House of Lords' European Committee publishes report on energy security post - Brexit

United Kingdom

On 29 January 2018 the House of Lords European Committee (the “Committee”) published their report on energy security in the UK (the “Report”) following withdrawal from the European Union (the “EU”). Reviewing evidence submitted by a number of Witnesses, the Committee has suggested that de-harmonisation of the UK and EU markets and exclusion from the Internal Energy Market (“IEM”) could lead to decreased efficiency and increased costs. Key among the Report’s conclusions is that investors require certainty as to the future of UK energy policy (particularly regarding the Carbon Price Floor, the Capacity Market and Contracts for Difference) if long-term investment is to deliver energy security to UK consumers. The Report also makes the recommendation to Government that any change in arrangements should be accompanied by a transition period that ensures consumers are protected while businesses adjust their working practices, contracts and systems.

A number of policy opportunities are also set out in the Report, with Witnesses highlighting the following changes that they would like to see in UK energy policy following removal of the constraints of EU membership:

- changes to the process for amending Network Codes;

- domestically-tailored renewable energy targets;

- support for specific generation technologies without State Aid restrictions; and

- changes to the charging structure applicable to electricity traded over interconnectors.

IEM

Witnesses to the Inquiry were unanimous in supporting the UK’s continued participation in the IEM, as it was noted that exclusion from the IEM will likely impact UK’s security of supply and costs for consumers negatively. Features of the IEM that are particularly valued by market participants include market coupling (estimated to be worth £100m per year) and the information exchange facilitated by the REMIT Regulation, which allows Ofgem to monitor the market more effectively.

There is some disagreement among Witnesses as to whether retaining membership of the IEM would require the UK to accept the EU’s broader energy and climate legislation as well as the jurisdiction of the European Court of Justice (“ECJ”), although the Committee notes that Government’s indication that the UK will leave the Single Market will put significant constraints on the ability to remain in the IEM. Some respondents argue that flexibility is indeed possible, while others expect that, at the very least, requirements similar to existing State Aid rules will be the price of access to the IEM. The Committee requests further policy clarity, and Government has said only that it believes “there will be arrangements very comparable with the IEM” in place.

Where continued participation in the IEM is permitted and compliance with EU legislation is required, the Committee recommends that the UK should make efforts to retain and exert influence over EU energy policy. Levels of optimism about the possibility varied among the Witnesses to the inquiry, but examples included retaining membership of ENTSO-E and ENTSO-G, as well as ensuring that Ofgem continues its strong engagement with ACER. It is noted also that the UK could retain influence through continued and increased participation in European NGOs and trading bodies in the sector.

Integrated Single Electricity Market (“I-SEM”)

Government has indicated that it is committed to protecting the continuation of a single electricity market covering Northern Ireland and Ireland, but has not given any further details as to what this might look like. With ISEM going live in May 2018 to integrate the all-island electricity market with the European markets, European codes will apply. Any GB departure from the IEM and the associated network codes will have an operational impact on any onward trading from Northern Ireland and Ireland, putting the ISEM at risk. Any special solution for Northern Ireland (e.g. designation as a special zone or giving special status to the ISEM) which may mean that EU legislation would continue to apply to the ISEM would in any case require the devolution of powers from Westminster to the Northern Irish Assembly.

Interconnectors

The Report generally acknowledges that, while interconnections between the UK and other states contribute to addressing all three sides of the UK’s “energy trilemma”, electricity imports are forecast to increase over the next five years and are therefore key to safeguarding UK energy security. The Committee therefore recommends the post-Brexit convergence of regulatory regimes on either side of the UK’s interconnectors to ensure that these trading links operate efficiently. This continued harmonisation and certainty will also be key in ensuring that future interconnector projects linking the UK are not destabilised.

Interconnector projects with Project of Common Interest (“PCI”) status have received €40m of funding via the Connecting Europe Facility (“CEF”) grant, and there is some concern whether UK projects will have continued access to this funding. It is noted, however, that the requirements for PCI status require only that the project has a positive impact on the European electricity market generally, and so it is possible that future interconnectors connecting the UK to any EU member state will qualify and therefore be eligible for CEF funding; one project is named as having good arguments to qualify for PCI status and CEF funding – the North-South interconnector linking the northern and southern transmission systems on the island or Ireland. In response to the inquiry for the Report, Government has provided assurance that all CEF commitments made by the European Commission to UK companies will be honoured by the government guarantee, but the Committee has requested that Government go one step further by seeking to preserve an ability to participate in transnational energy projects and providing some much needed clarity on how it envisions replacing EU funding schemes for the UK’s interconnectors.

Nuclear

Separate from the trigger of Article 50, Government has submitted notification to the European Atomic Energy Community (“Euratom”) that it intends to surrender its membership of this community, which provides for the transportation of nuclear fuel, waste and people among signatory states. While a form of associate membership of Euratom is a possibility for maintaining nuclear research and development connections with the EU, without equivalent provisions and new nuclear fuel supply agreements in place, the UK would be unable to trade in nuclear goods and services (including the import of nuclear material) and the operation of the UK’s nuclear facilities would be brought to a halt. Despite a statement from Government that negotiations on future nuclear arrangements have been broadly “positive”, many respondents consider this the most material risk to the UK’s security of supply in a Brexit scenario. Given that membership of Euratom is legally distinct from EU membership, the Committee urges Government to consider Euratom-specific transition arrangements to avoid the risks associated with a cliff-edge.

The report also touches on the nuclear sector’s acute dependence on EU workers, with testimony from EdF that the construction of Hinkley Point nuclear facility will be difficult to achieve where there is no access to EU labour.