Energy cooperation between the UK and the European Union (EU) has long been recognised as not only beneficial but also essential for achieving their respective energy transition goals effectively. Political leaders and regulators on both sides have reconfirmed the importance of closer energy cooperation as they decarbonise their energy systems. The idea is to find win-win solutions for both sides. Post Brexit, the UK left the EU’s internal energy market (IEM) in January 2021, which created issues in the EU-UK energy relationship, such as inefficient market coupling and the carbon border adjustment mechanism (CBAM), designed to ensure that the carbon costs of imported goods are equivalent to those of domestically produced goods. The EU-UK trade and cooperation agreement (TCA) of 2021, set for renewal in 2026, regulates energy-related interactions between the two sides.

In October 2024, during the first visit of a UK prime minister to the European Commission (EC) in Brussels since Brexit, the EC President and the UK PM expressed their commitment to enhancing strategic cooperation in the fields of energy and climate. This announcement was welcomed by industry stakeholders, which issued a joint letter urging the UK, EU governments and the EC to pursue the opportunity urgently, transforming the North Sea into a European green power hub. This letter was signed by key industry associations like WindEurope, Solar Power Europe and EuroElectric; transmission system operators (TSOs) like French Réseau de Transport d’Électricité (RTE), Norway’s Statnett, Belgium’s Elia Group, UK’s National Grid, Dutch-German TenneT, German Amprion and Denmark’s Energinet; and UK-EU interconnectors like Nemolink, ElecLink and Greenlink.

Later, in the same month, the energy ministers of the North Seas Energy Cooperation (NSEC), which comprises Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Norway and the EC with the UK as an observer country, met at Odense, Denmark, and recommended to the new EC (which will take office in December 2024), among other things, to take steps for more constructive cooperation with the UK by building on the  memorandum of understanding (MoU) of 2022 to facilitate the planning and development of specific offshore renewable and grid projects. This is also reflected in the new NSEC work programme for 2025-2027, released in October 2024.

In November 2024, the UK’s energy regulator, Office of Gas and Electricity Markets (Ofgem), approved five primary undersea direct and hybrid links between GB and the EU (with 10 GW of capacity) to harness the vast potential of North Sea wind, under the third cap and floor regime window (Window 3) and the Offshore Hybrid Asset (OHA) pilot scheme. This includes two of the UK’s first OHAs – the 1.4 GW Nautilus Link (with Belgium) and the 1.8 GW LionLink (with the Netherlands) – which are novel  assets that combine cross-border interconnection with electricity transmission from offshore wind (OSW) generation. Ofgem’s decision will enhance GB’s energy trading capacity with the EU to over 18 GW by 2032 compared to the current 9.8 GW of interconnection capacity across nine interconnectors, which helps the GB import around 10 per cent of its electricity needs from the EU.

This is expected to reverse by 2030 as GB expects to become a net exporter with one of the lowest wholesale prices in Europe, owing to the tremendous work to date to build out onshore wind and OSW capacity. This is confirmed by the “Clean Power 2030” report released in November 2024 by the National Energy System Operator (NESO), formed on October 1, 2024, by the government with the acquisition of 100 per cent stake in National Grid Electricity System Operator Limited. The report states that more interconnection and long-duration energy storage capacity can help mitigate clean energy curtailment, remove constraints, lower costs and improve the country’s supply security. On days when its own wind power is limited, GB can rely on common renewable and low-carbon resources across its trading partners instead of relying on expensive gas. Given its geography, GB is best positioned to generate its own clean wind power but also leverage export opportunities to Europe, contributing to the global net zero target.

Key highlights of industry joint letter

The signatories of the joint letter iterated that resolving the critical outstanding issues in the EU-UK energy relationship would provide massive benefits to both consumers and industry, in addition to helping the EU, the European Economic Area (EEA), which includes Norway, and the UK to meet their respective climate and energy targets. The first issue relates to CBAM, a tool developed by the EU to put a price on the embedded carbon emissions generated in the production of certain goods (including electricity) entering the EU to address risks of carbon leakage. The transition phase started in 2023, and the mechanism will apply fully from 2026, aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS). The UK also plans to implement its own CBAM (which does not include electricity) by 2027. The letter calls for the linking of the EU and UK ETS in fast-track mode.

The second issue relates to the urgent need to establish more efficient electricity exchange arrangements between the European IEM (which includes Norway) and the GB market to unlock investment in OSW generation and grid infrastructure required to fully harness the renewable energy potential in the North Sea. Within this, there is a great opportunity for collaboration and coordination to create a meshed grid harnessing the potential of the North Sea, using world-leading energy islands and offshore hybrid cables. Currently, electricity is traded using sub-optimal market mechanisms as capacity on most EU-GB interconnectors is allocated using explicit capacity rights. The letter calls for re-establishing implicit price coupling between the UK and EU/EEA institutions to maximise consumer benefits and enable future investments. Without requiring the UK to join the IEM, the suggested solution would allow the inclusion of interconnectors to the GB market (and North Sea hubs) in the single day ahead coupling (SDAC) allocation process, but as a distinct service extension. The GB market would only procure a clearly defined service provided by SDAC, which remains under EU control. Once implemented in SDAC, it should be quickly followed by a roll-out in the intra-day timeframe (single intra-day coupling), considering its importance for variable renewable energy sources. Such a solution must be accompanied by operational agreements between parties, guaranteeing coordinated and harmonised operations. The service will fully respect the existing EU regulatory framework and the established EU-UK cooperation principles. It will also be subject to the dispute resolution process outlined in the EU-UK TCA. The solution will require only limited changes to Annex 29 of the TCA, which is within the remit of the Specialized Committee for Energy under the TCA.

Ofgem’s Window 3 and pilot OHA decisions

The cap and floor regime of Ofgem has been successful in attracting investment to increase interconnector capacity over the past decade, from 4 GW in 2015 to 11.7 GW operational or under construction at present. The cap and floor regime is awarded through investment windows rather than in response to ad hoc applications. Under the mechanism, developers are guaranteed minimum revenue (floor) reflecting construction and debt costs, with capped profits (cap). Following the cap and floor regime pilot with the Nemo Link (with Belgium), Ofgem launched two windows, one in 2014 and one in 2016, and took forward eight projects through both windows.

Ofgem opened the Window 3 application between September 1, 2022, and January 10, 2023, and the OHA pilot scheme [previously known as the multi-purpose interconnector (MPI) scheme] in 2022. Following the selection of seven interconnectors for Window 3 and two OHA candidates in 2023, on March 1, 2024, Ofgem released the initial project assessment (IPA) for these projects. All projects were assessed based on six criteria – projects to become operational by the end of 2032, socio-economic welfare (SEW) impacts, system operability and balancing markets impacts, decarbonisation, security of supply, and hard-to-monetise impacts.

Window 3 interconnectors

In November 2024, Ofgem announced its decision on the IPA, approving three Window 3 projects – the Tarchon interconnector to Germany, the 750 MW MaresConnect to Ireland, and the 700 MW LirIC to Northern Ireland, all scheduled to be delivered by 2032. It rejected the remaining four projects – the 1.4 GW Aminth to Denmark, the 2 GW AQUIND to France, the 1.4 GW Cronos to Belgium, and the 1.2 GW NU-Link to the Netherlands, due to deliverability concerns (Aminth and NU-Link) and high constraint costs (even after applying constraint cost reduction rate by NESO) or both (AQUIND and Cronos).

While LirIC and MaresConnect were provisionally rejected in Ofgem’s March 2024 IPA due to negative SEW issues, the latest decision confirms that these now demonstrate positive SEW for GB and have switched to being power importers from the Integrated Single Energy Market (I-SEM) (electricity market of Ireland and Northern Ireland which is aligned to EU IEM) to GB. These projects are expected to benefit consumers by importing cheap and clean Irish wind energy into GB, lowering emissions and domestic wholesale prices. Ofgem also confirmed its IPA approval for Tarchon. As GB grows its OSW capacity, Ofgem expects this interconnector to export surplus generation that would otherwise need to be curtailed. Although net power exports at the margin are likely to marginally raise wholesale prices, this negative impact on consumers is likely to be outweighed by reduced renewables curtailment, increased flexibility and improved security of supply. The next step for the selected projects will be the final project assessment (FPA), which will determine the specific cap and floor levels for each project before it reaches financial closure and can enter the construction stage. In the FPA stage, special licence conditions related to the regime are added to the interconnector licence. Finally, Ofgem carries out the post-construction review (PCR) to determine the final cap and floor levels based on its final assessment of the project’s costs.

Meanwhile, rejected projects could apply again in future windows if they meet the terms of the application guidance for that window.

OHAs

Ofgem considers OHAs, which provide better coordination and efficiency compared to standalone point-to-point interconnectors and radial offshore wind connections, as a step toward developing a meshed North Sea grid. Ofgem acknowledges that there is significant strategic value in coordinated development to reach the extensive OSW ambitions for 2050 and that developing the technical, regulatory and commercial structures of OHAs will assist in meeting this goal.

In the IPA stage (March 2024), Ofgem was minded-to approve LionLink and reject Nautilus for a pilot OHA regulatory regime. Both projects, which are referred to as non-standard interconnectors,  (NSIs) [comprising assets that connect the UK to the offshore converter station in the connecting jurisdiction while the entire shore-to-shore asset is known as an OHA, are being developed by National Grid Ventures (NGV) in the UK. In response to the OHA IPA consultation, Ofgem received new information on proposed changes to the connection location and the configuration of the Nautilus project, prompting reanalysis. Nautilus was modelled initially with a 3.5 GW Line 2 (from an offshore substation on the Belgian Princess Elisabeth Island (PEI) to the Belgium onshore network). Following the consultation on PEI in Belgium, this capacity was confirmed to be 1.4 GW. Based on this information, on July 15, 2024, Ofgem published a consultation on the resulting material modifications to the IPA for Nautilus. Following an updated analysis, it was found that the connection at the originally assessed location, Grain, was acceptable. Ofgem updated its modelling for the IPA of Nautilus to account for updates on Line 2 capacity and cost and revenue sharing.

The way forward

In a future decarbonised electricity system, the UK expects the construction of additional interconnectors to mainland Europe, including pilot OHAs. These interconnections are expected to remain in the consumer interest due to their benefits in supporting national and international goals related to decarbonisation, economic growth, security of supply, flexibility and renewable energy integration. Overall, Ofgem’s analysis has confirmed that the UK will become a net electricity exporter in the long term. Its decisions will contribute to shaping the trajectory of the UK’s interconnector portfolio, balancing economic viability and environmental considerations.

The UK aims to generate all electricity from 100 per cent zero-carbon sources by 2035, while EU targets to reach there by 2050. This transition requires a massive OSW expansion, particularly in the North Sea. The EU wants at least 300 GW of OSW by 2050, with around half of it in the North Sea, whereas the UK needs 60 GW of OSW by 2030. Both the UK and EU want to coordinate OSW development in the North Sea, which requires innovative solutions such as hybrid projects to minimise onshore cabling and its environmental impact. Cross-border interconnections, both direct and hybrid, can potentially speed up the energy transition and reduce its cost for both the UK and the EU.