Brexit is an event that brings several controversies with it and it is not even known if it will ever be delivered. Britan is going to face several problems in all areas and from the point of view of energy, it is possible to say that it brings a series of disadvantageous consequences. As a matter of fact, the Brexit was desired by a large part of the Britons that did probably not know what would have been the results in the field of energy, which is a very important aspect of daily life. If there are some aspects and features of the European Union (EU) that are questionable, these are not part of the energy system that the EU has created over the years.
The European Union has been creating over the years a reliable and effective system. The European energy market is an heterogeneous one, meaning that most of the Member States’ domestic market characteristics and prices vary notably among each other. The EU is a net importer of energy products, with crude oil largely dominating the import scene. This idea of a common energy market, which later became the Internal Energy Market, was put forward by the EU Commission and has been constructed through several directives over the years, in four main legislative packages, and through the creation of new EU institutions (ACER, ENTSO-E, ENTSO-G)[1]. The first attempts towards the liberalization of electricity and gas markets refer to the 1980s, and an effective gradual liberalization of the energy market started in 1997, commonly referred to as the “first legislative package”; a second and third legislative package were created in 2003 and 2007. [2] Within this EU picture, the UK has had a leading role in the development of the single market in energy, heavily influencing the EU-wide rules, which draw on UK practice. In the UK the central role in this field is yielded by Ofgem. According to Ofgem it is important to develop with and through the EU for several reasons: the UK is physically connected to Europe through pipes and wires, thus the European energy prices have a major influence here; the UK is subject to EU legislation and policy-making impacting on consumers and markets in Britain; the creation of transparent, integrated and liberalized European gas and electricity markets would contribute to higher levels of competition and increase the security of supply and contribute the safe and stable provision of gas and electricity to British consumers; finally, developments in environmental policy relating to energy are increasingly driven at a European level. Ofgem supports the vision of a competitive, secure and sustainable European energy market that brings affordable and secure energy supplies to consumers through working within the European Regulators’ organizations such as CEER [3] and ACER[4].
The UK has been reliable on the North Sea, which offered important resources and made it possible for the UK to be a net exporter for several years. In the 1970s the UK was a net importer of energy, but it was able to turn into a net exporter in 1981 following developments of oil and gas production in the North Sea. The production costs were relatively high, but the quality of the oil and the political stability of the region made it an important source for Western European markets. The peak has been followed by a slow return to becoming a net importer since 2004 and UK is now a net importer of all main fuel types with a 36% [5] of energy used in UK being imported.[6] UK’s key energy partner is the EU by supplying approximately 12%[7] of UK’s gas and 5%[8] of its electricity. Around half of the UK’s gas supplies (44%)[9] comes from the North Sea and the East Irish Sea gas fields. The EU has also importantly contributed to the creation of the ISEM (Integrated Single Electricity Market), in the island of Ireland, the wholesale electricity market, which allows the continous flow of electricity along the whole island.[10]
For all these reasons is it possible to say that Britain does actually not want to take the distances from the EU energy system, but as a consequence of Brexit it could be forced to do so. The main areas where Brexit shows the disadvantages it will bring in the British energy sector can be summurized in four points. It is possible to say that the whole IEM system and the relations between UK and EU insititutions have been well-functioning and reliable up to now and much of what will come next depends wether the Brexit will be with a deal or not. The deal was well received by the UK energy community, as it safeguards most of the current system, while the no-deal Brexit could lead to extreme situations, like energy shortages.
The first point addressed is about energy security and trade. Energy security has been solid up to now thanks to the IEM. The valuable features that should be highlighted are the market coupling and the REMIT Regulation. Market coupling is where participants use a shared algorithm to arrange international electricity trade, a tool which improves cooperation and guarantees a good functioning of the market. The REMIT Regulation, a tool that gives Ofgem access to data about market participants’ trading behavior and enables to monitor the market more effectively.
Moreover, the EU is currently not charging import duties on electricity and, although, a tariff on imported gas exists and is of 0.7%[11] , it has chosen not to apply it in practice. In case the UK would manage a deal and stay within the IEM no drastic changes would occur, but this is probably not the case as the UK does not want to be subjected to the European Court of Justice (ECJ). As a matter of fact, the full continued membership to the IEM would be the best option for the UK, but this is very unlikely since the British government showed its strong interest in leaving the Single Market and taking the distances from the European Court of Justice. However, the IEM is subject to the ECJ, and access to the IEM implies adopting the rules that govern it and accepting the jurisdiction of the ECJ. Whithout a deal the UK would probably see the reintroduction of explicit import and export transmission tariffs. Although tariffs on energy itself are very unlikely to be introduced, the energy industry could be affected by tariffs on products used to construct and maintain the energy system.[12]
Within this picture, a fundamental aspect to be addressed in the best way, is on the consequences between the UK and Ireland, especially, on what will happen with the ISEM. The ISEM has been a clear demonstration of British-Irish energy cooperation and is now at risk. If a deal could still guarantee some certainty, the no deal appears to be on the table between the UK and the EU and creates higher tensions. However, the ISEM is the result of independent agreements between Ireland and the UK and in theory should be unaffected by the UK’s withdrawal from the EU, therefore, the real complication stays in Ireland’s EU membership, that makes it subjected to EU regulations concerning energy generation and supply.[13]
It is possible to say that the island of Ireland will be the part suffering the most from this situation due to its ‘newborn balance’, a balance that took a very long time before it could be found. Undermining any of the agreements that now exist between Northern Ireland and Ireland is very risky.
The second point addressed regards the interconnectors: the system of interconnectors around Great Britain and Ireland is a strong one and it is expanding. Other projects of interconnectors are in the making. These projects are joint ventures between multiple companies, and all require the cooperation of different governments, regulators and grid companies. Unless the market and commercial arrangements are made clear, it is not sure whether these projects will be realized. The UK needs more interconnection to ensure it takes the lowest cost pathway to decarbonization and should prioritize interconnectors in the future relationship negotiations with the EU. The IEM contributes strongly throughout Europe in achieving green targets by smoothening the flow of electricity through interconnectors and increasing the production of renewable sources. More precisely, interconnectors can contribute to the UK having a low carbon, low cost, and secure electricity system.[14]
The third point addressed is about the policy influence and agenda setting role that it has historically had via the EU. The UK is set to lose its position in the key decision making body ACER. Nevertheless, it can still have a role in technical matters in nework of Transission System Operators. Ofgem will not be able to remain a full member of ACER, although it may be able to have observer status, subject to negotiations, and could therefore potentially participate in working groups. They would not, however, be represented on the board or have voting rights.
The last and fourth point is the nuclear energy aspect, as the UK is also leaving Euratom. The nuclear sector is an increasing one in the UK, an example is the construction of Hinkley Point C in Somerset. It is the first new nuclear power station in the UK under construction since last December. It will provide low-carbon electricity for around 6 million homes. The Nuclear resource could become of primary importance for the UK and could guarantee a high level of electricity production for Britain, enhancing also exporting opportunities. What should be considered at this point is that leaving Euratom, means that some dynamics are going to change for the UK. The production of nuclear energy is under UK regulations and not EU ones, so it won’t be problematic, while a problem would be the trading of nuclear material which relies on the Euratom regulations. The real issue, in this case, is about the immigration law for low-skilled labor force, as it would not allow the entrance of enough workers from the EU which are needed.[15] It is estimated that a the peak of its contruction it is going to need 1,400[16] steel fixers. At the moment the number of certified steel fixers in the UK is 2,7000[17] , meaning that more than the half of them would be needed to meet the requirement.[18]
There is still no idea if the Brexit will ever be delivered or if there are any chances to stop it. If it ever will, it would be best to exit at least with a deal to safeguard the population, guaranteeing energy security and a stable situation on the border between Ireland and Northern Ireland.
Note
1. European Agency for the Cooperation of Energy Regulators (ACER), European Network of Transmission System Operators for Electricity (ENTSO-E), European Network of Transmission System Operators for Gas (ENTSO-G)↑
2. Shubert, Pollack and Kreuter, “Energy policy of the European Union”, 2016 ↑
3. Council of European Energy Regulators (CEER)↑
4. “Ofgem and Europe”, Ofgem, accessed on 28/07/2019 https://www.ofgem.gov.uk/about-us/ofgem-and-europe ↑
5. Department for Business, Energy & Industrial strategy ,“UK energy in brief 2018”, July 2018 ↑
6. Department for Business, Energy & Industrial strategy ,“UK energy in brief 2018”, July 2018 ↑
7. HOUSE OF LORDS, “Brexit: energy security”, 2018 ↑
8. HOUSE OF LORDS, “Brexit: energy security”, 2018 ↑
9. “Where does UK gas come from?”, The Source, Our World of Energy, accessed on 03/06/2019
https://www.britishgas.co.uk/the-source/our-world-of-energy/energys-grand-journey/where-does-uk-gas-come-from ↑
10. Department for Business, Energy & Industrial strategy ,“UK energy in brief 2018”, July 2018 ↑
11. HOUSE OF LORDS, “Brexit: energy security”, 2018 ↑
12. HOUSE OF LORDS, “Brexit: energy security”, 2018 ↑
13. HOUSE OF LORDS, “Brexit: energy security”, 2018 ↑
14. Joseph Dutton, “UK-EU electricity interconnection: the UK’s low-carbon future and regional cooperation after Brexit”. January 7, 2019. https://www.e3g.org/library/uk-eu-electricity-interconnection-low-carbon-future-and-brexit ↑
15. HOUSE OF LORDS, “Brexit: energy security”, 2018 ↑
16. HOUSE OF LORDS, “Brexit: energy security”, 2018 ↑