Blog: Has Brexit created higher electricity prices? A look at the impact of decoupling from EUphemia – Current News

The first week of 2021 has been a turbulent one for the UK’s energy market, with price spikes and tight margins keeping traders on their toes.

National Grid ESO has issued two Electricity Margin Notices (EMN) – one for Wednesday evening and one for Friday evening – as the cold weather and lower generation cut into its safety buffer, putting the security of supply at risk.

The tight margins led to dramatic peaks in intraday trading and Balancing Mechanism (BM) prices. Power prices in the N2EX auction hit £1,000.04/MWh for the period 17:00 to 18:00 on Wednesday 6 January, the highest hourly price seen on the auction. During the same period EDF’s CCGT plant West Burton B was called on at £3,000/MWh in the Balancing Mechanism.

Following on from the EMN issued for Friday, West Burton B2 and B3 had offers accepted at £4,000/MWh in the BM, while Uniper’s Connahs Quay 3 CCGT plant was accepted at £2,750/MWh.

An additional factor that drove up the N2EX auction price was the decoupling of the markets as Alastair Martin, founder and chief strategy officer at Flexitricity, explained: “The two main day-ahead auctions (operated by Nordpool and EPEX-Spot) are no longer linked, which means they can clear at different prices. Most of the time, they come out very close to one another, but yesterday the divergence was large. This is probably a market inefficiency, and it remains to be seen how it will be resolved.”

Decoupling and confusion: Leaving EUphemia

While much of the price volatility seen this week was driven by the changing nature of the nation’s electricity, with more intermittent renewables taking over from baseload coal stretching periods of high demand, there is now also the additional impact of Brexit and this decoupling of Great Britain’s auctions from EUphemia (EU + Pan-European Hybrid Electricity Market Integration Algorithm).

“All of the EU’s electricity markets are linked at the day ahead in a big algorithm called Euphemia,” explained EnAppSys’s director Phil Hewitt, describing it as “one of the crown jewels of the internal electricity market”.

“At noon Central European Time – so that’s 11am GB, Irish and Portuguese time, and 1pm over in eastern Europe – what happens is that all of the auctions in each country are linked to their neighbours. This results in the automatic flow of power from less expensive regions to more expensive regions. So if, for example, it was tight in GB, then the power would flow across from France, Belgium and the Netherlands automatically. So, now, because we’ve left the European Union and the transition period has ended, we’re no longer in that market arrangement; we have decoupled. Not only that but the two auctions in GB have decoupled from each other, causing more price confusion.”

Now GB has decoupled, it is running two auctions- Nord Pool and EPEX, as well as participating in the European auction. This creates more liquidity, and with it the potential for higher and lower prices.

Whilst leaving EUphemia doesn’t in itself increase energy prices, it does complicate trading which is likely to lead to higher prices for the GB market.

“Before you had a single auction, so if you were an interconnector capacity holder there was little risk to scheduling those flows,” expanded Adam Lewis, partner at market insight company Hartree Solutions. “There was a low risk methodology of optimising those flows to ensure that they flowed in the best way. Whereas now because of Brexit, we’ve decoupled and the UK has now decided to go on to have two auctions in the morning, which creates more confusion, volatility, uncertainty and risk. We believe the market would benefit from a single coupled UK auction.”

Does Brexit mean we’ll see more price volatility?

It seems likely that there will be more power price volatility going forward, especially if the UK sees continued cold weather as well as low wind generation. This is more a mark of the changing makeup of the nation’s energy mix than the impact of Brexit however, with that more a secondary aspect.

“The current system was designed to create peaky prices, reflective of the stress on the system at the time,” pointed out Martin. “The idea was that electricity suppliers and wind farm operators would put more effort into forecasting, and thermal generators would put more effort into reliability if the consequences of getting it wrong at the wrong moment were more unpleasant.

“Since then, renewable generation has continued to grow, and the electricity system looks quite different. So, we may see a revision to the pricing mechanism at the extremes. Whether that calms down prices, or re-directs the peakiness to different types of event remains to be seen.”

Additionally, it is worth noting that price spikes are not entirely negative as they can help keep power stations that might ordinarily struggle to compete in auctions running and encourage increased expansion.

“The high prices encourage people to enter the market, so they’re not necessarily a bad thing,” argued Hewitt. “A power station that’s marginal is going to make reasonable money in periods of high prices, which might mean it will decide to stick around for another year or maybe somebody who’s developing battery projects or developing gas peakers or maybe even CCGTs is going to look at these high prices and say, ‘well, there we go, I can make money in this market’. So they’re going to be more encouraged to build.”

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