The EU-UK Trade Agreement – first impressions (2) Title VIII Energy

The European Union has been attempting to build a single energy market for over two decades based on liberalised markets for both electricity and gas.  This started with the First Energy Package for electricity approved in 1996.  Britain had started the process earlier and by the end of 1990 had privatised the 12 regional electricity companies.  Far from the big bad EU pushing privatisation it was Britain that led the way, continuing to have a major influence on EU energy policy as a member state.

By looking at the Energy section of the new EU-UK Trade and Cooperation Agreement we can see characteristics that are repeated throughout the Agreement and illustrate the wider issues that it contains.

Reading Title XVIII Energy of the Agreement is like reading the Directives of the EU’s Third Energy Package, without the detailed rules but with the same principles agreed by the two Parties.  So, we have agreement to “competition in markets and non-discrimination”; with wholesale electricity and natural gas prices that “reflect actual supply and demand”; rules that “encourage free price formation”; and services that “are procured in a transparent, market-based manner.”

The EU also claims that it has agreement to “enforceable commitments towards Paris Agreement and non-regression on climate change and carbon pricing, with possibility of linking EU and UK carbon pricing regimes.”

Since the energy sector is heavily regulated and of strategic importance the Agreement permits heavy state intervention so that the commitment to free markets is heavily qualified, something that the most extreme libertarian advocates of capitalism might bristle at and left supporters of Brexit fail to appreciate.

For example, one of the sections (Article ENER.8) on ‘Third-party access to transmission and distribution networks’ repeats the EU requirement that “Each Party shall implement arrangements for transmission system operators which are effective in removing any conflicts of interest arising as a result of the same person exercising control over a transmission system operator and a producer or supplier.”

The EU recognises that while there can be ‘competitive’ markets in electricity generation between different companies, and in electricity supply to final domestic and business customers, there can only be one provider of the transmission system of high voltage overhead power lines and associated equipment.  In order to prevent the transmission system owner in the middle of the industry discriminating against particular generators or suppliers from rival companies, these transmission system owners have to be ‘unbundled’ from any joint ownership of generation and supply.

In order to protect the ownership structure of Scottish companies the UK as a member state had the rules elaborated to protect ownership structures that on the face of it looked incompatible with separate ownership requirements and removal of any potential conflict of interest.  This was an example, noted earlier, of British influence and not the ‘subordination’ claimed by some supporters of Brexit that we noted in the previous post.  In practice also, the transmission system operators mostly remained state-owned across Europe.

How far the rules could be bent is best illustrated in Ireland where the largest generation company is owned by the Irish State; as is the largest supply company, while the transmission system (and distribution system of low voltage wires) is also owned by the Irish State.  Not only that, but the Irish State also owns generation in the North of Ireland, a supply company and the transmission and distribution systems as well.  It also owns the undersea cables (interconnector) joining the Irish electricity grid to the one in Britain.

Some states regard such assets as strategic and are keen to retain ownership.  What this does is make a nonsense of the view that the EU is somehow a more ‘neoliberal’ creature than Britain, but also that state ownership is somehow socialist.  The Irish State has never had a social-democratic Party in office without it being the junior partner of the traditionally most right-wing capitalist party in it, yet ownership of the electricity industry in the Irish state is dominated by that state.  Something the Irish supporters of Brexit seem utterly oblivious to.

State intervention obviously gives rise to concern about unfair competition but given that both sides subsidise renewable generation this will be a hard area to police, making it another potential area for conflict – “each Party preserves the right to adopt, maintain and enforce measures necessary to pursue legitimate public policy objectives . . .”

In the body of the Agreement and Annex ENER-2 ‘Energy and Environmental Subsidies’ there are numerous references to the need not to “significantly distort trade between the parties”, and that subsidies generally “shall be determined by means of a transparent, non-discriminatory and effective competitive process.”

This includes that “a Party shall not impose a higher price for exports of energy goods or raw materials to the other Party than the price charged for those energy goods or raw materials when destined for the domestic market . . .”

The existence and further development of undersea cables (interconnectors) joining the electricity grids of different countries is the foundation of the single European Energy market that Britain has left.  It is testament to what Marxists have analysed as the Internationalisation of the forces of production and upon which the socialisation of production will form the basis of international socialism.  Their existing development under capitalism imposes its own requirements regardless of reactionary political moves to limit or reverse the process.

The Agreement is therefore keen that the maximum level of the capacity of electricity interconnectors is made available (as also for gas interconnectors).  This is the case if for no other reason than, for example, the electricity interconnectors between Britain and France and Britain and the Netherlands are jointly owned by the British and French and the British and Dutch.  Brexit should therefore not prevent this process of interconnector development from continuing. (See here for a current list of existing and projected interconnection).

This requires continuing cooperation between the EU and UK even as the latter leaves the EU’s Single Energy Market.  Cooperation between the energy Regulators and the transmission system operators will continue although the EU is clear that this does not accord the UK partner equivalence to their own in either case.  In the case of the “administrative arrangements” between the GB and EU Regulatory Authorities, the Agreement states that it “shall not involve, or confer a status comparable to, participation in the [EU’s] Agency for the Cooperation of Energy Regulators by the regulatory authority in the United Kingdom.”  The cooperation nevertheless requires new provisions and rules for trading across the interconnectors joining the EU and Britain.

The main market for trading electricity in the EU is the Day-Ahead market in which hourly electricity flows are priced in an auction involving generators selling and suppliers buying power at the clearing price set by the auction.  This involves generation and supply companies right across the EU with the price calculated by an EU algorithm.  Because of restrictions in the flow of electricity across different countries a single price across Europe isn’t possible but the price differences that arise between different zones determines the direction in which electricity flows across the interconnectors between them.

So, for example, if the price in Britain is €60 and the price in France is €50 the flow of electricity would be to Britain, which would lower the price there and permit export from France and would be an efficient use of the interconnection.

The Agreement’s new arrangements are set out in an Annex (ENER-4):

“the Specialised Committee on Energy, as a matter of priority, shall take the necessary steps . . . to ensure that transmission system operators develop arrangements setting out technical procedures in accordance with Annex ENER-4 within a specific timeline.”

“If the Specialised Committee on Energy does not recommend that the Parties implement such technical procedures in accordance with Article ENER.19(4) . . .  it shall take decisions and make recommendations as necessary for electricity interconnector capacity to be allocated at the day-ahead market timeframe in accordance with Annex ENER-4.”

Which seems to say the Specialised Committee (made up of representatives of the EU and UK) can implement the new arrangements as set out in the Annex, and if it doesn’t agree to them, it can implement them anyway.

These arrangements envisage an auction involving the UK and those EU countries directly connected to the UK by interconnectors, before the EU Single Market Day-Ahead auction.  The results of it would be an input into the EU auction calculations.  The EU Day-Ahead auction closes at 12:00 and produces results for the 24 hours beginning 24:00 on the same day (all times are Central European Time i.e. one hour before UK time).

The newly mandated EU-UK auction would therefore have to be completed well before 12:00 and would not contain more up-to-date information on demand, the weather and power plant availability etc. which may thereby make it less attractive to potential participants.  In these circumstances the prices coming out of it may result in less efficient prices so that the interconnectors directly joining the UK with the other parts of the EU may not flow in the ‘correct’ direction.

In our example above, if, in the EU Day-Ahead auction, the price in Britain was €60 and the price in France was €50 the flow of electricity mandated by the earlier auction might be to France, which would lower the price there and permit export from Britain but would take electricity from where it is relatively expensive to where it is already relatively cheaper, exaggerating the price differences instead of bringing them together.  This would therefore not be an efficient use of the interconnectors.

This of course would affect both Britain and EU countries and would be sub-optimal for both but it is also the case that Britain would suffer proportionately more.  Another example of where exit from the EU may cause harm.

In looking in more detail at one area of the Trade Agreement we can see the stupidity of Brexit even from the narrow point of view of British capitalism.  This includes the left supporters of Brexit whose equally narrow nationalist claims are also unjustified as we have seen.  From a socialist point of view, while it undermines any genuine objective of international socialism Brexit also undermines its left supporters actual project of reforming capitalism through prioritising the nation state and its so-called ‘sovereignty’.

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