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Hot Topic: UK-EU energy cooperation after Brexit: what lies ahead?

Friday, March 31, 2017


The British Prime Minister Theresa May officially informed the EU Council of the UK’s intention to withdraw from the EU, however, at least in the near future, Brexit is unlikely to have a serious impact on the energy sector since the current frameworks and regulations will continue to apply until the UK is no longer a member of the EU

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On 29 March 2017, the British Prime Minister Theresa May officially informed the EU Council of the UK’s intention to withdraw from the EU by invoking the infamous Article 50 of the Lisbon Treaty. While this decision quickly became a hot topic, its impacts may be less immediate when it comes to energy cooperation between the UK and the EU and investments in the energy sector. The UK will have to choose a path and while it may not bring them to a complete halt, a possible policy and regulatory change as a result of Brexit can certainly slow down the trend of investments in European energy projects, predominantly driven by financial interests and industry initiatives.

What Happens after Article 50 is Triggered?

Under Article 50 Paragraph 3 of the Lisbon Treaty, the UK and the EU have two years to agree on a deal encompassing all the legislative measures taken between the two parties since 1973. After that period, the EU Treaties will cease to apply to Britain, unless an extension is agreed upon unanimously between the EU Council members and the British officials.

The following step in the complicated political and legal process is the announcement of the common positions of the EU and the British government. The EU’s position is based on the EU Council’s guidelines and is requires a strong qualified majority vote by the Council of the EU with the consent of the EP.

For an overview of key decision-makers and the Brexit timeline see below.

The Possibilities Ahead

Prime Minister Theresa May announced that the country would no longer be part of the European single market or of the European atomic energy community (Euratom), which announcements pose a number of questions for the energy sector. The main outstanding issue is whether the UK will remain part of the Internal Energy Market (IEM) like, for example, Norway, or if it will take the approach of Switzerland, which is not part of the IEM.

As part of the European Free Trade Association (EFTA) and the European Economic Area (EEA), the Norwegian approach includes implementing the EU’s energy market regime as well as making payments to the EU without having voting rights on the relevant legislation. On the other hand, if the UK decides to follow the Swiss model, it would not be part of the EEA and would have to negotiate individual sector specific bilateral agreements for each policy area under EFTA membership. This path would have heavier consequences since it would make the UK an energy island, requiring additional national efforts in regards to energy supply.

Due to the high level of interdependence and vested interest, the possibility of a specific British model remains. Under such model, there would be negotiations on the UK’s new relationship with institutions such as ACER, CEER, and ENTSO-E, as well as on whether or not to adopt European energy legislation to facilitate the future energy relationship between the UK and the EU.

Furthermore, the electricity interconnections between the UK and other EU countries (e.g. IFA, NEMO, and BritNed) that have been put in place to accelerate the creation of an IEM are not going anywhere. Eleven electricity interconnections between EU countries and the UK are included in the 2015 PCI list. Brexit will not annihilate these projects. However, since the Energy Infrastructure Regulation (EIR) applies to energy infrastructure “located within the Union or linking the Union and one or more third countries”, the uncertainty as to how such projects will be operated and regulated resulting from Brexit will probably slow down their development.

At the same time, the impact of Brexit will be higher on the interconnections between the UK and Norway that are currently also part of the PCI list. Indeed, based on the current EIR, the NSN Link between Norway and the UK would no longer be eligible to be recognized as a PCI since it would no longer involve at least one country that is a member of the EU. While negotiations between the UK and Norway to continue the project are still possible, it would lose the benefits of being a PCI.

Besides the legal and political uncertainties that Brexit brings, there is also a possibility of strong long-term funding impediments for new projects if the European Investment Bank (EIB) loans are cut off or even substantially reduced. For instance, the total EIB investments in the UK amounted to €7,8 billion in 2015, with energy projects accounting for 24% of total investments.

In 2008, the UK passed its own Climate Change Act, which imposes a legally binding target of cutting carbon emissions by 80% by 2050 compared to 1990 levels. Because it is already national law, Brexit is unlikely to have a negative effect on this target. Nevertheless, so far, how to achieve the UK RES and climate targets has been largely influenced by the EU. For example, through the requirement imposed on the UK to generate 15% of its energy from RES by 2020 in the framework of the Renewable Energy Directive. Additionally, in a recent motion for a resolution, the EP is considering adopting a position under which a Brexit deal would not be possible without ensuring the UK follows environmental and climate agreements.

At least in the near future, Brexit is unlikely to have a serious impact on the energy sector since the current frameworks and regulations will continue to apply until the UK is no longer a member of the EU. Afterwards, the exact impact Brexit would have on the European and British energy sectors and framework is difficult to predict mainly because a number of outcomes to the highly political negotiations are possible, each leading to different regulatory and market options for the future relationship between the UK and the EU.

The main people in the process of arranging the future relationship between the UK and the EU

 UK

Theresa May – UK Prime Minister.

David Davis – Secretary of State for Exiting the European Union, main negotiator on the British side.

EU

Donald Tusk – President of the European Council, who will announce the general guidelines agreed between the EU-27.

Michel Barnier – Chief Negotiator for the EU (proposed by the EC), in charge of the preparation and conduct of the negotiations with the UK.

Guy Verhofstadt – Chief Negotiator for the EP, in charge of preparing the position of the EP and conducting the negotiations on its behalf before the vote on the final deal.

Brexit Timeline

29 March 2017: British PM starts the withdrawal process triggering Article 50 of the Lisbon Treaty.

March-April 2017: European Council prepares guidelines on the EU’s position.

29 April 2017: EU-27 Summit – guidelines are officially voted and agreed upon.

May-June 2017: EU-27 formally nominate the EC as its negotiator with a legal mandate. The EC then makes a proposal, which the Council discusses and the EU-27 ministers approve with the consent of the EP. This is a crucial moment for the EU: negotiations with the UK cannot start before completion of this step.

May 2017: Final version of the Great Repeal Bill announced in the Queen’s speech, providing the legal continuity for the UK after Brexit. This legislative measure will repeal the European Communities Act of 1972 and will incorporate EU law into British domestic law (if appropriate and practical). This is an important moment for the UK: the government cannot start amending or repealing laws that it does not agree with before this step. These legislative measures will come into effect once Britain is no longer a member of the EU.

June 2017: Possible start of formal face-to-face negotiations.

May-September 2017: Although not directly connected with the Brexit negotiations, the French and German elections could influence the process by changing the political leadership of two major European countries. France elects its President in a first round on 23 April and a second one on 07 May, followed by legislative elections on 11 and 18 June, while Germany goes to the polls on 24 September to elect its new federal government.

October 2018: Michel Barnier’s deadline for negotiating an agreement.

March 2019: Deadline for the vote and ratification by the 27 Member States, the European Council, the EP, and the British Parliament on the British departure deal.

April 2019: British withdrawal from the EU institutions should be finalised.

Links:

Harvard Business Review

Financial Times (i)

European Commission

Financial Times (ii)

Herbert Smith Freehills

Financial Times (iii)

The Guardian

Royal Institute Elcano

Politico (i)

Politico (ii)

Norton Rose Fulbright