Abstract
The UK's withdrawal from the European Union could mean that it leaves the EU's Internal Energy Market for electricity (Elecxit). This paper develops methods to study the longer-term consequences of this electricity market disintegration, especially the end of market coupling. Before European electricity markets were coupled, different market closing times forced traders to commit to cross-border trading volumes based on anticipated market prices. Interconnector capacity was often under-used, and power sometimes flowed from high- to low-price areas. A model of these market frictions is developed, empirically verified on 2009 data (before French and British market coupling) and applied to estimate the costs of market uncoupling in 2030. A less efficient market and the abandonment of some planned interconnectors would raise generation costs by €700 m a year (2%) compared to remaining in the Internal Energy Market. This result is sensitive to how the British and French electricity systems develop over the coming decades. Economic losses are four times greater (€2700 m a year) if France retains substantial nuclear capacity due to its low marginal costs. Conversely, losses are reduced by two-thirds if UK weakens its decarbonisation ambitions, as lower carbon prices subsidise British fossil fuel generation, allowing electricity prices to converge with those in France. A Hard Elecxit would make British prices rise and French prices fall in three of our four scenarios, with the opposite movements in the fourth scenario.
Highlights
Electricity traders sometimes make mistakes, and they know it
To calculate the costs of Great Britain’s possible departure from the EU’s internal electricity market, we start by designing a microeconomic model of the decoupled markets between Great Britain and France in 2009
The demand on the spot markets is not completely common knowledge at the time when trades across the interconnector must be decided, and traders must consider the risk of anticipation errors
Summary
The UK’s withdrawal from the European Union could mean that it leaves the EU Single Market for electricity (Elecxit). This paper develops methods to study the longer-term consequences of this electricity market disintegration, and in particular the end of market coupling. Before European electricity markets were coupled, different market closing times forced traders to commit to crossborder trading volumes based on anticipated market prices. Interconnector capacity was often underused, and power sometimes flowed from high- to low-price areas. A model of these market frictions is developed, empirically verified on 2009 data (before market coupling) and applied to estimate the costs of market uncoupling in 2030. A less efficient market and the abandonment of some planned interconnectors would raise generation costs by €560m a year (1.5%) compared to remaining in the Single Electricity Market. Sixty percent (€300m) of these welfare losses occur in Great Britain
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