Brexit: The impact of the vote to leave the EU on the energy sector

24th June 2016

The short answer is that it is too early to give a definitive answer to an assessment of the impact of a Brexit on the UK energy sector. The key issue is whether the UK chooses to remain within the Internal Energy Market (IEM) made up of the existing EU Member States and the additional States forming part of the European Economic Area (EEA). It is not clear, at this admittedly very early stage, what the preference among Leave politicians is; having campaigned on an “out” message, it may not be easy politically to “sell” an EEA deal to the public, given this option would continue to mean a contribution to the EU budget and adherence to EU laws (e.g. Competition, State aid) without any say in the making of those laws – although the alternatives are far from straightforward either. If the UK does remain part of the IEM, the effect of a Brexit may, in practice, not be too dramatic. If it does not, the landscape may change considerably.

Interconnectivity and participation in the EU project

In view of the increasing interconnectivity with the EU and the proactive approach of UK Governments in liberalising energy markets, a retreat from participation in the EU energy project seems most unlikely, notwithstanding the result on 23 June. In particular, the position of Ireland will require the UK’s participation in a common regulatory network and trading rules across the EU, given the reality of the interconnectors between the UK and Ireland and Ireland and other EU Member States.

The UK will need to negotiate an appropriate partnership arrangement with the EU. The UK will not have any say in the applicable rules, unless it can negotiate terms that enable it to remain a part of the institutions coordinating EU energy regulation, notably the Council of European Energy Regulators (CEER) and the Agency for the Cooperation of Energy Regulators (ACER).

Again, given the UK’s lead in pushing a liberalised energy policy, it would be a surprise if the Government did not go ahead with implementation of the EU’s Third Energy Package, designed to liberalise the gas and electricity markets, and which measures include the unbundling of Transmission System Operators (TSOs) from generation, production and supply interests, and enhanced transparency requirements. For the time being at least, it is safest to assume that this will become law.

Climate Change

The UK’s climate change goals are established at national rather than EU level, so those goals will not change with the departure from the UK from the EU. However, there will be matters to sort out, such as separating out the UK’s emissions reduction commitment from the EU target under the UN Framework Convention on Climate Change and the recent Paris Agreement so that the UK is allocated its 2030 decarbonisation own target.

Businesses will be watching to see whether the UK will continue to be able to participate in the EU Emissions Trading Scheme. If the UK remains in the EEA then it will be able to participate in the scheme. If not, then transitional arrangements will need to be finalised which will clearly be very important for companies holding a surplus of allowances. One possibility might be for the UK to attempt to establish its own carbon trading scheme.

The target of closing all coal-fired plants in the UK by 2025 is a UK initiative rather than an EU one and, as such, is unaffected by the vote to leave.

Renewables

The EU Renewable Energy Directive requires the UK to generate 15 per cent of its energy from renewable sources by 2020 and, should the UK leave the IEM, it will be released from this target, although it would be very surprising if the pursuit of renewables and low carbon energy solutions did not continue to form a central part of the Government’s energy policy.

Oil and gas

Oil and gas initiatives are primarily of an international rather than EU nature so it is likely that the oil and gas sectors will be less affected by Brexit than other parts of the energy sector. The EU largely applied the UK Continental Shelf (UKCS) system when legislating in this arena. In practice, the development to watch in this context may well prove to be calls for another referendum on Scottish independence, given most Scots favoured remaining in the EU, with the consequences that Scottish independence would have for North Sea oil operations. That though is thinking too far ahead – there is enough fall-out from one referendum to sort out first, without worrying about another!