The draft Withdrawal Agreement: implications for energy

Posted in Energy The Withdrawal Agreement

On 14 November 2018, following agreement between negotiators for the European Commission and the UK, the Government published the draft agreement on the withdrawal of the UK and Northern Ireland from the EU and the European Atomic Energy Community (Euratom), as well as an outline of the Political Declaration on the UK’s future relationship with the EU. Our blog post on the terms of the Withdrawal Agreement is available here.

If the Withdrawal Agreement passes every obstacle, it will come into force in time for the UK’s departure from the EU on 29 March 2019 and implement a transition period which is set to end on 31 December 2020 (unless extended for which a mechanism is provided under the Withdrawal Agreement). For the period post-2020, the UK and EU intend to establish agreements which will govern future arrangements between them in line with the Political Declaration. If an agreement is not in place by the end of the transition period, a UK-wide backstop would come into effect.

The Withdrawal Agreement and Political Declaration address certain aspects of the effect of Brexit on the energy industry, in particular with respect to matters relating to Euratom, Northern Ireland and state aid.

Euratom

Treatment of Euratom related issues beyond the transition period has seen limited change compared with the terms published in the draft Withdrawal Treaty in March 2018 (for further information, see our blog post The Euratom aspects of the EU draft Withdrawal Treaty). The only outstanding provision identified in the draft of March 2018 relates to ownership, rights of use and consumption of special fissile materials under Article 79 (now Article 83), and this is the only provision which has undergone substantive amendment. However, the changes are mainly clarificatory in nature, rather than changing the underlying principles of the previous draft. The previous proposal that, following the end of the transition period, special fissile materials present in the UK will cease to be the property of Euratom and will become property of the persons or undertakings that hold the unlimited right of use and consumption of those materials, has been adopted, as has the principle that the Community will continue to have all rights arising under the Euratom Treaty from ownership by a Member State or any persons or undertakings established in a Member State pursuant to Article 86 of the Euratom Treaty.

The specific examples of such rights have been adjusted. In particular, the provisions that the Community should have the right to approve the sale of such special fissile materials to any person or undertaking established in the territory of the UK or a third country before that sale takes place, and to approve the transfer of such material to a third country before the transfer takes place, have been removed. Instead the Withdrawal Agreement clarifies that Article 20 of the Commission Regulation (Euratom) No 302/2005 applies, requiring advance notice to be given to the Commission if any source or special fissile materials are exported to a third country, where the consignment exceeds one kilogram in total or in any 12 month period and reasserts the authority of competent authorities of Member States to authorise the export of such materials to a third country in accordance with Article 9(2) of the Council Regulation (EC) No 428/2009.

Northern Ireland protocol

The Northern Ireland Protocol applies if and to the extent that the EU and the UK have not reached agreement on the future relationship of the UK and EU by 31 December 2020. As it relates to energy matters, the so-called backstop, designed to avoid the need for a hard border between Ireland and Northern Ireland, therefore extends to arrangements in relation to wholesale electricity markets in the event no agreement is reach on those aspects of the future relationship .

Article 11 of the Protocol provides for the continued application of certain EU laws which underpin the single electricity market (SEM), in order to enable it to continue to operate should there be a delay in agreeing the terms of a permanent, subsequent arrangement. Annex 7 lists the EU laws which will continue to apply including the electricity regulation (714/2009/EC) and the electricity directive (2009/72/EC) and the directive establishing the scheme for greenhouse gas emissions trading (2003/87/EC) (the EU ETS). The Protocol clarifies however that these will only apply insofar as they apply to the generation, transmission, distribution, and supply of electricity, trading in wholesale electricity or cross-border exchanges in electricity. Any provisions relating to electricity retail markets and consumer protection are expressly excluded (so policy measures such as UK government the gas and electricity retail price cap will be unaffected). This also means that no EU laws relating to gas markets will apply as part of the backstop arrangements (as in practice the Irish and Northern Irish gas markets are separate).

Also of interest to the energy industry is the framework offered by Articles 6 and 10 of the Protocol, establishing that certain environmental principles and provisions detailed in Annexes 4 and 5 will apply as part of the backstop arrangements. These include the principle that the level of environmental protection is not reduced below the level provided by the common standards applicable within the EU and the UK at the end of the transition period, including those related to environmental impact assessment, air quality and climate change. As part of this agreement, the EU and the UK also agree to take necessary measures to meet their respective commitments under international agreements, such as the Paris Agreement. The UK also undertakes to implement a system of carbon pricing which is at least as effective as the EU ETS.  In addition, Annex 7 provides that specific laws shall be applicable in Northern Ireland as part of the backstop arrangements including to energy labelling and fuel quality.

State aid

The application of EU state aid rules will also continue to be relevant in the backstop arrangements. Following Brexit, the UK has confirmed that it intends to follow EU state aid rules on an ongoing basis, with the Competition Markets Authority (CMA) replacing the European Commission’s enforcement role. However, UK and EU rules will be very closely linked for at least the duration of the backstop (for more information, see our blog post The Draft Withdrawal Agreement – UK and EU institutions to work closely together on competition and state aid after Brexit).

Political Declaration, an insight into the future relationship of the UK and EU

In the Political Declaration published alongside the Withdrawal Agreement, the UK and EU have provided further clarification as to what we can expect to see from an agreement governing the future relationship of the parties.

The Political Declaration sets out the intention for Euratom and the UK to enter into a “wide-ranging” Nuclear Cooperation Agreement (NCA). Information on the contents of this agreement has not yet been provided, but the reference to a wide-ranging agreement suggests that Euratom may be aligned with the UK’s desire to enter into an NCA that goes beyond any of Euatom’s existing NCA’s to establish a close relationship between Euratom and the UK. The Political Declaration also refers to the reassessment of authorisations and Euratom Supply Agency approvals of existing contracts for the supply of nuclear material, a reminder of the uncertain status of existing agreements if the UK exits the EU and Euratom on 29 March 2019 without a Withdrawal Agreement in place.

It is also indicates that the UK and EU plan to develop a framework that will facilitate technical cooperation between electricity and gas network operators to ensure security of supply and that efficient trade over interconnectors over different timeframes continues. Furthermore, the Declaration contemplates the possibility of future cooperation between the UK and EU on carbon pricing, by linking a UK-based greenhouse gas emissions system with the EU ETS.

These sign-posts as to the future direction of policy are welcomed, but also highlight the importance of the next stages of negotiation for the industry.

Brexit: planning for the future as negotiations continue

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