On 29 March 2017, the UK Government served formal notice under Article 50 of The Treaty on European Union to terminate the UK's membership of the EU (following the June 2016 UK referendum on EU membership). Based on Article 50, the EU Treaties shall cease to apply to the UK and the UK exit will take effect in March 2019 (subject to the unlikely possibility of the withdrawal agreement being concluded sooner and unless all Member States agree to extend the period). Negotiation of a new trade agreement with the EU could take several years beyond 2019 although the Prime Minister has declared the objective of achieving such an agreement within the two-year period.
This briefing note anticipates how that Brexit will impact on the area of energy management law and policy. The legal consequences are complicated, especially in this area as many principles and obligations in our national law stem from EU legislation.
Whilst the precise nature of the UK-EU relationship after a Brexit cannot be known now, it is possible to speculate a little about how a Brexit might affect energy management law and policy in the UK and this note considers – in brief, general detail only – some issues relating to demand management, demand response and distributed generation in the UK. We focus on energy management in this briefing, and do not cover issues relating to more traditional energy topics like oil and gas, interconnectivity and the Internal Energy Market.
Practical steps to take right now
In simple terms, it will be important to consider: what energy management laws and policies affect your organisation; any contracts you have or are currently negotiation; and any policies, business plans, administrative arrangements, etc you have prepared and implemented or are currently preparing. However, it is more nuanced for each organisation. For the purposes of this brief note, we look at it from the perspective of two key stakeholders: energy consumers and those that provide goods and services to energy consumers.
For energy consumers, energy management laws and policies have multiple layers of relevance. Two examples:
- It influences how an organisation sets and meets its energy management strategy including the type(s) of energy it sources, from where it sources that energy and how it improves energy productivity. Brexit may result in some organisations pausing until they feel they have sufficient clarity from Government, particularly given past experience, such as the "early movers" who failed to receive recognition under CRC. Others may, having considered the current situation, continue to carry on for various reasons including existing legal commitments (e.g. those that have signed Climate Change Agreements) or because broader market forces, and not the regulatory and policy landscape, are the predominant driver of their energy management strategy.
- Regulatory (predominately, reporting) compliance. Many organisations have spent the last 10+ years responding to various layers of energy management regulatory compliance frequently voicing "red tape" concerns to Government as policies change and/or duplicate existing regulatory administration. With the UK unshackled from having implement relevant directives, there may be a push to remove a number of the EU based regulatory measures in order to reduce the "red tape" burden.
For energy management goods and services providers, their immediate concern will have been a Brexit impact on market confidence. While energy consumer confidence is key, so is the sentiment of other key stakeholders such as the supply chain (e.g. will the UK be seen as an attractive export market for relevant energy management products manufactured overseas) and funders (e.g. will experienced green economy funders focus on other investment opportunities). A key strategy will be for relevant professional bodies and trade associations to continue to send a consistent message to Government about the positive impact that the right energy management policy framework can have on the UK's long term energy strategy.
For all stakeholders, there will be a number of common concerns and aspirations. In addition to the more general aspiration for Government to provide (the right) clarity on its energy management policy agenda, more specific matters include the Government grandfathering relevant policies to protect investment decisions already made or to be made in the short to medium term and, at a contractual level, how best to manage such things as bespoke change in law and price review mechanisms often found in contracts in the energy management space.
1. Energy Efficiency Targets
The EU has set ambitious energy savings targets (20% on projected use by 2020 and 27% by 2030). As noted in our Brexit Environment briefing, the UK government has its own legally-binding climate change targets – whilst the aim to cut carbon emissions is unlikely to change in the event of a Brexit, it is difficult to predict what role energy management will play in achieving these emission reduction targets. The EU energy efficiency targets have without doubt provided some certainty in the energy management sector and contributed to investors' confidence; as previously noted the intangible effect on market confidence may be the most important consequence of the UK having given notice to leave the EU.
2. Energy Efficiency in Buildings
The EU has been important in encouraging UK legislation and action to improve energy efficiency in buildings, especially since independent UK action has not been particularly effective (look for example, at the withdrawn Green Deal scheme, national zero carbon homes policy and Code for Sustainable Homes). The Energy Performance of Buildings Directive 2010 and Energy Efficiency Directive 2012 require EU Member States to introduce measures to promote energy efficiency and reduce the energy consumption of buildings (obligations relating to energy performance certificates ("EPCs") and display energy certificates ("DECs"); air conditioning inspection requirements; all new buildings to be nearly zero energy by end of 2020; setting of minimum energy performance requirements for new buildings; obligations to prepare national energy efficiency action plans; obligations on companies to carry out energy audits; etc.).
The UK has implemented the relevant obligations into national law, for example, the Energy Performance of Buildings (England and Wales) Regulations 2012 in relation to EPCs and DECs, the Energy Savings Opportunity Scheme Regulations 2014 in relation to energy assessments and Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 in relation to minimum energy efficiency standards.
The UK Government has indicated that it will freeze into UK law the EU legislation in force at the point of the UK's exit to ensure continuity, but may choose to amend such law in due course. These Regulations would be unlikely to change directly because of a Brexit, although (depending on the form of the Brexit) the UK may have to amend its national legislation to account for changes or progress in the EU frameworks. Rather, it is domestic policy that may lead to a change in these schemes where permitted, for example, the ongoing review of the business energy efficiency tax landscape and proposal for a simplified reporting framework (i.e to reduce "Red tap" which may expand the ESOS reporting requirements (assuming the UK retains this EU policy initiative) or replace it with something more bespoke to the UK market (although we anticipate certain stakeholders with European property portfolios will push to retain ESOS or have something akin to ESOS). Any differences in law and policy in the UK could affect how overseas stakeholders view the UK as part of their international growth strategy, particularly in comparison to the rest of the EU – for example, it may be necessary for the UK government to set tougher energy management standards or provide more attractive fiscal incentives.
3. Energy Efficiency in Products
The Energy Labelling and Ecodesign Directives set labelling and design requirements, requiring manufacturers to label and decrease the energy consumption of their products. There are also voluntary EU schemes, such as the ENERGY STAR programme. Regardless of Brexit, it is reasonable to speculate that the government and industry will continue to meet these European standards and obligations as a minimum:
- due to the need to meet these standards to access the EU market; and
- to meet commercial requirements (such as supply chain obligations and consumer pressure).
We consider the key effect of Brexit in this area would be our government's reduced influence on the development of product standards (and hence its reduced ability to represent and protect UK industry's interests). It is worth pointing out that, in the perhaps unlikely event of a difference in product standards materialising, then this would affect how overseas technology companies view the UK market – tougher standards may mean higher compliance costs which may push them elsewhere in the EU.
This is largely within domestic control, as measures such as participation of electricity demand reduction in the Capacity Market auctions are associated with the government's reform of the electricity market. It is difficult to see that Brexit would have a significant impact here, certainly in the short-medium term at least. Perhaps Brexit may give the UK Government some freedom away from State Aid constraints to support the demand-side industry (although there are still World Trade Organisation rules on state subsidies). This could make the UK energy market a more attractive market in which to invest.
Also, whilst the roll-out of smart meters may have had its genesis in EU energy market legislation, it is doubtful that Brexit would interrupt the UK's progress on this reform.
Again, this is largely within domestic control with our planning system implementing requirements for heat networks and onsite generation, especially within urban areas. Whilst planning obligations are supporting a transition to more efficient heating and cooling systems and networks, there has been significant support financially from the government through national renewable generation subsidies and renewable heat incentives.
Whilst UK planning policy etc. may not change tack as a result of Brexit, EU framework support and policy direction would be removed. The UK government is reducing renewable generation subsidies and so its legislative attention will perhaps now turn to demand-side measures to encourage sustainable and efficient energy consumption. It is here that EU support and policy direction can have an important impact, for example, the February 2016 Commission Heating and Cooling Strategy will encourage all Member States to move towards more efficient heating and cooling systems, thus supporting UK government action through planning obligations, the Renewable Heat Incentive and its 2013 Action Plan.
The EU has played a key role in energy management to date, through setting targets and legislating to improve energy efficiency in buildings and products. For reasons outlined above, it seems unlikely that a Brexit would affect existing legislation in the UK in these areas. Conversely, domestic policy is driving demand response and distributed generation in the UK and again, it is unlikely that a Brexit would have a significant impact here, certainly in the short-medium term.
Some may argue that a Brexit could lead to the UK government moving away from new law or policy requiring energy management improvements, certainly when faced with arguments from sectors such as the construction industry for more freedom from central policy decisions and building standards. Others are concerned that energy management will not be sufficiently high on the Government's Brexit agenda, leading to a lack of policy clarity for an extended period, thereby undermining market confidence. Perhaps we are too optimistic given the various concerns outlined in this note, but we consider alternatively that energy security and cost will be a central Brexit issue and in fact, the UK government and industry will support and perhaps require certainty around energy management policy. Indeed, even now momentum is growing, driven in part by the UK's proactive and commercial ESCO and funding stakeholders, but also by commercial requirements and the huge impact of (high) energy costs on manufacturers; the competitiveness of UK industry demands that we have a stable and secure energy market with costs to be kept to a minimum with or without the EU's support.
We intend to update our guidance in this area as the implications for energy management law and policy in the UK become clearer.
For any general enquiries regarding the issues raised in this briefing or any other energy management or low carbon matter, please contact Jo Ketteley or Michael Rudd.
This article is part of our Brexit series.