For the energy sector, there is little inherent immediate upside to the UK’s looming exit from the EU. Unlike motor manufacturing, for example, the threats that the sector faces are not potentially existential though.
Nevertheless, the integration of the energy market has been one of the European project’s lesser sung success stories, widely agreed to have contributed to lower customer bills and improved security of supply.
Following the passage of the EU Withdrawal Act though, the prospects of the UK remaining in the EU’s single market have dimmed with knock on consequences for its ongoing participation in the IEM (internal energy market).
The House of Commons’ decisive rejection of a bid by MPs to keep the UK within the European Economic Area (EEA), which shares the same membership as the IEM, has narrowed the chances that Britain can remain as tightly integrated with the EU’s energy market.
Whether it likes it or not, the industry has to plan for life after Brexit.
Brexit fog
However, the energy sector is as much in the dark as the rest of business community about what this future looks like.
A white paper setting out the UK’s was due to have been published by now to inform the government’s negotiations at the Council of Ministers summit last weekend. However, the mooted white paper is not now expected to be published until later this month.
Joanne Wade, chief executive of the Association for the Conservation of Energy, says: “The Brexit fog is greater than it was last year. We still don’t know whether we have the workforce that we need and what the relationship (with the EU) is going to be and the date is getting ever closer.”
Utility Week recently produced a special report outlining the key regulatory issues surrounding Brexit for the energy industry and how progress might be achieved on future co-operation.
The UK’s continued status vis-à-vis the EU ETS (emissions trading scheme) is one of the key uncertainties for the industry arising from Brexit. Energy UK has said that the industry needs to know the direction of travel on the UK’s participation by the end of October in order to provide enough time to prepare.
The EU ETS was launched in 2005 to reduce emissions from industry. Under the ETS, heavy industrial users of energy and power stations must buy certificates for the emissions that they produce.
And emissions trading is one of the key mechanisms which the UK government will use to meet its commitments under the Paris agreement to cut emissions.
The ETS currently contains 31 members, covering all of the states that within the EEA. And securing links to the ETS outside of the EU’s structures is tough. This is illustrated by the experience of Switzerland. Despite being landlocked within the EU, the country only now on the verge of securing agreement on linking its own ETS to the wider system after several years of negotiation
The likelihood that the UK could remain in the ETS has ‘significantly lessened’, says Anthony Froggatt, a senior research fellow in energy and environmental issues at the security thinktank Chatham House.
Trading systems
The UK could seek to join one of the number of alternative ETSs which exist across the world, but none are reckoned by experts to be as closely aligned with the UK as the EU’s.
Noting that the Australian ETS is the only one that is “outright compliant” with the UK’s existing systems, Silke Goldberg, a partner at the solicitors Herbert Smith Freehills, says: “It will be difficult to find another market to link with post-Brexit.”
Another potential avenue is for the UK to levy a carbon tax, which as a fiscal measure is beyond the EU’s competence.
However, carbon taxes are less inherently stable than ETSs because they can be more easily reversed by governments, warns Froggatt: “A carbon tax is less politically stable than being part of a trading system.”
The situation is further complicated by the imminent end of the third phase of the ETS in 2020. If the UK is to exit the EU ETS by the end of this decade, there little time to put alternative arrangements in place.
The least complicated option is to find a way of remaining within the EU ETS.
The “pinking” of the government’s red lines in the prime minister’s March Mansion House speech on removing the UK from the jurisdiction of the ECJ increases the prospects that the UK could remain in the ETS, says Froggatt.
And in an echo of wider debates on the IEM, the UK’s over performance on tackling carbon emissions may give the British government some leverage in its efforts to secure continuing participation in the ETS, which is one of the EU’s key tools for meeting its Paris agreement climate change targets.
UK withdrawal from the ETS will make this harder, argues Shane Tomlinson, director of environmental consultancy E3G.
He says: “The UK is more than pulling its weight and will continue to do so in terms of emissions reduction so there is quite a lot of good will for the UK to remain part of ETS.”