It's not really MER in the case of FTTC as the modem is doing the encapsulation so you don't have to worry about it, the Encapsulation is to do with the DSL side of things on the LLU ADSL it's MER (Probably RFC1483/2684 Encapsulation with VC-mux which is a rather odd combination as usually you'd use LLC-SNAP with RF1483/2684)

It's an Ethernet presentation from the Openreach Modem to whatever router you connect to the service.

Therefore the router needs to be configured for Ethernet WAN with DHCP.

HOWEVER and this is the big BUT, Sky's DHCP server will not respond to the DHCP request unless it sees your username and password in sent in DHCP option 61 of the DHCP request.

The ASCII format is username@skydsl|password (It may require "" in which case it's "username@skydsl|password) or depending on your DHCP client you may need to provide it as a HEX string (You do in openWRT)

Providing your DHCP client is able to format the content of the DHCP option 61 packet in a way Sky's DHCP server is happy with it will respond to your DHCP request and offer you an IP.