The European Union and the United Kingdom have agreed to extend their current energy trading rules under the Trade and Cooperation Agreement (TCA) until 31 March 2027, with provisions for annual renewals thereafter. This extension ensures continued cooperation on energy trade, network development, and emissions trading, providing much-needed market certainty amid evolving climate and geopolitical challenges. The agreement also lays the groundwork for deeper integration, including exploring UK participation in the EU’s internal electricity market and linking their emissions trading systems (ETS), promising significant economic and environmental benefits.
Extension of Energy Trading Rules: Key Details
The energy title of the TCA, which facilitates cross-border trading of energy and raw materials, cooperation between transmission system operators, and joint development initiatives like the North Seas Energy Cooperation, was set to expire on 30 June 2026. The EU and UK have now formally extended these rules to March 2027, with a commitment to review and renew annually thereafter12.
This extension maintains the current framework that supports over 10 gigawatts (GW) of electricity interconnectors between the UK and EU, crucial for balancing supply and demand across borders. It also preserves cooperation on regulatory and network development, helping to stabilize energy markets and support the transition to renewable energy124.
Towards Linking Carbon Markets
A landmark aspect of the agreement is the commitment to work towards linking the UK and EU emissions trading systems (ETS). The ETS is a cornerstone of climate policy, setting a carbon price to incentivize emissions reductions. The UK and EU aim to create a functioning link between their carbon markets, covering sectors such as power generation, industrial heat, maritime and aviation emissions.
The linking agreement will grant mutual exemptions from the Carbon Border Adjustment Mechanisms (CBAM) that both jurisdictions are introducing—starting in 2026 for the EU and 2027 for the UK. CBAMs impose carbon costs on imports to prevent carbon leakage, but mutual exemptions will reduce trade frictions and protect electricity and industrial material flows like steel and cement.
The UK has committed to capping its greenhouse gas emissions and aligning its emissions reduction pathway to be at least as ambitious as the EU’s, with legally binding targets to cut emissions by 68% by 2030 and 81% by 2035 compared to 1990 levels. The EU aims for a 55% net reduction by 2030, with both targeting net zero by 2050.
Linking the ETS is expected to enhance market liquidity, reduce administrative burdens, and lower hedging costs for businesses. A recent study estimates that effective ETS coordination could save electricity consumers up to €44 billion annually by 2040 and reduce emissions by approximately 24% in the same period.
Exploring UK Participation in the EU Electricity Market
Alongside the ETS linking, the EU and UK have agreed to explore the UK’s potential participation in the EU’s internal electricity market. This would involve UK access to EU electricity trading platforms across all timeframes, from day-ahead to intraday markets24.
Currently, the UK is a net electricity importer from continental Europe but a net exporter to Ireland. The interconnectors between the UK and EU already facilitate dynamic power flows based on supply and demand, but Brexit led to decoupling and more complex trading arrangements. Reintegrating markets could reduce inefficiencies, lower electricity prices, and improve security of supply4.
WindEurope CEO Giles Dickson welcomed the move, stating that UK participation in the EU market “will make trading easier and reduce electricity prices for consumers in both the UK and EU,” helping to alleviate energy costs for European ind.
Economic and Environmental Implications
The extension and associated agreements promise significant benefits but also pose challenges. Modelling indicates that if CBAMs were applied to UK-EU electricity trade without exemptions, UK electricity exports to the EU could drop by 50-60% in the short term and up to 85-92% in the long term, risking a loss of 24 terawatt-hours (TWh) of green electricity annually. This would increase wholesale electricity costs for EU consumers by €2.3–4.6 billion per year and raise EU gas-fired generation and emission.
By contrast, the mutual exemptions and ETS linking aim to avoid such disruptions, supporting continued trade in low-carbon electricity and industrial goods. The UK government also anticipates unlocking significant revenue by aligning its carbon allowance prices with the EU’s, though this may lead to higher UK carbon prices but lower overall hedging costs for industry.
Cooperation on Clean Energy Technologies
The agreement extends beyond trading rules to foster cooperation on emerging energy technologies such as hydrogen, carbon capture, utilization and storage (CCUS), biomethane, and decarbonized gases. These efforts align with the UK’s ambition to meet 100% of its electricity demand with clean power by 2030, with at least 95% from low-carbon sources and no more than 5% from unabated gas.
Continued UK participation in initiatives like the North Seas Energy Cooperation will support offshore wind and hybrid interconnectors, enhancing infrastructure efficiency and security of supply in the region.
Outlook and Next Steps
The European Commission and UK government have committed to formalize the political agreement within a month, with detailed negotiations expected to continue on ETS linking rules, electricity market integration parameters, and technical regulatory exchanges.
While linking carbon markets and electricity trading is complex and may take one to two years to fully implement, stakeholders view these developments as crucial steps toward a more integrated, efficient, and sustainable European energy landscape.
