19
Examination of witnesses
Adam Berman, Mark Copley and Jack Pardoe.
Q116 The Chair: Good morning and welcome to this public evidence session of the House of Lords Select Committee on European Affairs. We are looking into the issue of dynamic alignment. Today we are focusing on the issue of electricity trading, which is one of the prospective agreements that the Government have said they will negotiate. We are delighted to welcome as our first witnesses this morning Mr Adam Berman, who is director of policy and advocacy at Energy UK, Mr Mark Copley, who is CEO of Energy Traders Europe, and Mr Jack Pardoe, who is head of policy at Octopus Energy.
It is a public session. It is being broadcast. There will be a transcript produced and you will be provided with a draft to check for any errors and omissions you may find. We hope to conclude the session by 12 noon. With that in mind, could the questions and answers be as concise as is reasonable? Do not feel you all have to answer every question if you have nothing to add, but, if you do have something to add, of course please do.
I will kick us off with a general question, which is just to set the scene for our evidence. How does electricity trading between the UK and the EU take place at present? Is work continuing on both sides to try to implement the electricity trading arrangements foreseen in the TCA, or has that been superseded by the negotiations that are now under way?
Adam Berman: A very good morning to everyone. The status quo as it currently stands post Brexit is that we have moved from what was called implicit trading through the internal energy market of the European Union to something called explicit trading. To use a slightly glib analogy here, it would be like going from booking a package holiday, where, with one click of your mouse, you book the accommodation, the transfers, the travel and some excursions, to booking everything separately. They are different clicks. They are different processes.
At a more practical level, what has happened is that capacity on interconnector cables is sold in advance, separately from the electricity itself. That means it is less efficient, because the capacity is allocated based on forecasts, rather than on real-time prices and weather conditions. There is an impact of that. There is an impact on bill prices. There is an impact on the efficiency of that trade.
While there was a possible different solution envisaged within the TCA, it was the view of many stakeholders, including the energy industry, which I represent, that that was unworkable. That now seems to be the conclusion of both the UK Government and the European Commission: that that possible new solution is unworkable. Instead, they are now working toward possible re-participation of the UK in the EU internal energy market.
The Chair: For clarity, could you explain what the possible alternative was?
Adam Berman: I can give you a high-level overview and then my colleague Mark will give a better view. It was a solution called MRLVC—multi-region loose volume coupling—which was something that the European Commission threw on the table and believed could be workable. I think the UK side was perhaps slightly more agnostic about whether that was practical. Mark might have views there.
Mark Copley: Good morning, everybody. This gets very detailed very quickly, so please wave at me if I start getting into acronyms and all the rest of it. Fundamentally, on these cables you are trying to work out a price and a volume. You want to do the two of them together so that the energy flows to the place where it is most valuable, i.e. from low price to high price. Multi-region loose volume coupling—horrible acronym—only works out the volume and leaves the price to be calculated by the EU side and the UK side. It is an attempt to form a closer trading relationship while keeping the two systems extremely separate.
It worked once about 10 years ago, when these things were evolving. I will be fair to all the stakeholders out there. Everybody is doing the things they are supposed to do in the TCA. I am not convinced that anybody believes in it. Sometimes, if you do not believe in it, it is never really going to happen. At the risk of pre-empting a future question, I do not think MRLVC will ever truly see the light of day. Were it implemented, I think the members I represent who trade would question whether they wanted to use it because of the risks involved. Therefore I do not think it would be particularly effective.
Baroness Brown of Silvertown: Can I ask what risks?
Mark Copley: When you are trading power, you want to have certainty that your power is going to flow in the direction that you need it to flow to. If I have a customer in France, I want to make sure I can get power from the UK to France. If a system does not have many people in it, the price will bounce around. If the system is relatively technically unproven, it may fail, at which point you end up in a situation where you have a customer you need to supply without the energy to supply them with. Then you have to go and buy replacement energy at extremely high costs, and you do not get burned like that twice.
The Chair: Mr Pardoe, do you have anything to add to that?
Jack Pardoe: Not particularly, no. My colleagues have articulated it very well. It is most fundamental. We have gone from a one-step process where the computer works it out to a two-step process where there are humans working it out and there is much more room for error. There could be definite efficiency gains from going back to a one-step process worked out by a computer. There could be disadvantages too, depending on the context of the electricity markets that we are connecting into.
The Chair: That has set the ground very nicely. Thank you very much indeed.
Q117 Lord Tugendhat: Is UK participation in the EU’s internal electricity market the only way of overcoming the difficulties you set out, or do you think there would be other ways of doing it?
Mark Copley: We were asked for brevity. The answer is yes. It is the only way of doing it, particularly while the EU takes the stance it currently takes. If you look at the Swiss-EU draft electricity agreement, it gives you a very strong sense of what the Commission is going to be looking for. I had the pleasure, or something close to a pleasure, of being involved in the previous negotiation. Believe me, Lord Barrow and others thought about all the different options that were out there. Frankly, if you want the more efficient trading with the EU, participation in the IEM is your only option.
Jack Pardoe: Yes, there are costs of being outside the market. The only way to eliminate those costs is by rejoining the market. This is part of a wider agreement, so you would have to weigh up the efficiency gains from going back to that one-step process versus the costs and benefits of the wider agreement.
Lord Tugendhat: You are saying that this would be in our interest. There has been talk of linking an agreement of this sort to some sort of UK financial contribution towards the EU cohesion funds. In the light of that, to what extent do you think the EU itself would gain from the change we are talking about? When I say the EU, I mean the EU as a bloc but also individual countries. I am thinking perhaps of Ireland. We stand to gain. Do they stand to gain?
Adam Berman: Yes, they stand to gain. There are absolutely benefits that would accrue to the northern European countries that we are interconnected with. That being said, as a general principle, the EU is a pay-to-play club. The EEA is a pay-to-pay club, as is Switzerland with its sector-specific single market access. It is reasonable and consistent for the Commission to ask for some form of settlement, which is both payment towards participation within the institutions, and for the institutions themselves and maybe something broader.
I do not think it has to be a vast sum of money. Actually, it categorically should not be a vast sum of money. I am concerned that there is the possibility of heading toward another SAFE-style fiasco, where the Commission, as a negotiation tactic, asks for something that is clearly ludicrous and UK negotiators have to walk away. That does not have to happen. In Switzerland and if you take cases such as Norway, there are really good examples where these are not vast sums of money.
To take Norway as an example, it pays about €450 million a year to the European Union as part of its EEA settlement. Let us conclude that electricity generation or electricity is perhaps, at absolute most, 2% of European GDP, and that is the entire internal electricity part of the market but probably a bit more as well. Two per cent of €450 million is not a vast sum of money and that is absolutely consistent with the scale of benefits that the UK could receive. Equally, if the Commission comes out and says, “You have to pay €500 million for access”, that is a price that is too high and not worth paying.
Lord Tugendhat: That is very clear, but can I press you on one other point? I asked to what extent the EU stands to gain. Looking at individual countries—I do not know anything about this market—does Ireland, for instance, particularly stand to gain, or any other neighbouring country? It is not just a question of whether the bloc stands to gain, but whether this is a tangible benefit to one or other of the member states.
Mark Copley: One of the things we should be proudest of from the negotiation around the trade and co-operation agreement is, for Ireland, which has a single market, so one market for the entire island, that market continued to operate. There were some very distinct rules worked out for that and that was incredibly important.
To your question about the distribution and scale of the benefits, there have been various studies. They tend to find the benefits are between about £300 million and £700 million. The reason for that range is that it all depends how often you are exporting and importing, which changes all the time with weather, temperature, French nuclear plants being broken and all the rest of it.
Those studies tend to find that the benefits are in the region of 40/60. Most of the studies say that the UK benefits slightly more in electricity, but that does not mean the EU does not benefit at all. Those benefits come in terms of security of supply, lower prices in the periods they are importing and greater ability to balance their systems.
When people say “mutual benefit”, which they do an awful lot in these negotiations, it is actually true in electricity. There are lots of situations where the imports from Great Britain have had very positive effects. Where are those benefits most felt? They are felt most in the closest countries. In the short term, it is France and the Netherlands. In the longer term, depending on how we build out future interconnection, it is likely to be northern Europe.
Adam’s key point is the right one here. There are benefits. They are relatively small over many hours of the day, and that accumulates, but we should not be looking at a very vast figure to secure that access. A bit of pragmatism is needed, I think.
Q118 Lord Jackson of Peterborough: I wanted to come back, if I may, to the comment Mr Berman made. I am not necessarily contradicting you, but what evidence do you have that the EU, the Commission and the Council of Ministers have learned the lessons of SAFE, which was a little bit of an own goal by them? Do you think you have different people and a different nuanced mindset doing the negotiations for the internal electricity market?
Adam Berman: There is something in favour of these negotiations, which is that they are happening separate to any other negotiation that the UK is doing. You have the entirety of the reset, which is ETS, SPS, youth mobility et cetera, over here on one side, with a hope to get a lot of that completed by the time of this summit. Then you have electricity trading as this discrete extra bit that was added in at the time of the last summit last summer. No one expects that to make radical progress. It will proceed, but it is not going to be done by the time of the summit. Having it as a separate issue and not being politicised by other items that they are doing will be really positive.
Otherwise, I read the same media that everyone else does about the lessons learned from SAFE. It is clearly the case that the Commission recognises that there is a price that the UK would not be willing to pay. The question is whether the UK negotiators are able to get the structure of the negotiations such that the balance of the scope of dynamic alignment and the payment is the right one. Those are the two competing parts of it on the negative side of the spectrum. I have confidence that there is a deal that absolutely could be doable. I cannot say categorically that the Commission could not turn around and throw a silly number out. I just hope that that is not the case.
Q119 Lord Brennan of Canton: I wanted to drill down on that. We all understand that, if you want to join a club, you have to pay your membership fee. If you do not pay your subs, you do not get to drink at the bar. Could you be a bit more specific about what you think a reasonable sum would be that the UK would pay? We have talked about silly numbers, but what would be a sensible number?
Adam Berman: The Commission will come up with some form of probably quite convoluted methodology.
Lord Brennan of Canton: I know it will. I am asking you what you think a sensible number would be. You are not doing the negotiating, are you?
Adam Berman: I am not, thankfully.
Lord Brennan of Canton: Therefore you can offer us an opinion.
Adam Berman: I am very grateful to the UK officials for doing that on our behalf. I am not sure I can tell you exactly what the right figure should be.
Lord Brennan of Canton: Give us a range.
Adam Berman: I can tell you that, for anything north of £2 million to £3 million a year, it would be really challenging for UK officials to make the case to Ministers that there would be net benefits. We can get into some of the complexity behind what the benefits are. None the less, around that figure would seem to me to be getting too high.
Lord Brennan of Canton: Do you agree with that?
Jack Pardoe: I do. You have to particularly put it into the context of what will happen over the coming years. At the moment, if we were to switch this on tomorrow, there would be definite gains for Britain because it would be more efficient and basically we would be importing subsidised French nuclear. With the policy objectives that our own Government have and are under control from UK officials, over time we will see more benefits likely go to Europe.
This is because, for example, at the moment, when it is a very windy day up in Scotland where we built all of our wind, France goes, “Yes, please. Thank you very much. We will buy that cheap power from you”. On the ground, in reality, where the interconnector is, we actually have very little power and end up having to fire up gas plants at extra cost just to make sure that we have power and avoid blackouts. If you have a joining fee that is quite big and over time you start to have more benefit go over to Europe, it starts to look like quite a poor deal.
Q120 The Chair: I want to make sure that I have understood what you are collectively saying on this. We could continue with the arrangements in the TCA, but, in your view, they are inefficient. In your view, the only way to improve efficiency is through participation in the internal electricity market, but not at any cost. Could I press you on one point there? I do not want to go into great detail on this. In all of this and in seeking to improve efficiency, are there not a great many inefficiencies in our own internal electricity distribution system, for example, that we should be paying attention to if we want to drive down costs? You can say yes or no.
Jack Pardoe: There absolutely are. If we are to do this, we need to get our own house in order first. We have an incredibly inefficient, wasteful market. If we were to have that instant one-step process of interconnection with Europe again by being in the market, that efficiency might exacerbate the inefficiencies within our own market.
While we are doing this, if we are to rejoin the European market, we need to take action to make sure that we protect British bill payers from that exacerbation and inefficiencies. At Octopus Energy we have advocated for zonal or nodal pricing. If you are doing the wider agreement and raising everyone’s carbon price on their electricity by joining the European carbon market, you might want to recycle the extra revenues that the Treasury would then be getting off energy bills back into cutting energy bills to make sure that there are no bill rises for British consumers.
Q121 Lord Moynihan of Chelsea: Thank you all for coming. I will try to sum up what I have heard—you can knock me back if you think I have heard it wrong—and then ask my question. The first question said that we have this complicated system, prone to human error, right now, and we are going to move back to “one click and you are done”, which will be computer-mediated with fewer errors and so forth. This is good. This is a good technical change.
Then I heard that the sums involved are not huge. We will gain sums, but, from the numbers that you were all throwing around, it is about the same amount as what was described as pay-to-play money. The net financial gain will be about nothing for us. On the other hand, there was no mention of the EU having to pay to play in our market, which seems to me quite strange. It keeps all the benefit that it gets, which is slightly less than ours, but it keeps it and we pay ours back. None the less, it is just a technical change from what we have heard so far.
Is that a correct description, that it is just a technical change, or will there, going forward, be a lot more complexity? What kind of volume of laws will we have to implement on an annual basis, both in quality—that is to say how hard they hit us—and quantity? What kind of cost will there be to us? I note that, in our briefing, we are told that the outcomes document on a joint agreement between the UK and the EU said, “All of these measures should be designed in such a way that they do not … iii) put the United Kingdom in a more advantageous position than a member state of the European Union”. Is there anything that protects us from being put at a disadvantageous position relative to members of the European Union? Is it going to be much more than just a technical issue?
Jack Pardoe: If the question is whether it is a technical fix, in a very narrow sense, yes, it is, if you are just going back to that one-step process. If it is part of a wider agreement, no, it is much wider. It depends on what the UK Government sign up to in terms of taking on European laws. I think the last wave of electricity market reforms were about 400 pages back in 2019.
In terms of whether there is an overall cost, again, it depends on the time and space. There is that problem I just mentioned that, unless we sort out our market, we are going to be subsidising European households to the tune of about £20 a year, or £400 over the length of a CfD contract. That could be minimised and cut down by our own Government in order to improve the overall benefits that we are getting from a deal with Europe. It would be critical to make sure that we do that if there is a rejoining fee in order to balance out against that rejoining fee overall. The crucial thing, as I said, is getting our own house in order to prevent this from adding more cost down the line on top of any rejoining fee.
Lord Moynihan of Chelsea: Who are we subsidising in the EU, and how?
Jack Pardoe: Because of the way our electricity market works, you will get cheap wind. We will then sell that to France. British bill payers will be subsidising that wind after the fact and we do not get the subsidy back from France. Even if we send it off to be stored in Norway, which is good—at least then we are not wasting the energy—we will not get the subsidy back. Alternatively, we will be almost pretending to export very cheap electricity to our neighbours, but then it turns out, after those sales and trades are done between the traders, the power is not physically there and we end up raising the bills of British bill payers to make up for the deficit. The French or the Belgian bill payers still have lower bills from the cheaper price. That is in the £20 per year region with the Government’s clean power target.
Mark Copley: Lord Moynihan, your question had an awful lot to it. I have a couple of things. Your fundamental understanding is spot on. When you say that we pay back as much as we benefit from, that would be an appalling piece of negotiation. The Swiss pay a fee that reflects their contribution to agencies and algorithms, which seems fair enough. They then pay a fee that proxies the level of benefit the market access provides under their draft electricity agreement.
We would want to sit down and look very carefully at how those benefits were distributed. We would want to look at the net of those benefits, so what the EU gains and what we gain. The number we would be looking at would need to look at those. It would also need to keep one eye on the fact that we have gas market integration too. The UK has some extremely nice, shiny LNG terminals, which are beneficial to a continent that is short of gas supply. You would need to be looking at that number absolutely in the round.
You asked about benefits. It is very important to bear in mind that the benefits case will grow over time if you choose to build more interconnection, build more hybrid assets and build out the northern seas. I do not work for a grid company. I am sure that, if I did, representatives of them might tell you that the business case for those future investments would be severely undermined were these arrangements not in place.
To your final point, EU energy law is vast. I have spent about 25 years doing this and I do not know it all yet, which might be my failing, but there is a lot of it. There is some good news, though. I was talking to one of the probable negotiators earlier this week and he said, “We based most of it on you”. There is some truth in that statement. That does not mean that it is all perfect or fine, or that you should not worry, but it is a worthwhile starting point. The UK was the forefather of the European integration of energy markets. That means that the way it is designed perhaps contains fewer pitfalls than might be the case for a country that did not start from that position. I will not bore you with the detail, but I went through the Commission’s work programme and the Swiss agreement, and my notebook is fairly full of the things I have written down.
Lord Moynihan of Chelsea: That was very helpful. Am I completely wrong in remembering that, in this agreement, we are going to commit to a much faster acceleration of our move to renewables, and we will be required to have more renewables more quickly if we join in with this agreement, or do I have that completely wrong?
Mark Copley: That is not my reading.
Adam Berman: No, I would not say that that is accurate. The UK has very ambitious renewables targets, whether it is through the Government’s own renewables targets or the carbon budgets that stem from the Climate Change Act. Even if you did not, the TCA already binds you into having quite a lot of renewables anyway, which you can take up with the TCA.
Unfortunately, the broader issue of dynamic alignment here is that there is absolutely a world in which the UK says, “I don’t want to do any of this. I want a completely different pathway. I don’t want any more renewables. I don’t want carbon pricing”. Fine, but the TCA does not allow you to do that anyway. You would have to renegotiate that deal or end up in many years of dispute settlement around that, which you would almost certainly lose based on the deal as it currently is. For the time that we already have rules that are consistent with the TCA, we are already largely doing the same thing. There has been some divergence, but it is pretty marginal, since Brexit.
I do not particularly see any problems with UK law as it is today or major issues stopping us from doing something we are currently doing. There is an open question as to whether it reduces flexibility in the future, but, as of today, I do not think that that is the case.
Lord Moynihan, to your point about costs, I would certainly agree with Mark that it would be a poor negotiation if we ended up not with net benefits. There are several buckets of benefits. Some of it is around wholesale prices themselves, where we know that that is up to about £370 million a year of benefit to the UK from moving to these arrangements. We also know that, in times of system stress events, this can reduce prices by up to about £100 per megawatt hour. That is in a report that we have not yet published, but it will be published in the next three weeks or so. To put that in context, it could be reduced by £100 per megawatt hour. On the current bill as it is today, electricity prices are about £90 per megawatt hour, so these can be really substantial savings at peak times.
It also benefits the future of interconnectors, as Mark said, whether it is the interconnectors we have today between two countries or ones in future, so these so-called hybrid interconnectors that connect into a wind farm and into another country. The economic case for that and lowering the cost of that project is incumbent on getting these arrangements away. There are there are, absolutely, benefits. Clearly, if the EU comes up with a silly number, that is going to be problematic, but I see no reason why the UK cannot agree a reasonable financial settlement and accrue significant net benefits on top of that.
The Chair: I remind everybody that we are conducting an inquiry into dynamic alignment and not the internal electricity market. We need to understand the context, which is why we are looking at this subject. We need to understand the scale of the benefits, because there will be a question of trade-offs when it comes to the dynamic alignment, but also the volume of work that is likely to be involved, which I think is one of the things that Lord Moynihan was getting at there. That seems to me, from what you have said, to be fairly substantial, as we go forward in dynamic alignment.
On the question of costs as well, we need to make sure that we differentiate between the bill that the EU presents to us and the bill that, in some senses, we create for ourselves. You have talked about us subsidising others. That is, in a sense, because we choose to put government money into subsidising certain parts of our electricity generation, I assume.
Adam Berman: Yes. I would maybe frame it in a slightly different way from Jack. We use mechanisms such as the contracts for difference, which is in essence the mechanism that we use to drive investment into renewables. We would use it either way to secure renewables. We would pay for that through whatever construct we pay for it. We would pay for it either way, whether we have interconnectors connecting us to Europe or not.
At least with the interconnectors we can make better use of it and better use of those British electrons. We can use it when we need it. We can export it when there is excess. We can use it to decrease curtailment. If you did not have those interconnectors, you would probably have to build a lot more capacity anyway, because at the moment interconnectors provide a very significant portion of the UK’s overall energy demand.
Jack is absolutely right. There is a political conundrum around how we discuss system costs and operate the system in a really efficient way, but I see that the benefits would likely grow over time, even notwithstanding that issue.
Q122 Baroness Ashton of Upholland: There are lots of political conundrums that we face in this committee all the time. I just wanted to make a comment. Sometimes we forget that a lot of the European law that we are dealing with stems back to very positive, strong British inputs of its time. In my experience in Brussels, as a trade commissioner and a high representative, there was a lot of input coming in, which we no longer have, unfortunately, but which I think we will find means that it is not quite as terrible as the 400 pages that you quite rightly described, Mr Copley.
Based on all the conversation we have had so far, which has been really interesting, do you think there are particular terms, carve-outs or transition periods that the Government need to seek in any electricity agreement? If you could wave your magic wand and be the negotiators, would you say, “Whatever you do, keep this separate”, or, “You’ve got to get this term”? We have talked a little bit about the money and, as Lord Jackson has said, the issues of SAFE, which I hope are not going to be part of this, but none the less we are all scarred by. We need to keep that in mind. Are there particular things that you would like to point to briefly?
Mark Copley: This is an agreement about the trading of wholesale electricity, and the EU starting point will be what it has done with Switzerland. I would make an argument that Switzerland, which has somewhere over 30 interconnections to the countries around it, is somewhat different from somewhere that is slightly arm’s-length connected. I would try to keep this as focused on wholesale aspects as possible. It is not clear why you need to harmonise your smart metering policy to facilitate a more efficient flow over an interconnector, so my starting point would be, “Let’s look at what changes the difference in prices over that interconnection”.
When I looked at the EU’s negotiating mandate, it recognises some of the areas that I think would be problematic. There is, as we have mentioned, a review of the renewable energy directive coming up. We are fundamentally on similar trajectories towards net zero. I would be pretty concerned about any sort of target being imposed into a country with a system of carbon budgets that I think is extremely effective. That has started to be reflected. I would be looking at that. I would also make sure we were not being brought into wider pieces of legislation, perhaps around renewable fuels of non-biological origin, to use another horrible acronym. You need to be wary of targets.
The other thing you need to be wary of in the context of recent discussions about market design in this country is changes to what are called bidding zones, which is the geographic area in which a price is set. That is one of the most political issues in the EU.
The answer to your question is that there are one or two things one needs to be particularly aware of, and where they involve a target they are probably most important to focus on. From a general perspective, the more you take an electricity agreement and focus it on electricity, to state the blindingly obvious, the more safe it is for everybody concerned. Now Adam will give you a better answer.
Adam Berman: I can try. It all comes down to the scope of dynamic alignment, ultimately, and there are positive signs. The document that the UK and the EU released in December last year was almost like a heads of terms of negotiation. It laid out the dilemma that, on the one hand, the UK is solving a discrete problem through these negotiations, which is cross-border electricity trading, but, in order to solve those problems, we have to gain access to the entire internal energy market, with the rights and obligations that come with it.
You can already see, within that document, a middle ground sketched out where the Commission is recognising that there are areas where clearly it is not plausible to ask you to dynamically align. For example, the renewable energy directive is the big piece of European law that governs everything related to renewable energy. It has a big target up top and then a set of different sectoral targets, so the share of final energy usage in transport or from buildings that comes from renewable energy. The UK has already, in that heads of terms, secured an opt-out from the sub-sectoral targets. It has already said clearly that that is beyond the terms of this agreement.
The signs are positive, but, to Mark’s point, there absolutely is a world in which the Commission pushes for a very expansive view of what dynamic alignment looks like. There are some areas, particularly around state aid, where I would start to get more nervous if it was anything on state aid beyond simply the issue of the electricity market and headline investment targets for that. That is not least because the EU is already quietly watering down its state aid obligations, but also because the UK and the EU are largely doing the same thing. They have different policy structures. They call them different things. There is an accelerator Act and things like that in the EU. We have contracts for difference and the clean industry bonus, which is a kind of supply chain industrial policy-style mechanism for renewables. They are all pretty much doing the same thing. As long as it does not extend beyond energy, I do not see anything deeply problematic.
Jack Pardoe: You have to first ask what you are doing this for. If you are doing it to cut bills, prioritise lots of other things first, because this is a marginal benefit. If you are doing it to cut bills but you are still going to do it anyway because it is part of a wider package, the cost of dynamic alignment, rejoining fees and everything else has to be weighed against that bill rise or bill cut. You will still need to get your own house in order first, or else you might turn what could be a net positive to begin with into a net negative for the British economy over time. A lot of the power is in our hands.
If I were the Government and the priority was that we are going to try to cut bills or cut energy costs for the economy, I would prioritise fixing our own roof before joining, or making it part of a condition of rejoining that we do it. It is quite serious. There was a Government in Norway brought down by the inefficiencies of the German market, which has a very similar market and energy policies to our own.
That is the main thing. If it is strictly to do with the cost of electricity, it is marginal. Prioritise other things. If you are going to do it, make sure that it remains a net saving for the British consumer over time, as well as immediately. If we have gone to this two-step process and it is less efficient and more costly, but, ultimately, that two-step process has a human in there, deciding the flows of interconnectors, who can correct them rather than exacerbate our own market failures, there might be a benefit to that. It is definitely about doing all we can to make our own electricity market work much better before we hook into the European market.
The Chair: The message I am getting from this is that, when the Government bring forward their UK-EU partnership Bill, which will set the terms for dynamic alignment for everything, not just the current negotiations, it will be crucial that there is scope, during the negotiation of subsequent deals, for scrutiny of the extent of the dynamic alignment that is agreed for that deal, for example in the internal electricity market to be able to scrutinise which particular sectors of EU law are agreed to in that deal.
Do you see what I am saying? The partnership Bill is going to be a sort of general applicability in terms of dynamic alignment, but you have just pointed to the fact that, in agreeing to dynamic alignment under an internal electricity market participation scheme, we need to be careful to exclude some aspects of it.
Jack Pardoe: It is not necessarily that you have to exclude things as part of the agreement. It is more doing things on our own side of the channel to make sure that the agreement works for the benefit of the British household or the British business in terms of energy costs.
The Chair: You have talked about focusing on wholesale rather than retail, for example. You talked about not including smart meters and things like this. My point is not whether those are the right things, but the fact that there will need to be some important decisions taken in terms of dynamic alignment. There needs to be some process of scrutiny of the taking of those decisions.
Mark Copley: That is absolutely right. I spend a lot of my life in Brussels. It is important to bear in mind that, from the EU perspective, it has off the shelf things it is going to be bringing forward. With the best will in the world, its willingness to flex some of those things is probably going to be quite limited. I would not want to put my former colleagues in an almost impossible position by saying, “Hey, all of this is going to be up for grabs and we will be able to pick and choose parts of it”. There needs to be a realism there. To your point, yes, absolutely, there needs to be a scrutiny of what is being signed up to.
It is important to bear in mind that we have 10 interconnectors that customers have paid for. We are talking about using them a little more effectively. There are loads of other questions about GB energy policy swirling around and they need to be answered. Fundamentally, I would frame this as a relatively low-regrets way of improving something we have and maybe enabling something in the future, rather than something that is going to fundamentally alter the nature of the system we are working in today.
Q123 Baroness Brown of Silvertown: You have already, in part, answered the question that I have in front of me, which is whether it is possible to say at this stage that an electricity agreement would have an effect on UK energy costs.
Adam Berman: Yes, it would have an effect on UK energy costs. It would have a downward effect on UK energy costs. It is hard to give you an exact figure. It is likely in the low hundreds of millions on an annual basis, but, at a time in which we have almost the highest energy costs in the industrialised world, I would argue that you need to be doing everything. Sure, this is one marginal policy, but maybe we have 15 marginal policies. Let us say, even at a lower estimate, it was £200 million of benefit every year. Over a Parliament, that is £1 billion. In Westminster terms, that may not be very much, but a billion here and a billion there is quite significant for energy bills.
I would absolutely recognise what Jack says. This is absolutely not a silver bullet to the UK’s energy dilemma around energy prices, but it is one weapon in your arsenal that you can use and that we know would have a downward impact on prices. Inevitably, it is going to take some time to negotiate and then implement. I do not want to pretend this is going to come into effect tomorrow and people will feel it in their energy bills and in the next price cap, but there clearly is a negative impact on power prices.
Mark Copley: It is also important to bear in mind that, from 1 January this year, there has also been a carbon border adjustment mechanism applied to flows across those interconnectors. The numbers I have seen say £2.2 billion of additional costs to the UK from that. This agreement in and of itself does not make the CBAM go away. If you agree an ETS linking agreement and an electricity agreement, you can—99% probability—remove that carbon border adjustment mechanism payment, which will create another immediate benefit. There were inefficiencies over the last four and a bit to five years. They are now greater because of the carbon border adjustment mechanism being in effect as well.
Lord Moynihan of Chelsea: Yes, that is true, taking that CBAM in isolation. There is a hell of a lot more to CBAM and everything we import from the rest of the world will become more expensive for us. That will be way larger than the £2.2 billion. Are you not making a special case there that actually should be looked at in a wider context, and your point would fall?
Mark Copley: You are correct that I think the EU covers six sectors under CBAM. I am an electricity geek and therefore I probably look at things through a slightly more narrow lens. For the people who trade across those interconnectors, as of 1 January there is a clear payment. There is a loss of revenue to the Exchequer and there are periods when energy is not flowing when it should be because of that tax.
Jack Pardoe: I agree with both Adam and Mark. If you make the interconnectors flow more efficiently, that will lead to a reduction in the cost of those interconnectors. If those interconnectors then exacerbate the worst features of an inherently inefficient market, which is what we have now, with the Government’s plans for what we are building in this country and where, over time they might raise the costs for British households and businesses.
Baroness Brown of Silvertown: Do all three of you agree with that?
Adam Berman: There is a difference of view on that one. That is not specifically about UK market design or anything like that. We are building a lot of renewable capacity. Some of that is being curtailed. Some of that is being exported out to the European Union. Because of the way our financial structures work around incentivising that capacity, the French or the Dutch may well benefit from a very low wholesale cost, but there may be another cost that is borne by British energy bill payers. That is simply a fact of how the interconnectors currently work and of how renewable generation capacity is procured. That is happening, regardless of what gets decided between the UK and the EU on electricity trading.
There is a question on the broader system costs and whether, as Jack puts it, there is a kind of net payment to European consumers or whether, in fact, there might be lower system costs overall. It is best that we do not get into that. For this specific discussion, all we are saying is that, yes, there are a lot of issues with the GB energy market, but we are talking about an incremental and modest improvement in the way that things work, notwithstanding any of those other dynamics that are already in place.
Mark Copley: The answer to your question is no. I do not agree with that characterisation. There is much in the UK/GB market that I would love to fix. There is an awful lot that needs to be sorted out. In this committee we are talking about making something that used to be efficient and became more inefficient more efficient again. To me, that sounds like a good idea.
Q124 Lord Moynihan of Chelsea: In this modern era, why are these process difficulties that you are saying cost us money not being dealt with by agentic AI? In any other industry they are sorting this sort of thing out by having AI agents get rid of all those inefficiencies. Why are we not doing that? I know that I am colossally ignorant.
Mark Copley: No, not at all. I represent 180 companies that trade electricity, gas and carbon all around Europe. Believe me, they are all algorithmically trading. They are all using AI agents to do this.
Lord Moynihan of Chelsea: I mean in the process side of things, not in their decision to trade.
Mark Copley: You need to buy capacity ahead of time and, when you buy that capacity, you have to predict what the difference in price is going to be. People are extremely good at that, but they still get it wrong sometimes. Doing it at the same time takes away the opportunity to get it wrong, so it is simply a timing mismatch really. I can tell you, if this was solvable with AI, there are a lot of trading companies that would already have fixed it. I can guarantee you of that.
Q125 Lord Brennan of Canton: We were told that we should declare our interests, so I suppose I should declare that I get my energy from Octopus Energy.
Jack Pardoe: I hope you are a happy customer.
Lord Brennan of Canton: Am I right in concluding, Mr Pardoe, that I am not going to see any reduction in my bill as a result of any of this?
Jack Pardoe: It would take a long time to come in, I imagine. It is marginal. I personally would prioritise things that are going to cut bills a lot more if you have a limited amount of officials doing work.
Lord Brennan of Canton: That was your “fixing your own roof” comment earlier on, was it not?
Jack Pardoe: Yes.
Lord Brennan of Canton: To stray slightly, what would that entail? It is relevant to whether this is worth doing.
Jack Pardoe: It would be moving to Norwegian-style zonal pricing or American-style nodal pricing. Basically, you have more price signals in your electricity market and make it operate better, so that we are not pretending that we are going to export Scottish wind to France, for example, and then finding that we actually cannot get it down there, so then we fire up a bunch of gas plants at extra cost and raise everyone’s bills.
This is out of scope, but the fastest and surest way to cut energy bills is through energy bill levy reform, so taking some of the renewable subsidies and social policies of electricity bills into general tax, which the Government started doing in autumn. It is the only thing that has cut a bill in the last 30 years, frankly.
Then there is a massive £100 billion grid upgrade, which we are just in the foothills of now. More transparency should be opened up in what those costs are.
All these things would cut bills much more than re-entering the European market. The crucial thing is that, if you are going to take this marginal benefit from making the interconnectors flow better and be more efficient, you have to make sure that the system that they are operating within is also efficient.
Lord Brennan of Canton: If the Government proceed with the electricity agreement, how long do you think it would take for it to come into force?
Mark Copley: At the risk of sounding a bit pedantic, you can bring something into force and then start operating different parts of it at different times. There is some IT complexity involved in sorting these algorithms out. There is a good amount of time required. As people who buy capacity on interconnectors, you need to know absolutely when your existing arrangements will stop and your new arrangements will start.
Personally, I think that you might consider staggering the different timeframes in which trading happens. You might well start with the day‑ahead market, which is where the benefits are largest, and move through towards balancing, which is most complex. You could agree the terms of the deal, if you like, relatively quickly. You would then need at least 12 to 18 months for the algorithmic changes. You would need to give the market absolute certainty on how and when you are selling capacity so you could use those interconnectors. We are in the three-year optimistic timeframe, but I have not given it the largest amount of thought.
Lord Brennan of Canton: The Government said they think they could bring the agreement into force within this Parliament, which happens to be, I suppose, three years at its longest stretch. From what you said, am I right in thinking you think that that is ambitious?
Mark Copley: Ambitious, yes, but unachievable, no.
Adam Berman: It is ambitious, but absolutely doable. If there is political will, there is no reason why we cannot get an agreement done within six to 12 months, and that is 12 months at the outside. Then you are looking at an implementation timeline. There are complexities. There is UK legislation. There is dealing with devolved Administrations. There are things that we will have to dynamically align on. I do not think that anyone is denying that. I would view this as a 2028 timeline, just being plausible. That is probably the earliest you could see it in place. There is no reason why it has to take much longer than that. If there are big political or technical difficulties, it probably gets pushed to the other side of the next general election.
Lord Brennan of Canton: Do you have any further things to add on that, Mr Pardoe?
Jack Pardoe: No. Very simply, it depends on political will.
Lord Brennan of Canton: You have worked in government. What do you think?
Jack Pardoe: I have, yes. Previously I worked in DESNZ. These things come down to the prioritisation of Ministers, at the end of the day.
Q126 Lord Jackson of Peterborough: Thank you, gentlemen. I get admonished by my colleagues for mentioning that things are not in the Labour Party manifesto. This is one of them, so I had better not mention that.
Lord Brennan of Canton: Can we strike that from the record, Chair?
Lord Jackson of Peterborough: It is a difficult question for you guys, because you are practitioners and lobbyists, rather than people involved in Parliament necessarily, but give it a go. What role could Parliament most usefully play during the negotiation of an electricity agreement and, if the agreement comes into effect, in subsequently scrutinising that agreement? What views do you have, drawn from your previous experience?
Jack Pardoe: Mine is a very simplistic answer. It would be good for MPs and Lords to have many more sessions such as this, where we are talking about how electricity markets or energy trading systems work. That would put this agreement into the widest possible context to make sure that, ultimately, British consumers do not lose out and they maximise the benefits from any kind of reintegration. I know that that is a very wishy-washy ask, but that would be the best one.
Adam Berman: I would love the Government to be more transparent about some of the key issues. That is not specifically a criticism of the current Government, but the approach of this and the last Government has largely been to do it behind closed doors without much discussion, other than the odd strategic leak to the media. I am not convinced that that is the most mature way to get these negotiations done.
After the negotiations are done, we need a standing body within Parliament. We need something like a European Scrutiny Committee, again to look at the dynamic alignment that is coming out.
The other thing that I am afraid is not Parliament but is really important is that, I would imagine that, as part of this deal, we will regain access to a set of European institutions, particularly ACER, the energy regulator, and ENTSO-E, the network body. We will not have a vote, but you will be a rule maker. Within that, the UK is going to need to provide a lot of resource to ramp up again on engagement and to do that at a professional level. We have probably slightly lost the ability to do that over the last few years. That is not parliamentary, but it is really important in our ability not just to adjudicate on whether the dynamic alignment is good or bad at a parliamentary level but also to impact the EU laws to begin with that then end up in a dynamic alignment discussion.
Lord Jackson of Peterborough: Coming back on that, what is the timescale? We are now in mid-June and I am not sure when we are going to have the summit. It is allegedly going to be 2027. What is your estimate of the timescale for securing a final deal on the electricity agreement?
Adam Berman: If we were not in the midst of a quite challenging political climate about the leadership of this country, I would say that there is really no reason why you cannot get the agreement done this year, with some political will. It is doable. Negotiations have started. They have been going on for some time now. If there is a change in leadership and therefore questions come up again about new Ministers and perhaps new Secretaries of State—who knows—what the right balance of dynamic alignment is will inevitably get pushed into next year. That will be 2027 before we get an agreement.
Mark Copley: I broadly agree with Adam there. We are rightly separating the ETS, so the carbon pricing aspects, and the electricity aspects, but really they go hand in hand. If you are making progress on your carbon pricing, there is absolutely no reason you should not be making rapid progress on your electricity agreement. What I hear is reasonably positive on the carbon pricing side, so I would like to think that that would create some momentum to move this quickly.
Yes, you can agree it reasonably quickly. You then need to make a series of technical changes to make it feasible and give market players enough time to start buying the capacity, but I am with Adam. You can get some momentum into this reasonably easily, particularly if ETS linking moves.
Lord Jackson of Peterborough: Do you think, from your experience of dealing with this sector, that Parliament is going to have the capacity and the bandwidth to deal with what could be many statutory instruments and secondary legislation arising from the new EU partnership Act, as it will be, in terms of secondary legislation in your sector?
Mark Copley: I have not given that a great deal of thought. I worked on Brexit last time round and there was a vast number of things to be done. At the risk of sounding like I am sucking up, I was very pleasantly surprised by the ability of people in this House and elsewhere to scrutinise that. My view is that it is entirely doable. As Jack said, perhaps things such as this enable you to get a series of different perspectives. As Adam said, perhaps some of those scrutiny structures need to be recreated. I think that Britain is quite good. I back our ability to do that.
Adam Berman: My issue would not be with resource; it would be with understanding. The level of understanding of European policy-making is low in Westminster. That is not a party-political point. It was probably low pre-2016, to be honest, but it is especially low now. I very much understand those who say, “We want more of a process in the Commons with the Bill that is going through”, and I would agree with them if there was a higher level of understanding about what is going on in the European Union. If we are going to have more due diligence and scrutiny from Parliament, we probably need to upskill policymakers, perhaps not in this House, perhaps in the other House, to better have a sense of what is going on and some of those trade-offs.
The Chair: On that note, we have run out of time. You have done a great job in taking us through a very complex issue, helping our understanding and contributing to this inquiry. I am most grateful to you for that and for coming and sparing so much of your time. Thank you very much.
