Proposal for a COUNCIL DECISION on the position to be taken on behalf of the European Union within the EU-UK Specialised Committee on Energy of the EU-UK Trade and Cooperation Agreement

EXPLANATORY MEMORANDUM

This proposal concerns a Council Decision establishing the position to be taken on the Union's behalf in the Specialised Committee on Energy (‘the Specialised Committee’) set up under Article 8(1)(l) of the EU-UK Trade and Cooperation Agreement (‘the Agreement'). The position relates to adopting a recommendation on electricity trading arrangements.

On 1 February 2020, the United Kingdom of Great Britain and Northern Ireland (‘the United Kingdom’) withdrew from the European Union and from the European Atomic Energy Community.

The arrangements for the withdrawal are set out in the Agreement on the withdrawal of the United Kingdom from the European Union and the European Atomic Energy Community (‘the Withdrawal Agreement’) ¹ . The Withdrawal Agreement entered into force on 1 February 2020 and provided for a transition period during which Union law ² applied to and in the United Kingdom in accordance with that Agreement. This period ended on 31 December 2020.

During this transition period, the European Union, Euratom and the United Kingdom agreed on a Trade and Cooperation Agreement (‘The Agreement’), which was signed on 30 December 2020, applied provisionally since 1 January 2021 and has entered into force on 1 May 2021.

Since the end of the transition period, the European Union and the United Kingdom have run separate policies related to energy. Cooperation in this area has taken place in the Specialised Committee on Energy established under Article 8(1)(l) of the Trade and Cooperation Agreement.

The Agreement aims to govern the relationship and promote trade and cooperation between the EU and the UK, including in the area of energy under Title VIII and Annex 29.

In particular, the Agreement provides for the development of a new procedure for the allocation of capacity on electricity interconnectors at the day-ahead market timeframe. This new procedure is to be based on the model of ‘multi-region loose volume coupling’ (‘MRLVC’).

The 2021 Cost benefit analysis identified two potential ways forward, a Preliminary Order Book design and a Common Order Book design solution, where the main difference is that the Preliminary Order Book design uses preliminary order book information as available 15 minutes before gate closure time of the EU single day-ahead coupling. The Preliminary Order Book solution was proposed as an alternative to Common Order Book in order to avoid the impact of MRLVC on single day-ahead coupling.

A first recommendation to develop MRLVC was adopted by the Specialised Committee on 7 February 2023. Each Party was to request its respective Transmission System Operators (‘TSOs’) to provide additional information within five months of the date of the request. As a result, both the EU and the UK TSOs and regulatory authorities have ruled out the Preliminary Order Book approach of MRLVC due to identified significant risks of market manipulation. Therefore, they turned to see if a number of fundamental design challenges of the alternative Common Order Book approach to MRLVC could be resolved. The Specialised Committee welcomed the above-mentioned contribution in November 2023. It also noted that development of the design must be consistent with the process set out in Article 312(1), 312(2) and 317 of the Agreement and requirements set out in Annex 29.

The information and tentative conclusions arising from the 2021 cost-benefit analysis and 2023 reply to the Recommendation found that the efficiency of MRLVC will depend on the accuracy of the bordering bidding zone net position forecaster. As a result, the two parties involved proposed to further analyse this point. In addition, the EU and UK TSOs identified in their report that future development of offshore hybrid projects will require electricity trading arrangements that support efficient pricing and capacity utilisation. As a result, the Specialised Committee also decided that further consideration needed to be given to ensuring that EU-UK electricity trading arrangements support their ambitions for the rapid development of renewable energy projects in the North Seas.

Hence, in light of the progress achieved to date by the TSOs, and the additional information provided in response to Recommendation No 1/2023 regarding the cost-benefit analysis and the outline proposals for technical procedures, the necessary step should be adopted to ensure that the TSOs commence a next phase of work which focuses on addressing the fundamental design issues, which have been highlighted, in order to satisfy the Specialised Committee’s obligations under Article 312(1) and Article 317(2), read in conjunction with Article 312(1), of the Trade and Cooperation Agreement.

The Specialised Committee noted that the Parties expect a phased approach to the development of technical procedures for MRLVC, starting with an initial concept-validation phase in which fundamental design issues, identified in the 2021 cost benefit analysis and additional information provided to the Parties in 2023, are addressed and set out in the initial draft technical procedures with supporting analysis. This concept-validation phase should inform and support the development of a single set of draft technical procedures for MRLVC in line with Articles 312(1) and 317(2) of the Trade and Cooperation Agreement.

Any decision by the Specialised Committee on the implementation of technical procedures for an MRLVC solution following a Common Order Book Approach, pursuant to Article 317(4) of the Agreement, should be supported by a stakeholder consultation, robust periods of testing, and an updated cost benefit analysis.

Article 8(1)(l) of the Agreement establishes the Specialised Committee on Energy.

Under Article 8(4) of the Agreement, the Specialised Committee on Energy, in its area of competence, has the power to:

• monitor and review the implementation and ensure the proper functioning of the Agreement or any supplementing agreement;

• assist the Partnership Council in the performance of its tasks and, in particular, report to the Partnership Council and carry out any task assigned to it by the Partnership Council;

• adopt decisions, including amendments, and recommendations on all matters where this Agreement or any supplementing agreement so provides or for which the Partnership Council has delegated its powers to a Specialised Committee in accordance with point (f) of Article 7(4) of the Trade and Cooperation Agreement;

• discuss technical issues arising from the implementation of this Agreement or any supplementing agreement;

• provide a forum for the Parties to exchange information, discuss best practices and share implementation experience;

• establish, supervise, coordinate and dissolve working groups; and

• provide a forum for consultation in line with Article 738(7) of the Agreement.

The Specialised Committee on Energy is to adopt a Recommendation to the Parties regarding the development of the EU-UK electricity trading arrangements at the day-ahead timeframe, as provided for under the Agreement.

Given the prominent role provided for TSOs and regulators, it is required to ensure that they take ownership of further developments to implement MRLVC, including the need to address all the design challenges referred to the Common Order Book approach to MRLVC. Hence, the Recommendation is specifically addressed to the EU and UK TSOs, with the expectation that regulators will also provide a motivated opinion on the conclusions and reply provided.

As a result, the TSOs of both Parties shall request the opinion of ACER and the regulatory authority in the UK designated in accordance with Article 310. The Parties’ respective TSOs shall submit those opinions together with their motivated conclusions replying to the Recommendation to the Specialised Committee on Energy. The latter shall review their conclusions and replies, taking into account the opinions of ACER and the regulatory authority in the UK designated in accordance with Article 310.

Pursuant to Article 218(9) of the Treaty on the Functioning of the European Union (TFEU), the Council shall adopt, on a proposal from the Commission, the decision on a position to be taken on behalf of the Union in the Specialised Committee on Energy, as regards decisions having legal effect under public international law. The adoption of a recommendation by the Specialised Committee on Energy under the Trade and Cooperation Agreement, albeit non-binding, requires that such a Decision be adopted by the Council.

While acknowledging that the Preliminary Order Books approach is not a viable option for further development of MRLVC, the Specialised Committee on Energy recommends abandoning it. The Specialised Committee recommends, therefore, that each Party requests its respective TSOs to jointly commence an initial concept-validation phase to produce the single set of initial draft technical procedure for MRLVC in accordance with Annex 29 of the Agreement and with supporting analysis. The TSOs shall produce a joint report for the Specialised Committee investigating any barriers to the delivery of joint and hybrid offshore projects that may result from existing trading arrangements or MRLVC, and any specific changes needed to existing trading arrangements or specific requirements of the design of MRLVC needed to deliver efficient electricity trading that supports the delivery of joint and hybrid offshore projects. The report should investigate the impact of both existing trading arrangement and an MRLVC solution on joint and hybrid projects, over the medium term (2030-2035 horizon).

The development of the work mentioned above should involve regular oversight and input by the Parties. It could also involve the TSOs engaging with wider stakeholders that may include regulators, NEMOs/power exchanges, and academia.

The proposed position to be taken on behalf of the Union in the Specialised Committee is therefore to support the adoption by the Specialised Committee, pursuant to Article 312(1) of the Agreement, of a Recommendation to the Parties set out in the Annex to this Decision. Once adopted, each Party is expected to request its TSOs to develop the replies to questions set out in the Recommendation.

Article 218(9) of the Treaty on the Functioning of the European Union (‘TFEU’) provides for decisions establishing “the positions to be adopted on the Union’s behalf in a body set up by an agreement, when that body is called upon to adopt acts having legal effects, with the exception of acts supplementing or amending the institutional framework of the agreement.’

The concept of ‘acts having legal effects’ includes acts that have legal effects by virtue of the rules of international law governing the body in question. It also includes instruments that do not have binding effects under international law, but that are ‘capable of decisively influencing the content of the legislation adopted by the EU legislature’ ³ .

The Specialised Committee on Energy is a body established by an international agreement, namely the Agreement.

The envisaged recommendation to be adopted by that Committee will not be binding under international law pursuant to Article 10 of the Trade and Cooperation Agreement. However, it is capable of decisively influencing the content and implementation of EU legislation, namely the Commission Regulation (EU) 2015/1222 of 24 July 2015 establishing a guidance on capacity allocation and congestion management ⁴ , given that the development of trading arrangements with the UK would require adjustments to the EU’s price coupling algorithm which manages the allocation of capacity on the EU single day ahead coupling.

The envisaged act does not supplement or amend the institutional framework of the Agreement.

Therefore, the procedural legal basis for the proposed decision is Article 218(9) TFEU.

The substantive legal basis for a decision under Article 218(9) TFEU depends primarily on the objective and content of the envisaged act in respect of which a position is taken on the Union's behalf. If the envisaged act pursues two aims or has two components and if one of those aims or components is identifiable as the main one, whereas the other is merely incidental, the decision under Article 218(9) TFEU must be founded on a single substantive legal basis, namely that required by the main or predominant aim or component.

With regard to an envisaged act that simultaneously pursues a number of objectives, or that has several components that are inseparably linked without one being incidental to the other, the substantive legal basis of a decision under Article 218(9) TFEU will have to include, exceptionally, the various corresponding legal bases.

The main objective and content of the envisaged act relate to the area of energy. Therefore, the substantive legal basis of the proposed decision is Article 194(1) TFEU.

The legal basis of the proposed decision should be Article 194(1) TFEU, in conjunction with Article 218(9) TFEU.

As the purpose is for the Specialised Committee on Energy to adopt a Recommendation under the Trade and Cooperation Agreement, it is appropriate to publish it in the Official Journal of the European Union after its adoption.

COUNCIL DECISION

on the position to be taken on behalf of the European Union within the EU-UK Specialised Committee on Energy of the EU-UK Trade and Cooperation Agreement

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 194(1), in conjunction with Article 218(9) thereof,

Having regard to the proposal from the European Commission,

Whereas:

1. On 29 April 2021, the Council adopted Decision (EU) 2021/689 ⁵ on the conclusion of Trade and Cooperation Agreement between the European Union and the European Atomic Energy Community, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part ⁶ (the ‘Agreement’). The Agreement entered into force on 1 May 2021.

2. Article 8(1)(l) of the Agreement established the Specialised Committee on Energy. Its competences are set out in Article 8(4) of the Agreement.

3. Pursuant to Article 8(4), point (c), of the Agreement, the Specialised Committee on Energy (the ‘Specialised Committee’) may adopt decisions and recommendations in respect of all matters where the Agreement or any supplementing Agreement so provides or for which the Partnership Council has delegated powers to it, on issues related to its area of competence. Pursuant to Article 10(2) of the Agreement, a Committee shall adopt decisions and make recommendations by mutual consent.

4. Regarding the EU-UK electricity trading arrangements, Article 312(1) of the Agreement requires that for capacity allocation and congestion management at the day ahead stage, the Specialised Committee take, as a matter of priority, the necessary steps in accordance with Article 317 to ensure that TSOs for electricity develop arrangements setting out technical procedures for the day ahead timeframe.

5. In particular, the Trade and Cooperation Agreement provides for the development of a new procedure for the allocation of capacity on electricity interconnectors at the day-ahead market timeframe. This new procedure is to be based on the model of ‘multi-region loose volume coupling’ (‘MRLVC’).

6. On 10 July 2023, the TSOs of the EU and the UK delivered a report, following on the Specialised Committee Recommendation No. 1/2023 of 7 February 2023, requesting the TSOs to address a number of questions as regards the implementation of the multi-regional loose volume coupling. This was supplemented by an informal opinion of ACER and the UK regulatory authorities.

7. Considering the conclusions of the TSO report of 10 July 2023, supported by the informal opinion of ACER and of the UK regulatory authorities, it is appropriate for the Specialised Committee to recommend further action to the Parties.

8. The Specialised Committee is to adopt the Recommendation either at a forthcoming meeting, or by written procedure, following the completion of domestic procedures by each Party.

9. It is appropriate to establish the position to be taken on the Union's behalf in the Specialised Committee, as the Recommendation of the Specialised Committee will be capable of decisively influencing the content of or the way in which the Union acquis is to be implemented, in particular Commission Regulation (EU) 2015/1222, ⁷ while the Decision of the Specialised Committee on Energy will be binding on the Union. 

HAS ADOPTED THIS DECISION:

Article 1

The position to be taken on the Union's behalf in the Specialised Committee on Energy, established by Article 8(1)(l) of the Trade and Cooperation Agreement, is set out in the Annex to this Decision.

Article 2

This Decision is addressed to the Commission.

Done at Brussels,

ANNEX

Recommendation …/2024

of the Specialised Committee on Energy established by Article 8(1)(l) of the Trade and Cooperation Agreement between the European Union and the European Atomic Energy Community, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part

of …

to each Party concerning the preparation of technical procedures for the efficient use of electricity interconnectors

The Specialised Committee,

Having regard to the Trade and Cooperation Agreement between the European Union and the European Atomic Energy Community, of the one part, and the United Kingdom of Great Britain and Northern Ireland of the other part (the ‘Trade and Cooperation Agreement’), and in particular Article 311(1) and (2), Article 312 (1) and (2), Article 317 (1), (2) and (3), and Annex 29 thereof,

Whereas:

1. Pursuant to Article 8(4), point (a) of the Trade and Cooperation Agreement, the Specialised Committee on Energy (the ‘Specialised Committee’) has the power to monitor and review the implementation and ensure the proper functioning of the Trade and Cooperation Agreement in its area of competence. Pursuant to Article 8(4) point (c), it has the power to adopt decisions and recommendations in respect of all matters where the Trade and Cooperation Agreement so provides or for which the Partnership Council has delegated its powers to that Specialised Committee pursuant to Article 7(4), point (f). Pursuant to Article 329(3) of the Trade and Cooperation Agreement, it shall make recommendations as necessary to ensure the effective implementation of the Chapters for which it is responsible.

2. Pursuant to Article 312(1) of the Trade and Cooperation Agreement, the Specialised Committee, as a matter of priority, shall take the necessary steps in accordance with Article 317 to ensure that Transmission System Operators (‘TSOs’) develop arrangements setting out technical procedures in accordance with Annex 29 within a specific timeline.

3. On 7 February 2023, the Specialised Committee adopted Recommendation No 1/2023 for each Party to request its respective TSOs to provide the additional information as set out in Annex II to Recommendation No 1/2023 within five months of the date of request made by each Party.

4. The European Union and United Kingdom TSOs provided that additional information to the Parties in response to their respective requests, and the respective EU and UK regulatory authorities provided opinions to the Parties in relation to that additional information, in July 2023. The Specialised Committee welcomed these important contributions to the implementation of the Energy Title of the Trade and Cooperation Agreement at the Specialised Committee meeting on 9 November 2023.

5. Both EU and UK TSOs and regulatory authorities have identified significant risks of market manipulation associated with the Preliminary Order Books approach to the operation of day ahead electricity trading arrangements based on the concept of Multi-Regional Loose Volume Coupling (‘MRLVC’).

6. Both EU and UK TSOs and regulatory authorities have identified that the potential benefits of the Common Order Book approach to MRLVC will depend on the resolution of a number of fundamental design challenges. Further specific work to develop a robust design for MRLVC following a Common Order Book approach is needed before any decision on implementation can be made. This design will, among other requirements, need to ensure secure and efficient operation of the respective EU and UK electricity wholesale markets, and address any trade-off between the efficiency of MRLVC and the secure and efficient operation of the EU and UK electricity wholesale markets. Thorough consultation, assessment, and testing of the mechanism will also be required ahead of any implementation decision. Moreover, the Specialised Committee noted that development of the design must be consistent with the process set out in Article 312(1), 312(2) and 317 of the Trade and Cooperation Agreement and requirements set out in Annex 29.

7. Both the 2021 cost-benefit analysis (‘the 2021 CBA’) and the 2023 additional information prepared by EU and UK TSOs have found that the efficiency of MRLVC will depend to a significant extent on the accuracy of the bordering bidding zone net position forecaster. Further specific work to develop and confirm the validity of the concept of this forecaster is needed before a decision on implementation can be made. The Specialised Committee notes that EU and UK TSOs proposed a phased approach to the development of the forecaster in their report, beginning with an initial prototype design and validation phase.

8. Both the EU and the UK have ambitious goals to unleash the offshore renewable energy potential in the North Seas to enhance access to affordable energy and advance their transitions towards climate neutrality. Pursuant to Article 321 of the Trade and Cooperation Agreement the Parties shall cooperate in the development of offshore renewable energy by sharing best practices and, where appropriate, by facilitating the development of specific projects. The EU and UK TSOs identified in their report that the future development of offshore hybrid projects will require electricity trading arrangements that support efficient pricing and capacity utilisation. The Specialised Committee acknowledged that further consideration needed to be given to ensuring EU-UK electricity trading arrangements support their ambitions for the rapid development of renewable energy projects in the North Seas.

9. The 2021 CBA identified a single Great Britain clearing price at the day-ahead timeframe as an assumption in all MRLVC design options under consideration. The UK published its consultation response on re-coupling relevant Great Britain auctions for cross-border trade with the EU at the day-ahead timeframe in August 2023. The UK’s analysis showed the majority of respondents were supportive of the proposals set out in the consultation. The UK has since engaged with the Specialised Committee and presented the outcomes of the consultation.

10. In the light of progress achieved to date by the TSOs, and the additional information provided in response to Annex II to Recommendation No 1/2023, the Specialised Committee on Energy should address the Parties to ensure that the TSOs commence a next phase of work. This work should focus on addressing the fundamental design issues which have been previously highlighted to satisfy the Specialised Committee’s obligations under Article 312(1) of the Trade and Cooperation Agreement.

11. The Specialised Committee noted that the Parties expect a phased approach to the development of technical procedures for MRLVC, starting with an initial concept-validation phase. In light of findings from the TSOs’ report submitted in July 2023, additional analyses are necessary and should be included in the concept validation phase. This concept-validation phase should inform and support the development of a single set of draft technical procedures for MRLVC in line with Articles 312(1) and 317(2) of the Trade and Cooperation Agreement.

12. Any decision by the Specialised Committee on the implementation of technical procedures for an MRLVC solution following a Common Order Book Approach, pursuant to Article 317(4) of the Trade and Cooperation Agreement, should be supported by stakeholder consultation, robust periods of testing, and an updated cost benefit analysis.

HAS ADOPTED THIS RECOMMENDATION,

Article 1

The Specialised Committee acknowledges that the Preliminary Order Books approach is not a viable way forward for the further development of a Multi-Regional Loose Volume Coupling (‘MRLVC’) solution and recommends that it not be pursued further by the Parties.

Article 2

The Specialised Committee recommends that each Party requests its respective TSOs for electricity and, for the Union, the ENTSO-E facilitating the work of EU TSOs, to jointly commence an initial concept-validation phase prior to producing the single set of initial draft technical procedures for MRLVC in accordance with Annex 29 of the Trade and Cooperation Agreement and with supporting analysis, comprising:

1. An optimal operational timeline combining the operations of the MRLVC, the EU Single Day-Ahead Coupling, and the Great Britain wholesale electricity market arrangements under a Common Order Book approach, including the optimal validation and fallback arrangements. The optimal operational timeline should promote the robust and efficient use of interconnectors while minimising risks for the secure operation of the EU and UK electricity wholesale markets and taking into account possible market developments up to 2030-35. The operational risks linked to that timeline on both the EU Single Day-Ahead Coupling and the Great Britain wholesale electricity market should be assessed and, to the extent possible, quantified. A range of options for operational timelines should be included in the supporting analysis to support the identification and assessment of the validity of an optimal timeline.

2. A draft tender specification for a prototype for a bordering bidding zone net position forecaster. This draft tender specification should include a detailed description of requirements, including the following:

   • The methodology (e.g., statistical and/or deterministic) to be employed;

   • Specific outputs that would be required from the forecaster;

   • How the forecaster will incorporate future market developments, including the future introduction of new bidding zones whether onshore or offshore;

   • How outputs from the forecaster will be inputted into wider MRLVC processes;

   • Any other key requirements identified through the work set out under subparagraph (a) and Article 3.

This draft tender specification should be accompanied by the following:

• Information on how the tender would be issued and governed, including consideration of ownership and intellectual property rights;

• A detailed breakdown of anticipated timings and costs; 

• Any relevant issue related to administrative functions required to address UK and EU system interdependencies in the implementation of an MRLVC solution.

Article 3

1. The Specialised Committee recommends that the Parties request their respective TSOs for electricity, and, for the Union, the ENTSO-E facilitating the work of EU TSOs, to produce a joint report for the Specialised Committee investigating any barriers to the delivery of joint and hybrid offshore projects that may result from existing trading arrangements or MRLVC, and any specific changes needed to existing trading arrangements or specific requirements of the design of MRLVC needed to deliver efficient electricity trading that supports the delivery of joint and hybrid offshore projects.

2. The TSOs joint report should investigate the impact of both existing trading arrangements and an MRLVC solution on joint and hybrid projects, over the medium term (2030-2035 horizon), with a particular focus on:

   • the scope of the application of the trading modalities, and whether and how the performance of capacity allocation may be affected;

   • how these trading arrangements could operate with different market designs, in particular offshore bidding zones; and

   • whether there may be sufficient clarity in the business case for infrastructure investment,

The TSOs joint report should take into consideration:

• the nature and scale of possible offshore renewable energy infrastructure developments across the North Seas in the medium term, including possible hybrid interconnectors, energy islands, meshed grids and offshore electrolysers;

• possible mechanisms of price formation;

• the complementary role of forward and intraday trading arrangements;

• impact on the accuracy of bordering bidding zone forecasts; and

• any specific adjustments that may be required in the design features of these trading modalities, within their general confines, to help address any identified barriers and or requirements in the development and operation of joint and hybrid offshore projects to deliver efficient trading arrangements. 

Article 4

The development of the work recommended under Articles 2 and 3 should involve regular oversight and input by the Parties. It may also involve the TSOs engaging with wider stakeholders that may include regulators, nominated electricity market operators/power exchanges, and academia.

Article 5

The Specialised Committee recommends that the Parties coordinate their communication with their respective TSOs for electricity and, for the Union, the ENTSO-E facilitating the work of EU TSOs with respect to Articles 2 and 3 and request them to complete the work listed under those Articles within 11 months of the adoption of this Recommendation.

Article 6

The Specialised Committee recommends that the Parties request their respective TSOs for electricity and, for the Union, the ENTSO-E facilitating the work of EU TSOs to request an informal opinion of the UK national energy regulators and ACER regarding their work completed with respect to Article 2 and Article 3, to be delivered within one month of the delivery of the TSOs joint report.

[Done at [XX], [DATE]]