Written evidence submitted by the Ofgem (FRE0076)

Overview

1. Ofgem is Britain’s independent energy regulator. Our role is to protect consumers now and in the future by working to deliver a greener, fairer energy system.

2. We do this by:

• working with Government, industry and consumer groups to deliver a net zero economy at the lowest cost to consumers.
• stamping out sharp and bad practice, ensuring fair treatment for all consumers, especially the vulnerable.
• enabling competition and innovation, which drives down prices and results in new products and services for consumers.

Our role

3. Ofgem is the Office of Gas and Electricity Markets. We are a non-ministerial government department and the independent National Regulatory Authority[1] for Great Britain. As such, our response covers GB only, and not Northern Ireland.[2] While Ofgem has been working closely with the government to provide technical and regulatory advice, it does not have a formal role in the government’s negotiations regarding any Future Trade Agreement with the EU. As a result, our response is not able to cover specific details related to ongoing negotiations.

4. We work effectively with, but are legally distinct and functionally independent from, central government, the energy industry and other stakeholders within a legal framework determined by the UK government and the European Union.

European interactions

5. As part of our role, we support the vision of a competitive, secure and sustainable European energy market that brings affordable and secure energy supplies to consumers.

6. The GB market is physically connected to many other neighbouring markets via interconnectors, which allow both gas and electricity flows across borders. The direction of interconnector flows (import or export) is driven by market prices in either GB or other connected countries. GB imports when prices are higher in GB (because, for example, demand is high or it is cold). GB exports when prices are lower compared to other markets, providing an opportunity for GB market participants to sell excess power and gas to other markets. This cross-border energy market:

• Enables the system to be used more efficiently (by making best use of the network and the generation connected to it);
• Enhances competition (by bringing more buyers and sellers to market to trade); and
• Enhances security of supply (by reducing the reliance on one source or type of generation).

7. It ultimately provides mutual benefits for the countries involved as the more efficient the trading arrangements with our neighbours, the more efficient the flows between the countries and the higher the overall benefits to society.

8. For electricity,[3] the GB market is connected to several EU markets. These are Belgium (Nemo Link), France (IFA) and the Netherlands (BritNed) along the Channel. There are also two interconnectors (EWIC and Moyle) with the Irish electricity market. All of these interconnectors are bi-directional, meaning they can flow to (supply) or from (demand) GB. In addition to this, there are multiple projects with existing and new markets at various stages of development. These include the ElecLink and IFA2 projects planned between GB and France, each with capacities of 1 GW, and NSL between GB and Norway,[4] which will become operational in 2021 with a capacity of 1.4 GW, and be the longest subsea interconnector in the world. Also in the pipeline is the Viking Link with Denmark, which is expected to be completed by the end of 2023 with a capacity of 1.4 GW. 

9. The GB gas[5] market is also connected to EU and EEA markets. Along the Channel, there are interconnectors with Belgium (IUK) and the Netherlands (BBL). There is also one interconnector to the Republic of Ireland. Only IUK and BBL are bi-directional. GB is also physically connected via pipelines from Norway

Ofgem's preparations for leaving the EU and the end of the transition period

10. Following the UK’s exit from the EU, we have been working with the government and energy industry stakeholders to ensure that our regulatory framework is fit for purpose and protects customers, whatever the arrangements are for following the transition period.

11. The government is leading in ongoing negotiations with the EU about a Free Trade Agreement which will determine the nature of future arrangements after the end of the transition period.

12. We are confident that our regulatory framework will be fit for purpose for a range of scenarios, including exiting the transition period without a deal. GB also has diverse energy sources, and GB’s market-based energy system has repeatedly proved to be resilient. We expect this to remain the case.

13. Below we outline the preparations we made ahead of leaving the EU. These may form the basis of our end-of-transition period preparations, depending on the negotiated outcome.

Interconnectors and cross-border trading

14. If, following the transition period, we are obliged to leave the Internal Electricity Market (IEM), we do not expect any interruption to the flows of electricity and gas across GB’s interconnectors. Gas and electricity will still flow across GB interconnectors, just on different terms that are less efficient. We expect exiting the IEM will lead to the loss of single day-ahead market coupling (SDAC) and single intraday coupling (SIDC) on GB electricity interconnectors.

15. Exiting the IEM will mean EU legislation such as Commission Regulation (EU) 2015/1222 of 24 July 2015 on capacity allocation and congestion management (“the CACM guideline”) will cease to apply to the UK. The CACM guideline sets out the legal framework – including a shared order book - that underpins GB’s participation in SDAC.[6]  SDAC is a framework under which power exchanges designated as Nominated Electricity Market Operators (NEMOs) match orders across geographic areas, taking into account the available capacity – called implicit trading. This allows for more efficient allocation of interconnector capacity. Under these arrangements, a shared order book between the two GB NEMOs allows for a single GB reference price for the day-ahead auction.

16. In a scenario where we leave the IEM, GB’s electricity interconnectors to Continental Europe will switch from implicit to explicit trading arrangements, which does not take into account transmission capacity, and so is less efficient.[7] GB will revert to pre-CACM arrangements, and as a result will no longer have access to implicit day-ahead and intraday[8] market coupling arrangements with the EU. Measures in CACM establishing shared order books which allow a single GB reference price no longer will apply.

17. In 2019, ahead of leaving the EU, in preparation for the possibility of a no-deal outcome, we approved modifications to the Access Rules for BritNed, IFA and Nemo Link, IFA2 and ElecLink.[9] These rules would have allowed interconnectors to switch from implicit to explicit trading arrangements in the event of a no-deal outcome, and could form the basis of explicit arrangements if GB no longer had access to the IEM and/or alternative trading arrangements from the FTA.

18. For the GB’s interconnectors to the Irish electricity market, we do not expect to receive updated Access Rules ahead of the end of the transition period. In the event that GB no longer has IEM access, the Irish interconnectors will allocate capacity via implicit intraday auctions.

19. For GB’s gas interconnectors, we engaged with the interconnectors and neighbouring regulators ahead of leaving the EU. The interconnectors did not identify any changes needed to ensure operability ahead of exit day. These access rules and charging methodologies will be reviewed again ahead of the end of transition period. Limited references to EU law may need to be changed in future reviews.

Codes and Licences

20. Ofgem grants licences to companies so they can operate in GB’s energy market, and licensees must comply with the conditions of their licence and industry codes developed under those conditions. Some of the licence conditions and industry codes have been modified or inserted to ensure compliance with EU legislation. In preparation for the possibility of a no-deal exit, last year we reviewed licences to identify interactions with EU law, and found the majority of licences would need to be changed.[10] As we reach the end of the transition period, we will need to ensure that licences reflect necessary legislative changes resulting from any outcome of ongoing negotiations.

21. In addition, ahead of leaving the EU, Code Administrators reviewed the codes to identify where changes would have been required in the event of a no-deal outcome. Codes will also need to reflect any legislative changes resulting from the outcome of ongoing negotiations. We previously have communicated the importance of ensuring that ‘day 1’ code changes are prioritised so that the regulatory framework is updated in a timely manner. By ‘day 1’ changes, we mean consequential changes required to update industry codes in line with domestic legislation following the transition period. We will continue to engage with Code Administrators to support the work they have been undertaking.

REMIT

22. Leaving the EU governance framework will also impact the administration of the REMIT regulation. The outcome of the ongoing UK-EU negotiations is likely to determine the nature of this relationship.

23. REMIT is an EU-wide Regulation which guards against wholesale market abuse. It provides a consistent EU-wide regulatory framework specific to wholesale energy markets that:

• Defines market abuse. This includes market manipulation, attempted market manipulation or insider trading.
• Explicitly prohibits market abuse.
• Requires effective and timely public disclosure of inside information by market participants.
• Obliges firms professionally arranging transactions to report suspicious transactions.

24. As the GB NRA, we have powers through REMIT to monitor, investigate and enforce breaches of REMIT. Under REMIT, market participants submit to the Agency for the Cooperation of European Regulators (ACER) transaction data on wholesale energy trading.

25. We previously prepared our REMIT administration (eg registration, data collection etc) for a no-deal outcome ahead of the UK leaving the EU, and these preparations provide the basis in the event no agreement is reached on continuing existing arrangements for administering REMIT. The REMIT prohibitions and obligations will still apply in GB after the transition period. Ofgem will continue to have the powers to monitor and enforce them.

26. Trade and fundamental data relating to GB wholesale energy markets and products will no longer be collected by ACER. In September 2019 last year, we said there will be a review period if the no-deal arrangements were used. At the time of writing, we planned to use this period to consult with industry stakeholders on the best way to report GB REMIT data.[11]

27. After the end of the transition period, Ofgem will continue to monitor the market for possible breaches of market integrity using existing data sources. GB fundamental data will continue to be made publicly available by obligated parties.

28. Ahead of leaving the EU, we advised that market participants registered in GB that also trade GB energy products will not need to re-register with us, and we will continue to recognise the registration of market participants registered with the Utility Regulator and EU NRAs.  

29. Again, ahead of leaving the EU, we advised that market participants registered in GB that also trade EU energy products would need to re-register with an NRA within the EU. They would also continue reporting order and trade data related to transactions for wholesale energy products deliverable in the EU to ACER using new registration codes. Those market participants were advised to initiate the re-registration process in January 2019 by ACER,[12] and in subsequent Ofgem guidance. Following re-registration, these market participants can use their new registration code both in GB and the EU.

30. We understand that ACER, as expressed in its Open Letter, is engaging on a continuous basis with Registered Reporting Mechanisms (RRMs) to ensure a smooth ongoing REMIT reporting following EU exit. The re-registration process should not present a REMIT compliance risk to market participants.

Involvement in EU and European bodies

31. Future participation in ACER is part of ongoing negotiations about the Free Trade Agreement. ACER is a European Union body established under the Third Energy Package. ACER's mission is to foster cooperation among European energy regulators and ensure market integration and harmonisation of regulatory frameworks. It does this through developing Framework Guidelines and Network Codes regarding the cross-border infrastructure for the trade of gas and electricity, and resolving disagreements between NRAs on access to cross-border infrastructure through its powers to issue binding decisions on issues where agreement is not reached. 

32. Since the UK left the EU on 31 January 2020, Ofgem is no longer a member of ACER, as is consistent with the Withdrawal Agreement.[13] During the transition period, UK representatives may be invited to have a limited role in ACER meetings, for example in cases where the discussion concerns the UK, or UK presence is in the interest EU members.[14] The future of Ofgem’s relationship with ACER is subject to the outcome of negotiations on the Free Trade Agreement.

33. Ofgem is a member of the Council of European Energy Regulators (CEER), and will continue to be regardless of the outcome of any future deal. CEER is not an EU institution; it is a not-for-profit European association established in 2000 in Brussels. CEER brings together the independent national energy regulators from the member states of the EU and from countries in the European Economic Area (EEA). CEER acts as a focal point for information exchange and assistance between Europe's national energy regulators. The nature of UK participation in CEER will remain almost status quo, though with a few restrictions – for example, in relation to voting on certain items related specifically to EU legislation.

Conclusion

34. Ongoing government negotiations on the Free Trade Agreement will ultimately determine future trading arrangements for gas and electricity. We will continue to work with the government and industry to ensure that regardless of the outcome of these negotiations, our regulatory framework remains fit for purpose.

35. Should you have any further questions in the course of your enquiry, please get in touch.

July 2020