Brexit – challenges ahead for the energy sector28 August 2016
Andrew Whitehead* tackles some of the legal and trade aspects.
Energy – admittedly not one of the mainstream topics in the Brexit debate – is never far from the headlines. The implications of the UK’s departure from the EU are potentially far-reaching and could significantly impact businesses across the UK. A good benchmark from which to measure the pros and cons of Brexit is the energy ‘trilemma’; maintaining energy security, keeping bills down so energy remains affordable, and decarbonisation.
On security of supply, the investment need for the UK electricity sector is considered to be around £100 billion by 2020, and investment from EU companies into the sector has been significant over the years. And when it comes to bills, few would argue that the Commission’s policy of strengthening interconnections between member states to facilitate greater cross border energy trading is not a good thing.
Over the years, multibillion pound interconnector infrastructure projects, linking the UK’s power and gas grids to mainland Europe, have been commissioned to improve energy security throughout Europe, and these have undoubtedly had an impact on prices. Decarbonisation, the UK’s own domestic policy agenda, set by the UK’s Climate Change Act 2008, is not radically different to that of the Commission, and where there has been a divergence – for example on flexibility for member states to meet carbon reduction targets with a mix of measures that suit it best, rather than adherence to fixed quotas – the UK has been successful in influencing policy change.
However, in other areas the UK has seemingly been out of kilter with mainstream EU thinking, notably the UK government’s enthusiasm for fracking for shale gas. So, what happens next? As with all aspects of the economy, the full implications of Brexit for the energy sector will only emerge over time, and will depend on the nature of the UK’s relationship with the EU. Various options have been postulated, ranging from a Norway-style deal to reliance on WTO rules. In all likelihood, the process will be hugely complex and take some time to negotiate.
The energy sector is one area of the UK’s economy where EU law and policy has been pervasive. For any business active in the sector, the list of European Directives and Regulations which have a significant impact on business is a long one, and includes:
- The “Third Package” of 2 Directives and 3 Regulations, which seek to build a single market for energy, notably by establishing the European regulator ACER and by introducing the EU Network Codes; changes here are evolutionary, but are already influencing domestic codes and agreements in areas such as operation and use of interconnectors and generation connection standards, which should improve access for UK companies into European markets whilst improving its security of supply;
- The Emissions Trading Directive – establishing the EU Emissions Trading Scheme and its regime of tradeable carbon emissions permits, which impose cost and red tape on carbon intensive industry to encourage decarbonisation ;
- REMIT – the market abuse regime for energy markets which impacts on all energy market participants;
- The Renewables Directive – establishing legally binding targets for renewable energy across the power, transport and heat sectors;
- The Energy Efficiency Directive – establishing certification of energy efficiency performance of buildings, and requirements on public sector building owners and energy suppliers; and
- The Large Combustion Plant Directive – driving the closure of coal-fired power stations across the continent.
But there are also significant domestic laws and policies that did not come from Brussels, most significantly the Climate Change Act 2008, which sets the UK on a path towards an 80% reduction in carbon emissions by 2050. Additionally, there are also international treaty obligations such as the UNFCCC and the Paris Agreement on climate change.
To leave alone, amend or re-enact?
The process of unpicking all this, to identify and assess legislation which derives directly or indirectly from Brussels and to decide whether to leave alone, amend, or re-enact as domestic legislation, is a mammoth task.
The challenge for Parliament here should not be underestimated. There is 43 years worth of EU law-making on the statute book, ranging from Acts of Parliament and secondary legislation giving effect to EU Directives, to EU Regulations which will disappear automatically if not re-enacted in the same or modified form. This could take up to a decade to complete.
Undoubtedly, there will be many areas where the assessment is that the EU law positively benefits the UK. In others, the retention of the acquis (the provision that EU citizens of one member state have the right to work in another member state) by the UK could be a condition of continued participation in the single market. All of this will need to be considered and debated, but key constraints will be the available Parliamentary time, and the ability of our pared-down civil service to meet the challenge of a wholesale statutory review.
Ideas bandied around have included a Royal Commission on Regulatory Reduction, which would have special powers to sort through the legislation and present packages of reforms to Parliament. However whilst laudable for its expediency this does not sit well with one of the major justifications for Brexit in the first place – namely the EU’s democratic deficit. If we are not careful we might end up swapping one technocracy for another, an irony which would not be lost on those in the corridors of the Commission.
Priorities for the energy sector
For the energy sector, one of the fundamental questions will be around single market issues, in terms of activity such as cross border trading between market participants and transmission system operators across cross-border interconnectors which link the UK to the rest of Europe, but also how the UK will continue to adapt to, and influence, the rules that govern such activity as they continue to evolve. An early steer from government with a long term low carbon policy framework to confirm the direction of future travel in a Brexit world is vital, to provide certainty and restore confidence.
Perhaps, most immediately, the impact of Brexit for the energy sector is no different to other parts of our economy. Uncertainty abounds, and market conditions are in a state of flux. Financing costs for investors are set to rise, and those looking for long term political and regulatory stability will need to hear, very soon from new political leaders that the UK has a clear vision for the future.
*Andrew Whitehead is senior partner and head of the energy sector at Shakespeare Martineau <http://www.shma.co.uk/>