The Single Electricity Market Committee, a joint regulatory committee governing the "All-island" market in Ireland (SEM), noted in its annual report that one of its tasks for this year would be to consider market coupling between SEM in the island of Ireland and BETTA in Great Britain. A discussion paper on this topic is due to be presented to SEMC later this month. Meanwhile, OFGEM has discussed the use of market coupling in a recent discussion paper on "liquidity in the GB wholesale energy markets" concluding that increased interconnection combined with greater integration through measures such as market coupling are "key drivers for liquidity", which is an important feature of a competitive and well functioning market.

Market coupling is part of ERGEG's "regional initiatives" programme, which seeks to improve integration between regional areas of Europe. ERGEG is the European Regulators' Group for Electricity and Gas, a body of independent national energy regulatory authorities set up by the European Commission as an advisory group. A separate but related development is the recent approval of the so-called "third package", which includes a new Access Regulation, dealing with issues relating to cross-border exchanges of energy.

With increased interconnection planned between GB and Ireland and also between GB and the Netherlands, it is timely to consider these initiatives and recent developments. This article considers, firstly, market coupling, a regional initiative driven by ERGEG, and secondly the provisions of the TEN-E (Trans-European Energy Networks) programme and the new Access Regulation.

What is market coupling?

Put simply, market coupling is the alignment of one or more markets in order to facilitate cross-border trade across interconnectors. The concept of market coupling has developed through transnational forums such as ERGEG and CEER (the Council of European Energy Regulators). Market coupling is a market-led initiative and is not a result of requirements imposed by EU legislation. It is therefore a "bottom up" initiative that runs alongside "top down" measures such as the Access Regulation (1228/2003/EC) (see below). Recently there has been a number of successful market coupling initiatives in Europe such as seen between France, Belgium and the Netherlands where harmonisation of auction rules has facilitated cross-border trade across interconnectors.

Market coupling is part of ERGEG's "regional initiatives" project, which aims to improve integration of the electricity and gas markets by encouraging increased co-operation in a number of areas. The regional initiatives programme has divided Europe into seven regions, taking the view that harmonisation measures would be more effective if pursued in a more localised and therefore more manageable way. The UK and Ireland are part of the UK-Ireland-France regional initiative.

Interconnection in Europe

Increased interconnection has been on the EU agenda for several years. In addition to ERGEG's regional initiatives, the European Commission have been working towards a more integrated EU market through their TEN-E programme. This programme aims to achieve a (non-binding) target to increase the level of electricity interconnection to at least 10% of member states' installed production capacity. The Commission decision laying down guidelines for trans-European energy networks (Decision 1364/2006/EC), aims to foster "a more favourable context for the development and construction of trans-European energy networks".

As well as encouraging member states to facilitate projects of "common European interest" (i.e. interconnectors), the Decision identifies priority projects which will receive priority for EU funding made available under TEN-E. An interconnector between Ireland and Wales is one such priority project. It is expected that Eirgrid's project, the "East-West interconnector", will be eligible for up to €100 million through EU funding.

The Access Regulation

In addition to these developments, the regulatory framework has similarly been under development through the so-called "third energy package". A new access regulation, which will repeal the current Access Regulation 1228/2003/EC, is part of the third package. That Regulation had provision for a number of matters, including transmission tariff harmonisation. However, the relevant guidelines under Article 8 that were to be introduced to support this were never put in place, although the Commission did belatedly issue a consultation on this topic in December 2008.

The new regulation, which has now received formal approval and is awaiting publication in the Official Journal, provides for the introduction of binding network codes covering, among other things, rules regarding harmonised transmission tariff structures including locational signals and inter-transmission system operator compensation rules. These are to be developed by a new body established under the Regulation, the European Network of Transmission System Operators for Electricity (ENTSO).

Article 6 of the new Regulation provides that the Commission shall request the new Agency for Cooperation of Energy Regulators (ACER) to produce framework guidelines on the content of these network codes. ACER will have up to 6 months after receipt of a request by the Commission to produce draft guidelines, which will then be consulted upon for a period of 2 months.

After the framework guidelines have been finalised, ENTSO will have a period of up to 12 months to develop binding network codes. The network codes must be drafted in accordance with the framework guidelines and are to be approved by ACER.

New binding congestion management guidelines are also included in the annex to the draft regulation, which are guidelines that require to be complied with in relation to the management and allocation of available capacity of interconnectors. These cover both implicit (i.e. coupled systems) and explicit (i.e uncoupled systems) auctions.

Accordingly, the new regulation builds upon the provisions of the existing regulation and, in particular, strengthens the requirements by introducing mandatory binding network codes.

The new access regulation does not attempt to coordinate with the "bottom up", market-based measures encouraged through the regional initiatives except to note in article 12 that transmission system operators should pay "due attention to the specific merits of implicit auctions for short-term allocations, and the integration of balancing reserve power mechanisms". Accordingly, while the regulation tentatively encourages market coupling, there is no positive requirement imposed in this area.

Conclusion

There has been a significant push in favour of increased cross-border integration, with the ultimate aim being a single European energy market. A mixture of measures have been adopted, both "top down" and "bottom up".

In relation to the UK and Ireland, it seems likely that further work will take place to achieve "market coupling" between SEM and BETTA. A report to the SEMC on this topic is expected shortly. In the meantime, with the help of funding from TEN-E, the UK and Ireland are forging ahead with the new "East-West" interconnector project by Eirgrid. There are also two further projects planned by Imera Power Limited (a merchant interconnector company).