What does the Windsor Framework mean for the Single Electricity Market?
Despite ongoing comment and debate around the Windsor Framework, agreed by the UK and EU, there has been little mention of the potential impact on the Single Electricity Market (SEM) on the island of Ireland. This element of the Protocol on Ireland/Northern Ireland facilitates the continued cross-jurisdictional wholesale market on the island of Ireland. Although the new agreement does not directly impact the SEM, it could still have repercussions on the trading of electricity between the UK and the EU, for meeting climate targets in Northern Ireland, and potentially affecting consumer prices for energy bills.
No direct impact…
It is important to first highlight that the Windsor Framework does not modify Article 9 or Annex 4 of the Protocol, which pertain to the SEM, and apply select parts of EU acts in Northern Ireland under the principle of dynamic alignment (for more on the SEM in the Withdrawal Agreement see here). The new ‘Stormont Brake’ will not apply to the SEM. As such, while concerns were raised in the House of Lords regarding the potential negative effects of the Northern Ireland Protocol Bill on the SEM, the Windsor Framework specifically targets the areas of the Protocol perceived as problematic, primarily the movement of goods. Nevertheless, there could still be some indirect repercussions in the energy sector in Northern Ireland resulting from the new agreement.
But some positive indirect repercussions
One of the potential indirect effects of the Windsor Framework is the changes to customs and VAT regulation within the agreement. The easing of trade between Great Britain and Northern Ireland with regard to goods is likely to be beneficial for the industry, as the supply of goods and materials is crucial for the construction, operation, and maintenance of energy infrastructure. The simplification of customs declarations and VAT arrangements under the new agreement could be particularly significant in this regard. For instance, manufactured goods entering and remaining in Northern Ireland will benefit from reduced paperwork.
The agreement also includes a new zero-rate for solar panels and other energy-saving measures, while the partial application of EU VAT rules in Northern Ireland may pave the way for future reductions on other goods. It remains to be seen whether this could allow Rishi Sunak to fulfil his campaign promise (£) to cut VAT on domestic fuel. Putting aside any discussion about whether this is a good idea, implementing such a measure could have a modest yet noticeable impact on the price of domestic electricity while easier access to goods could facilitate decarbonisation goals.
In addition, the renewed commitment to the committees and mechanisms of the Withdrawal Agreement, could enhance the implementation of its SEM provisions. While the regulatory bodies responsible for the SEM have continued to operate the market, political support and cooperation is necessary to ensure its viability long-term. For instance, there has been no agreement on which aspects of each EU law apply to Northern Ireland under the provision that excludes those ‘relating to retail markets and consumer protection’ (Annex 4). However, the new working group on the SEM, established under the Joint Consultative Working Group could find a resolution in the current cooperative environment.
This cooperative environment could and hopefully will extend beyond just the Withdrawal Agreement. Electricity is a fundamental component of our contemporary lifestyle and recent years have demonstrated the significance of having access to affordable and dependable sources of electricity while the escalating climate crisis highlights the need to generate power sustainably. Improved UK-EU cooperation could contribute to decarbonisation efforts through various means, such as research and innovation funding, however this discussion centres on the potential for enhanced electricity trading as a result of the Windsor Framework.
Electricity cooperation beyond the SEM
The UK’s departure from the EU has disrupted the trade in electricity between the UK and the EU via interconnectors with implications for the SEM. A single wholesale market allows generators to benefit from economies of scale and sell electricity to a larger consumer base across markets with different demand profiles. This reduces inefficiencies and leads to lower prices. This is the underlying justification for not just the SEM but also for the EU-wide electricity market. Although the UK-EU Trade and Co-operation Agreement (TCA) included provisions to restore cross-border cooperation in electricity trading, progress in this area has so far stalled. This has added cost to electricity prices (£) and introduced inefficiencies to trade between GB and the SEM.
Fortunately, improvements in the UK’s relationship with the EU could potentially unlock this situation and facilitate smoother electricity trade between Great Britain and the EU, including the SEM. This would be beneficial for market participants and consumers in both jurisdictions and reduce carbon emissions. Furthermore, if there was progress in connecting the UK and EU emissions trading systems, another TCA commitment, it could address potential issues with a Carbon Border Adjustment Mechanism and facilitate decarbonisation efforts.
To conclude, although the SEM on the island of Ireland is not directly affected by the Windsor Framework, there is a potential for positive indirect effects on electricity trading between the UK and the EU and the energy market in Northern Ireland. With ambitious decarbonisation goals in both the UK and EU, the Windsor Framework must be the gateway to greater cooperation.
