Brexit: Energy market liberalisation implications

This note outlines the key consequences, both for the GB market (England, Wales and Scotland) and for the separate Northern Ireland (NI) market, which is integrated with the electricity market of the Republic of Ireland to form the Single Electricity Market. This analysis is likely to change during the transitional period, depending on the progress of negotiations between the UK and the EU about their future trading relationship, outlined below.

However, we start with a description of the current arrangements, and then of those arrangements, as modified, as they will apply in the absence of further agreement between the UK and EU.
 

The EU electricity regulatory framework
Effect on national implementing rules
Effect on REMIT
Effect on the Electricity Regulation and the ACER Regulation
Effect on the EU electricity Network Codes
Effect in Northern Ireland
Conclusions

The EU electricity regulatory framework

A series of EU Directives and Regulations adopted over the past 15 years or so have created a liberalised and largely harmonised EU wholesale electricity market. Particularly significant measures are those originally adopted as part of the Third Energy Liberalisation Package in 2009 and then updated, deepened and extended as part of the Clean Energy Package in 2019: the Electricity Directive, the Electricity Regulation and the Regulation creating ACER, the Agency for the Cooperation of Energy Regulators.

The European Commission has also adopted a series of EU Network Codes and Guidelines. These are EU Regulations setting out detailed rules for the operation of and connection to energy networks, and for the operation of energy markets. They include the Network Codes on Requirements for Generators, Demand Connection and HVDC Connections (NC RFG, NC DC and NC HVDC), the Guidelines on Capacity Allocation and Congestion Management, Forward Capacity Allocation and Electricity Balancing (CACM, FCA and EB GL), the Guideline on System Operation (SO GL) and the Network Code on Emergency and Restoration (NC E&R). Other particularly important measures are the Regulation on Energy Market Integrity and Transparency (REMIT), and the Renewables Directive. The Renewables Directive was also updated as part of the Clean Energy Package. 

The Directives have been implemented into UK law, either through amendment of primary legislation such as the Electricity Act 1989, which (among other things) implements the unbundling requirements of the Electricity Directive, or by means of statutory instruments (SIs). In contrast, EU Regulations are directly applicable and generally require no implementation, although for example the UK Government has adopted GB and NI statutory instruments to give the energy regulators the necessary powers to enforce REMIT.

Effect on national implementing rules

The European Communities Act 1972 made EU law enforceable in the UK and provided a framework for the adoption of necessary national legislation, mainly in the form of Sis, to implement the requirements of EU law. The European Union (Withdrawal) Act 2018 will repeal the ECA 1972, with effect from 31 December 2020. The consequence of repealing an enabling statute such as the ECA 1972 is normally that SIs made under it lapse, unless the legislator at the same time enacts a "saving" provision. In this case, however, the Withdrawal Act, at the same time as repealing the ECA 1972, will import the entire acquis (the body of existing EU law) into UK law on exit date, except as otherwise provided. Over the past couple of years, the government has conducted a detailed review of the rules and has decided which of them to retain and which ones to repeal.

The Withdrawal Act therefore saves, in principle, the UK legislation implementing the 2009 version of the Electricity Directive (most of the 2019 recast of the Directive does not need to be implemented in national law until January 2021, so will not apply to the UK after the exit date). Much of the UK legislation implementing the 2009 Electricity Directive is likely to remain in the longer term. The UK has led the way in the EU in terms of energy market liberalisation, and it is very unlikely that it will reverse the separation of transmission from generation interests, for example (particularly given that it has already gone further even than EU law required, by separating National Grid's system operation and system ownership businesses). However, amendments will clearly be required in some areas in order to ensure that the arrangements can continue to function outside the EU. While the UK rules implementing the Directives are retained, the Directives themselves are not, except to the extent that the principles set out in them have been interpreted by the European Court of Justice, in judgments such as Cases C‑105/12 to C‑107/12 Netherlands v. Essent.  

Effect on REMIT

In March 2019, the Government adopted Regulations to ensure the preservation of the substantive prohibitions in REMIT (market abuse and insider trading), as well as the requirement to publish inside information. The Regulations also provide for the enforcement of REMIT outside the EU framework, in GB and Northern Ireland, and through the criminal system.

Having gone to the lengths of providing for criminal sanctions for energy market abuse in 2015, the UK government is likely to retain the substantive prohibitions of REMIT in the longer term. However, it would not, without further agreement with the EU, be able to access the EU-wide energy market monitoring and cooperation arrangements set out in REMIT, and these provisions of REMIT are accordingly not retained at this stage (but could be, depending on the outcome of the negotiations with the EU. Conversely, ACER would no longer obtain access to UK electricity data and market monitoring under the REMIT framework.

Effect on the Electricity Regulation and the ACER Regulation

The Electricity Regulation (Regulation 2019/943, the revised and extended update of Regulation 714/2009), the ACER Regulation (Regulation 2019/942), and other Regulations forming part of the Clean Energy Package, will in principle be imported as part of the acquis. The UK Government has not yet published an SI to adapt Regulation 2019/943 or the other Regulations, and any such SI is now likely to await further developments in respect of the future trading relationship. However, in March 2019, the UK Government published the SI intended to adapt Regulation 714/2009. Although Regulation 714 has now been repealed by the 2019 recast, the Government's approach provides an indication of the likely amendments to Regulation 943 in the absence of any deeper agreement, and a picture of the retained scope of EU electricity market rules in GB post-exit.

In essence, the UK Government proposed to delete nearly all of Regulation 714, with the exception of the mechanism for the adoption of network codes by ENTSO-E, and rules on congestion management. Rules that were revoked included the rules relating to the certification of transmission system operators, the approval of interconnectors, the inter-TSO compensation mechanism for hosting cross-border electricity flows and transmission charges. Maintenance of these rules would have required ongoing membership of the EU internal energy market and interaction with EU bodies.

Effect on the EU electricity Network Codes

Similar considerations apply to the EU electricity Network Codes and Guidelines.

Implementation of these rules in GB has been via a number of routes – legislation where necessary, for example an amendment to the Electricity Act 1989 to give Ofgem the power to monitor the activities of nominated electricity market operators (NEMOs), but more often via licences, national codes and market rules. However, there are large parts of the EU network codes and guidelines that are not the subject of specific national implementation, but are in the normal course of events effective as a result of their direct applicability as EU Regulations.

As in the case of the Electricity Regulation itself, these provisions will apply in GB post-Brexit by virtue of the Withdrawal Act. However, while this will work for many of the substantive elements at a GB level (e.g. rules on requirements for connection to the transmission system), the forward, day-ahead and intraday markets will rely in particular on price-coupling processes carried out at an EU level, on the basis of common methodologies and processes developed and applied among EU TSOs and NEMOs under the supervision of national regulators and ACER. It would be possible to provide for some of this process contractually, as between the GB NEMOs and TSOs and their EU counterparts. Indeed CACM to some extent formalises arrangements that are already being developed voluntarily between the TSOs and power exchanges of North-Western Europe.

However, the fact that this framework has been given legal force will give rise to a degree of asymmetry post-Brexit that may be difficult to overcome, and the expectation is that absent a further specific agreement, the UK will leave these EU-wide arrangements post exit. The SIs published in March 2019 provided for the revocation of CACM and FCA, and would have amended the EB GL and SO GL These Regulations will now all continue in operation unamended for the remainder of 2020, as will the other Guidelines and Network Codes, but in the absence of further agreement with the EU, are likely to be revoked or substantially amended with effect from the exit date.

Effect in Northern Ireland

As mentioned above, NI is a separate market from the rest of the UK for electricity purposes. Together with the Republic of Ireland, it forms the Single Electricity Market (SEM). For SEM issues, the Irish and NI regulators work together through a joint SEM Committee.

Over more than 3 years, the Irish and NI governments and regulatory authorities worked with the TSOs EirGrid and SONI and other stakeholders to implement the EU-wide internal electricity market created by CACM, in a project known as the Integrated Single Electricity Market (I-SEM). The I-SEM went live in October 2018, operating a single set of markets (forward, day-ahead, intraday, balancing and capacity) across both Ireland and Northern Ireland.

Brexit raises particular issues for the SEM, as a single market involving part of the UK and an EU Member State, Ireland. In the absence of arrangements for the ongoing application of at least some elements of EU internal energy market rules in NI, it would be difficult to operate the SEM in its current form. The UK Government recognised this, and the SEM was the subject of specific arrangements in the NI "backstop" arrangements contained in the Withdrawal Agreement entered into in October 2019. The Northern Ireland protocol therefore provides that in the absence of other agreement between the EU and the UK "[t]he provisions of Union law governing wholesale electricity markets listed in Annex 4 to this Protocol shall apply, under the conditions set out in that Annex, to and in the United Kingdom in respect of Northern Ireland." The legislation listed in Annex 4 includes the 2009 Electricity Directive (in so far as it applies to wholesale electricity markets), the 2009 Electricity Regulation (and thereby the Guidelines and Network Codes adopted under it) and the 2009 ACER Regulation, although all 3 have since been repealed. REMIT is also on the list. This will provide a minimum framework for the effective operation of the SEM in accordance with CACM, and the other relevant Guidelines and Network Codes, although it will not, unless the list is updated to apply to the 2019 recasts of the Electricity Regulation and Directive and the ACER Regulation, allow NI within the SEM to be fully integrated into the regional cooperation agreements and other amendments to the EU electricity market introduced by the Clean Energy Package.

The future trading relationship

The particular position of Northern Ireland within the SEM is discussed in the previous paragraph. In order to displace it, any future arrangement (which may or may not be one that extends to the whole of the UK) will need to provide at least as effective integration of NI into the SEM and the EU internal electricity market as the backstop. For the rest of the UK, the future trading relationship with the EU is still to be negotiated. This is clearly a complex and multi-dimensional negotiation, in which energy policy is only one of many issues to be discussed. However, the Political Declaration signed at the same time as the Withdrawal Agreement provides some indication of the parties' thinking:

"64. The Parties should cooperate to support the delivery of cost efficient, clean and secure supplies of electricity and gas, based on competitive markets and non-discriminatory access to networks.

65. The Parties should establish a framework to facilitate technical cooperation between electricity and gas networks operators and organisations, such as the European Networks of Transmission System Operators for Electricity and Gas, in the planning and use of energy infrastructure connecting their systems. The framework should also include mechanisms to ensure as far as possible security of supply and efficient trade over interconnectors over different timeframes.

This suggests retention of the unbundling rules for TSOs and the rules on interconnector access, as well as some market rules. National Grid and SONI are likely to retain some official status within ENTSO-E. The reference to "efficient trade over interconnectors over different timeframes" is particularly interesting, suggesting, as the EU-wide market coupling arrangements under CACM were introduced in order to maximise efficient use of capacity on the interconnectors, that GB could continue to participate in some form in the internal electricity market, i.e. the cross-border forward, day-ahead, intraday and balancing markets.

Further pointers to the possible direction of future arrangements is provided by the European Commission's January 2020 briefing to Member States on the EU negotiating position in relation to energy.

In its briefing note, the Commission adds to the Political Declaration the following principles:

• competitive markets and non-discriminatory access to networks, meaning the effective unbundling of network operators, independent regulation and the prevention of abusive practices on wholesale energy markets. All of these are likely to be principles that the UK would wish to retain in any event;
• a guarantee of a level playing field, including effective carbon pricing, state-aid, and environmental protection. These may be more challenging for the UK – there has been considerable discussion about the extent of a UK state aid policy post Brexit; and
• a commitment to clean energy, including renewable energy. This is unlikely to be objectionable in principle, although the details are likely to prove difficult to agree.

The Commission also identifies the following key instruments:

• information sharing on risk-preparedness and crises;
• mechanisms to ensure as far as possible security of supply and efficient trade over interconnectors over different timeframes. The Commission indicates that this would also require there to be no undue disruption of energy flows in crisis, the market-based use of interconnectors and a prohibition of import and export restrictions and dual pricing. This is particularly interesting. It had been suggested that one possible consequence of leaving the internal energy market would be that the UK would be free to reverse the lifting of charges on energy imported via the interconnectors, required by EU law, and would be able to curtail interconnector flows to resolve national shortages. It is clear, however, that the EU will expect rules in this area is if the UK remained in the internal electricity market.
  

Conclusions

It is clear that while large parts of the EU-derived UK energy framework will remain intact, other major parts are now likely to fall away in their entirety. There is clearly some commitment to retaining certain aspects of the EU internal electricity market, but at the same time the UK Government has emphasised that it wishes to remain free to adopt diverging standards from the EU. Some of the trading arrangements under the Electricity Regulation and the EU Network Codes can possibly be partially replicated by contractual means, but full effectiveness of the governance arrangements that underpin or will underpin electricity markets will require specific agreement between the UK and the EU. This is not likely to be a straightforward process, and it will probably take some time for the electricity regulatory framework to reach some measure of stability.

Given the current uncertainty, there is little that can be done to prepare for any possible changes, other than to ensure that where possible, contracts relating to any of the requirements of EU electricity rules are drafted in sufficiently flexible terms that they can be adapted, or terminated, if required once the final outcome of this process is known.

We intend to update our guidance in this area as the implications for energy liberalisation become clearer.

This article is part of our Brexit series.