Brexit's impact on energy sector remains uncertain despite recent parliamentary and legal developments

by DLA Piper

DLA Piper

Recent legal and parliamentary developments have yet to resolve the significant uncertainty related to the impact of Britain's exit from the European Union on the UK and international energy sector.

In January, Prime Minister Theresa May outlined her government's blueprint for Brexit, as we reported.  

Importantly, if Britain does not seek continued membership of the EU single market, then membership in the European Economic Area (as, for example, in the case of Norway), is also no longer an option.

On January 24, 2017, the UK Supreme Court ruled that the government must hold a parliamentary vote before triggering the EU exit process. 

The UK government has since tabled the European Union (Notification of Withdrawal) bill, which passed the House of Commons on February 8. The current view is that it is almost certain the bill will ultimately clear the House of Lords in time for Ms. May to trigger the Brexit negotiating process by March 2017.   

The government has also produced a white paper outlining its plan for Brexit, As regards energy, this merely states that the government is "considering all options for the UK's future relationship with the EU on energy…"  Ultimately, the White Paper therefore resolves few if any of the myriad uncertainties raised by Brexit with respect to the international energy sector. 

UK Brexit Secretary David Davis has stated that another white paper will be published before the Great Repeal Bill, which will convert EU laws into UK law.

Effect on legislation: implications for the energy market

A Brexit in the form outlined by Theresa May in her speech of January 17, 2017 and in the white paper would have a number of implications for the UK energy market. Outside the EU and the European Economic Area, a significant amount of energy-related EU legislation would fall away. Compared to the rest of the EU however, UK energy law does not tend to be heavily modelled on the structure of EU Directives but has rather led the thought leadership on the development of the rules on the internal energy market, with the exception of the treatment of renewables and addressing climate change.

The government's white paper says that the UK "will continue to be a leading actor" in addressing climate change, and that the "UK's climate action will continue to be underpinned by [the UK's] climate targets as set out in the Climate Change Act of 2008 and through [the UK's] system of five-yearly carbon budgets, which in turn support [the UK's] work to drive climate ambition."

As a result, the discontinuation of the application of the EU Directives is unlikely to have a material impact on the legislative landscape in the UK. Certain UK legislation is impacted to a greater extent by EU Directives, such as the Electricity (Fuel Mix Disclosure) Regulation and the UK Greenhouse Gas Emissions Trading Scheme Regulations.

EU Regulations, on the other hand, are directly applicable and currently do not require implementation into UK legislation. These Regulations include, for instance, the EU Network Codes, which have had a significant impact on the operation of the UK's national transmission infrastructure. As a result, in a scenario where a cooperation arrangement would require adherence by the UK to EU legislation, when the application of the Regulations falls away, UK legislation will need to fill the gap left behind.

What next for the energy sector?

The two-year negotiation period will likely be spent in part establishing how and to what extent to cooperate with the EU, and in part filling in the gaps left by EU law. This falling away of legislation and the variety of possible cooperation scenarios will likely have several effects on the UK energy sector.

The operation of cross-border infrastructure is likely to remain heavily influenced by EU law, irrespective of the type of the cooperation agreement eventually reached. Operating infrastructure in compliance with both an UK and EU regime will only work if the operating regime satisfies both systems. As a result, the operation of cross-border infrastructure will require the de facto adherence to EU legislation. Experience with interconnectors between EU Member States and Norway or Switzerland are instructive on this point.

Furthermore, the EU bodies responsible for the coordination of the National Regulatory Authorities and the TSOs will entirely lose their application to the UK. These are the Agency for the Cooperation of Energy Regulators (ACER) and the European Network of Transmission System Operators for Electricity (ENTSO-E) and for Gas (ENTSO-G), all of which have been established by EU Regulations. This will create difficulties in coordinating energy policies between the UK and EU, as well as capacity allocation, network balancing and security of supply.

Theresa May´s initial promise of a "hard" Brexit now seems somewhat softened.  This may open the door for a number of UK-EU cooperation models, including in the energy sector.

It is important to note that none of the cooperation options would fully require the implementation of internal energy market and financial services regulations into UK legislation, thereby almost certainly requiring further attention by legislators.

The next few years - both prior to and after the UK actually leaving the EU - will doubtless be highly complex, creating political, legal and regulatory uncertainty. Certain EU laws will nevertheless continue to apply to the UK as a third country and to UK-based entities, and whilst these entities may continue to participate in the EU single market, they will likely be subject to increased regulation in comparison to their EU-based counterparts.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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