We will cover the potential impact of Brexit on three of the main strands that make up the energy sector, namely power and renewables, climate change and oil and gas. We will look at each of the three strands separately as there are fundamental differences between them and Brexit is likely to affect each of them very differently.
Power and renewables
At present, the core underlying obligation for the UK to source 15% of its energy requirements (which include electricity, heat and transport) from renewables by 2020 comes from the Renewable Energy Directive, which has direct effect in the UK. So Brexit will clearly have an impact on the effectiveness of this target. However, for electricity at least, the value of the target has almost been realised by projects that have already been deployed or are in the course of construction.
The path beyond 2020 at EU level is not clear. The UK has lobbied for a number of years for a carbon rather than a renewable energy target and, given that the Paris Agreement enshrined a decarbonisation target, that direction of travel might be reinforced.
For the broader power sector, there have been a number of recent developments establishing a common regulatory network and trading rules across the EU. Whether the UK will wish to continue to be a part of these after Brexit is an open question but in practical terms, the position of Ireland will require the UK's participation in the scheme given the physical realities of the Interconnectors between the UK and Ireland and between Ireland and the continental countries. The EU has also promoted greater interconnection as a means of increasing security of supply. UK power companies have already raised concerns over the competitive position of such imports, which have advantages such as not paying the Climate Change Levy on their input fuel. Brexit would allow the UK to redress that imbalance by imposing tariffs on imports but that possibility would add materially to the regulatory risk faced by any new interconnectors and so would decrease the chances of any such developments being brought forward.
At present, almost all UK initiatives require State aid clearance (see the Projects and procurement section for more information) so whether it is to remain subject to the ongoing EU State aid rules could make a significant difference to the timescale for certain projects. As an example, the Hinckley Point project is still subject to a State aid objection by the Austrian government and, if EDF seeks additional support from the French state, then a further round of State aid clearance may be required.
Furthermore, the EU also sought to lead developments and encourage security of supply both through the evolution of carbon capture and storage and through the complex issue of gas storage. For carbon capture and storage, the EU provided funds to assist developers commercialising this new technology and the failure of that scheme had more to do with the position of the relevant projects in the UK market than any fault of the EU itself. On the question of gas storage, the physical fact remains that the UK is a net gas importer at the end of the existing pipeline structures and must therefore rely on other countries making their gas storage available if circumstances demand it. The UK's current gas storage facilities are small, a problem that is partly driven by the current lack of demand for these facilities.
Climate change is a complex topic. In the context of carbon trading, the UK has transposed the European Directive into the Greenhouse Gas Emissions Trading Regulations. So, while the regulations governing carbon trading in the UK are domestic and will remain in force, the trading scheme itself is run on a European wide level. Ongoing participation in this scheme will therefore be required unless the UK attempts to set up its own carbon trading scheme.
The UK does have a track record of taking an initiative in this area; the carbon price support mechanism was initially introduced to provide a floor price for carbon in the market. However, in the March 2016 budget, the Government elected to continue its freeze on the level of carbon price support making it clear that this initiative was not going to be pursued on a unilateral basis.
The position on decarbonisation more broadly across Europe remains an open question. As noted above, the outcome of the Paris Agreement was a 2030 decarbonisation target across Europe as a whole so an allocation will be required for the UK to have its own target. However, in some respects, the Europe wide position is matched by domestic UK legislation (enshrined in the Climate Change Act 2006) so, provided that the Government does not seek to repeal that legislation as well, the underlying obligation to continue with decarbonisation of the economy through to 2030 and beyond to 2050 will remain in place.
Further key steps to decarbonisation, including the closure of all coal fired plants in the UK by 2025, are domestic initiatives rather than originating from Brussels. Whether the replacement of coal fired plants with gas fired CGTs is a long term solution is a separate question.
Oil and gas
Unlike the above two strands of the energy sector, oil and gas is fundamentally an international business not driven by Europe and, as far as the North Sea is concerned, the EU chose (largely) to adopt the UKCS regime when legislating on the industry. As a result there should not be far-reaching implications for our clients in respect of their operations in the North Sea as a result of Brexit. That said, our clients will be affected in the same way as other businesses by the legal implications highlighted by the practice areas (such as employment, commercial, corporate, competition, corporate immigration and regulatory) covered elsewhere in this document.
However, a vote to leave Europe is likely to reignite the Scottish independence debate with the consequent implications that would have for the UKCS regime; opinion is mixed as to whether that debate would lead to a second Scottish referendum.