Post-Brexit power trading

The BritNed cable has boosted power trading between the UK and the Netherlands. Listen to a discussion on post-Brexit trading, the impact of more prevalent negative prices and how the platform could set the standard for other interconnectors. Was the power link shackled or freed by the UK’s exit from the EU?

Host: Snjólfur Richard Sverrisson, Editor-in-Chief, Montel

Guests: Nils Teipel, Commercial Operations Manager, BritNed and Daniel Homoki-Farkas, Managing Director, Supercharge.

Transcript

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:18

Hello listeners and welcome to the Montel Weekly podcast. Bring you energy matters in an informal setting. In this week's pod, we turn our attention to a key power cable linking the UK market with the Netherlands. How have post Brexit trading arrangements impacted flows on the interconnector? And what's the outlook going forward? How has the electricity link contributed to energy security in Northwest Europe? Has it lowered the energy dependency on countries such as Russia? Helping me, Richard Sverrisson, to talk about these issues and much, much more. Nils Teipel, commercial operations manager, BritNed and Daniel Homoki-Farkas, managing director at Supercharge. A warm welcome to you both gentlemen. I want to start, Nils, so maybe I'll direct these questions at you. To start off with, talk a little bit about post Brexit's energy training arrangements and the general regulatory environment. Did the energy system or the energy markets get a no deal Brexit, and what does that actually mean in practis?

Nils Teipel, Commercial Operations Manager, BritNed: 1:15

That might sound a bit harsh, but I think yes, that's the case. I think in the end, with the dropout of the internal energy market for the UK and therefore the dropout of the single day head coupling, it feels a bit, at least like a no deal. Brexit on the energy side, I think we've been of course also dropped out of the developments of the further integration of the expert markets or the inter intraday implicit markets. And since then, the progress on, especially the short term trading arrangement has been very limited.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 1:45

Has that increased costs?

Nils Teipel, Commercial Operations Manager, BritNed: 1:47

I think it has been increased cost for the consumer. I think what we of course see less price convergence between the countries, therefore higher energy prices and also flows against price differential for the interconnectors, as such, it has not necessarily increased the cost.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:02

So what are the current trading arrangements? The, you mentioned X bid the day ahead and intraday market coupling. The UK is not part of that.

Nils Teipel, Commercial Operations Manager, BritNed: 2:11

Up until Brexit, all the interconnectors that were present to that time had been part of the single day ad coupling or the European coupling. And a couple of the continental ones had already joined the expert intraday arrangements. And then at when Brexit came around the corner, basically we were moved back approximately. 10 years and we had to revert back to they had explicit trading. So since then, every border to the UK has its own they had explicit auction setup. Different timings of the auctions are used. Therefore, there's much less harmonization across the auction setups. And the same applies to intraday. So every interconnector runs now a different inter intraday trading setup, selling different blocks of the day at different times in the day. So again. The harmonization or the kind of alignment between the borders is not a given anymore. It is a bit complex, and I think it's especially a lot more complex for the parties that are trading on it because they need to keep all these arrangements basically in, in check and work with it. So I think where it makes sense perhaps on the long-term products to give a bit more freedom and actually allow for different trading setup and different products. I think on the day at the intraday market. It would be actually needed to, yeah. Get things a bit better together again, and actually harmonize it a bit more to the European setup.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 3:29

Is there any way that the UK can join those continental market setup?

Nils Teipel, Commercial Operations Manager, BritNed: 3:34

In the Trading Corporation agreement between the UK and the eu? There is an article in there or multiple articles that foresee the setup of a multi regional loose volume coupling. So a new. Implicit setup with the uk, but it's so far it has not been moved a lot forward. There's a lot of unclarities around how this should work and I think also there's a lot of concerns that how this multi regional loose volume coupling should really work with a single day head coupling on the European side, which is well established and actually working. Perfectly well, and I think from a pure economical perspective and trading perspective, I think most people would probably wish to just rejoin the European, the head coupling, but that's blocked by political matters.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 4:19

Okay. That's, yeah, that's quite a political hot potato. But Daniel, if I can turn to you, it's not all been bad news. Has it, Brexit has allowed, especially you guys who developed the platform or empire to get the freedom to develop in the way that you wanted.

Daniel Homoki-Farkas, Managing Director, Supercharge: 4:33

Yes, that's correct. So previously during whilst the UK was part of the eu every single allocation had to happen on one single platform called jao, the Joint Allocation Office. And by obviously the UK leaving Brexit, this freed up BritNed net and other interconnectors. To leave J and build their own platforms such as we did with Empire and to connect back to what News has said, obviously interconnect is losing out on the implicit data. Heading into their allocations means that now inter the products are a little bit all over the place. By BritNed going to their own platform, this will allow the freedom for BritNed to offer, for example, even 24 individual internet products, which is going to help significantly to stabilize the grid and obviously offer a larger flexibility for market participants and TSOs to counteract some of the changes which is occurring right now due to the renewables and everything else is going on.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 5:31

Exactly how have your customers reacted?

Daniel Homoki-Farkas, Managing Director, Supercharge: 5:33

I think overwhelmingly the feedback was very positive. It's obviously a very new customer-centric platform where long-term they had in today, allocation and nomination is all happening under one roof, so that's definitely positive. There was, of course, some resistance to change, which is. To be expected, but overall, I think every single market participant is happy with the new offering, and Brittany is going to roll out new products to the market first time ever in a couple of weeks. So again, we are really interested to see how the uptake of that is going to happen.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 6:07

Nils, if I can then turn to you more about the general regulatory environment. It's all a bit messy. We've just had in the week where we're recording, there's been a cabinet reshuffle. Obviously there wasn't a change in the Ry minister in, in the uk, but there have been a few, over the past few years there's been policy u-turns, basically rolling back some of the green policies that were key for the government here. What does that do to your commercial operations? How can you operate in this kind of very uncertain way? Uncertain context, rather, I should say.

Nils Teipel, Commercial Operations Manager, BritNed: 6:36

Yeah, I think that's a good point. I think what we have seen after Brexit was a bit of a bit of an empty space in terms of the regulatory framework. Some of the European market codes were pulled over as statutory instruments into UK law, but not all. And for some of them, also only parts of it. So it was actually not easy as an interconnect operating between the two frameworks. Finding out what is now applicable and what is actually now the rule to follow. So that has been challenging for us. I think we took at some point the position that we make most out of it. Really do what is possible in terms of what is best for the trading setups, what is actually good for our customers, and therefore operate in a way. Until somebody holds us back or a regulation holds us back, and that has worked out well so far.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 7:20

So you're almost proceeding ahead in spite of the policy environment rather than because of

Nils Teipel, Commercial Operations Manager, BritNed: 7:24

Yes, because I think we, we do obviously have an in a vital interest or general interest. In offering the best trading solution. I think there should be also in, in line with what our governments want what the traders want. So therefore we indeed just basically try to step a bit ahead of it and not necessarily always wait until all regulation has been fallen into place. And obviously we are part of the discussion on the regulation as well. So we're trying to make sure of course, that it is still in line with it. And otherwise we will need to fine tune our setups. But overall, I think that's currently the case. I think what concerns us a little bit at the moment is more on the emission schemes. We obviously have a UK ETS and we have a European ETS and what concerns us is now the. Carbon adjustment mechanism that has been basically set up just by the European Union. And this could have actually detrimental impact on interconnector trades because it might mean that additional charges would be applied to interconnector imports and exports, which would then mean it basically lowers the spread, makes it less viable to trade across borders. And that is, of course, something that we would hope. It could be avoided because it simply cannot be good for social welfare.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 8:34

Talk us through that sort of calculation there. How does it impact the technicalities of trading on those cables?

Nils Teipel, Commercial Operations Manager, BritNed: 8:40

We're also still in the position or in the situation where we're trying to exactly figure out how Cbu M. Or the carbon adjustment mechanism should be applied. How we understand that it could be that you basically have to integrate a bit of a additional price step into your spread calculation between the two markets simply to pay the levies, pay the pay, the tax for the carbon emissions, if it is deemed to be different between the UK and the eu. And in that case, let's say you have a euro. Price spread between the UK price and the day and the Dutch price or European price. It might mean that you have to pay 20 cent carbon tax, which means actually your spread is only 80 cents, and that is okay if it's one euro and it's 80 cent left, but it's not okay if it's 20 cent and it's nothing left, so therefore there would be no flow anymore and actually a viable trade that should actually happen to, to support each other's network and also to just general generally make use of the price difference. Would not happen anymore because it's eaten up by the tax.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 9:36

So if you look back at sort of historic prices over the last sort of year or so, how often would that resulted in no flows?

Nils Teipel, Commercial Operations Manager, BritNed: 9:44

I think especially now and especially after the whole gas crisis in Ukraine, it would've happened more often. I think we've seen, especially last year and this year, a lot more volatile flows. So we are, the years before we have been pretty steadily flowing into the UK with quite a. Clear price difference towards the uk. This has flipped multiple times now and is does flip multiple times during the day, every day now. And the price differences are not that clear anymore, so you will have the situation way more often. Currently we also see negative day ahead prices in the Netherlands, basically caused by, mostly by an overshoot of solar input. So that, that kind of would trigger. The situation more often that you would actually create no flow or have such a uncertainty in the market, especially with the missing implicit trading solutions, that you would just not find a trader who is willing to basically schedule a flow like that.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 10:37

But in terms of the platform itself, Daniel, that's robust enough to deal with these incredibly complex market where you've got negative prices in one market, lower in the other.

Daniel Homoki-Farkas, Managing Director, Supercharge: 10:46

Yes, that's correct. The platform itself is flexible enough to deal with, I think pretty much anything that Briad throws at us in the future to, to create new products and obviously counteract any kind of market volatility and try and keep the flow and generate the interconnection between the UK and other ends flowing and up and running.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:06

But it, but if I understand you correctly, Nils said there, there could be situations where people just decide, I'm not gonna trade on the interconnector at all.

Nils Teipel, Commercial Operations Manager, BritNed: 11:13

That could happen. And I think for some reason or for the reason that we would like to be ready for any kind of circumstance going forward, we have also created this new platform because there is a sufficient flexibility to offer different types of products that might overcome some of these issues. But yes, absolutely. I think with the with the challenges that the carbon adjustment mechanism brings and the current volatility of the market and the lack of implicit trading solutions currently on the UK Interconnectors, that is absolutely in the realm of possibilities.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:44

So it's not in a way just the carbon border adjustment mechanism. It's also the I mean it, the, it is more that than the ES the ETS prices, the, or the combination of the two or the three.

Nils Teipel, Commercial Operations Manager, BritNed: 11:56

Yeah, absolutely. It's a sum of things really. It's like where you had a very clear steer when you were part of the, they had market coupling. It was algorithm based trading. Every scent was utilized in terms of price spreads. Then even with a carbon adjustment mechanism, you would have a clear steer if there's, let's. Stick with the example of 20 cents. Tax, if there would be a 21 cent price difference, it would schedule a flow. But a human being, a trader would not schedule a flow for a cent. And so you will, it basically adds up to all these kind of different aspects of the trading setup will make it or are making it more complicated.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 12:30

In, in some countries, more and more, I'm hearing around the concept of interconnectors that it's very problematic. It's politically very difficult, especially in areas that have. Historically low prices. So the connector will then raise prices in those markets. What do you say to the people that are very skeptical about the role of interconnect?'cause I know you have a very clear stake in this Nils and Daniel. But what would you say to these, the skeptics out there that, there's a political movement as well in, in many countries, specifically in, in, in the Nordics, that, that don't want cables, they don't want, they want to keep low prices in their own markets.

Nils Teipel, Commercial Operations Manager, BritNed: 13:05

Understandable. I think however that is looking at the current price setups at the current market setups, I think we've all decided, or most of us have decided to be in one economic zone to actually compete with the large economic forces around the globe like the us like India, like China. So therefore, I think it is key that also the whole economic zone of the European continent is actually getting access to cheap energy to be competitive, to actually not only in the energy market, but also wider than that actually be competitive. And I think overall it does create social welfare, even if it temporarily rises prices in some market. But overall, it will decrease prices across the whole sector and therefore it will also pay back in different aspects. It's. I think too narrow to just look at a single market price and just fix it on that there are wider aspects of this which need to be considered.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 13:56

Absolutely. And the platform itself, Daniel, is that something that could potentially be rolled out for other cables or other markets, do you think?

Daniel Homoki-Farkas, Managing Director, Supercharge: 14:03

Yes, absolutely. So the platform itself was built in a way. Thinking of this eventuality and we are actually in conversation with multiple interconnectors connecting the UK to mainland Europe, who are also interested in obviously benefiting from the new offering and the platform that we have built for BritNed when it comes to obviously flexibility. The offering to the customer, getting much and better data, which obviously when it comes to participants and traders is something which they desperately need to optimize their flow, their positions and their general. Economical setups.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 14:40

If I can talk a little bit return to talk a little bit about, you mentioned negative prices and that's obviously been, a major factor in the Netherlands with the rollout of solar specifically, and we've also had several instances in the UK in October. How can the Interconnector help ease that's kind imbalance?

Nils Teipel, Commercial Operations Manager, BritNed: 14:57

Yeah, I think you, Richard, I think you do need the interconnectors exactly for that. Purpose. We have different generation challenges across Europe. Just looking for a moment at the three big markets UK, France, Germany, you have very different generation fleets. As we all know, France is heavily relying on nuclear headed challenges last summer with with the kind of droughts in the rivers for cooling and so on. So had a substantial part of the nuclear fleet out of operation. We have Germany, which has. Maybe too fast moved out of all the carbon generation, more or less, and then very heavily relying already on, on renewables. And now with with the gas crisis, have had seen a setback in that. And we have the uk, which is I think generally. Quite a good mix still, but has a generation problem in itself. So generally too low too low amounts of generation often. And I think the answer to that is basically sufficient interconnection. Because if you combine the three markets, then you probably have the ideal generation mix. But if you see them in isolation, you don't. And therefore you do need the interconnections to actually help each other out in the situation where one of the generation types is not performing. But another one is, and I think if you extend that view across Europe, that even more. You have hydro in the Nordics, you have large solar in the South. Spain is huge in solar in the meantime. And you do need the interconnection for that to actually inter. Best way utilize your energy sources.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 16:17

It's gonna get more complex potentially with more instances of neg negative prices. We're going into the winter where that maybe isn't such a huge issue except on very windy days of low demand. But there are plans to roll out energy islands and offshore park. Where does that place the role of cables? It's obviously, they obviously are essential parts of bringing that power to these markets, right?

Nils Teipel, Commercial Operations Manager, BritNed: 16:39

Yeah, it absolutely is. I think there are a lot of interesting questions around these kind of energy islands. I think one of them would be in which bidding zone do they actually fall? Will they be their own bidding zone and have their own prices or will they be allocated to one of the countries connected to it? That will obviously impact how it will play out for the rest of the ecosystem there. And I think also there's a lot of questions still. How, for example, the wind connectors that would connect two countries. But also offshore generation, how would they function? How would they actually be integrated into the market? I do still think that if we want to see in the future a North Sea offshore network, which most tiers are working on and are striving towards, then I think there's definitely room for both. I think you will need to point connections with established market setups. You will need the energy islands, which are probably heavily boosted by that time, by wind generation. Also for the reasons that you mentioned before Richard. It might not always be the right day for the wind, but you still want to see the power flows and I think the more interconnection, the better. For our energy landscape at the moment and with the vast integration of renewables.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 17:48

But in a way, I can see why you'd say that Nils being a, a representative of a interconnecting a company or a cable of course, but if Daniel, the platform itself can deal with this level of complexity, right? With more added offshore wind parks more flow, flows actually being, changing on an hourly, maybe on a minute by minute basis. That this is. Perfectly doable.

Daniel Homoki-Farkas, Managing Director, Supercharge: 18:10

Yes, that's correct. So we actually had multiple conversations with Nils about the upcoming multipurpose interconnector between the Netherlands and the uk and see how we could maybe repurpose this platform to cater for such a complex flow when obviously we have a generation in the middle and you need to decide where to flow it. And obviously it's. Acting as both a interconnector for the participants and also as a transfer vessel for the power generated by the wind. So it's something which we have had conversations and definitely we could repurpose it in a way to even cater for, I'm not sure about minute to minute flow. Yes the technology could do it from a digital perspective, but I don't know if the actual control system is able to. Change directions that quick.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 18:59

Absolutely. Gentlemen, thank you very much for a very interesting and lively conversation. I think it's absolutely clear that if we are to meet our net zero targets to decarbonize in the way that we want to, both in the UK and in Europe we have to focus on the cables and bringing the power to where it's needed. So thank you very much for joining the Montel Weekly podcast.