On June 23, 2016, the United Kingdom public voted to leave the EU. This briefing note advises readers on practical steps they may wish to take now and anticipates how a Brexit will impact on the electricity regulation framework more widely. Indeed, significant parts of UK electricity regulation either implement EU Directives, or are imposed directly by EU Regulations. As a result of the decision to leave the EU, much of the UK's energy regulatory framework will now therefore require re-assessment.
This note outlines the key consequences, both for the GB market (England, Wales and Scotland) and for the separate Northern Ireland (NI) market, which is integrated with the electricity market of the Republic of Ireland to form the Single Electricity Market. While the notice period required means that the actual Brexit date would be very unlikely to be before 2018, there are numerous policy and technical issues to resolve before then.
The EU electricity regulatory framework
A series of EU Directives and Regulations adopted over the past few years have created a liberalised and largely harmonised EU electricity market. Further liberalisation and harmonisation measures are in the pipeline. Particularly significant measures are those adopted as part of the Third Energy Liberalisation Package in 2009: the Electricity Directive, the Electricity Regulation and the Regulation creating ACER, the Agency for the Cooperation of Energy Regulators.
The European Commission is also in the process of adopting a series of EU Network Codes. These are EU Regulations setting out detailed rules for the operation of and connection to energy networks, and for the operation of energy markets. Some of these are already adopted and the remainder are nearing finalisation. Other particularly important measures are the Regulation on Energy Market Integrity and Transparency (REMIT), and the Renewables Directive (proposals for a new Renewables Directive are currently being debated).
The Directives have been implemented into UK law, either through amendment of primary legislation such as the Electricity Act 1989, which (among other things) implements the unbundling requirements of the Electricity Directive, or by means of statutory instruments. EU Regulations are directly applicable and generally require no implementation, although the government adopted GB and NI statutory instruments to give the energy regulators the necessary powers to enforce REMIT.
The effect of a Brexit on this body of EU energy law depends very much on the nature of the UK's future relationships with the EU – whether it rejoins the European Free Trade Area, seeks to negotiate individual arrangements with the remainder of the EU or seeks some other accommodation.
It is worth noting that Switzerland, which is outside the EU, has been seeking to negotiate an energy agreement with the EU for several years, but negotiations have stalled, in particular following the Swiss decision to impose limits on immigration from the EU in 2014.
This note does not consider the separate security of energy supply implications.
Effect on national implementing rules
Brexit will almost certainly result in the repeal of the European Communities Act 1972. The ECA 1972 gives ministers the power to adopt secondary legislation in the form of statutory instruments (SIs) to implement requirements of EU law. he consequence of repealing an enabling statute such as the ECA 1972 is that SIs made under it lapse, unless the legislator at the same time enacts a "saving" provision.
It seems very likely that the great majority of the provisions implementing the Electricity Directive would be saved – at least for the short term. The UK has led the way in the EU in terms of energy market liberalisation, and it is very unlikely that it will reverse the separation of transmission from generation interests, for example, or the principle that energy prices should be set by the market rather than by regulators. In contrast, the fate of the Renewables Directive is less certain – it is possible that a post-Brexit UK government will now wish to relax some of the renewables targets contained in the Directive.
Effect on REMIT
The substantive prohibitions in REMIT (market abuse and insider trading) as well as the requirement to publish inside information will no longer be directly applicable in the UK post-Brexit. Even if the repeal of ECA 1972 contains saving provisions for the three regulations (one GB, one NI and one UK) that provide for the civil and criminal enforcement of REMIT, these regulations are so tightly tied in to REMIT through their numerous references to the substantive requirements and definitions that they will be unable to exist in isolation.
Having gone to the lengths of imposing criminal sanctions for energy market abuse in 2015, it is likely that a future UK government following the exit will wish to replace the substantive prohibitions of REMIT, possibly with legislation in very similar terms. However, it would not, without entering into a specific bilateral energy agreement with the EU, be able to access the EU-wide energy market monitoring and cooperation arrangements set out in REMIT. Conversely, ACER would no longer obtain access to UK electricity data and market monitoring under the REMIT framework.
Effect on the Electricity Regulation and the ACER Regulation
The Electricity Regulation will also no longer apply in the UK once Brexit is complete. Rules on the certification of transmission system operators, the development of EU network codes, the approval of interconnectors, the inter-TSO compensation mechanism for hosting cross-border electricity flows, interconnector congestion management and transmission charges will therefore not apply.
However, many of these principles are now so closely enmeshed in the GB electricity framework that it might be thought desirable to retain them following the vote to leave. While it would be possible to replicate a large part of the substantive rules in UK legislation, much of the institutional framework requires some form of agreement between the UK and the EU in order to function.
However, it is likely that the government will decide not to replicate every part of the Electricity Regulation framework. The European Commission has compelled the UK to make a number of changes to the GB electricity framework in order to comply with the Electricity Regulation, and a future government may decide that national interests are better served by reversing them. One example is the removal of charges on interconnectors for the use of the transmission system, for transmission losses and for balancing costs, in response to threatened infringement proceedings by the European Commission. The Electricity Regulation also limits the extent to which Member States may curtail interconnector flows to resolve national issues.
While the government and Ofgem currently consider that interconnectors can play an important part in ensuring GB system adequacy, they also recognise that price-driven interconnector flows may sometimes result in exports rather than imports from GB at times of system stress, and they may be tempted in future to permit curtailment of interconnector exports in order to resolve GB system margin or balancing issues.
The UK will now also be free to return to its historically preferred "merchant" approach to interconnector regulation, in place of the regulated approach imposed on it by the Electricity Regulation, which has led to the development of a complex "cap and collar" model. In practice, of course, the UK will need to strike a balance between preferring its own energy policy interests and entering into arrangements acceptable to its neighbours and other partners. However, outside the EU there is likely to be greater scope for a GB-specific regime to emerge, with the resulting increase in uncertainty for businesses.
As in the case of REMIT, even if the UK government wishes to continue to align GB energy policy closely with that of the EU post-Brexit, a number of the institutional arrangements under the Electricity Regulation, and certainly the entire ACER framework, will be difficult to replicate without some sort of specific agreement between the UK and the EU. As in the case of Switzerland, an energy agreement is likely to be conditional on acceptance of at least some of the fundamental EU freedoms – a condition that can be expected to be particularly hard for the UK to swallow judging by the importance of this issue in the debate leading up to the vote .
Effect on the EU electricity Network Codes
Similar considerations apply to the EU electricity network codes. These are a series of EU Regulations, adopted by the Commission under a procedure set out in the Electricity Regulation. They will set common rules for the connection to and operation of electricity networks across the EU, and for the operation of forward, day-ahead, intraday and balancing electricity markets across the EU.
Implementation of these rules in GB will be via a number of routes – legislation where necessary (for example a proposed amendment to the Electricity Act 1989 to give Ofgem the power to monitor the activities of NEMOs), but more often via licences and national codes. There are large parts of the EU network codes that will not be the subject of specific national implementation, but will in the normal course of events be effective as a result of their direct applicability as EU Regulations.
As in the case of the Electricity Regulation itself, these provisions will no longer apply in GB post-Brexit, leaving large gaps in the design of most electricity market timeframes. While it will be possible to replicate many of the substantive elements at a GB level, the day-ahead and intraday markets will rely in particular on price-coupling processes carried out at an EU level, on the basis of common methodologies and processes. It would be possible to provide for some of this process contractually, as between the GB Nominated Electricity Market Operators (NEMOs) and transmission system operators (TSOs) and their EU counterparts. Indeed the Capacity Allocation and Congestion Management (CACM) Network Code that creates the EU intraday and day-ahead markets to a large extent formalises arrangements that are already being developed voluntarily between the TSOs and power exchanges of North-Western Europe.
However, the fact that this framework has now been given legal force will give rise to a degree of asymmetry post-Brexit that may be difficult to overcome. For example, CACM contains methodologies for allocating the costs of market coupling as between NEMOs and TSOs, and for those costs to be determined by the relevant national regulators. If the GB TSOs and NEMOs are not formally bound by these arrangements, some alternative method of linking them in will presumably be required. Again, a bilateral energy agreement will be the most logical approach, although the Swiss experience shows that this might take time to negotiate and might require UK concessions in other areas.
Effect in Northern Ireland
As mentioned above, NI is a separate market from the rest of the UK for electricity purposes. Together with the Republic of Ireland, it forms the Single Electricity Market (SEM). For SEM issues, the Irish and NI regulators work together through a joint SEM Committee.
The Irish and NI governments and regulatory authorities are now engaged in a programme to align the SEM with the EU Network Codes, creating the Integrated Single Electricity Market (I-SEM). Essentially a single set of markets (forward, day-ahead, intraday and balancing) will cover both Ireland and Northern Ireland with a number of the key roles being carried out on an all-island basis by EirGrid, the holder of the Irish TSO and market operator licences, and SONI, its NI subsidiary that holds corresponding NI licences.
Brexit raises the same issues for NI as it does for GB, with the added dimension that the NI markets will be very closely integrated with the Irish electricity markets, which will remain in the EU. If the government decides to withdraw the NI market from the I-SEM so as not to implement the EU market design, it will need to put in place alternative market arrangements – creating separate NI electricity markets, or integrating NI with the GB electricity market.
On the other hand, if – as seems more likely – the government decides to maintain the I-SEM so that NI consumers can benefit from the larger all-island market, the institutional issues will be significant. As in the case of the GB market, some of the coordinated EU-wide and regional cooperation in determining methodologies can probably be carried out contractually as between post-Brexit NI market participants and their EU counterparts.
A further option might be for Irish participants and authorities to be delegated to represent their NI counterparts in the various operational and regulatory frameworks created under the EU Network Codes. This might be achievable as between Ireland and the UK, by means of a bilateral arrangement. However, it is likely that further arrangements between the UK and EU institutions would be needed in order to give EU authorities the power to make determinations in respect of issues relating to the NI part of the I-SEM.
A further issue to consider for the I-SEM is that until the development of interconnectors with countries other than GB, the I-SEM is dependent on the GB market for its access to the coupled EU electricity markets. If the UK pulls back from full market coupling with the continental EU following a Brexit, the I-SEM may also become uncoupled.
It is clear that while large parts of the EU-derived UK energy framework will remain intact, other major parts will now fall away in their entirety. To the extent that the government of the day wants to retain a degree of alignment with EU energy law, some of the substantive EU rules can be replicated, with appropriate modifications to reflect shifts in GB policy. To what extent this can be done, and how, will take many months to assess and consult on.
The operational arrangements under the Electricity Regulation and the EU Network Codes can probably be partially replicated by contractual means, but full effectiveness of the governance arrangements that underpin or will underpin electricity markets will require specific agreement between the UK and the EU. This is not likely to be a straightforward process, and it will probably take many months after a decision to leave the EU for the electricity regulatory framework to reach some measure of stability.
Given the current uncertainty, there is little that can be done to prepare for any possible changes, other than to ensure that where possible, contracts relating to any of the requirements of EU electricity rules are drafted in sufficiently flexible terms that they can be adapted, or terminated, if required once the final outcome of this process is known.
We intend to update our guidance in this area as the implications for energy liberalisation become clearer.
This article is part of our Brexit series.