Brexit: stormy weather ahead for UK power

The UK’s vote on June 23 to quit the European Union is creating deep uncertainty over the shape of future electricity industry regulations in Britain, and the UK’s regulatory relationship regarding power supplies with countries remaining in the EU.

Victory by the ‘Leave’ side in Britain’s in- out referendum enabled the UK government to kick off an exit process by invoking Article 50 in the Treaty on European Union, which is the mechanism by which a member state gives notice that it wishes to leave.

Assuming Article 50 is invoked, and only a serious political crisis would prevent this, Britain would then have two years to renegotiate its relationship with the EU, during which time existing EU legislation would stay in force. Afterwards, the permanency of that legislation would depend on the post- Brexit relationship negotiated by the UK, and whether the UK would, unilaterally, impose national controls based on EU laws.

And there is, of course, a great deal of EU electricity legislation in force that may not apply in Britain after a Brexit. These – critically – could include directive 2009/72/ EC on the internal market in electricity and involvement in the EU’s emissions trading system. Other laws include the 2009 directive on renewable energy; the 2004 and 2011 directives on cogeneration; the 2006 security of energy supply directive; the 2012 energy efficiency directive; the 2014 regulation on power transformers; the 2010 regulation on inter-transmission system operator compensation and a common approach to transmission charging; and much more besides.

Similar but separate issues will impact the nuclear power sector. Since the EU’s Euratom treaty was first forged in 1957, this legislation has grown, and now includes important controls on how nuclear power plants operate in Britain and the rest of the EU. Laws that may cease to apply in the UK include the EU directive 2011/70/Euratom on responsible and safe management of spent fuel and radioactive waste, which requires the creation of EU country plans for financing the safe disposal of radioactive waste during decommissioning; the 1993 Euratom regulation 1493/93 on shipments of radioactive substances between member states; and the 2003 Euratom directive on controlling high-activity sealed radioactive sources and orphan sources.

Choosing a path

It is up to the UK to decide when to request withdrawal from the EU, so that Article 50’s two year clock has yet to start ticking, and it maybe some months before Britain makes its formal exit application.

Once it has, however, then the UK must choose what kind of relationship it wants with its former EU partners. One option would be for Britain to apply to join the European Economic Area (EEA) – which currently includes non-EU members Norway, Iceland and Liechtenstein. This EU halfway house system could limit the impact of a Brexit. It involves the application of most general EU energy and environmental laws in non-EU EEA countries, which – critically – would include the legislation on the electricity internal market, the EU’s emissions trading system, renewable energy, cogeneration, security of supply, and energy efficiency.

That said, these laws may not apply in exactly the same way to Britain, if it became an non-EU EEA member, as there is a range of detailed exemptions and opt-outs negotiated for these countries – see http:// www.efta.int/media/documents/legal-texts/eea/ the-eea-agreement/Annexes%20to%20the%20 Agreement/annex4.pdf

Also, the UK and rest of the EU would maintain a duty free zone for non-food goods, which would of course cover power sector equipment supplies.

And as an EEA member state, Britain could maintain its membership of the Council of European Energy Regulators (CEER), which helps its national members forge an operational and effective European energy market. However, such countries are not covered by the Euratom treaty, so the nuclear power laws would not necessarily be applied, unless the UK chose to do this unilaterally.

But Britain may balk at this choice as non- EU EEA members have to pay into the EU budget to get access to non-food elements of the EU single market; they have no votes on the EU Council of Ministers and in the European Parliament (although it would be consulted on energy legislation); and other EEA countries would have to accept Britain as a member. As this includes other EU member states – maybe upset over Brexit – British EEA membership maybe refused.

The Swiss option

Another option would be following Switzerland and remaining outside the bulk of EU laws, including the ETS, negotiating bilateral trade deals with the EU. But the Swiss usually have to implement EU rules as the price of such deals. And they are struck only where the EU wants to grant the Swiss market access – so duties on UK energy industry exports to the remaining EU and vice versa could well be erected.

Crucially, Switzerland does not have access to the EU single market for electricity. And while it has been attempting to negotiate access to the market since 2007, the passing of a referendum measure in 2014 ordering the Swiss federal council to enact immigration controls on EU citizens, has meant these talks have not been brought to a conclusion. With immigration being a key concern underpinning the UK’s ‘leave’ vote in the referendum, the risks of a Brexit without accepting free movement of EU citizens into Britain are clear – the UK may not remain a member of the EU energy market, even if it wanted to. This could complicate electricity exchanges with its EU members and probably increase the cost of imported power, although Britain’s liberalised power market system has inspired many rules written into the EU’s energy market system. So unless the EU moves back towards a more statist model, British energy sales should mesh with EU procedures, even after a Brexit.

Also, the UK would no longer have to submit intergovernmental agreements regarding electricity to European Commission assessment over whether they comply with EU energy and competition laws, which could give it a freer hand to strike bilateral energy agreements with non-EU member states.

Existing trade deals

One quandary, however, would be the fate of EU nuclear co-operation deals that Britain is already a part of – such as with the USA, Kazakhstan, Canada, Australia, Japan and more, once the UK is no longer part of the Euratom treaty. Would Britain renegotiate these agreements for the UK nuclear sector and what would be their terms? Would it have time to renegotiate then before it quit the EU – supposedly in two years’ time?

Also, what about EU spending on trans- European networks, under the Connecting Europe Facility, for which the European Commission released €200 million in March – its priority projects include new power interconnectors between Britain and France, for instance. What would happen to the prospect of these power lines being built with EU money?

And then there are the trade deals that Britain is already part of – such as the free trade agreement with South Korea; those that are pending ratification – such as the deal with Canada; or those under discussion – such as the Transatlantic Trade & Investment Partnership (TTIP) with the USA. All of these have energy and energy equipment elements. The Canadian deal would have to be renegotiated as regards the UK, a process that maybe slower than with the rest of the EU – giving continental manufacturers better access to the Canada market. The USA has already said that Britain would be at the back of the queue for a trade deal with America, long after TTIP is concluded with the rest of the EU. 

And previously approved deals such as with South Korea would cease to apply after the UK’s two year cooling off period, unless the South Koreans agree continued market access. They may want to renegotiate with the UK and could wait until Britain loses its Korean market access through the EU deal.

Another uncertainty is over whether the UK will implement new EU energy legislation that has already been approved by EU institutions, but where the deadline for following these laws has yet to pass, such as UK commitments under the renewable energy directive. Given that Britain intends to quit and the European Court of Justice (ECJ) could in future no longer order the UK to comply on pain of huge daily recurring fines, British may flout rules it does not like, even before Brexit happens.