One of the lesser discussed aspects of the Protocol on Ireland / Northern Ireland is the provisions it makes, and the effects it has, on the supply of electricity to Northern Ireland after Brexit.
This explainer sets out the key provisions as they currently apply and considers some of the challenges and complexities related to the energy and electricity market in Northern Ireland that might be coming down the line.
What is the Single Electricity Market?
On the island of Ireland, the electricity industry operates in one wholesale market known as the Single Electricity Market or SEM. What this means is that any electricity used in either Northern Ireland or (the Republic of) Ireland has been bought and sold through a central market where electricity power generators sell to electricity suppliers who in turn sell to consumers.
To enable the SEM to work, the two electricity grids in Ireland and in Northern Ireland are physically connected. By implication, any wholesale electricity that is generated anywhere on the island of Ireland enters a Single Electricity Market regardless of whether the generator is located north or south of the land border.
Operation of the SEM is facilitated by the Single Electricity Market Operator (or SEMO) which is a contractual joint venture between the two system operators on the island of Ireland – SONI (System Operator for Northern Ireland) Ltd in Northern Ireland and EirGrid Plc in Ireland – and enables the financial coordination that underpins the SEM. What this means is that SEMO effectively ‘owns’ the rulebook when it comes to the generation and sale of electricity across the island of Ireland. For instance, SEMO sets the technical rules that govern participation and the procedures such as the timing of the regular auctions of electricity that take place.
The SEM is jointly regulated by the Single Electricity Market Committee, made up of three representatives from Ireland and three from Northern Ireland along with two independent members. Its purpose is to protect the interests of consumers of electricity anywhere on the island of Ireland by promoting effective competition between generators and traders.
When was it established and why?
The SEM was established under legislation that passed in March 2007 and the market ‘went live’ in November of that year. It operates with dual currencies (€/£) and, when it opened, it was the first cross-jurisdictional wholesale electricity market of its kind in the world.
Cooperation in respect to electricity supply on the island of Ireland first began in the 1970s. This was, however, interrupted due to security concerns during the conflict known as The Troubles but was reinstated in 1995 following paramilitary ceasefire agreements. Throughout this time, it was believed that the integration of electricity infrastructure on the island of Ireland would increase efficiency and reduce prices; the creation of the SEM in the early 2000s was underpinned by this motivation as well as by the desire to extend competition in light of the liberalisation of the sector and to facilitate decarbonisation.
A Memorandum of Understanding between the UK government and Irish government sets out that the SEM should provide a ‘competitive, sustainable and reliable market in wholesale electricity’ thereby reducing prices, increasing security of supply, and facilitating investment, particularly in renewable generation. It was established ‘within the context of the European Union’s policy on the creation of an EU-wide internal market for electricity.’
The SEM obliges all but the very smallest power generators to ‘bid in’ their power to the collective market for suppliers to buy and sell on to consumers. What this means is that electricity generation on the island of Ireland is available at the lowest cost source possible to meet customer demand at any given time.
On average each year the SEM manages financial flows of approximately €3.5 billion.
In 2018, the SEM underwent significant change as part of an EU-wide initiative to create a fully liberalised internal electricity market. The main aim of the new ‘Integrated Single Electricity Market’ or I-SEM is to maximise competition and therefore enable access to cheaper sources of electricity by linking trading on the island of Ireland with trading in the wider EU market using European market procedures.
How does the rest of the energy market work in NI?
It is not only in respect to electricity supply that arrangements in Northern Ireland are distinct, the energy market in general operates, and is regulated, separately from that of the rest of the UK.
In Northern Ireland the Utility Regulator performs the regulatory function that Ofgem performs for Great Britain. The energy price cap that applies in GB does not apply in NI. Instead, price increases in NI come through immediately and the Utility Regulator is responsible for regulating prices and implementing controls.
Profits of energy suppliers in Northern Ireland are capped by the Utility Regulator at 2% for gas suppliers SSE Airtricity and Firmus, and at 2.2% for Power NI, the legacy electricity supplier.
“A promised £400 energy support discount has not yet been distributed to Northern Ireland gas and electricity customers.”
Compared to GB, the NI system for regulating energy prices is more sensitive to change. Suppliers can announce price increases as and when they need to, subject only to Utility Regulator approval. Any increases in the price of gas or electricity in NI therefore tend to be more gradual than in GB where, typically, price caps are updated biannually, though this has now increased to every three months due to the rapid rise in global energy prices.
Another difference in the Northern Ireland energy market is the reliance on home heating oil, which is used by roughly two thirds of homes. This compares to approximately 5% of the overall UK population.
Home heating oil is an unregulated market. There are many different suppliers which means that competition and price efficiency is in-built, however, this also means consumers are much more exposed to fluctuations in the cost of the fuel at source.
How does the cost of energy in NI compare to the rest of the UK?
The prices of wholesale electricity in Great Britain and in the SEM are generally similar; in recent quarters, both have been above the EU average. This reflects the fact that the SEM’s only interconnection with the European market is currently via its interconnection with Great Britain.
The regulated price of domestic energy in Northern Ireland tends to be lower than in the rest of the UK.
According to the most recent comparable statistics available – in 2021 the average electricity bill (all payment types) for households in Northern Ireland was considerably lower (£699) that anywhere else in the UK, behind the average in Scotland (£770) and England and Wales (£771).
Of course, the price of and level of dependence on gas and heating oil also impact bills. However, because of the very different structure of the NI energy market compared to GB, and the fact that it is regulated separately, direct comparisons can be difficult and ought to be tempered by context. While energy bills in NI tend to be, in general, lower than in the rest of the UK, households in NI also, on average, spend a higher percentage (16%) of their non-discretionary income on energy (including fuel) than elsewhere in the UK (average 10%) due to NI having the lowest average (discretionary and non-discretionary) income of anywhere else in the UK.
How has the lack of an NI Executive affected the functioning of the NI energy market and support schemes?
While the lack of an Executive has not affected the operation of the SEM or energy markets directly, it has ‘hindered’ government provision of support for NI customers facing rising costs. Little progress has been seen on the Executive’s energy strategy, agreed in 2021 which set targets to improve energy efficiency and increase electricity consumption from renewables to 70% by 2030, in part to make energy more affordable.
Unlike the rest of the UK, where gas and electricity customers have been receiving financial support from the government since 1 October, a promised £400 energy support discount has not yet been distributed to NI gas and electricity customers. Payments had been promised to arrive in November, but they have not materialised due to ongoing political stagnation and the timeline for eventual delivery is still unclear. The Utility Regulator has suggested that it may be January before people in NI receive that support.
“Any wholesale electricity that is generated anywhere on the island of Ireland enters a Single Electricity Market regardless of whether the generator is located north or south of the land border.”
For the two-thirds of the NI population who rely on home heating oil, a one-off payment of £100 had been promised by the UK government under Prime Minister Liz Truss. Against a backdrop of criticism about the perceived inadequacy of the proposed support due to the rising cost of heating oil, in the Autumn Statement Chancellor Jeremy Hunt announced a revision to the proposed support, increasing it to £200 which will be given to all NI households. The timeline for delivery is unclear.
How has the Single Electricity Market been affected by Brexit and the NI Protocol?
The importance of protecting the SEM and NI energy market more generally in the context of Brexit was identified early on as a ‘key priority’ for Northern Ireland by the First and deputy First Minister at the time.
As currently agreed, Article 9 of the Protocol on Ireland / Northern Ireland sets out provisions to ensure the continued functioning of the ‘Single Electricity Market’ after UK withdrawal. Under its terms, 7 instruments of EU law, related to the regulation of energy and electricity markets, apply to the UK in respect of Northern Ireland ‘insofar as’ they apply to the ‘generation, transmission, distribution, and supply of electricity, trading in wholesale electricity or cross-border exchanges in electricity’. Any provisions in these 7 EU acts that are not necessary for the operation of the SEM do not apply to NI. In addition, state aid rules apply to and in NI in relation to energy.
The SEM is connected to Great Britain via two interconnectors which allow the SEM to import electricity when supply is short or to export when supply is high (particularly when there is excess wind generation). Following the UK’s departure from the EU’s Internal Energy Market (IEM), the inefficiencies in trade across interconnectors and the resultant higher prices, may have had a knock-on effect on prices in the SEM. The SEM Committee has consulted industry on any improvements which could be made to the current arrangements for trading electricity between GB and the SEM.
How would the Single Electricity Market be affected by the creation of UK and EU ETS and CBAMs?
Under the Northern Ireland Protocol, the EU Emissions Trading Scheme (ETS – which requires companies in some sectors to bid for a finite number of permits to cover their carbon emissions) continues to apply to Northern Ireland’s three fossil electricity generators while the UK ETS applies for all other relevant sectors.
The UK and EU committed under the Trade and Cooperation Agreement to ‘give serious consideration to linking their respective carbon pricing systems’ (Article 392). This has been supported by industry in the UK, Ireland and across the EU, who say it would make processes simpler and more predictable, and reduce the risk of competitive distortions from different permit prices. However, no progress has been made on this issue and the relevant committee under the TCA has not met since October 2021.
The plan for a Carbon Border Adjustment Mechanism (CBAM) was announced by the EU in July 2021. It targets imports of products such as electricity, iron and steel, aluminium, and some fertilisers (though the list may change as the inter-institutional negotiations take place). The CBAM will apply a carbon price equivalent to the cost of permits under the EU ETS to these products, to help domestic producers compete fairly against imports from producers located in markets where climate regulation is weaker.
As currently drafted, the CBAM would not apply to goods originating in countries and territories where the EU ETS applies or where it is linked to that of the third country or territory, or where an equivalent price is paid in the country of origin.
The EU is likely to want this to apply to Northern Ireland under the Protocol. In practice this would mean checks and tariffs on goods within the scope of the CBAM moving from GB to NI, unless the EU and UK ETS regimes were linked.
Under the rules of the Withdrawal Agreement, the addition of any CBAM legislation would need to be approved by the UK government acting together with the EU in the Joint Committee. The UK government told the European Scrutiny Committee in March 2022 that it: ‘expect[s] the EU to take into account the UK’s ambitious carbon pricing regime in its implementation of the CBAM and will continue to engage with the [European] Commission on how this will function in practice’.
How would the Single Electricity Market be affected if the Northern Ireland Protocol Bill passed?
The Northern Ireland Protocol Bill is designed to give the UK government unilateral powers to overwrite provisions of the NI Protocol. Under the NIP Bill, Article 9 and Annex 4 of the Protocol (which underpin the function of the SEM), is neither protected nor excluded. This means that, if the Bill becomes law as it is currently drafted, the seven provisions of EU law relating to the SEM would not be ‘excluded’ from domestic law and therefore would continue to have legal effect in the UK.
However, according to clause 13 of the NIP Bill, they would then apply outside the jurisdiction of the CJEU and would no longer apply dynamically (meaning updates to EU law would not apply); this would be the case unless, under an NIP Act, UK Ministers decided otherwise, which they could also do.
Using powers granted under the NIP Bill as drafted UK Ministers could make provisions to facilitate the continued operation of the SEM, for example by introducing procedures for the referral of issues of interpretation and/or enforcement of (previous) EU laws to the CJEU.
“On average each year the Single Electricity Market manages financial flows of approximately €3.5 billion.”
Alternatively, NIP Act powers could be used by Ministers to ‘exclude’ Article 9 and Annex 4 thereby denuding them of their effect in domestic law. Doing so would remove key parts of the legal underpinning of the SEM as it currently operates. As this has never happened before the immediate practical effects are hard to predict; much would depend on decisions taken by those involved in running the market including the Single Electricity Market Operator, the SEM Committee as well as those companies who participate in it. Any decisions taken by the European Commission in response to the NIP Bill could also play a key role here.
As such, the impact of the NIP Bill on the SEM depends to a very large degree on what Ministers of the Crown decide to do, or not do, with the (expansive) powers granted them to make changes to the legal effect of the Protocol in the UK, as well as reactions to those decisions if/when they come.
How would the Single Electricity Market be affected if the Retained EU Law Bill passed?
This already complex hypothetical set up of the Protocol plus the NIP Bill/Act becomes even more complex when we add in the Retained EU Law (REUL) Bill/Act: which will see all EU law copied onto the UK statute book after Brexit expire (or ‘sunset’) at the end of 2023, unless actively retained.
EU law instruments relevant to the SEM also became retained EU law in the rest of the UK, though some changes have already been made to them, which means they could fall in the scope of the REUL Bill. This begs a question or two.
Because EU laws that are relevant to the SEM apply in NI only to the extent that they are necessary for the continued functioning of the SEM, the question arises as to whether they will be subject to the sunset clause in the REUL Bill and, if so, how they will be redrafted to reflect their continued, stripped back application?
Alternatively, if those 7 acts of EU law are not subject to the sunset clause in the REUL Bill when it comes to NI, what is the legal basis for this to be the case?
Further, SEM market participants, regulators and stakeholder will need to understand which rules apply, under what basis, and who makes those decisions.
These questions may seem overly technical, and, in truth, they possibly are, but they also symbolise the very real-world issues that are at stake here for Northern Ireland. If questions like these go unresolved, the legal basis for the continued operation of the electricity market in NI could be endangered.