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. We have highlighted specific Brexit-related Energy topics in the previous posts of this series, which can be found here. Part 5 of the series will focus on the expected Brexit impact for State aid and the numerous EU initiatives in the field of energy infrastructure investments.

Background

European state aid law is – due to its direct applicability, its great economic importance and its considerable effects on the regulatory competence of the Member States – a particularly sensitive regulatory issue.

There have been significant investment gaps in the energy sector in the EU to overcome. For the reason that energy projects are often fragmented, small and customised they are likely to cause high transaction costs for lenders, a relatively high risk perception among investors and an unclear business case for companies. Therefore the EU has launched the European Fund for Strategic Investment (EFSI).

In particular, many UK energy projects are supported with EU funds by institutions such as EFSI and the European Investment Bank (EIB). EFSI is an initiative which has been created to help to overcome the current investment gap in the EU. It aims to make available more than EUR 500 billion by 2020. Jointly launched by the EIB Group and the European Commission, it is the central pillar of the Investment Plan for Europe, aiming to boost jobs and GDP, improving the lives of people across the UK. EIB financing (signed projects) in the UK came to a total of EUR 1.8 billion in 2017. The total investment of the EIB Group (the European Investment Bank and the European Investment Fund) in the UK in 2017 was EUR 2.1 billion.[1]

As already outlined in Part 2 of the series, there are currently a substantial number of UK energy infrastructure plans listed for financial support as a Project of Common Interest (PCI). As we already know PCI`s benefit from accelerated procedure and access to financial support from the EU.

Why does it matter?

The UK position on State aid post-Brexit has been published on August 20, 2018. Shortly later guidance on state aid in case of a hard Brexit in March 2019 has been published. Although it states that “Negotiations are progressing well and both we and the EU continue to work hard to seek a positive deal.” the guidance identifies the duty of a responsible UK government to prepare for all eventualities, including ‘no deal’, until one be certain of the outcome of those negotiations. They are supposed to give guidance how to prepare for Brexit if there is no deal with the EU.

It is planned to establish a full UK-wide subsidy control framework based on transposing the existing EU State aid rules, with a single independent UK body for enforcement and supervision. It is expected that the existing UK competition authority, the Competition and Markets Authority (CMA), will take over this task.

This might let some complications arise. Therefore, the first step must be to bring the implementation of such a regulation into line with parliamentary sovereignty, the principles of judicial control and political realities. This alone requires considerable effort. Reconciling the conflicting national and international interests and the different types of support and funding such as EIB and EFSI financing or projects under the PCI-Programme will represent a milestone in the history of British State aid law.

Another particular problem from European and British perspective could be that a national governmental authority, the CMA, will assume the functions of a supranational authority. The main advantage of the European Commission has been to investigate and enforce the aid system outside the influence or direct control of any member states government. Transferring this control function to a national government authority not only opens the door to direct abuse, but also contradicts the fundamental market principles of the EU and the purpose of the initiatives for investment in energy infrastructure. EU has doubts whether a swift State aid landscape can be created.

In particular from an Energy perspective, it is how this approach will affect the number of EU-sponsored PCIs or other British energy projects supported by EFSI and the EIB after the Brexit. As already outlined in Parts 2 and Part 3 of the series, limiting access to EU funds can significantly affect the UK’s ability to finance and ultimately realise energy projects, i.e. capital-intensive projects such as offshore wind farms. Once again, considerable investment gaps would have to be filled. This applies in particular to the PCIs. Their financial support is also linked to EU membership.

Consequently, financial support of the UK PCIs could be seriously jeopardised under current law and UK PCIs could lose their funding status under current State aid rules. It is questionable whether the UK are willing to absorb the loss of subsidies, whether the countries participating in the PCI`s are in return willing to join the UK in this respect or whether the achievements of recent years in the energy sector are ultimately at risk.

Finally, any subsidies granted under EU regime may cease to be paid for the simple reason that they require EU membership of the applicant and beneficiary. A way forward to object to the loss of its subsidies could be to bring a claim under the Energy Charter Treaty (ECT) since the ECT applies between the EU and the UK as parties to the ECT.

Outlook

It is a sensible step forward for all participants in subsidised programmes that UK intends to transfer the EU state aid rules to national legislation. Certainly, planning and operation of energy projects past Brexit are likely to be easier, less risky and continuously attractive to investors on this basis.

However, Energy investors are recommended to monitor the developments closely and to prepare themselves for safeguarding existing subsidy grants and a remaining in projects – or alternative funding.

Read more on Brexit and the Energy & Utilities sector in Part 6 of the series.

[1] http://www.eib.org/en/projects/regions/european-union/united-kingdom/index.htm

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.