The governance of energy and climate policy after EU-Exit. An inextricable quandary or a Gordian knot?

Ingmar Versolmann 

In this article, I analyse the impact of EU-Exit on the governance structure of the energy sector in the United Kingdom (UK). As energy policy is inherently intertwined with the European Union (EU) acquis, an important question is how and through which regulatory instruments energy and climate policy will be addressed in the UK after the transitions period ends on 31 December 2020. How close to existing EU energy law might legal provisions be designed in the UK? Will there be some form of regulatory alignment or will there be no common ground between the two parties?

 

A historical perspective on UK-EU energy relations

The United Kingdom was a close partner of the European Union concerning the development of a governance framework for energy and climate change policy. It helped to develop the energy market and to shape the current form of the EU’s energy acquis. As a matter of fact, the UK was a vocal advocate in terms of energy market liberalisation, which was reinforced through the Single European Market programme in the 1990s, and the UK’s Emission Trading Scheme of 2002 served as a blueprint for the EU’s own Emission Trading Scheme.

In turn, the EU’s regulatory framework has influenced domestic energy policy in the UK and its devolved administrations (for instance, see the Climate Change (Scotland) Act 2019). Consequently, energy governance in the UK and the EU has seen a high level of coherence in the past. Within the context of this mutually reinforcing partnership, energy law under the EU’s Energy Union represents the latest regulatory umbrella, designed to deliver sustainable energy, enhance energy security, and create a competitive market system that deploys the best prices for consumers. Provisions within the Energy Union framework build upon previously established legislation, which was updated to deliver the Energy Union strategy and meet the EU’s 2030 energy and climate targets. However, as things currently stand, it is likely that the UK’s and EU’s future energy governance structures will diverge.

 

The challenges of an energy agreement

From an EU perspective, a partnership agreement between the UK and the EU would rely on strong commitments regarding level playing field provisions and trade (that support sustainable development). This would include, for example, obligations to tackle climate change within the parameters set by National Energy and Climate Plans (NECPs). NECPs are important regulatory planning tools that each Member State is required to prepare under the Governance Regulation. They address the various goals set out in the Energy Union package, with a focus on the 2030 Climate and Energy Framework targets, addressing greenhouse gas emission reduction, energy from renewable sources, energy efficiency and electricity interconnection, as set out in associated secondary European law. Whilst the UK Government published a draft NECP in January 2019, it is still to be seen whether a final NECP will be delivered before the end of the transition period.

The UK Government’s negotiating position, on the other hand, does not foresee energy policy as a part of an overall deal. The UK’s negotiation mandate indicates a preference for a separate agreement on energy policy, addressing electricity and gas trading, carbon pricing, and climate change, without level playing field commitments or jurisdictional oversight of the European court. Thus, the UK Government’s negotiating position is incompatible with full membership of the internal energy market (IEM). Continued participation in the IEM would require an agreement setting out a level playing field with the EU and would involve the UK complying with, or at least emulating, relevant European legislation regarding competition and environmental standards.

Nevertheless, divergence is not inevitable. The refusal to commit to jurisdictional oversight or to accept alignment constraints is a sovereignty issue rather than a policy one. Even under a no deal scenario, the UK Government may judge that it is in its interests to autonomously develop UK energy policy in a way that facilitates close engagement with the EU internal energy market and might replicate the EU’s governance functions at the domestic level.

Regardless, once the transition period ends, the UK will need to secure agreement from the EU to maintain the status quo. This will have a direct impact on, for instance, so-called ‘Guarantees of Origin’ (GoO) under the Renewable Energy and Energy Efficiency Directives, which are needed to fulfil existing contracts with EU countries’ electricity suppliers and traders. GoOs issued in the UK will no longer be recognised by EU Member States after 31 December 2020 in a no deal scenario. This could mean that existing contracts with EU countries’ electricity suppliers or traders might be compromised if the contract requires the transfer of a Guarantee of Origin recognised by the EU.

Moreover, if the UK ends the transition period without an agreement, the EU Emission Trading Scheme will cease to exist in its current form in the UK. This would necessitate the development of an alternative carbon pricing mechanism. The UK Government has proposed both a standalone emissions trading system and a carbon emission tax, as possible alternatives but it is unlikely that any scheme will be ready by the end of the transition period.

 

Access to the internal energy market

In terms of the internal energy market, the issue is not so much whether the EU and the UK could trade energy products after EU-Exit. Even under a ‘worst-case scenario’, energy products would likely continue to flow between the UK and the EU. However, the costs of doing so (trade over interconnectors will become less efficient), and the capacity to shape the rules surrounding trade, will be influenced by the scope of the trade model that the UK is willing to negotiate. The energy sector fears that, depending on the breadth of a future trade deal, explicit import and export transmission tariffs on power, abolished as part of EU’s Third Energy Package, could be reintroduced. Therefore, energy companies in the UK want to continue to seamlessly trade with their partners in Europe and the majority suggested that it would be preferable for the UK to remain in the IEM.

Another important question is whether the UK will have a right to shape the governance of energy markets, for instance, via participation in influential agencies and institutional players such as the Agency for the Cooperation of Energy Regulators (ACER) and the European Network of Transmission System Operators for Gas and Electricity (ENTSO-E&G). Trade is facilitated through various gas and electricity interconnectors, which are governed by ACER and ENTSO. Hence, influencing the rules (network codes) that shape the internal energy market and cross-border trade is in the interest of the UK Government and the devolved administrations.

Now that the UK has left the EU, the UK no longer has representation within ACER’s Board of Regulators. In the UK’s draft energy agreement, published in May 2020, the government envisions the use of provisions that would allow the UK to participate as an observer in the EU regulatory bodies ACER and ENTSO-G, alongside the right of the UK’s transmission system operators to be members of the ENTSO-E. From the EU’s negotiating position, cooperation, although encouraged between the parties, shall not involve or imply membership of ENTSO-E or ENTSOG by the UK’s transmission system operators.

Moreover, the EU does not foresee membership of the UK in ACER and will not grant the same levels of participation in ACER as it does to countries like Norway and Iceland. For instance, Norway is part of ACER as a non-voting member, due to its membership to the European Economic Area and internal energy market, and subject to the supervision of the European Free Trade Association Surveillance Authority that oversees the internal market, state aid and competition in EEA countries. Under a trade deal not implementing strict level playing field obligations, non-voting membership like Norway/Iceland would be impossible.

The European Union (Withdrawal) Act 2018 retains EU-derived energy legislation in UK law at the end of the transition period. However, retained EU law does not have supremacy over other domestic legislation. It will remain in place until modified or superseded by new primary or secondary legislation. Therefore, the terms under which the UK decides to diverge or align with the internal market in terms of a free trade agreement, will have a direct impact on the transposition of recent EU energy law into domestic law, retained EU law and the different levels of energy governance. Given the ambiguous mandate to reduce influence of the EU’s institutions over UK’s domestic institutions to a minimum, it is therefore to be seen how many new secondary provisions of the Energy Union will eventually be copied or transposed into domestic law.

As we can see, EU-Exit creates a highly uncertain environment for energy governance in the UK. The nitty-gritty details of UK-EU energy relations are yet to be ironed out and will prove a challenge for ongoing negotiations. The extent to which any agreement will impact the UK’s future energy governance will depend upon whether EU-Exit is an amicable divorce or not.

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