Brexit - The Future Of The UK’s Energy System (Or, How Do We Keep The Lights On, On 30 March?)
Over the last month, as climate change-exacerbated storm and tempest has raged worldwide, the Government has published notices on a range of topics to help businesses prepare for a No-Deal Brexit on 29 March 2019. Just in case.
Topics covered include EU funded programmes, farming, importing and exporting, product safety and labelling, state aid, protecting the environment and regulating energy. Energy related notices have so far addressed only nuclear regulation and research, and running an oil and gas business. Separately, Minister of State for Climate and Industry Claire Perry published a letter indicating that her department had prepared a draft statutory instrument to transfer limited energy-related functions, such as the creation of Network Codes or amendments to the Regulation on wholesale energy market integrity and transparency (REMIT), from the European Commission to the Secretary of State.
Considering the broad-ranging topics which could be and need to be addressed under a heading of “regulating energy”, there is a great deal that remains unsaid. We eagerly await some comment from the Government on what arrangements will be made in the event of a no-deal Brexit for “keeping the lights on”, in other words how it plans to ensure the security of the UK’s energy supply.
The state of Government preparations
BEIS, the Government department responsible for energy regulation, has not fared well in analyses of its Brexit preparations. In April this year (before no-deal was the serious possibility that it is today), the Chair of the Public Accounts Committee, Meg Hillier MP, described BEIS as appearing to operate “in a parallel universe where urgency is an abstract concept with no bearing on the Brexit process”. By the time of the Government’s response in June, the Government was reporting that BEIS had implemented many of the Committee’s recommendations. BEIS’ Single Departmental Plan, published on 23 May 2018, lists five priority objectives, one of which is to ensure that the UK has a reliable, low cost and clean energy system. There is virtually no discussion on how that will be achieved on a practical level.
Ofgem on the other hand seems to be several steps ahead of BEIS. As far back as February 2018, it consulted on proposed changes to licences and industry codes and by that point had already done sufficient analysis to allow it to say that there is nothing in the current licence conditions that would become inoperable on Exit Day. Industry largely agreed. However, these are practical, measurable questions – easier by far than those with which BEIS is grappling.
What might a deal involve?
The Prime Minister’s Chequers plan refers to the preservation of the Single Electricity Market which currently operates on the island of Ireland and broad cooperation on energy. The plan makes clear that most options are still on the table, including participation in the EU Internal Energy Market. In the PM’s Mansion House speech, she said that the UK would be “exploring options” for the UK’s continued participation in the IEM – not quite an iron commitment to participation but the later Chequers plan has a more reluctant tone. The plan also makes clear that there is no option of the EU mandating the UK to adopt all environmental and climate change rules.
In addition to the existing three electricity interconnectors which ensure that the UK can import energy from and export to the rest of the EU (plus one from Northern Ireland), three more are contracted and another seven are planned before 2022. Energy demand forecasts to 2035 note that the UK will have an increased dependence on energy imports until nuclear capacity reduces the need for this in the 2030s. Import of electricity as it on the terms applied today is only really possible if the UK remains a member of the Internal Energy Market, but that means adopting the EU’s regulatory framework, current and future - unlikely to be the Government's first choice. The loss of access to the interconnectors which act as something of a pressure valve would be strongly resisted by many as it would inevitably create extra difficulties for those balancing the UK market. In a no-deal scenario, the application of WTO rules would not require the application of any tariffs on electricity, but exclusion from coupling and balancing mechanisms would cost the UK £260m annually according to a report for National Grid in 2016.
Meeting rising demand
We are entering an era of unprecedented demand for electricity. By the end of this year, there are expected to be around 200,000 electric vehicles on the road. By 2022, this number is likely to be nearer one million. By 2040, when the UK says that it will ban the sale of new petrol and diesel vehicles, at least half of all new car sales will be electric under the Government’s “Road to Zero” plan (new vehicle registrations in 2017 were just over 2.5 million). No doubt technology will emerge which can help meet the demand of charging this vastly increased number of electric vehicles – solar car ports are viable solutions for the commercial sector already – but the Government could offer both a carrot and a stick rather than stepping back from industry’s efforts.
No longer bound by the EU state aid rules which prevent national protectionist measures, the UK could elect to incentivise a particular technology by the payment of subsidies, in a more direct way than is currently offered by Contracts For Difference. Step forward tidal and wave who would hope to emulate the success of off-shore wind? Step forward the hydrogen economy innovators, to change the transport industry and shift the focus away from electricity?
On the other hand, more aggressive binding targets for generation of renewable energy have recently been discussed in Brussels. The Government gave a disappointing “wait and see” response when asked whether these increased targets to be included in the new Renewable Energy Directive would apply in the UK after Brexit. The agreed 32% target is to be reached by 2030, by which time any implementation period will long be over.
In our experience, commercial and industrial clients are seeking their own routes to stability and control; on-site or dedicated private wire arrangements are looking increasingly rational.
Unless some specific deal is struck on energy, we may not hear much detail from the Government, since the impact on most businesses of a no-deal Brexit, following which WTO rules will automatically apply, is likely to be simple - higher costs of acquiring the energy they need to keep the lights on. This presents an opportunity for energy-sector players to deploy renewable assets or advance emerging technology within the UK, but also for businesses with space to do so, to assess the value of undertaking their own renewable projects – the return on investment on a rooftop or carport solar project on a facility for example will automatically increase when the price of acquiring energy elsewhere increases. Though a reluctance to invest is entirely understandable at this time, there is a deadline worth bearing in mind: in July, the Government that it is likely to close the Feed-in Tariff support scheme (which can change the economics of small projects) to new applicants on 31 March 2019.
A no-deal Brexit presents a risk for energy in the UK but the Government should be preparing to rise to the challenge – promote and encourage promising technologies whether via procurement decisions or unconstrained subsidies, regulate appropriately, recognising that now more than ever regulation is struggling to keep pace with technology, and apply creativity but also joined-up thinking about wider environmental issues when deciding how to rewire the UK national energy market.
Update: The latest tranche of notices, published on 24 September just after this article was written, includes one on "Generating low-carbon electricity if there's no Brexit deal". The notice does not include any discussion of policy, but is very practical in tone and directed to generators and suppliers, and installers of microgeneration technology.
- Guarantees of Origin for CHP, and Renewable Energy Guarantees of Origin: The British Government will continue to recognise EU and Northern Ireland GoOs and REGOs (for now), but those issued in GB and NI will not be recognised in the EU. Prior to exit day, generators should ensure that any supply or trading contracts include an explicit reference to GB and NI - and not simply "EU" - GoOs or REGOs .
- Certification of installers of microgeneration technologies: Installers of certain microgeneration technologies are required to be certified, and there is currently mutual recognition of Member States' certifications. After Brexit, the UK will continue to recognise certificates issued by EEA countries (for now), but EEA countries will not recognise UK certificates. Installers with cross-border businesses will probably need to be re-certified in an EEA country.
- The notice also discusses renewables support schemes, but advises that feed-in tariffs, Contracts for Difference and the Renewables Obligation will continue to operate as they did pre-Brexit, should no deal be reach.