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Brexit and Energy

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The European Union (EU) and the United Kingdom (UK) concluded a Trade and Cooperation Agreement (TCA) at the end of December 2020 to govern their new relationship as from 1 January 2021. Such agreement was necessary because the UK left the EU on 31 January 2020 and the transition period following that 'Brexit' ended on 31 December 2020. The TCA has been provisionally approved by both the EU and the UK. Final approval is expected by 1 March 2021. 

By means of the questions and answers below, the energy section of the TCA (Part 2, Heading 1, Title VIII) is being briefly discussed.

 

Why was it so important to reach an agreement on energy?

 

The EU's internal energy market ensures security of supply of electricity, gas and oil and enables a free flow of energy throughout the EU based on infrastructure and without too much of technical or regulatory barriers. When it comes to energy, the EU and the UK are interlinked, thanks to so-called ‘interconnectors’ (electricity cables such as Nemo Link and gas pipelines such as the UK Interconnector) running between the UK and continental Europe. Currently, the UK is a net importer of energy, with the EU providing approximately 5-10% of its electricity supply and 12% of its gas needs. This energy inter-dependency made an agreement between the EU and the UK necessary.

 

What has changed since 1 January 2021?

 

As the UK left the EU's internal energy market, energy trades over electricity interconnectors between the EU and the UK are no longer managed through existing Single Market tools, such as market coupling, as they are reserved to EU member states.

The UK is also no longer part of the EU's joint action against climate change. It will by consequence no longer benefit from certain financial support that EU member states receive (for example, to develop and deploy low-carbon technologies). The UK also left the EU's Emissions Trading Scheme (EU ETS) and is thus excluded from its effort-sharing arrangements which allow member states to share the burden of meeting decarbonisation targets.

Moreover, the UK also left the European Atomic Energy Community (Euratom) – the Single Market for trade in nuclear materials and technology – which ensures the security of atomic energy supply and enables the pooling of knowledge, research, infrastructure and funding of nuclear energy.
 

What is covered by the TCA when it comes to energy?

 

A new framework was established between the EU and the UK regarding their future cooperation in the energy field, ensuring the efficiency of their cross-border trading. Also a framework was established regarding the cooperation in the fight against climate change, as well as provisions for cooperation in the development of offshore energy. In addition, a separate agreement between Euratom and the UK provides for cooperation on nuclear safety and peaceful uses of nuclear energy.

 

Are any measures foreseen to ensure a ‘level playing field’ within the energy sector?

 

Indeed, the TCA's level playing field provisions, including those on social and environmental issues, apply to the energy sector. Next to that, specific provisions in the TCA exist that aim to create a level playing field in the energy sector. All these provisions and measures serve the purpose of encouraging open and fair energy trade and cross-border energy investments and ensuring that a proper level playing field actually applies to the energy sector.

Examples of those principles and provisions relate to: subsidies to the energy sector, the promotion of renewable sources in a non-discriminatory manner, the prohibition on export restrictions, provisions on authorisations for exploration and production (which are aimed at ensuring the respect of important safety and environmental standards), etc.
 

What about energy trading?

 

Both parties have an interest in the continuation of cost-efficient, clean and secure supplies of energy that are essential to the functioning of their respective economies.

As the UK no longer participates in the internal energy market of the EU, it will have to trade with the EU on third-country terms. Nevertheless, the TCA foresees the possibility to develop separate arrangements for trade over interconnectors, based on a coupling model.

The TCA also includes the following:

  • provisions that guarantee the non-discriminatory access to energy transport infrastructure and a predictable and efficient use of electricity and gas interconnectors;
  • a new framework for cooperation between EU and UK Transmission System Operators (TSOs) and energy regulators (given that the UK will no longer participate in the European Network of Transmission System Operators for Electricity and Gas);
  • provisions that regulate subsidies to the energy sector to ensure they will not be used to distort competition;
  • provisions committing the Parties to ensuring the security of supply.

 

What about offshore renewable energy?
 
 

The TCA contains provisions for cooperation in the development of offshore energy, with a focus on the North Sea. The EU and the UK will continue to cooperate in this area, building on the North Sea Energy Cooperation, a platform developed by the EU, a number of its Member States and Norway to develop the use of renewables in this region. The scope of the cooperation in the area of off-shore energy envisaged by the TCA reflects the EU's Strategy on Offshore Renewable Energy, as presented on 19 November 2020, in which the Commission proposes to increase Europe's offshore wind capacity to at least 60 GW by 2030 and to 300 GW by 2050.

 

Is the UK still bound by EU climate change targets and policies?
 
 

No, the UK will define its own climate change targets and policies. However, the TCA establishes an ambitious framework for cooperation in the fight against climate change.

Under the TCA, both parties agree that the fight against climate change, and in particular the 2015 Paris Agreement on climate, constitute an essential element of their partnership. Any violation of this essential element by one Party gives the other Party the right to terminate or suspend all or parts of the TCA. The EU and the UK also reaffirm their ambition to achieve economy-wide climate neutrality by 2050.

It is also included in the TCA that the current level of climate protection in the EU and in the UK will continue to be upheld. This means that both sides have agreed to ensure that, at a minimum, the level of climate protection in place at the end of the transition period shall be guaranteed also in the future. 
 

What are the consequences of the UK leaving the EU Emissions Trading System (ETS)?

 

The UK no longer participates in the EU's Emissions Trading System, but has undertaken to implement a system of carbon pricing as of 1 January 2021. The EU and UK committed to ensure that their carbon-pricing systems cover greenhouse gas emissions from electricity generation, heat generation, industry and aviation. Also, the Parties will consider to link their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness, for instance by adding sectors, such as buildings. This is subject to an agreement to be negotiated separately in the future.
 

Our dedicated Lydian team is ready to assist you with any questions you might have regarding Brexit. 

Contact us with all your questions on brexit@lydian.be

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