UK ENERGY LAW AND ELECTRICITY SYSTEM – INTERCONNECTOR ECONOMICS AND CROSS-BORDER PRICE CONVERGENCE

1. Concept and Economic Function

Electricity interconnectors are high-capacity transmission links connecting Great Britain with neighbouring electricity markets. They permit electricity to flow toward the market where it has greater economic value, subject to available transmission capacity, market rules and physical system constraints. Ofgem currently identifies 10 operational interconnectors connecting GB with seven neighbouring markets, providing approximately 10.3 GW of capacity.

Cross-border price convergence occurs when interconnection reduces wholesale-price differences between connected markets. If Market A has a lower electricity price than Market B, traders have an economic incentive to export from A to B. Increasing cross-border flows can raise the price in A and reduce it in B, narrowing the differential. Where the interconnector becomes congested, however, prices may remain different and the congestion rent can accrue to the transmission-capacity arrangements.

2. Legal Framework

The principal domestic foundation is the Electricity Act 1989, supplemented by electricity interconnector licence conditions, the Grid Code, Balancing and Settlement Code arrangements and Ofgem regulatory decisions.

Ofgem's cap-and-floor regime is particularly important economically. The regime places an upper limit on certain interconnector revenues while providing a minimum revenue floor, reducing investment risk while allowing consumers to receive benefits when revenues exceed the cap. Ofgem's policy review has also sought to integrate future interconnector investment more closely with strategic network planning.

Before EU Exit, GB interconnectors participated in EU market-coupling arrangements under the Capacity Allocation and Congestion Management (CACM) Regulation. CACM was designed to maximise efficient use of interconnection through coordinated day-ahead and intraday capacity allocation.

3. Market Coupling and Price Convergence

Under implicit market coupling, electricity and transmission capacity are effectively allocated together by a market-coupling algorithm. The algorithm considers bids, offers and available cross-border capacity and determines commercially efficient flows.

This mechanism promotes price convergence because electricity generally flows from a lower-price bidding zone toward a higher-price bidding zone until transmission constraints prevent further convergence.

The UK Government explains that, following Brexit, Great Britain ceased participating in the EU Internal Energy Market. Most GB-EU interconnector capacity is consequently traded separately from electricity volumes, producing a more complex explicit-capacity trading model. The Government identifies the possibility of inefficient flows and under-utilisation of interconnector capacity as consequences of this separation.

Thus, post-Brexit law creates an important research distinction between physical interconnection and economic integration: cables may remain physically connected while the legal-market architecture governing their use becomes less integrated.

4. Interconnector Economics

Interconnector economics involves several revenue and welfare components:

Congestion revenue – the value created by price differences across connected markets.

Capacity utilisation – the extent to which available transmission capacity is actually used.

Consumer welfare – potential reductions in wholesale electricity costs.

Security of supply – access to electricity during periods of domestic shortage.

Renewables integration – ability to export surplus renewable generation and import electricity when domestic renewable output is insufficient.

Investment risk – uncertainty concerning future price differentials, utilisation, regulatory rules and construction costs.

The UK Government states that interconnection can reduce system costs by enabling GB to import cheaper electricity and export surplus generation.

5. Case Name/Citation

R (AQUIND Ltd) v Secretary of State for Business, Energy and Industrial Strategy [2023] EWHC 98 (Admin)

Facts: AQUIND proposed a 2,000 MW subsea and underground electricity interconnector between southern England and Normandy. The Secretary of State refused development consent for the UK elements of the project.

Legal Issue: The judicial review concerned whether the Secretary of State's decision-making concerning the proposed interconnector complied with the Planning Act 2008 and applicable planning requirements.

Judgment: The High Court considered the legality of the decision-making process in relation to the proposed cross-border infrastructure.

Legal Principle/Ratio: Major electricity infrastructure remains subject to statutory planning controls and lawful administrative decision-making, even where the infrastructure may have substantial strategic and cross-border energy-system implications.

Significance: AQUIND demonstrates that interconnector economics cannot be separated from planning law, environmental assessment, infrastructure policy and public-law accountability. A project may have potential market-integration benefits while still requiring lawful assessment under domestic development-consent procedures.

6. Cross-Border Trading After Brexit

The Trade and Cooperation Agreement (TCA) provides a framework for UK-EU cooperation concerning efficient electricity trading. The UK Government has stated that negotiations have continued concerning arrangements capable of improving cross-border electricity trading.

The legal-economic issue is therefore not simply whether electricity can cross borders, but whether the market architecture allows capacity to be allocated efficiently alongside electricity trades.

This distinction is especially significant because price convergence depends on both physical capacity and institutional design. Even a large cable cannot guarantee convergence if transmission capacity is inefficiently allocated, markets are insufficiently coordinated, or congestion and trading arrangements prevent economically optimal flows.

7. Future Legal Development

Future research is likely to focus on GB-EU market recoupling, offshore hybrid assets, multi-purpose interconnectors, cross-border balancing, congestion management, renewable-energy sharing and strategic interconnector planning. Ofgem has already explored multiple-purpose interconnectors and, in its third cap-and-floor window, assessed projects involving Denmark, France, Belgium, Ireland, the Netherlands and Germany.

8. Overall Significance

Interconnector law sits at the intersection of energy regulation, infrastructure law, competition, international cooperation and electricity-market economics. Price convergence is the economic consequence of efficient cross-border trading rather than an automatic result of physical connection.

The central UK legal challenge is therefore to design rules that encourage investment in interconnection while ensuring efficient capacity allocation, consumer protection, system security, competition and effective cooperation with neighbouring electricity markets. The post-Brexit framework makes this particularly important because the UK's physical electricity connections remain international even though Great Britain's market architecture is no longer fully integrated with the EU Internal Energy Market.