Special Report: Brexit’s impact on the energy sector

Special Report: Brexit’s impact on the energy sector

Brexit raises significant questions for the EU’s internal energy market. Will the UK continue to participate in the Energy Union project? Will Brexit fatally damage the EU’s Third Energy Package? Could it affect the ability of multinationals to operate in the North Sea? And how will the UK approach energy security? GRI’s Leo Kabouche takes an in-depth look in this Special Report.

Brexit talks were launched in Brussels in June, marking the start of a two year long process that will see the United Kingdom leaving the European Union (EU) on 29 March 2019. Following the fourth round of monthly Brexit talks, EU chief negotiator Michel Barnier said there had been no decisive progress on any of the main issues.

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

As an EU Member State, the UK is part of the Internal Energy Market (IEM) which enables harmonized, tariff-free trading of gas and electricity across Europe. The UK played a major role in the liberalization of the IEM and the development of cross-border energy markets. Between 1996 and 2009, three EU Directives were implemented with a view to opening the market in electricity and gas across Europe. This has involved three levels of market extension and deregulation: the creation of wide area wholesale electricity and gas markets; non-discriminatory rules for access to transmission wire and pipelines; and the extension of retail competition and full deregulation of ownership.

A new partnership

Considering that the UK Government has set itself a goal of ending the supremacy of the EU over UK law, it is almost certain that the UK will leave the IEM. According to this hypothesis, the UK would also be leaving the institutions which co-ordinate EU energy regulation, such as the Agency for the Cooperation of Energy Regulators (ACER), the European Network of Transmission System Operators for Electricity (ENTSO-E) and the European Network of Transmission System Operators for Gas (ENTSO-G).

Therefore, for the UK to continue participating in the Energy Union following Brexit, it would have to negotiate a new partnership with the EU. In this scenario, the UK would have to comply with most of the EU legislation on the energy dimension, without having any influence on the implementation of the standards as it would have left all the institutions at the heart of the EU energy governance.

The two parties could negotiate an agreement on the same basis of the one between the EU and the countries in South East Europe and the Black Sea region. Although they are not EU Member States, these countries are part of the Energy Community, which aims to extend EU internal Energy market standards outside the EU’s borders. Another example is the one of Norway and Switzerland, two non-EU countries which are heavily integrated into the EU energy market under their participation in the European Free Trade Area (EFTA).

Will Brexit affect the EU’s Third Energy Package and emissions trading?

The EU’s Third Energy Package is a legislative package aiming to liberalize European gas and electricity markets. It was adopted in July 2009 with the long-term goal of creating a single EU gas and electricity market, keeping prices as low possible and increasing standards of service and security of supply. The package includes two directives, one concerning rules for the internal gas market (2009/73/EU) and one implementing common rules for the internal electricity market (2009/72/EC). It also contains three regulations, one on conditions for access to the natural gas transmission networks, one on conditions for access to the network for cross-border exchange of electricity and one on the creation of ACER.

Emissions trading

The EU’s Emissions Trading System (EU-ETS) is the cornerstone of the European policy regarding the reduction of man-made greenhouse gases emissions. It implements a limit on overall emissions from covered installations which is reduced each year. Within this limit, companies can buy and sell emission allowances as needed. EU-ETS is the world’s largest scheme for trading greenhouse gas emissions allowances. It entered into force in 2005, and now covers 11,000 power stations and industrial plants in 30 countries.

With regard to the UK’s participation in the EU-ETS, the EFTA model could again provide the negotiators with a source of inspiration. In the case where Brexit would be based on the EFTA model, then, like Norway, Liechtenstein and Iceland, UK companies would be able to fully participate in the trading on the market. Should negotiations fail, UK companies would experience a freeze of their participation in the EU-ETS, which would have a significant impact on companies holding a surplus of allowances.

Liberalized energy policy

The UK has been a strong advocate of liberalized energy policy, and would likely continue to implement and be supportive of many aspects of the EU’s Third Energy Package, such as the ownership unbundling requirements, the level playing field, and standards of transparency. It is thus highly possible that the UK would bring its energy policy into the line with that of the EU in the post-Brexit era. However, we may also see a shift in the EU energy policy after the UK’s departure, with a stronger regulatory focus which might have an impact on European and British companies operating across the continent.

Could Brexit affect the ability of multinationals companies to operate in the North Sea?

For oil and gas companies operating in the North Sea, one of the most important aspects of Brexit is the access to skilled labour and the advent of new visa regimes that would change employment laws. Brexit will put an end to freedom of movement of persons, which will degrade manpower flexibility. Moreover, holidays and working time legislation could also be reformed, and particular consideration should be given to these two areas as they have an important impact on the offshore sector.

How will the UK approach energy security after Brexit?

Should the two parties fail to reach a new free trade agreement or settlement, it would have a significant impact on the import and export of goods relating to the energy sector.

UK exports to the Union would become subject to the so-called ‘most-favored nation tariff’ (MFN) applied by the EU. European exports to the UK would also have to be in accordance with the new MFN tariff that the UK will adopt in the aftermath of Brexit. Under MFN, a country enjoys the best trade terms given by its trading partner, which means that it receives the lowest tariffs, the fewest trade barriers, and the highest import quotas. In addition, the ordinary customs administrative procedures would henceforth apply to UK-EU trade.

Gas

Regarding the UK’s gas supply security, Brexit could lead to the exclusion of the UK from the ‘solidarity principles,’ under which EU Member States undertake to supply gas to their neighbors in the event of a gas supply crisis. Moreover, the EU is in charge on all issues relating to energy trading, which prevents individual Members States to sign treaties with the UK to preserve market access. However, gas sectors between the UK and the EU are already well integrated through three interconnectors. Therefore, the gas sector should not be sensibly impacted by Brexit. Moreover, Ireland’s gas sector is heavily integrated into that of Great Britain and largely relies on UK gas imports. This might pressure EU’s negotiators to come to an arrangement which does not put Ireland’s energy security at risk.

Electricity

In the electricity sector, the UK’s security may be negatively affected if Ireland, France, Belgium and the Netherlands are less willing to operate their electricity interconnectors with the UK strictly in line with price differentials. But it is especially UK’s departure from the European atomic energy community, Euratom, that may do serious damage to the UK’s electricity generation. In the case where the two parties fail to establish replacement arrangements within the two-year period of negotiations, the UK faces import and export of materials governed by the Euratom Treaty becoming illegal. This would have consequences for companies operating in the UK and which use radioactive materials.

Climate change

Finally, Brexit should not have any adverse consequences on the UK’s climate change goals, which were decided at a national level under the Climate Change Act 2008.

Categories: Economics, Special Reports

About Author

Leo Kabouche

Léo is currently a Master’s student at the University of Montreal completing his studies in International Affairs. He has specialized in U.S. foreign policy with a focus on Europe and the Middle East.