Negotiations on the UK’s withdrawal from the EU are progressing and both the parties agree that a deal could be reached. This will be the foundation of the future relationship between UK and EU, and hopefully, it’s good for both parties going forward.
As we get nearer to March 2019, preparations for a no deal scenario are being considered as well to ensure the plans are in place in the unlikely scenario of no deal Brexit.
In both cases, there would be some impact on the way we do business with EU member states.
There are strong possibilities that the policies would change for various businesses like finance, transport, farming, environment and others including the Energy.
How is it going to impact Energy Business in the UK? Whether it would have a significant impact on the way we source, transport, distribute and supply energy or would it be business as usual?
Over 80 per cent of UK households rely on the gas for heating their homes and premises, while natural gas is used to create 42 per cent of the electricity consumed in the UK.
The UK imports around half of the natural gas that it consumes. This is likely to increase during the 2020s as domestic production falls, creating greater exposure to the global market. We import around 6% of our electricity demand from the interconnector with EU member states.
The most important aspect of the future trading relationship with the EU is the principle of climate change strategy. Both EU and the UK have common objectives of climate and energy policy leading to more integration and interdependence that we have seen so far. It looks like the UK would need to do some balancing act between taking back full sovereignty and Energy economics. The most important thing is, the UK would need to have its own independent policies for Energy and Climate Change. We all know that the UK would be leaving customer unions and the single market. That means we will have to invest more in new electricity generation, new sources for importing the gas, there could be possibilities of higher prices initially, and new policies for security of Energy Supply. But if UK and EU decide to continue the progress that has been made in integration it would be business as usual; more competition, no new investment in Energy generation and consumers will continue to enjoy the cheaper energy prices with security of supply.
We have gas interconnectors with Ireland, the Netherlands, and Belgium to import most of the national gas demand.
In the Brexit impact assessment papers, the government has published implication in case there is no deal scenario.
For gas, EU energy law will no longer apply to the UK, and the UK will no longer play a role in the EU organisations that support the implementation of these laws, such as the Agency for the Cooperation of Energy Regulators (ACER).
However, Government has made it clear that the UK domestic law relating to energy, the licences and industry codes that are used to implement these laws, will remain in place. Some changes and clarifications to the licences and industry codes may be required to ensure they remain operable.
Government has published implication for no deal scenario where it says:
The mechanisms of cross-border trade are not expected to fundamentally change. National Grid (Great Britain’s Transmission System Operator), Premier Transmission Limited (Northern Ireland’s Transmission System Operator) and the UK’s interconnector operators currently use the PRISMA gas capacity trading platform to allocate capacity at interconnection points.
There will be some implications for the way gas is traded with the 27 EU Member States. These are described below.
There will be changes to access rule approval and trading arrangements. Interconnector operators’ access rules are approved by regulatory authorities both in the UK and in interconnected Member States (i.e. Ireland, the Netherlands, and Belgium). The trading of gas across EU borders under these rules is governed in part by the EU Network Code on Capacity Allocation Mechanisms, which establishes the rules for capacity allocation on interconnector pipes, and how adjacent transmission system operators should cooperate to facilitate capacity sales. The approval of regulatory authorities in interconnected Member States is needed to continue using Capacity Allocation Mechanisms Code processes.
The electricity market is a bit different. We have interconnectors with France and the Netherlands, but we import only 6% of our national demand at the moment. We also have a trading arrangement between Great Britain and the island of Ireland; and between Northern Ireland and Ireland. These flows, and the domestic markets are currently governed through EU legislation relevant to the functioning of the EU’s Internal Energy Market.
The Northern Ireland electricity market is separate from Great Britain and different considerations apply. Northern Ireland shares a wholesale electricity market with Ireland, the all-Ireland Single Electricity Market.
The Single Electricity Market involves significant cross-border flows of power between Ireland and Northern Ireland and operates within the framework of common EU rules on electricity markets. Reforms to maximise efficiencies and bring the Single Electricity Market in line with the requirements of the EU’s Third Energy Package came into effect on 1 October 2018. According to the govt impact assessment, negotiators have already made good progress on a legal provision to underpin the Single Electricity Market in the Withdrawal Agreement and the UK will work with Ireland and the EU to ensure that the Single Electricity Market is maintained in any future economic partnership.
In case of no deal scenarios govt says:
Cross-border flows across electricity interconnectors will no longer be governed by EU legislation which provides for efficient trade and cross-border cooperation in operating the electricity system. Without these arrangements, alternative trading arrangements will be needed to be developed. This will need to involve regulators in the UK and EU approving new access rules, which set the terms and conditions for this trade. The government and Ofgem are already working with interconnectors to ensure new access rules are approved in Great Britain and are providing support to interconnectors engaging with EU Member State authorities.
The majority of the existing Regulation on Energy Market Integrity and Transparency regime will be maintained domestically with minimal changes. Market participants will need to make use of the alternative arrangements developed for purchase and sale of power cross-border.
The government insists they will lay statutory instruments to ensure the UK’s energy laws continue to work on day one of exit in a ‘no deal’ scenario.
Both negotiating parties must ensure that there is a continuance of frictionless import and export power and gas across borders.
There are existing challenges which are very critical for UK Energy market. We are still reliant on 5% of our energy import from the interconnectors with member states. 50% of gas supply is imported.
Govt must focus on the security of energy supply. Govt has made it very clear that we won’t be part of a single market and custom arrangement after Brexit. If we leave single market, we would automatically cease to be the member of Internal Energy Market (IEM) for security of supply reasons.
This could have some consequences for our security of supply but not serious, as interconnectors currently provide only 6% of our electricity demand. Our indigenous supply is sufficient to meet our demands, so that we can reduce our dependence on imports. There could be short-term disruption, but we can ramp up our CCGTs and if the weather is good our wind and solar power plants can bridge the gap. Only on extreme weather conditions like Beast from East last year; we could face problems, but advance preparation could mitigate that risk.
Some experts say that once the UK sits outside of the EU energy market, we won’t have the same influence we currently do over key EU energy policies. However, if the UK adopt the regulations and policies at par with IEM, I don’t think it would be much of the problem. We will be trading in the same way post-Brexit as we are now.
Energy trading – both between the UK and the EU, and the UK and countries outside of the EU – will undoubtedly continue after Brexit, and we don’t expect to see any huge increases in import or export costs, as trading is mutually beneficial to both sides.
Brexit provides us with an immense opportunity to trade with the world outside the EU. We need to look beyond the EU to meet our demand, we could import more liquefied natural gas (LNG) from countries outside of Europe. It could be costly for us initially but if we make good trading arrangements with non-EU countries we would benefit immensely.
As we move towards a low carbon future, the interconnectors also help all parties by facilitating decarbonisation. We’re becoming increasingly reliant on renewable sources of energy, which is essential for us to meet our carbon targets, but renewables are intermittent. We need alternative sources, like nuclear, to help us to balance the grid.
With some careful planning and negotiation, the government can ensure there is no disruption to the energy industry. We know there would be a transition period for complete withdrawal that would give us enough time to adapt our regulatory frameworks and systems in line with the existing structure, we could even create the much better trading environment; not only with our European neighbours but with other countries around the world.