The Government consulted on the impact of Brexit upon the UK energy sector in late 2015/early 2016. The following points address the main issues highlighted in the Government's report and subsequent steps taken in preparation for Brexit.
Whilst the UK may both want and be able to negotiate its continued membership of several EU energy groups, any EU-derived legislation will require review and amendment post-Brexit. It is essential that Parliament has adequate time to scrutinise any proposed legislative changes.
It raises the question of whether such laws will be meaningful when the directives from which they are derived no longer apply to the UK and there is no longer access to the European Court of Justice?
The ETS is a policy instrument for reducing greenhouse gas emissions across the EU and is the world's first major carbon market and the largest. It is currently in its third phase; the main difference from previous phases being the single EU-wide cap on emissions in place of the previous system of national caps.
Clearer price signals and improved governance in this third phase better incentivises low carbon investment as well as reducing emissions. It is on this basis that some stakeholders make the case for the UK's continued participation in the ETS after Brexit, particularly if price signals align closely with the UK's carbon price floor. Establishing a separate UK ETS linked to the EU system will be costly and complex. The Government must therefore consider the impact of alternative approaches upon consumers and the competitiveness of UK industry.
On 20 July 2016 the European Commission presented the Effort Sharing Regulation, setting out binding annual greenhouse gas emissions targets for Member States for the period 2021-2030. The EU cap aligns closely with the UK's domestic targets so there is little risk in the UK signing up to EU Effort Sharing proposals up to 2030. Renegotiating these proposals could be burdensome and costly. In any event, any regulations must be implemented at a national (not EU) level, enabling the UK to control how it implements them.
The Brexit decision does not change the UK's requirement to reduce emissions in line with the Paris Agreement and its own domestic legislation. The required levels of emissions reduction has already been set by UK Parliament up to 2030 (57% reduction by 2030 on 1990 levels). Maintaining a positive relationship with the EU on climate change negotiations going forward, together with a progressive domestic climate change agenda, will assist the UK in retaining a positive influence over EU nations and elsewhere worldwide.
The Internal Energy Market (IEM) enables harmonised, tariff-free trading of gas and electricity across Europe. The UK has been a leading force in designing the IEM and UK consumers benefit from access to lower wholesale prices.
In deciding the future of the UK's relationship with the IEM, the Government will need to weigh the costs of associated legislation and regulation against the economic, security of supply and carbon reductions benefits afforded by IEM membership. There is also a need to consider wider factors such as freedom of movement.
Northern Ireland's electricity system is highly integrated with that of the Republic of Ireland, which will continue to be bound by IEM rules. The Government should consider carefully how any changes to the UK's relationship with the IEM will affect Northern Ireland. It may be appropriate to differentiate between the approach taken for Northern Ireland and that for Great Britain.
If the Government pursues IEM participation post-Brexit, exploration of potential membership models will be required, such as the Energy Community Treaty. If IEM participation looks doubtful, a thorough assessment to identify, understand and minimise policy risks will be required. If the UK is no longer a member but retains access to the IEM, the Government will need to identify new routes to shape development of IEM policy or risk losing its role as an IEM 'rule-maker', instead becoming a 'rule-taker'.
A bespoke alternative post-Brexit is likely to take many years to negotiate and put in place and creates considerable uncertainly for projects currently under development. Introduction of tariffs or custom duties, or dislocation of trading arrangements, would also result in higher consumer bills and risks to security of supply.
The UK is heavily dependent on Europe for its electricity and gas imports and pan-European co-ordination has helped improve the UK's security of supply. The Government should seek to build investor confidence and focus upon how the UK can continue to participate in the 'solidarity principle' whilst avoiding exacerbating any difficulties in bringing forward investment in new electricity capacity and new indigenous resources.
The "solidarity principle" is where EU countries are obliged to help out a neighbouring EU country if they are experiencing gas supply trouble. If the UK is excluded from the 'solidarity principle' it must source back-up arrangements to ensure security of supply in the event of a crisis.
The European Network Codes (ENCs) may need to be retained to ensure functionality of energy trading and system operations across interconnectors with Europe. In particular, Ofgem and National Grid should seek to retain membership of ACER, ENTSO-E and ENTSO-G so the UK can continue to shape the development of new ENCs.
The EU has provided substantial financial support for energy infrastructure and R&D in the UK. In 2015, 17 UK projects were amongst a total of 195 key energy infrastructure projects earmarked to help deliver Europe's energy and climate objectives. These included priority corridors to Belgium and Ireland.
The Government should ascertain whether access to EU financial institutions and funds will be remain available to British applicants long-term and develop credible alternatives where this is not possible. Clarity should also be provided to Parliament on whether funds awarded from EU schemes other than Horizon 2020 will be retained and/or underwritten after Brexit.
The Brexit vote has reduced investor confidence in the energy sector. The Government should work to promote investment by providing clear signals on the direction of domestic energy policy to be followed during and after exit negotiations, for example through the publication of a detailed Emissions Reductions Plan.
Brexit is not expected to change the general direction of UK energy policy which is perceived to be primarily driven by the Climate Change Act 2008 and concerns about security of supply.
However, the absence of external enforcement and accountability measures may weaken the drive to deliver on policy targets. Successful exit negotiations are paramount to ensuring the UK's continued international standing in climate leadership and as a hub for low carbon innovation.
Authors: Andrew Simms, Partner and Charlotte Hughes, Trainee Solicitor