Impact of Brexit on the energy sector

Publication | June 2016

Would the UK continue to participate in the Energy Union project?
Would the UK continue to participate in the liberalisation of the European energy market?
Would EU State aid rules apply to energy infrastructure and support schemes?
How would an exit affect the UK’s climate change ambitions?
How would Brexit affect the UK’s renewable and low carbon energy policy?
What implications might there be for environmental standards applicable to fossil fuelled power projects?
Will an exit affect UK projects which have received or expect to receive funding or guarantees from EU institutions?
How would Brexit affect the ability of multi-nationals to operate in the North Sea?
What impact might Brexit have on the way the UK sources gas?
Could Brexit have an effect on UK gas prices? Could there be increased interest in LNG imports?

Would  the UK continue to participate in the Energy Union project?

Increasing interconnectivity with continental Europe will necessarily require co-operation with the EU internal energy market in any Brexit scenario. Because the UK Government has been at the forefront of efforts to liberalise and develop cross-border energy markets, we envisage that this cross-border policy direction is likely to endure.

If the UK were permitted to participate in the Energy Union following Brexit, it would - irrespective of the Brexit model - need to negotiate an appropriate partnership with the EU, and adopt - and comply with - the relevant European legislation. The difference, however, would be that the UK is unlikely to have a say in the formulation and interpretation of the rules, unless the UK manages to negotiate to remain part of the institutions which co-ordinate EU energy regulation, such as ACER, ENTSO-E and ENTSO-G. Any failure to cooperate might result in divergence of the Great Britain and EU energy regulatory regimes.

Would the UK continue to participate in the liberalisation of the European energy market?

Given the UK‘s liberalised energy policy, we expect that the UK will continue to implement and be supportive of many aspects of the EU’s Third Energy Package (an EU legislative package with the central aim of liberalising European gas and electricity markets). For example, the ownership unbundling requirements, which require the separate ownership and operation of electricity/gas transmission systems from any generation, production and supply interests; the level playing field; and the standards of transparency. The UK Government also appears committed to market-based interventions in energy markets and supports EU initiatives such as market coupling. We therefore consider that businesses should plan to continue to comply with these requirements.

Would EU State aid rules apply to energy infrastructure and support schemes?

If the UK were to remain part of the EEA, the EU State aid rules would continue to apply to energy infrastructure and support schemes in identical form, since the EEA Agreement contains a similar prohibition. Under other Brexit models, any subsidy granted by the UK Government would not fall foul of the EU State aid rules. However, any such subsidy will need to comply with the WTO subsidy regime which is similar in its intentions to the EU State aid rules. The WTO regime disciplines the use of subsidies and regulates the actions which WTO members can take to counter the effects of subsidies. 

Please also see question 4 of the Anti-trust and Competition Q&A.

How would an exit affect the UK’s climate change ambitions?

Brexit, in whatever form, is unlikely to change the UK’s climate change goals; these are established at a national level under the Climate Change Act 2008. But, there will nevertheless be important issues to settle. For example, at an international level the UK’s emissions reduction commitment would need to be disentangled from the EU target under the United Nations Framework Convention on Climate Change (UNFCCC) and the recent Paris agreement. The UK would also need to submit its own Nationally Determined Contribution in respect of its intended climate actions under the UNFCCC processes.

Industry will wish to understand whether the UK will still be able to participate in the EU Emissions Trading Scheme (EU ETS). If Brexit used the EEA + EFTA model, then, like Norway, Lichtenstein and Iceland, UK industry would be able to participate in the EU cap and trade scheme. If the UK did not participate in the EU ETS, transitional and linking arrangements would be required, which would be particularly important for companies holding a surplus of allowances.

How would Brexit affect the UK’s renewable and low carbon energy policy?

Following Brexit (other than using the EEA + EFTA model), the UK would be released from its renewable energy targets under the EU Renewable Energy Directive and from EU state aid restrictions, potentially giving the government more freedom both in the design and phasing out of renewable energy support regimes. The availability of funding from EU institutions may impact the deployment of capital intensive projects such as offshore wind (for more information see below). However, given that the UK would still be bound by national and international decarbonisation obligations (see further above), it is anticipated that renewable and low carbon energy development would continue to form part of UK Government climate change policy.

What implications might there be for environmental standards applicable to fossil fuelled power projects?

Operators of specified industrial and combustion plants are required under the EU Industrial Emissions Directive 2010 (IED) to hold environmental permits that are granted subject to conditions seeking to control and gradually reduce emissions/discharges into the environment and the generation of waste. Within the energy sector, the IED imposes strict emission limit values that have to be achieved (through permit conditions) which may require investment in pollution abatement equipment or where it is determined this is not cost effective, the plants will close down. This is having an impact on coal-fired power plants and many older gas plants which are expected to close by 2023 as they have selected a limited life derogation and can operate without abatement equipment until the end of 2023. Following Brexit, it is unclear to what extent the IED will continue to apply. However, it is nevertheless likely that unabated coal-fired plants will close, particularly as the UK Government is also proposing a policy (subject to consultation) to close all unabated coal-fired power stations by 2025.

Will an exit affect UK projects which have received or expect to receive funding or guarantees from EU institutions?

There are a number of EU initiatives to promote investment in energy infrastructure which represent an important source of funding for UK projects. For example, total European Investment Bank (EIB) investments in the UK economy came to EUR 7 billion in 2014 (energy projects accounted for 50 per cent of this).

Projects which are already funded will need to examine the terms of their credit or investment agreements to establish the impact of Brexit. In particular, if it becomes unlawful for an EU institution to fund a project, a prepayment may be triggered (although participation may be transferable to any unaffected funder)

The impact on proposed EU funded projects will depend on the timing of the changes to investment criteria and the project’s nature, including if it furthers EU policy. For example, the European Fund for Strategic Investment supports cross-border projects (such as interconnectors and pipelines) and EIB has to date provided EUR 3.9 billion of funding for EFTA

How would Brexit affect the ability of multi-nationals to operate in the North Sea?

Without freedom of movement of persons, it may be more difficult to manage a flexible workforce, which can currently be moved from project to project within Europe depending on need. It is unclear of the extent to which Brexit would have an impact on employment laws which are derived from EU Directives. Regardless of whether the UK stays in EFTA + EEA (in which case EU employment law directives would still apply) there may well be political and commercial pressure to retain, for example, anti-discrimination legislation and the rules on the transfer of employees. One area which is likely to be reformed however, are the rules on holidays and working time which have had a particular impact on the off-shore sector.

What impact might Brexit have on the way the UK sources gas?

In practice, the UK already has mitigation against security of supply risks built into the system. The existing import infrastructure allows multiple sources of supply via its three gas interconnectors and three liquefied natural gas (LNG) import terminals. As the infrastructure is already largely in place, we would expect operations and gas flows to continue as normal, irrespective of any Brexit.

Of greater significance will be issues such as expiry of long term supply contracts and restrictions, under the current regulations, on selling capacity on a long term basis or under bilateral contracts. The draft tariff network code will also, when implemented, restrict the price at which interconnectors can sell their capacity. Brexit may give rise to complex issues such as whether or not the interconnectors continue to be bound by such restrictions.

Could Brexit have an effect on UK gas prices? Could there be increased interest in LNG imports?

For Brexit to have an effect on UK prices, it would need to lead to consequences such as export tariffs imposed on EU gas flowing to the UK.

LNG import capacity is not fully utilised at present, but this is more of a supply and demand issue and unlikely to be connected to Brexit. LNG accounted for only 13 per cent of UK gas supply in 2015 but there is room for this to increase given current spare capacity and with a fourth import terminal due to start up later this year (offshore Barrow-in-Furness). However, whether or not the UK will be an attractive destination for spare LNG volumes is more likely to be driven by the price of gas in the UK market than any other factor.


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