What are the principle documents regulating the UK-EU relationship with respect to energy?
Following the end of the implementation period, the agreement with respect to energy matters between the UK and the EU is now comprised within:
- the UK-EU Trade and Cooperation Agreement (TCA)
- the UK-Euratom Nuclear Cooperation Agreement (an agreement for cooperation on the safe and peaceful uses of nuclear energy)
- the revised Withdrawal Agreement published on 19 October 2019
The UK and the EU have not reached agreement on all aspects of their future energy relationship. The energy aspects of the TCA will terminate on 30 June 2026, although this may be extended by agreement of the Partnership Council established under the TCA, to 31 March 2028 at the latest. With issues such as trade over interconnectors and an enduring agreement with respect to the electricity sector in Northern Ireland, the UK is likely to be involved in energy negotiations with the EU for some time longer.
Is the UK a member of the Internal Energy Market?
The TCA does not include any agreement regarding continued membership of the internal energy market (IEM). As a result, the UK left EU IEM at 11.00 pm UK time on 31 December 2020 after the end of the implementation period. However, increasing interconnection with continental Europe and the structure of the electricity market in Northern Ireland will necessarily require cooperation with the IEM.
Continued participation in the IEM is particularly important in relation to the electricity sector in Northern Ireland which is an “all island” system, highly integrated with that of the Republic of Ireland through the I-SEM (Integrated Single Electricity Market). The TCA does not include any new agreement relating to Northern Ireland and so it is the Protocol on Northern Ireland to the revised Withdrawal Agreement published on 19 October 2019 (the Withdrawal Agreement) which provides for the continued operation of the I-SEM. The Withdrawal Agreement provides for the continued application of certain EU laws which underpin the I-SEM including: the EU Electricity Regulation 2009 (714/2009/EC), now recast as the EU Electricity Directive 2019 ((EU) 2019/944), the EU Electricity Directive 2009 (2009/72/EC), now recast as the EU Electricity Regulation 2019 ((EU) 2019/943) and the Directive establishing the Scheme for Greenhouse Gas Emissions Trading (2003/87/EC) (the EU ETS). However, these only apply insofar as they apply to the generation, transmission, distribution, and supply of electricity, and to trading in wholesale electricity or cross-border exchanges in electricity. Any provisions relating to electricity retail markets and consumer protection are expressly excluded.
How does Brexit impact interconnectors?
The UK’s energy networks remain physically connected to those of the EU. Trade over interconnectors is beneficial to both the UK and the EU, due to the lower costs to consumers of cheaper imports and the additional flexibility which interconnectors provide.
The TCA provides that exemptions from requirements for third party access, unbundling and use of revenues granted to gas and electricity interconnectors will continue in accordance with their terms (ENER 11). Now that the UK has left the IEM without an agreement to replace the IEM arrangements, Great Britain has lost access to implicit day-ahead and intraday market coupling arrangements on GB electricity interconnectors, meaning that capacity on interconnectors will, in most cases, no longer procured together with electrical energy. Notably, as a result of the electricity market arrangements with respect to Northern Ireland (see above), the TCA provisions relating to electricity interconnectors apply to the interconnectors linking the GB and Northern Irish markets, and explicitly exclude those within the I-SEM. The arrangements now in force are those developed in the event of a ‘no deal’ scenario, outlined in Ofgem’s open letter of 16 December 2020, with new access rules published on each affected licensed electricity interconnector’s website. Ofgem are making changes to electricity licence conditions following the end of the implementation period.
The TCA envisages arrangements that compensate transmission system operators for hosting cross-border flows of electricity on their networks will need to be agreed under a multi-party agreement (to be negotiated) (ENER 13). Until this is reached, under the Inter-transmission system operator compensation mechanism regulation (838/2010), all scheduled imports and exports of electricity from the UK are subject to a transmission system use fee, the UK being a third country not applying EU law (ENER 13).
The TCA (INST 2) establishes a Specialised Committee on Energy (SCE) which addresses matters relating to energy under the TCA, other than those aspects relating to “energy goods and raw materials”, cooperation on standards and environmental subsidies. One aspect of the SCE’s role is to oversee the establishment of technical procedures to allocate day-ahead interconnector capacity efficiently, on the basis of “Multi-region loose volume coupling” (Annex ENER 4). These measures are required to enter into force by 1 April 2022 (although the SCE also has discretion to alter the time-frame). The SCE will keep under review electricity trading arrangements for all time-frames (being forward, day-ahead, intraday and balancing) and may request UK and relevant EU transmission system operators work to improve arrangements if required (ENER 14).
With respect to GB gas interconnectors, the TCA includes principles for the efficient use of pipelines, including that necessary steps are taken to ensure that transmission system operators offer jointly standard capacity products and coordinate procedures for use (ENER 15). Ofgem guidance notes there are no expected changes to either trading arrangements or the approval processes or requirements for access rules from 1 January 2021. Parties expect to continue to use the PRISMA as capacity trading platform to allocate capacity on interconnection pipes and will continue to apply the Capacity Allocation Mechanisms Code processes for gas trading requires, with the approval by the regulatory authorities in interconnected EU member states: Ireland, Belgium and the Netherlands. However, Ofgem stresses the need to engage with the relevant EU regulators, particularly with respect to access rules and transmission system owner certification. Ofgem are also making changes to gas licence conditions following the end of the implementation period.
From a security of supply perspective, the TCA provides for cooperation on the timely development and interoperability of energy infrastructure connecting the territories, as well as the exchange of gas and electricity network development plans. (ENER 16) Cooperation on security of supply of electricity and natural gas, and exchange of information relating to risk preparedness and emergency planning is also foreseen (ENER 17 and 18). These commitments recognise that the integrity of national gas and electricity networks may be impacted by disruption to cross-border supply, incorporating principles from the EU Regulation on risk preparedness in the electricity sector into the TCA.
Access to the Connecting Europe Facility (CEF), which has provided funding for interconnectors into the UK, may also be adversely affected. The CEF is an EU funding instrument with the purpose of promoting growth through targeted infrastructure investment. Eligible energy projects must have a significant impact on energy markets and market integration in at least two EU countries. The Government has previously confirmed that commitments made between companies and the Commission in respect of the CEF will be honoured following withdrawal under the Government guarantee . In relation to the availability of future funding to interconnectors linking the UK and an EU member state, the position is not yet clear. Part 5 of the TCA (Participation in Union Programmes, sound financial management and financial provisions) provides a framework for the UK and EU to reach agreement on UK participation in EU funded programmes, activities and services, backed by the EU’s budget. The list of EU programmes and activities is however yet to be agreed and requires entry into a specific protocol (UNPRO 1.3).
Does the TCA affect the regulation of the UK and EU energy markets?
The UK has played an important role in the liberalisation of EU energy markets and as market rules converged, we have seen significant integration of energy utilities across Europe. As a result, both the UK and EU are keen to avoid the protectionism in energy markets. It is therefore unsurprising that the TCA contains extensive provisions relating to the regulation of energy markets.
The TCA reflects commitments to respecting a number of the fundamental principles underpinning the IEM. These are derived from both the Third Energy package and the Clean Energy package although fall a long way short of the full requirements for participation in the IEM. Commitments include:
- that each party’s regulatory framework for the production, generation, transmission, distribution or supply of electricity or natural gas be non-discriminatory with regard to rules, fees and treatment (ENER 5). Here, ‘non-discriminatory’ means most-favoured-nation treatment and national treatment, in each case as defined in the TCA, as well as treatment under terms and conditions no less favourable than that accorded to any other like entity in like situations (ENER 2.2).
- non-discriminatory third party access to gas and electricity networks and cost reflective and transparent network charging (ENER 8).
- removing conflicts of interest as a result of the same person exercising control over a transmission system operator and a producer or supplier (i.e. system operator unbundling) (ENER 9)
- that wholesale electricity and natural gas pricing will be reflective of supply and demand, including rules to enable the efficient dispatch of generation, energy storage and demand-side response, and the efficient operation of both gas and electricity systems (ENER 6)
- relating to the organisation of electricity capacity mechanisms, although in contrast to the Electricity Regulation 2019 (2019/943), the TCA includes no pre-conditions to their introduction and makes clear neither party is required to permit capacity in the other’s territory to participate (ENER 6.3)
- requiring operationally independent regulatory authorities for electricity and gas (ENER 12).
Exemptions are permitted however:
- from the commitment to ensure competition in markets and non-discrimination: this is without prejudice to each party’s right to regulate to achieve legitimate public policy goals based on objective and non-discriminatory criteria (ENER 5) and exemptions are permitted in relation to small or isolated electricity markets or systems or small, emergent or isolated natural gas markets or systems (ENER 10.2)
- from the provisions relating to the wholesale electricity and gas markets in relation to small or isolated electricity markets or systems or small, emergent or isolated natural gas markets or systems (ENER 10.2) and
- from unbundling and third party access requirements under the TCA (ENER 10.1) where necessary to fulfil a legitimate public policy objective and based on objective criteria in relation to emergent or isolated markets/ systems or for infrastructure meeting the conditions in Annex ENER 3, including where the risk attached to the investment in the infrastructure is such that the investment would not take place unless an exemption is granted.
These commitments also need to be read in the context of article ENER 4 of the TCA which confirms each party’s right to adopt, maintain and enforce measures necessary to pursue legitimate public policy objectives, such as securing the supply of energy goods and raw materials, protecting society, the environment, including fighting against climate change, public health and consumers and promoting security and safety.
Interestingly, the TCA provisions in Chapter 2 (Electricity and gas) of Title VIII (Energy) related to natural gas also apply to biogas and gas from biomass or other types of gas such as hydrogen in so far as such gas can technically and safely be injected into, and transported through, the natural gas system (ENER 5).
Whilst the level of cooperation will be lower than would have been the case had the UK remained in the IEM, the TCA establishes regulatory cooperation in a number of areas including:
- Network development (ENER 16)
- Security of supply (ENER 17) and risk preparedness and emergency plans (ENER 18)
- Technical cooperation, with frameworks for cooperation to be developed between UK transmission system operators on one side with the European Network of Transmission System Operators for Electricity (ENTSO-E) and European Network of Transmission System Operators for Gas (ENTSO-G) on the other (ENER 19)
- Between the Agency for the Cooperation of Energy Regulators (ACER) and Ofgem (ENER 20)
The TCA establishes a new institution, the Specialised Committee on Energy, that will oversee cooperation on a number of matters, including the development of technical procedures to implement the TCA requirement in respect of efficient use of electricity and gas interconnectors (see further above), electricity trading arrangements, network development and security of supply, and monitor their effectiveness. (ENER 19)
How does Brexit affect the market abuse regime in the UK?
Article 7 ENER provides the basis for continued cooperation with a view to detecting and preventing insider trading and market manipulation, and for information sharing, including on market monitoring and enforcement activities. In practice, this provides the basis for continued cooperation in respect of the market abuse regime established under the EU Regulation on wholesale energy market integrity and transparency (REMIT). However, no further agreement has been agreed in relation to these regimes within the TCA.
As a result, as advised by Ofgem, in its advice to market participants in October 2020, arrangements in relation to REMIT now in place in Great Britain are those originally envisaged in the preparation for a ‘no deal’ Brexit. The GB REMIT regime has been retained by application of the European Union (Withdrawal) Act 2018 albeit with amendments pursuant to the Electricity and Gas (Market Integrity and Transparency) (Amendment) (EU Exit) Regulations 2019. Reference to guidance by the Agency for the Cooperation of Energy Regulators (ACER) is still relevant however, as Ofgem will continue to refer to this for interpretation of the GB REMIT obligations. Ofgem has stated that, in due course, it will consider whether there is a need for GB specific REMIT guidance.
Ofgem issued a direction on 4 January 2020 exempting market participants registered with the Northern Ireland Authority or with a National Regulatory Authority of a member state of the EU from the requirement to register with Ofgem, in order to minimise potential disruption to the GB wholesale energy markets and to reduce the registration burden on market participants. However, market participants registered with Ofgem who wish to enter into transactions in the EU (or who need to report lifecycle events to transactions entered into before 31 December 2020) are required to re-register with a national regulatory authority of an EU member state where they are ‘predominantly active’, following guidance provided by ACER. In addition, those market participants that are trading wholesale energy products for delivery in GB who are not registered with the National Regulatory Authority of an EU member state or with the Northern Ireland Authority will need to be registered with Ofgem.
There are also changes to the data reporting arrangements as trade and fundamental data relating to the GB wholesale energy markets will no longer be collected by ACER. Ofgem will consider whether to implement GB specific REMIT reporting arrangements and is required to provide at least three months’ notice to the industry before any such implementation. In the meantime, Ofgem will monitor the GB wholesale energy markets for possible market abuse using existing data sources, including trade and order data collected directly from GB brokers and exchanges. Those GB market participants that have re-registered with an EU National Regulatory Authority, and that are entering into transactions for wholesale energy products deliverable in the EU, will be required to report trade and order data to ACER using their new registration code.
How does the TCA impact state aid rules relating to energy infrastructure and support schemes?
The UK Business Secretary, Alok Sharma, confirmed on 9 September 2020 that the UK will follow WTO subsidy rules after the end of the implementation period as well as any international obligations on subsidies agreed under future free trade agreements. The WTO rules apply to goods and not services, ban subsidies that are dependent on how much a company exports or the use of domestic goods over imports, and provide a mechanism to resolve disputes between countries for all other subsidies. They are therefore substantially narrower in scope than the EU state aid rules.
In contrast to the WTO rules, the framework for subsidy control agreed under the TCA (which was one of the final points to be settled) largely replicates the EU state aid regime in substance, although also allows the UK considerable flexibility in adopting its new regime. The definition of “subsidy” is essentially the same as under EU state aid law, capturing a broad range of financial assistance and regarding both goods and services. Each party must have an effective system of subsidy control, ensuring subsidies respect certain key principles (for example proportionality) and preventing any material effect on trade or investment between the EU and UK. The TCA also sets out types of subsidies that are prohibited (for example unlimited state guarantees) or subject to conditions (including subsidies regarding large cross-border or international cooperation projects, such as for energy, and subsidies regarding energy and the environment), as well as certain exceptions.
The TCA permits environmental subsidies aimed at delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market or increasing the level of environmental protection. Similarly to the current EU state aid guidelines for environmental protection and energy 2014-2020 (extended to 31 December 2021 and currently under review), the TCA generally requires competitive allocation of subsidies for capacity providers, renewable energy and cogeneration. Non-competitive allocation of subsidies is however permitted for renewable energy and cogeneration if the potential supply is insufficient to ensure competition, eligible capacity is unlikely to impact trade or investment between the UK and the EU, or for demonstration projects, and subject to appropriate measures to prevent overcompensation. These exemptions are potentially wider that those under the current EU state aid guidelines, although this is a matter of interpretation of the TCA provisions and may differ for particular types of projects. This may be material in the context of the upcoming reviews of electricity and heat market design in the UK.
The UK has agreed to establish an independent authority or body with “an appropriate role” in its regime, but subsidies do not need to be notified to that authority for prior approval. This differs to EU state aid law which requires prior notification to the European Commission, although in practice the vast majority of aid in the EU is exempted under formal block exemptions without needing to be notified. The UK is not required to adopt similar block exemptions, although this would seem helpful and the UK Government has indicated that secondary legislation may come in early 2021. New primary legislation may also follow with the Government intending to publish a broader consultation on how best to design a bespoke approach to subsidy control for the UK economy.
Interested parties will be able to challenge UK subsidies before the UK courts, with possible remedies including damages and recovery of incompatible aid. The TCA also includes mechanisms to resolve disputes between the EU and UK regarding whether particular subsidies are compatible with the agreed requirements.
It should also be noted that the Protocol on Ireland/Northern Ireland envisages that EU state aid law will continue to apply in respect of trade (including electricity) which affects both Northern Ireland and the EU. However, there is potential complexity around how this will work in practice and interact with the TCA subsidy control provisions.
Under the Withdrawal Agreement, for a period of four years after the implementation period ends, the European Commission will retain the ability to initiate new investigations in respect of UK aid granted before the end of the implementation period.
At EU level, there are a number of proposals for new powers to protect the EU single market against distortions caused by foreign subsidies from outside the EU. As set out in a White Paper published in June 2020 for consultation, the proposals include possible powers to remedy distortions caused by foreign subsidies, a new notification system for acquisitions of EU companies where the acquirer has benefitted from financial support from a non-EU government, and possible exclusion from procurement procedures if a bidder has received a foreign subsidy that makes the procedure unfair. These proposals could impact UK businesses if introduced.
How does Brexit affect the UK’s climate change and emission reduction ambitions?
Brexit does not affect the UK’s climate change goals as these are established at a national level under the Climate Change Act 2008. However, the TCA seeks to ensure that neither the EU nor the UK reduce their commitments regarding emissions and removals of greenhouse gases and ozone depleting substances to below those levels in place at the end of the implementation period (Article 7.2 of Chapter 7 (Environment and climate)).
Chapter 8 of the TCA deals with trade and sustainable development. Here, the EU and UK commit to effectively implementing the United Nations Framework Convention on Climate Change (the UNFCCC) and the Paris Agreement goal of limiting the increase in global average temperature to well below 2ºC above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5ºC above pre-industrial levels (article 8.5). It includes commitments to remove obstacles to trade and investment in goods and services of particular relevance for climate change mitigation and adaptation and to cooperate in trade-related aspects of climate change policy. The UK has now submitted its own Nationally Determined Contribution, independent of that of the EU, in respect of its intended climate actions under the UNFCCC processes, committing to reduce economy-wide greenhouse gas emissions by at least 68 per cent by 2030, compared to 1990 levels.
The UK is no longer a member of the EU Emissions Trading Scheme (EU ETS). Under the terms of the Withdrawal Agreement, the UK remained in the EU ETS during the implementation period and operators are required to comply with obligations relating to the 2020 scheme year (obligations with respect to the 2020 scheme year end on 30 April 2021). According to Government guidance, UK stationary installation operators and aircraft operators will continue to have access to their Union Registry holding accounts administered by the UK for 2020 EU ETS compliance obligations up to and including 30 April 2021 but access to accounts after this date may no longer not be possible. Participants who wish to continue trading in the EU ETS after this date may wish to consider opening a trading account in another member state.
In relation to an enduring regime, the TCA requires that the EU and the UK have effective system of carbon pricing as of 1 January 2021, covering greenhouse gas emissions from electricity generation, heat generation, industry and aviation (Article 7.3 of Chapter 7 (Environment and climate)). The UK implemented a UK Emissions Trading Scheme (UK ETS) on 1 January 2021, established through the Greenhouse Gas Emissions Trading Scheme Order 2020. Details of the UK ETS are set out in the Government’s consultation response (see our blog post “The future UK carbon pricing after the end of the implementation period: consultation outcome”).
Although no agreement with respect to linking carbon markets was possible, the TCA does provide for the UK and EU to give “serious consideration to linking their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness” (Article 7.3 of Chapter 7 (Environment and climate)).
How does Brexit impact the nuclear power sector?
In addition to leaving the EU, the UK has withdrawn from the European Atomic Energy Community (Euratom) and the associated treaty (the Euratom Treaty). Withdrawal from Euratom also came into effect on 31 January 2020, subject to the implementation period that ended at 11.00 pm UK time on 31 December 2020.
With effect from 1 January 2021, the Office for Nuclear Regulation (ONR) has assumed responsibility for overseeing nuclear safeguarding arrangements in the UK, under the Nuclear Safeguards Act 2018 (which amends the Energy Act 2013) and the Nuclear Safeguards (EU Exit) Regulations 2019. Having been ready to assume safeguarding responsibilities in accordance with the UK’s international obligations since March 2019 (the original Brexit date) if required, the ONR ramped up its capability to be ready to implement a regime at a level equivalent to the Euratom regime by the end of December 2020 and has been operating in parallel to the Euratom regime to test and demonstrate its capabilities.
The UK has entered into a Voluntary Offer Agreement and additional protocol with the International Atomic Energy Agency (IAEA) and Nuclear Cooperation Agreements (NCAs) with Canada, the USA and Australia, to replace arrangements which covered the UK as a member of Euratom. The UK has an existing bilateral agreement with Japan, entered into in 1998, which has been refreshed through an Exchange of Notes. These agreements are expressed to come into effect on a date to be agreed between the parties. This has hopefully been agreed as 1 January 2021, although no public announcement on the effective date appears to have been made. The UK has therefore replaced the international agreements required to enable it to continue to trade internationally with its major trading partners in the civil nuclear sector. The UK will lose the benefit of other NCAs entered into between Euratom and a number of other non-EU countries (for example, Argentina, Kazakhstan, South Africa, Ukraine and Uzbekistan), but agreements with those countries are not conditions to trade. Existing bilateral agreements between the UK and other non-EU countries (including China, India, Jordan, the Republic of Korea, the Russian Federation and the UAE) have not been affected by the UK’s exit from the EU and Euratom.
Under the Euratom Treaty, the approval of the Euratom Supply Agency and, for some contracts, the Commission is required before supply contracts are entered into for nuclear material within the EU. The UK is no longer subject to those rules, but is also outside of the protection of the security of supply and fair access principles that apply to contracts entered into by operators within EU Member States. Contracts entered into for the export of EU-produced nuclear materials to the UK will require the consent of the EU Commission pursuant to Article 59 of the Euratom Treaty, which will not be granted if the export is contrary to ensuring security of supply within the EU.
Alongside the TCA, the UK and Euratom have entered into an agreement for cooperation on the safe and peaceful uses of nuclear energy (the UK-Euratom NCA), reflective of the Parties’ stated intention in the Political Declaration to establish a broad relationship based on an NCA between the UK and Euratom including exchange of information in areas such as safeguards, safety and cooperation with the IAEA and facilitation of trade in nuclear materials and equipment.
The UK-Euratom NCA references the TCA, but is a standalone agreement. The UK-Euratom NCA is valid for an initial period of 30 years, and will then automatically renew for further periods of 10 years unless either party has given the required notice that it should terminate. Other than the right to terminate on a renewal date, suspension or termination of the UK-Euratom NCA or any part of is limited to grounds of serious breach of specified Articles.
Although the UK-Euratom NCA includes specific commitments between the parties in relation to topics such as safety, safeguarding, security, enrichment and reprocessing, the purpose of the agreement is to set out a framework for cooperation between the parties in the field of nuclear power. The scope of that cooperation is intended to be broad, encompassing all aspects of the peaceful uses of nuclear power, but the detail of that cooperation remains to be worked out under the framework provided.
The UK-Euratom NCA includes an agreement to facilitate trade in the items subject to the UK-Euratom NCA (nuclear material, non‐nuclear material, equipment and technology, as such terms are defined in the agreement). The Parties’ commitment that transfers of nuclear material, non‐nuclear material, equipment or technology will be carried out under fair commercial terms is without prejudice to the Euratom Treaty and its derived legislation, which would include the requirement to ensure security of supply within the EU referred to above.
It is noteworthy that the UK-Euratom NCA applies to nuclear material, non‐nuclear material, equipment or technology transferred between the Parties or their respective persons, but that, in respect of technology only, Euratom may serve a notice on the UK on entry into force of the UK-Euratom NCA to exclude technology in respect of certain Member States, who have expressed their will not to place technology in the framework of the UK-Euratom NCA.
Following the end of the implementation period, the UK is no longer a member of Euratom’s various research and development programmes, such as the Euratom Research and Training Programme and Fusion for Energy. The UK-Euratom NCA envisages that UK participation as a third country in Euratom’s research and training programmes may form part of the Parties’ commitment to cooperate on nuclear research and development, but this participation is left to be agreed separately under the terms of the TCA (Part V). The draft Protocol I attached to the Joint Declaration on Participation in Union Programmes and Access to Programme Services includes the Research and Training Programme of Euratom for 2021 – 2025 (with an automatic extension to cover the successor programme for 2026-2027 unless either Party notifies otherwise within 3 months of the publication of that successor programme) and the European Joint Undertaking for ITER and the Development of Fusion Energy. However, Protocol I remains subject to final agreement and adoption under Part V of the TCA.. The UK has also ratified the Generation IV International Forum (GIF) Research and Development Framework Agreement, which was signed by the UK in 2005. The UK is able to participate directly in this framework now that it is no longer participating indirectly through Euratom.
How does Brexit affect the UK’s renewable and low carbon energy policy?
Although the UK has been released from the renewable energy targets under the EU Renewable Energy Directive (recast), the TCA includes a commitment to promote energy efficiency and the use of energy from renewable sources and reaffirmation of the EU’s 2030 “targets” and the UK’s 2030 “ambitions” for renewable energy and energy efficiency (ENER 21). Whilst the strength of the UK’s commitment is open to interpretation, given that the UK is still be bound by national and international decarbonisation obligations (see above), renewable and low carbon energy development will continue to form part of Government climate change policy.
The TCA sets a number of parameters applicable to renewable energy and support schemes including:
- that electricity markets enable the integration of renewable electricity and that each party assess the necessary actions to facilitate the integration of gas from renewable sources (ENER 6)
- that producers of renewable energy are accorded reasonable and non-discriminatory terms when procuring balancing market products and services (ENER 6).
- non-discrimination in relation to renewable generation regarding connection to, and use of, the electricity network (ENER 8)
- licensing for renewable energy is necessary and proportionate (ENER 21)
- that support for electricity from renewable sources facilitates the integration of electricity from renewable sources in the electricity market and that support for biofuels, bioliquids and biomass is contingent on robust criteria for sustainability and greenhouse gas emissions saving, which are subject to verification (ENER 22).
- State aid rules (see above)
In terms of future cooperation between the UK and the EU on renewable energy and climate change, the TCA envisages close cooperation in offshore renewables, by sharing best practices and, where appropriate, facilitating the development of specific projects. To this end, a specific forum will be developed for cooperation on offshore grid development and the large renewable energy potential of the North Sea region (ENER 23). Cooperation will also extend to the development of international standards with respect to energy efficiency and renewable energy, with a view to contributing to sustainable energy and climate policy (ENER 25). Promotion of research and development in energy efficiency and renewable energy is also provided for (ENER 26). Finally, TCA provisions relating to cooperation in relation to climate change also envisage “facilitating the removal of obstacles to trade and investment in goods and services of particular relevance for climate change mitigation and adaptation, such as renewable energy, energy efficient products and services”, providing scope for less friction for trade in these areas (article 8.5).
The European Union (Withdrawal) Act transposed EU-derived legislation into UK law at the end of the implementation period, and a number of statutory instruments have been made under that Act amending current regulations which will remove authority of EU institutions from the UK energy regulation at that time (for further information please see our Q&A on the UK and EU legal framework). However, where EU law provides for the mutual recognition by EU Member States of rights derived under EU law, the UK and the EU needed to reach an agreement under the TCA to maintain the status quo. One example where this has not been achieved is in relation to renewable energy guarantees of origin (REGOs) used as proof of an energy supplier’s fuel mix. No agreement on mutual recognition of REGOs has been reached. As a result, from the end of the implementation period REGOs issued in the UK are no longer be recognised in the EU. The UK will however continue to recognise REGOs of EU origin, although, according to Government guidance, this will be reviewed in 2021.
What are the implications 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 2024 as they have selected a limited life derogation and can operate without abatement equipment until the end of 2023. Despite Brexit, it is nevertheless likely that unabated coal-fired plants will close, particularly as the Government is consulting on new policy to close all unabated coal-fired power stations by October 2024. Similarly, the Medium Combustion Plants Directive 2015 (MCP) sets limits on emissions such as sulphur dioxide, nitrogen oxide and dust in relation to a smaller plant with a thermal input up to 50 MW. Both the IED and the MCP have already been implemented into national legislation and, therefore, the effect of the European Union (Withdrawal) Act will mean that, in the short-term, these regimes will continue to apply to the UK. In the long-term the UK and devolved administrations will need to agree how to provide common frameworks to agree common standards.
Does Brexit affect UK projects which have received, or expect to receive, funding or guarantees from EU institutions?
A number of EU initiatives to promote investment in energy infrastructure which represented an important source of funding for UK projects. For example, European Investment Bank (EIB) investment in UK energy projects was EUR 13.334 billion from 2010 to 2020. Article 151 of the Withdrawal Agreement confirmed that going forward, the UK and UK projects located in the UK will not be automatically eligible for financial support from the EIB that is reserved for EU member states. The Political Declaration published alongside the Withdrawal Agreement acknowledged the UK’s intention to establish a cooperative relationship with the EIB, but it did not directly address how a relationship between the UK and EIB will be governed in the future. Under the TCA, there may be scope for participation in EIB funded programmes under Part 5 of the TCA (Participation in Union Programmes, sound financial management and financial provisions) but this will be subject to agreement of a further protocol.
Given the significance of EIB funding and support, the UK has been considering how to replace the role of EIB in UK energy and infrastructure finance. In January 2019, the EU Financial Affairs Sub-Committee published a report on EIB funding post-Brexit, including a recommendation for the establishment of a UK infrastructure bank (for more information, see our blog post: EU Financial Affairs Sub-Committee publishes report on EIB funding post-Brexit). The Government subsequently published the Infrastructure Finance Review in 2019, which sought views on whether the tools currently used by the UK are sufficient to encourage private sector investment, or whether an operationally independent institution playing the role of cornerstone investor like the EIB should be established to support the financing of projects post-Brexit. For more information, see our blog post: UK Government publishes consultation on how best to support private investment in infrastructure post-Brexit. The Government has now published its National Infrastructure Strategy, including plans for the establishment of a UK national infrastructure bank to co-invest alongside the private sector in infrastructure projects. The bank will also lend to local and mayoral authorities for key infrastructure projects, and provide them with advice on developing and financing infrastructure. As part of the NIS, the Government has indicated it will continue to develop new revenue support models and consider how existing models, such as the Regulated Asset Base model and Contracts for Difference, can be applied in new areas.
How does Brexit affect the operations of multi-nationals in the North Sea?
Freedom of movement of persons between the UK and the EU ended at 11.00 pm UK time on 31 December 2020. As a result, it may be more difficult to manage a flexible workforce, which previously (with freedom of movement) could be moved from project to project within Europe, depending on need. Having said that, the Government increased the number of roles on the Shortage Occupation List in 2020, so that employers hiring for those roles are exempt from conducting the RLMT (resident labour market test for skilled workers). In the context of the oil and gas sector, these include, for example, numerous engineering occupations and science professionals.
EEA and Swiss nationals (and close eligible family members) working onshore (and offshore within 12 nautical miles) in the oil and gas sector who are resident in the UK by 31 December 2020 can apply under the EU Settlement Scheme by 30 June 2021 to protect their UK immigration status.
From 1 January 2021, a new single immigration system which is based on the worker’s skills will control how EU nationals visit, live and work in the UK on a consistent basis with migrants coming to the UK from outside of the EU. Any employer wishing to employ EU citizens will need to have a sponsor licence and, if the worker is entering under the skilled worker route then will need to comply with a required skill level as well as relevant salary threshold. Points may be “traded” on specific characteristics if the salary threshold is not met.
What impact has Brexit had on the way the UK sources gas?
Given how recently the TCA was agreed, there have not been any changes to the way the UK sources its gas as yet. Whilst there is agreement for regulatory cooperation and alignment, much of the detail remains open to future agreement between TSOs and energy regulators (see above: Does the TCA affect the regulation of the UK and EU energy markets?). For now, all parties are trading on existing terms but should things change for the worse, the UK already has mitigation against security of supply risks built into the system. Existing import infrastructure allows multiple sources of supply in both liquid and gaseous form via its three gas interconnectors and three liquefied natural gas (LNG) import terminals. The TCA attempts to further protect energy security for both Parties by requiring cooperation on security of supply (ENER 17, which applies to both gas and electricity) and by imposing mutual obligations to inform one another of actual or potential disruption. It also requires the Parties to prepare and share risk assessments and plans for mitigation in relation to supply issues, and provides that neither Party shall endanger the supply of the other Party (ENER 18). Approximately 12% of the UK’s gas comes from the EU and should there be any interruption to gas flows via the interconnectors, the existing LNG import terminals all have sufficient spare capacity to allow for additional volumes of LNG to be imported. Having said that, although ramping up LNG imports is possible in terms of available capacity, the cost of liquid molecules has recently sharply increased (see below) and to purchase an LNG cargo on the spot market to plug a gap in pipeline supply would be an extremely expensive option.
Of greater significance then are issues such as expiry of long-term pipeline supply contracts, a failure to re-contract interconnected capacity on a long-term basis and restrictions on selling capacity on such basis in the future. For now, interconnectors will continue to be bound by similar principles to the EU Gas Transmission Tariffs Network Code (Commission Regulation (EU) 2017/460), which restricts the price at which interconnectors can sell their capacity. While final arrangements remain outstanding, the Government is advising that interconnector owners/operators engage with relevant EU national regulators to confirm whether gas can continue to be traded on the basis of the rules in the EU Capacity Allocation Mechanisms Network Code (Commission Regulation (EU) 2017/459) and to understand any requirements for re-approval of their access rules. REMIT registration considerations (discussed above) will also apply.
Does 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 or third country gas flowing to the UK, and the TCA does not do this (although as we note above, TCA Part 2, Title VIII: Energy is to be terminated on 30 June 2026). The UK hopes to replicate existing EU trade agreements as far as possible with third countries. For example, the UK and South Korea agreed to adopt terms based on an existing trade agreement between South Korea and the EU, meaning the exemption from a 3 per cent import tariff on oil imports will continue to apply to UK crude.
Utilisation of LNG import capacity is a supply and demand issue not connected to Brexit. LNG accounted for 39 per cent of UK gas imports in 2019 compared to 15 per cent in 2018, with the rise in LNG imports at least partly due to the end of the long-term supply agreement for the Bacton-Zeebrugge interconnector and cheap LNG prices. 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 and at present, the UK is not an attractive destination at all. The cold snap in Asia, combined with supply outages and congestion at the Panama Canal has sent demand – and consequently prices – rocketing. The UK will therefore be more reliant on pipelines to source any additional gas it requires via its interconnectors, rather than splashing out on a cargo that could cost in the region of USD 130 million (a new record price achieved in Japan in early January). Against this backdrop, it is even more important that all of the outstanding matters to be agreed between the UK and EU in the context of gas supply (see above) are resolved sooner rather than later.
Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com.