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The cost of uncoupling GB interconnectors

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  • Guo, Bowei
  • Newbery, David

Abstract

The UK left the EU Integrated Electricity Market on 31/12/20 and with it access to Single Day Ahead Coupling that clears local and cross-border trades jointly – interconnectors are implicitly auctioned. The new Trade and Cooperation Agreement requires a replacement “Multi-region loose volume coupling” to be introduced before April 2022. Until then, interconnector capacity is allocated by an explicit day-ahead auction before the EU auction with nomination after the EU results are known. The article measures the risks posed by taking positions in each market separately and the resulting costs of uncoupling of GB's interconnector trade. It compares four forecasts of price differences under two sequencing of markets and explicit auction, determining traders' risk discounts for each. The current timing leads to lower mistakes on the direction of flows, arguing for retaining current timing. Competitive traders locking in their positions after the explicit auction (overstating costs as subsequent trading out of unprofitable positions is ignored) limit the total loss of interconnector revenue from uncoupling to €31 million/yr. The social cost of uncoupling is €28 million/yr, considerably below earlier estimates in the literature. Experience since uncoupling validates this finding.

Suggested Citation

  • Guo, Bowei & Newbery, David, 2021. "The cost of uncoupling GB interconnectors," Energy Policy, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:enepol:v:158:y:2021:i:c:s0301421521004390
    DOI: 10.1016/j.enpol.2021.112569
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    Cited by:

    1. Mezősi, András & Kácsor, Enikő & Diallo, Alfa, 2023. "Projects of common interest? Evaluation of European electricity interconnectors," Utilities Policy, Elsevier, vol. 84(C).
    2. Michael G Pollitt, 2022. "The further economic consequences of Brexit: energy," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 38(1), pages 165-178.
    3. Savelli, Iacopo & Bokkisam, Hanumantha Rao & Cuffe, Paul & Morstyn, Thomas, 2023. "On-demand energy flexibility market via smart contracts to help reduce balancing costs in Great Britain," Energy Economics, Elsevier, vol. 126(C).
    4. Liu, Yang & Jiang, Zhigao & Guo, Bowei, 2022. "Assessing China’s provincial electricity spot market pilot operations: Lessons from Guangdong province," Energy Policy, Elsevier, vol. 164(C).
    5. Liu, Y. & Jiang, Z. & Guo, B., 2021. "Assessing China's Provincial Electricity Spot Market Pilot Operations: Lessons from the Guangdong Province," Cambridge Working Papers in Economics 2165, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    Electricity trading; Market coupling; Auctions; Price forecasting;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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