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Joining the Brexit debate –
what’s next for the energy sector?

Joining the Brexit debate – what’s next for the energy sector?

Published: 17th November 2017
Area: Corporate & Commercial
Author: Andrew Whitehead

Our head of energy, Andrew Whitehead, recently travelled to the German parliament to speak to an audience of business leaders, academics and politicians about the future impact of Brexit on the UK and EU energy sectors.

The importance of the energy sector cannot and should not be underestimated. It is one area that touches almost all other areas of industry. So, why has the energy sector avoided most of the heat of the Brexit discussions thus far?

In such a wide-ranging sector there are three areas that must be prioritised going forward in the journey towards a ‘technocratic’ solution, which largely preserves current conditions:

New investment – interconnectors

Interconnectors allow electricity to flow between neighbouring countries, with the direction of flow normally being in the direction of higher prices. The revenues from these installations are normally derived from ‘congestion rents’ received from users of interconnectors who trade across borders, taking advantage of favourable price differentials.

Interconnectors deliver many advantages, including:

  • Exerting downward pressure on energy prices
  • Reducing the need to build new power plants
  • Reducing the risk of blackouts
  • Providing back-up cover for intermittent renewables
  • Encouraging market competition

Earlier this year, Ofgem gave preliminary approval for three new electricity interconnector cables to be built connecting the UK to France, Norway and Germany. Once built, this new infrastructure would allow an extra 4GW of connection capacity.

In a perfectly unconstrained world, there would be sufficient interconnection to allow prices in neighbouring markets to harmonise, and congestion rents would come to an end. However, due to the difference in fuel mixes and usage, and different operational costs, this is unlikely to occur between the UK and continental Europe. That’s why there is currently 16 GW of new UK interconnector capacity planned or currently under construction.

The EU is very keen on interconnection. It has set a minimum 10% electricity interconnection target for all Member States by 2020, and 15% by 2030. Since the current UK interconnectors represent around half this 2020 target, and one third of the 2030 target, the promotion of UK interconnectors has been a priority of the EU.

And that’s been backed up by hard cash. The Trans-European Networks for Energy (TEN-E) strategy identifies the need for infrastructure development to strengthen cross-border interconnections, and every two years a list of Projects of Common Interest (PCIs) is drawn up. PCIs benefit from access to the Connecting Europe Facility (CEF) fund – €30 billion to boost energy, transport and digital infrastructure between 2014 and 2020.

New UK interconnectors have not just been an EU priority, but for UK Government too. Clearly, imports offset the need to build UK power plants, and enhance security of supply; particularly important as we see the UK rapidly wean itself off coal, and ongoing delays in new nuclear build.

So why would the UK come out of the Internal Energy Market (IEM)? Well, the IEM is a creature of the 3rd package, which is within the jurisdiction of the European Court of Justice (ECJ), so that’s a problem. But in any event, the UK Government has indicated it wishes to leave the single market, and that includes the IEM – and the EU 27 has indicated that there can be no “cherry picking”. It must be all or nothing.

Nuclear

One of the implications of the UK moving out of the jurisdiction of the ECJ is the potential for the UK to also exit the Euratom Treaty. The consequence is that there is another big black hole to plug when it comes to nuclear safety inspections and other nuclear safeguards. To try and address this, the UK Government published a position paper in July, outlining how it wants to work with the Euratom community, including to ensure a smooth transition to a UK nuclear safeguard regime.

Yet, there are still some significant problems to overcome, and not much time. One of Euratom’s most important research institutions, the UK-based Joint European Torus (JET), is a global leader in research into nuclear fusion, hosting the world’s largest operational nuclear fusion device. UK fusion research is likely to collapse unless an agreement is reached to maintain future funding, collaboration and to allow the movement of specialist staff from Europe.

Perhaps more importantly, operators of existing nuclear plant, and also the developers of the UK’s new nuclear reactors, will need to be sure they can get their fuel, components and people into the UK – currently all matters guaranteed by the UK’s membership of Euratom.

IEM regulatory matters – ACER, CEER and ENTSOs

There is one final area to touch on, which is governance and change control – an important issue if the UK is going to participate, one way or another, in the IEM after Brexit.

The Agency for the Cooperation of Energy Regulators, or ACER, is the EU energy regulatory body which monitors the internal energy market, and has a role in market monitoring under REMIT, an EU regulation on energy market integrity and transparency.

Cross-border cooperation between transmission system operators is affected through the European Networks of Transmission System Operators for Electricity and Gas (ENTSO-e and ENTSO-g). These produce the Network Codes and coordinate planning of new network investments.

The Brexit points to note here are that whilst ACER and the Council of European Energy Regulators (CEER) allow participation by non-EU Member States as observers, they have no voting rights. And sure, TSOs can be members of ENTSO-e and ENTSO-g where their home country is not a Member State, but the voting rights of non-EU TSOs are restricted.

Given the key roles that these bodies have in the IEM, if the UK is going to have any kind of ongoing role, then it will want to negotiate some continuing participation – at the very least membership of the various working groups.

So, what’s next?

There are some very clear advantages to all sides in keeping the UK very closely involved with the IEM and Euratom. However, the question mark over the future powers of ECJ is the a key barrier which needs some compromises on both sides.

Paradoxically, it’s likely that we’ll also see UK energy businesses begin to engage much more actively with EU institutions and their European counterparts. As the reality dawns that a status quo of any description for the energy sector post-Brexit probably means the UK becoming a rule taker – and in an area where the UK’s influence has generally been considered extremely helpful and constructive – that’s probably not a good thing.

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