. If required, the Government will prepare further legislation for the operation of the new trading arrangements once they are developed. I assure Members of the Committee that this legislation will be laid before Parliament to ensure that it can be appropriately scrutinised.

Since this instrument was laid in both Houses, the numbering of the provisions within the trade and co-operation agreement has been updated following the final legal revision process. Therefore, a correction slip has been laid in respect of the draft instrument to update the cross-references to the agreement.

In conclusion, this instrument is an appropriate use of the powers of the European Union (Future Relationship) Act and will ensure compliance with an international treaty and that an enforcement mechanism is in place to prevent delays in developing technical procedures for cross-border electricity trade. These new trading arrangements will provide for greater efficiency and consumer benefits than the alternative arrangements currently in place without the UK being a member of the EU’s internal energy market and subject to the EU regulations that that entails. I commend the regulations to the Committee.

My Lords, I am honoured to be in such a select group of noble Lords debating these regulations. I thank the Minister for his explanation of them.

If I did not already deeply regret the UK’s exit from the European Union, then having to get my head around this statutory instrument would surely have converted even the most ardent Brexiteer to the most ardent remainer. We are confronted by such tortuous statements as:

“cross-border electricity trading arrangements at the day-ahead market timeframe that will replace previous market coupling … will be based on the concept of ‘multi-region loose volume coupling’, where cross-border transmission … on an interconnector and electricity are auctioned together and the energy market in Great Britain maintains independence.”

That is not even from the SI; it is from the Explanatory Memorandum.

Can the Minister help us out a little here, on what is obviously a fairly technical measure? Can he tell us whether the proposed

“multi-region loose following coupling”

is preferable to the previous market coupling? Is this change between the two types of coupling taking place simply between the UK and the single energy market—is it happening because we are no longer part of the European Union and as part of the arrangements under the trade and co-operation agreement—or is it part of a broader change within the European single energy market?

I think the Minister confirmed in his opening remarks that Northern Ireland is not within the scope of the regulations. That certainly seems to be the case from what I have read. Northern Ireland will therefore continue to be governed by the single energy market rules. He has told us how he has consulted the Northern Ireland Executive on these regulations, but how are the Northern Ireland Executive and Assembly involved and able to make representations on the single European energy market, under which, if I have understood this properly, they are still governed? How will they be consulted as we develop these proposals and what practical impact will they have on them anyway, if they are part of the single European energy market? Can he also indicate how long it will take to put the new arrangements in place, given that they will obviously involve some fairly complex technical discussions between a range of stakeholders, domestically and within the European Union?

Paragraph 7.16 of the Explanatory Memorandum tells us that

“Placing obligations on relevant persons is not sufficient by itself to ensure that technical procedures are developed without delay”

and that “An appropriate enforcement mechanism” is therefore

“necessary to act against non-performance. The instrument applies Section 25 of the Electricity Act 1989”

in this respect. I have looked at Section 25 of the Electricity Act 1989 and it did not enlighten me particularly. Can the Minister explain to us what the enforcement procedures under Section 25 of that Act are and what the sanctions are? Section 25 refers to the notices that may be issued to relevant persons but says nothing about the sanctions if they are not complied with. I am happy for him to write to me on any of this because it is obviously a technical error.

The final question I have for the Minister is this. Throughout the documentation, there are references to the trade and co-operation agreement—the Minister has explained that the references have been amended because of the changes in the final version of the TCA. Paragraph 8 of the Explanatory Memorandum tells us:

“This instrument does not relate to withdrawal from the European Union.”

I am slightly at a loss as to that. Can the Minister explain how it does not relate to our withdrawal, when it seems so bound up with the fact that we are no longer part of the single energy market? That refers back to my first question: would this be happening anyway if we were within the European Union?

I thank the Minister for his comprehensive explanation of the regulations. I also thank his colleague, the noble Baroness, Lady Bloomfield, for providing answers on interconnectors earlier during Questions.

This statutory instrument may not be contentious and is largely technical. However, it is not entirely uncontroversial, as we have discovered this afternoon. It implements provisions relating to the efficient use of electricity interconnectors and requirements to develop technical procedures in respect of the day-ahead market timeframe in its operability in accordance with the EU-UK Trade and Cooperation Agreement that was initiated at short notice on 1 January this year.

The instrument makes reference to many aspects that need to be delivered as a consequence of the agreement. If the Minister could outline how fast and how quickly he envisages these things being implemented, it would be useful. The instrument makes reference to two agencies, the specialised committee on energy and the Agency for the Cooperation of Energy Regulators, necessary to implement and co-ordinate powers and regulations with what used to be the internal energy market across the EU, which at the time included the UK. Can the Minister give any more details about these structures, as they will have considerable powers to ensure that transmission system operators develop arrangements that run efficiently across both the UK and the EU through interconnectors? Does the reference to the Agency for the Cooperation of Energy Regulators relate merely to dialogue with the EU after any adjudication and consideration by Ofgem, as the authority and overall independent regulator within the UK, in connection with its operation of interconnectors? Will the SCE be suitably independent in this structure? What is its authority in relation to the TSOs?

Since 1 January, the arrangements have been necessarily ad hoc, while respecting the independence of the UK from the previous internal energy market. What is the specific timeframe within which transmission system operators must develop arrangements setting out the technical procedures? How will the Secretary of State determine this timeframe? Since 1 January, have any specific problems arisen, and will the powers of Ofgem be sufficient to implement all the provisions necessitated since ending the transitional arrangements? What assessment have the Government made of the efficiency of multi-region loose volume coupling compared to the internal energy market’s existing trading mechanisms? What material impact has there been on energy pricing since 1 January? What assessment have the Government made of the impact on consumer prices of the new arrangements envisaged under the trade and co-operation agreement for new, cross-border electricity trading at day-ahead timeframes, such that they are deemed more efficient and allow appropriate trading to benefit from greater transparency?

There are notable benefits from interconnectors. That more are envisaged can only be further insurance that energy continues to be supplied effectively while the huge transition to net zero, through reforms to the energy market, continues.

First, I thank our two hardy contributors who have stayed the course for this afternoon’s debate on the fascinating subject of the technical operation of electricity markets. I thank both noble Lords for their valuable contributions.

Both noble Lords, Lord Oates and Lord Grantchester, raised questions about multi-regional loose volume coupling and whether that is preferable to the previous market coupling. This model provides for greater efficiency than the current alternative arrangements without being a member of the EU internal energy market and subject to EU regulation. The UK and the EU are moving to a new relationship and a continuation of previous arrangements was not an option for either party. There are new internal EU arrangements as a consequence of the TCA.

On the questions regarding Northern Ireland, the department has engaged extensively with the Northern Ireland Department for the Economy and the Northern Ireland electricity regulator on this instrument which obliges parties to consult Northern Ireland counterparts as required under specific stages of development. To ensure that opinions reflect views that are specific to Northern Ireland, the instrument states that Ofgem must provide the Northern Ireland Utility Regulator with relevant information and opportunities to make appropriate representations. Ofgem must have regard to those representations and ensure that they are taken into account as appropriate.

On how long the new arrangements will take to put into place, the anticipated deadline for implementation is April 2022. All stakeholders are taking relevant steps to ensure that this deadline is met. In the meantime, alternative electricity trading arrangements are in place which will endure until a new agreed solution is implemented.

On the enforcement methods available under Section 25, I will write to the noble Lord.

The noble Lord, Lord Grantchester, asked about the SCE and ACER, the European regulator. I can tell the noble Lord that ACER will have no formal role but, of course, there are co-ordination arrangements in the TCA that will require co-ordination between UK regulators and ACER. The specialised committee on energy plays a key role in the development of the EU/UK electricity trading arrangements, and following ratification of the trade and co-operation agreement by the EU we are now working with the EU formally to set up the specialised committee on energy and all associated working groups. In particular,

“The Specialised Committee on Energy shall review the draft technical procedures”

submitted by November 2021 and

“shall take decisions and make recommendations”

as required by the agreement.

The noble Lord, Lord Grantchester, asked about the impact on consumer prices. The cost-benefit analysis shows that there are significant potential benefits in moving to more efficient electricity trading arrangements. The cost-benefit analysis quantifies the potential social-economic welfare benefits, as well as the carbon dioxide emissions savings. We welcome the CBA and outline proposals that the transmission system operators have jointly produced, and are assessing these materials together with the European Commission. We expect to provide feedback to the transmission system operators to support their development of the technical procedures that are required to be submitted to the specialised committee on energy by November this year. Alternative electricity trading arrangements across all Great Britain’s interconnectors have already been developed, which will endure until they can be replaced by the new agreed solution.

I therefore hope that I have been able to provide the necessary assurances to approve this instrument before us. The Government are committed to co-operating closely with the EU on efficient energy trading, energy markets and access to networks, with a deal based on friendly co-operation between sovereign equals. There is no precedent for an agreement on energy trading of this nature between the EU and a third country.

The UK and EU are moving to a new relationship. As of 1 January this year, trading between Great Britain and the internal energy market on the day-ahead market ceased. Until new arrangements are operational, trading will continue using what we feel are less efficient explicit auctions. The UK and EU are committed to developing and implementing a robust and efficient solution that will facilitate efficient electricity trade across interconnectors. As said earlier, these will be based on the concept of the famous multi-region loose volume coupling, allowing transmission system capacity on an interconnector and electricity to be auctioned together and the energy market in Great Britain to maintain independence.

The regulations that the Government are seeking to introduce will oblige transmission system operators to develop new efficient cross-border electricity trading arrangements under the TCA with the EU. They will also enable Ofgem to take the necessary decisions on the allocation and recovery of costs incurred in the development and implementation of the procedures. I am pleased with the progress that the transmission system operators have already made in developing these new efficient trading arrangements and assure the Committee that we will continue to take steps to facilitate their implementation.

As I said earlier, we will continue to work extensively with the Northern Ireland Department for the Economy, Ofgem, the Northern Ireland Utility Regulator and the UK industry to ensure that we see the benefits of the new arrangements as quickly and effectively as possible. The agreement notes that new arrangements should be operational by April 2022. This is a challenging deadline, but adherence to it will enable us to realise the benefits to consumers from the arrangements as quickly as possible. I commend this draft instrument to the Committee.

Motion agreed.

That completes the business before the Grand Committee this afternoon. I remind Members to sanitise their desks and chairs before leaving the Room.

Committee adjourned at 5.37 pm.