Brexit: Energy in the UK Government’s White Paper on the future UK-EU relationship

The UK government’s White Paper (July 2018) (the White Paper) on the future relationship between the UK and the EU states that the UK is seeking ‘broad cooperation’ with the EU on energy including trading arrangements, cooperation with EU agencies and data sharing and is exploring options for the future energy relationship.

Internal Energy Market (IEM)

Implementing a common rulebook for the IEM

Single Electricity Market on the island of Ireland

Nuclear

Trade of goods and services

Conclusion

Internal Energy Market (IEM)

The EU issued a notice to stakeholders on 27 April 2018 on the UK’s withdrawal of the EU and the IEM which set out, from the EU’s perspective, the implications of the UK leaving the EU (and as a consequence the IEM) without the status quo transitional period envisaged in the draft Withdrawal Agreement or any agreement on the future relationship. In other words it is a description of what the EU considers to be the position if the UK is treated as a third country in relation to energy. It assumes that if the UK leaves the IEM:

  • UK Transmission System Operators (TSOs) would not be party to the Inter-Transmission System Operator Compensation Mechanism and would be required to pay transmission system usage fees;
  • UK TSOs would require certification to continue activities within the EU;
  • UK TSOs would cease to participate in the single allocation platform for forward interconnection capacity, the European balancing platforms and the single day-ahead and intraday coupling; and
  • UK based wholesale power and gas market participants (and any other third country market participants who are registered in the UK) would need to register with a national energy regulatory authority in an EU member state in which it is active in order to continue to trade.

The White Paper discusses two options for the UK’s future relationship with the EU in respect of the IEM: (i) remain in the IEM and adopt a common rulebook on the technical rules for electricity trading, for example, market coupling mechanisms and the single allocation platform as well as adopting a consistent approach to carbon pricing (which could be delivered through the EU ETS) (however, the UK does not believe it is necessary to adopt a common rulebook on wider environmental or climate change issues); or (ii) leave the IEM and put in place systems for trading over interconnectors and explore options for the UK energy market (and note, as discussed below, that the impact on the island of Ireland Single Electricity Market (SEM) should be carefully considered in this context). It is not clear from the White Paper whether the UK perceives the trading framework of the IEM as distinct to the overall framework of regulation that makes up the IEM and is consequently only proposing to adopt the trading framework of the IEM under option (i) above (although, equally, it is not clear that the EU would accept this approach). The White Paper sets out a number of other considerations/options in this area and it is unclear how these additional considerations would interface with a decision to remain within the IEM. For example, the White Paper states that the UK also wants to explore options for the continued participation in the Inter-Transmission System Operator Compensation Mechanism to entitle UK TSO’s to receive compensation for hosting cross-border flows on their networks and, whilst the White Paper does not address this point specifically, it seems likely that the UK will seek to avoid any transmission system use fees for imports and exports to and from the UK. The UK would also like to see continued membership of UK TSOs in the European Networks of Transmission System Operators for Electricity (ENTSO-E) and Gas (ENTSO-G). These bodies deal with technical aspects of the transmission system such as the development of network codes. Further, the UK is also looking to implement reporting obligations in the UK that will not differ substantially to those under REMIT in the EU. The White Paper is unclear as to whether the UK intends these UK-based reporting obligations to apply if it opts to remain in the IEM and how any such UK reporting obligations would interface with the REMIT regime.

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Implementing a common rulebook for the IEM

If the UK remains within the IEM, as stated above, a common rulebook would be adopted in respect of, at a minimum, the technical rules for electricity trading (as discussed above, it is not clear from the White Paper whether the intention would be to include all IEM related legislation in the common rulebook or just those parts which relate to trading). Post-implementation of the initial common rulebook, the UK and the EU would then discuss any new proposed and adopted legislative proposals and determine whether such additional rules are within the scope of the future relationship and whether the new rules should be reflected in the relevant agreement (taking into account any necessary adaptations for its functioning in a UK context). The UK perceives that there would be a continuing role in the evolution of the common rulebook for UK experts participating in EU technical committees and UK regulators contributing their expertise and capability to EU agencies including by preparing expert opinions to be submitted to agencies. In this way, whilst the UK would be a ‘rule taker’, the White Paper envisages the UK continuing to take a participating role (albeit a non-voting role) in the development of any new legislation or regulation. One can speculate as to whether this is a view shared or accepted by EU institutions.  The White Paper acknowledges that on issues of interpretation of European law, which would clearly include the common rulebook, there will be an option to refer to the CJEU in respect of the issue of interpretation only.

Once it is agreed at the Joint Committee level that the rule change should be reflected in the relevant agreement between the EU and the UK, the amended agreement would become binding on the UK. Whilst the UK Parliament would be consulted throughout the process of the rule change and whilst it will be asked to vote to accept the amended agreement, it will do so in the knowledge that the amendment is binding on the UK and so to block the change would breach the UK’s international obligations, and the EU could raise a dispute and ultimately impose non-compliance measures. If no agreement can be reached on whether the new rule will apply to the UK at Joint Committee stage (and the White Paper makes clear that the UK’s proposal is that there would always be an option for the rule not to be added), a number of options are proposed (including for example “localised rebalancing measures could be proposed, for instance, requesting financial compensation” or the relevant part of the future relationship can be suspended). This is intended to be analogous to provisions in the EEA Agreement.

Please also see our blog post for more details in respect of the White Paper’s proposals on State to State dispute resolution.

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Single Electricity Market on the island of Ireland

The White Paper states that the UK is committed to facilitating the continuation of the Single Electricity Market (SEM) between Northern Ireland and Ireland. Whilst the White Paper alludes to the UK working with the EU to ensure that the SEM is maintained in any future scenario, the White Paper does not specifically address a scenario in which the UK does not stay within the IEM (see above). In such a scenario, for the SEM to remain in place, Northern Ireland would need to remain subject to EU law in the field of energy and legislate for any new European legislation, as any regulatory divergence between the EU and Northern Ireland would have a negative impact on SEM or at the very least create issues for its continued governance. It would also not be clear, depending on the shape of the overall future relationship, what the jurisdiction of European agencies or the CJEU would be in Northern Ireland for issues relating to the SEM.

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Nuclear

The UK envisages a civil nuclear relationship with Euratom based on a comprehensive nuclear cooperation agreement between Euratom and the UK. This is a clear policy statement that a nuclear cooperation agreement is the UK’s preferred route to a continued relationship with Euratom as opposed to an associate agreement under article 206. The approval of such a nuclear cooperation agreement would only require the approval of a qualified majority of Member States in the EU Council. The White Paper sets out that the nuclear cooperation agreement would include:

  • a cooperation mechanism in respect of technical information exchanges, joint studies and consultation on regulatory or legislative changes;
    association with the Euratom Research and Training Programme;
  • ensure the validity of nuclear supply contracts post-exit (or seamless re-approval (to the extent required));
    minimise barriers and simplify export control arrangements;
  • technical cooperation on nuclear safety including continued notification and information sharing arrangements on radiological events and monitoring with UK participating in EU systems such as ECURIE and EURDEP; and
  • cooperation and information-sharing with the European Observatory on the Supply of Medical Radioisotopes.

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Trade of goods and services

See the Trade: The new relationships section of our Brexit Legal Guide which has been updated to respond to the White Paper.

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Conclusion

In conclusion, there is still a significant amount of uncertainty surrounding the future relationship between the EU and the UK with respect to energy. The UK is yet to put forward a comprehensive proposal which goes further than setting out the various options to explore together with the overall aim of achieving ‘broad energy cooperation’ and ‘cost-effective, clean and secure energy supplies’.

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Silke Goldberg
Silke Goldberg
Partner
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Paul Butcher
Paul Butcher
Brexit Director
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Becky Skeffington
Becky Skeffington
Associate
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