Technical

What does the new Brexit trade deal mean for the energy sector?

Published: 1st February 2021
Area: Energy

On the 24 December 2020, the United Kingdom, the European Union (“EU”) and the European Atomic Energy Community (“Euratom”) negotiating teams reached agreement in principle on the basis of the future relationship between the UK and the EU.

The agreed principles are set out in three draft agreements, two of which are key to the energy sector:

The third agreement covers the exchange and protection of classified information. Each of the agreements applies provisionally until 28 February 2021, to give the EU and UK Parliaments time to analyse and ratify them. Approval by the UK Parliament has already been achieved although ratification by the European Parliament and the Council of the European Union may require an extension of time.

Brexit concerns

During the extended Brexit negotiations concerns were expressed over a number of areas in which the GB energy market might lose out. These included loss of access to the EU’s Internal Energy Market (IEM), including day-ahead market coupling, cross-border balancing and capacity market integration; loss of influence over EU policy resulting from membership of ENTSOe, ENTSOg and ACER terminating; adverse impact on UK renewables and carbon emissions policies; and disruption of nuclear operations.

The TCA and NCA address these issues through the various high-level principles they enshrine. However, they essentially provide a framework for the development of detailed arrangements for the future relationship in the energy sector. A range of committees will oversee the development of detailed measures and these include specialised committees addressing the maintenance of a level playing field for open and fair competition and another, addressing technical barriers to trade which will address cooperation on energy standards.  A Specialised Committee on Energy will address other issues including the efficient use of interconnectors.

Much attention during the Brexit negotiations was focussed on the future arrangements for Northern Ireland. These were largely settled in the Ireland/Northern Ireland Protocol agreed as part of the Withdrawal Agreement. In the case of the energy sector, it was agreed that the all-island electricity market, the i-SEM, would continue post-transition period and, to facilitate this, the UK government agreed under the Protocol to apply EU law in Northern Ireland in respect of the i-SEM.

Access to the Internal Energy Market (IEM)

One of the key areas of concern from a GB perspective pre-Brexit was the degree of access that would be retained to lower priced power in the IEM. In particular, would the GB interconnectors be able to continue their participation in the single day-ahead price-coupling process?

Whilst it is now established that the UK is a third country outside the IEM and interconnector trading has reverted to explicit auctions, new coupling arrangements are envisaged by the TCA for the day-ahead timeframe as outlined in Annex ENER-4.  The TCA provides for an alternative mechanism to be developed, based on the concept of multi-region loose volume coupling under a process to be overseen by the Specialised Committee on Energy. The new coupling arrangements are to be implemented by early 2022 and, whilst likely to be less efficient than single day-ahead price-coupling, should enable the GB market to regain at least part of the ‘social benefits’ from coupling. In the interim, the GB interconnectors can be used to access the EU markets but only through the less-efficient mechanism of explicit auctions.

There are no similar provisions in the TCA to facilitate access to the IEM in other timeframes, including intraday and balancing. However, the Parties are required under Article ENER.13 to develop “arrangements to deliver robust and efficient outcomes for all relevant timeframes, being forward, day-ahead, intraday and balancing” and this is reiterated by Article ENER.14.

Access to EU Institutions

Having been at the forefront of liberalisation of the EU energy sector and the development of cross-border trade, the UK risks losing its influence post-Brexit. This would have been a major concern if the UK had retained its participation in the IEM but remains an issue even with the reduced level of integration provided for in the TCA. Whilst the new arrangements leave the GB energy market outside the IEM and the key institutions, ENTSOe, ENTSOg and ACER, the TCA does include a framework for co-operation between UK TSOs and ENTSOe and ENTSOg. This will fall short of membership by the UK TSOs but does create the opportunity for cooperation in a number of key areas, including: technical procedures to implement the provisions on network development; efficient use of electricity and gas interconnectors; electricity trading and cooperation on the security of supply; offshore energy infrastructure planning; and gas decarbonisation/gas quality.

Similarly, Ofgem has ceased to participate in ACER but the TCA provides that ACER and Ofgem must develop contacts and enter into administrative arrangements as soon as possible to facilitate meeting the objectives of the agreement as a whole. The specialised committee on energy must agree guidance for this cooperation as soon as practicable (Article ENER.20).

Carbon emissions

Concerns were expressed pre-Brexit that the UK government might not maintain the same environmental standards and levels of protection on climate change in the future, particularly in light of the UK withdrawal from the EU Emissions Trading Scheme.   Whilst the TCA acknowledges the Parties’ rights to set their own policies on the protection of the environment and climate change, it includes a commitment not to reduce these protections below the levels at the end of the transition period in a way that might affect trade or investment (Part 2, Heading One, Title XI Article 7.2).

There is also a specific commitment to implementing the UN Framework Convention on Climate Change and the Paris Agreement. The fight against climate change is recognised as an “essential element” of the TCA and “materially defeating the object and purpose of the Paris Agreement is specified in Title III Article INST. 35 (4) as constituting a “serious and substantial failure” to ensure an essential element of the TCA.

Renewables

Similarly, the Parties have committed to maintain current targets for renewables. In the case of the UK, this means the targets set out in the National Energy and Climate Plan (ENER.21). The Parties have also committed to ensure that support for electricity from renewable sources will facilitate the integration of renewables in the electricity market (Article ENER 22). The Parties are to cooperate in the development of offshore renewable energy by sharing best practices and facilitating the development of specific projects with aim of developing higher volumes of renewable energy to address climate change. There is a specific commitment in respect of the potential for renewable energy and associated offshore network in the North Sea.

Developing the detail

By establishing a basis for EU and UK institutions to collaborate in the energy sector and setting out some high level principles, the TCA and NCA have created a framework for developing the detail of future cooperation in the sector. Inevitably this will result in looser ties than would have been the case had the UK had remained in the IEM but it seems likely that, following on from the protracted trade negotiations, discussions on energy matters will be ongoing for the foreseeable future as the new relationship is developed.

Nuclear operations

The UK government gave notice to withdraw from the Euratom at the same time as giving notice to withdraw from the EU on the basis that the treaties governing membership were considered to be inextricably linked. That gave rise to concerns that the UK’s nuclear industry might be disrupted. In particular, new nuclear cooperation agreements would need to be put in place to permit the future supply of nuclear materials and equipment, including intellectual property, software, and skills, to the UK.

Alongside the broader based TCA, the UK government agreed with Euratom a separate NCA for the safe and peaceful use of nuclear energy. The NCA applies from 1 January 2021 on a provisional basis until 28 February 2021 and, subject to ratification, will remain in force for an initial period of thirty (30) years.

The NCA provides a framework for cooperation in nuclear materials, non-nuclear material, equipment and technology; facilitation of commercial cooperation relating to nuclear fuel cycle; use of radioisotopes and radiation in agriculture, industry and medicine; exchange of scientific and technical information and participation in joint projects and establishment of joint ventures as outlined in Article 4 of the NCA.

Contact us

If you have any questions on what the Brexit deal means for the energy sector and the impact on trading arrangements with the EU, or need any guidance or support get in contact or contact a member of your local energy team.

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