This series will cover some of the most relevant sector-specific challenges arising from Brexit. Each edition will focus on one particular topic and highlight the current changes and opportunities in the energy and utilities sector.

On Friday 6 July 2017, Theresa May announced that her government would seek a soft Brexit solution. The 120 page document outlines a free trade agreement between the UK and the EU on industrial and agricultural goods. EU standards and rules would remain applicable with regard to the free trade agreement, while UK courts shall follow the ECJ when ruling on related matters. As a reaction to this proposal, Brexit minister David Davis resigned on Monday morning, while the outcry from Tories favouring a hard Brexit has been significant. Moreover, Theresa May will not only face opposition from within her own party but also from the EU, which welcomed the fact that the UK government came forward with a proposal but might consider the proposed deal unwanted cherry picking. Either way, there are still great uncertainties as to how the final deal will look like, if a compromise can be found at all. Therefore, this article will focus on the international treaties governing the cross-border trade and investment in the energy and utilities sector, which could become relevant in a soft Brexit scenario but even more so in a no-deal scenario.

Background

The European energy market is currently governed by substantive EU legislation (Remit and the Ten-E Regulation have been covered in parts one and two of this series). In addition to this European legislation, international treaties and rules apply as well. The most notable international sets of rules with regard to cross border trade and investment in the energy sector are the Energy Charter Treaty (ECT) and the World Trade Organisation’s (WTO) trade rules. Currently, they gain their importance predominantly from regulating cross-border relations between the EU, and its member states, and third countries. However, after the UK has repealed EU legislation and has left the common market, both legal regimes could see a significant rise in relevance with regard to the EU-UK relationship.

Brexit and the WTO rules

Should the UK leave the EU without having agreed on a deal, one of the options for the UK could be to resort to the use of WTO rules. This seems to be a probable scenario since the UK is not just a member of the WTO as part of the EU but in its own right as well. Since from Brexit onwards the UK will only act as an independent country, and therefore as individual WTO member, it will have its own rights and obligations within the WTO system. Nevertheless, that doesn’t mean that the UK can impose any tariffs it chose to on EU imports.

Under the WTO rules a country must grant the same market access to all WTO members as it does to its most favoured nation (MFN). Free trade agreements and preferential market access to developing countries are the only exceptions from this doctrine. Therefore, if the EU and the UK manage to negotiate a free trade deal, the EU could grant preferential market access to the UK and vice versa. However, in case the parties do not agree on a Brexit-deal the UK would still face the same tariffs that all other non-EU states face since the MFN principle applies. In turn, the UK could not treat the EU worse than any other state. Therefore, the implications that the lack of a Brexit deal could cause are limited to the tariff rates that each state grants to its MFN. Since these rights would be a significant change to the current common market, a free trade agreement between the UK and the EU would nonetheless be desirable for all stakeholders.

Brexit and the ECT

Similarly to the WTO rules, the UK signed and ratified the ECT not only as part of the EU but as an individual country as well. The ECT is a multilateral treaty that contains a framework for cross-border cooperation in the energy industry, including rules on international investment, trade, transit and energy efficiency.

As a consequence, Brexit would not have a negative impact on the ECT but rather increase its applicability and relevance. The rights and obligations of the UK under the ECT would only shift from the indirect application via the EU to an immediate application as an individual country, while the lack of EU legislation would increase its application. In particular, the UK could actually rely on its rights arising from the ECT with regard to a possible loss of status and funding of UK PCIs. Dispute procedures between two contracting parties of the ECT are a substantial part of the ECT framework, which the UK could use to try to sustain the PCI status for UK projects (see here for the impact of Brexit on the Ten-E Regulation).

Outlook

The UK could fall back on to both frameworks regarding the EU-UK relationship in order to mitigate the impact of a no-deal scenario. Naturally, this is not the outcome most stakeholder wish for but the impact on cross-border trade and investment, and in particular between the EU and the UK, would be less severe compared to other sectors. In case the parties agree on a deal similar to the once suggested by the UK government, both frameworks could still partially apply, in particular with regard to investments in the energy sector. Nevertheless, the Brexit would be minor. Although the ECT and WTO frameworks are not comparable to the European common market, they are however a structure that guarantees an orderly and fair continuation of cross-border relationships between the UK and the EU and its member states after Brexit.