Conclusions and recommendations
The Internal Energy Market
1.We have heard evidence from across the energy and wider industries that access to the Internal Energy Market is important for secure, clean, and affordable UK energy supply, and that it is in the interests of both UK and EU consumers to facilitate the most efficient sharing of energy resources established through the Internal Energy Market. (Paragraph 37)
2.There are some technical differences between the UK and EU energy systems, and therefore there is a potential long term risk of the UK losing influence on the design and detailed rules underpinning the Internal Energy Market in order to access and share energy resources. Some witnesses have also raised concerns that network charges and the UK Carbon Price Floor may be distorting competition in favour of interconnection and continental generation. (Paragraph 38)
3.We believe that membership of the Internal Energy Market has been beneficial to UK and EU consumers and has helped provide flexibility and certainty to the supply of energy. We therefore agree with the Government’s intention to retain as free as possible access to this market and the intention to remain an influential player on energy in the EU. (Paragraph 39)
4.We recommend that the Government seeks continued access to the Internal Energy Market, with no accompanying tariffs or barriers to trade. This should include continued participation in the trading arrangements established by the European Network Codes to ensure the most efficient operation of UK interconnectors. (Paragraph 40)
5.We recommend that the Government should seek continued UK influence over the rules of the Internal Energy Market. In particular it should explore continued full membership of the technical institutions for developing the detailed rules of the Internal Energy Market. (Paragraph 41)
Northern Ireland
6.The free trade of energy across the island of Ireland and efficient use of interconnection with Great Britain are of critical importance to Northern Ireland, which is reliant on imports from the Republic of Ireland and Great Britain for gas and power supply. Any disruption to the development of and trading within the Single Energy Market of the island of Ireland (SEM), and the ongoing implementation of the Integrated Single Energy Market (I-SEM) project, may have serious implications for consumers across the island of Ireland. (Paragraph 51)
7.We recommend that the Government protect the continued operation of SEM and implementation of the I-SEM project, through the UK’s wider access to the Internal Energy Market or alternatively through special arrangements for the island of Ireland. (Paragraph 52)
EU Emissions Trading System
8.Emissions Trading Systems are in theory the most effective means of reducing emissions at lowest cost. The UK and EU benefit by being part of a wider system able to import and export carbon allowances to reduce emissions in a way that is most cost efficient. The EU ETS is also a good example of international collaboration and ambition to tackle climate change. In practice, the EU ETS is performing poorly, due to a low target and domestic policies causing oversupply of EU ETS permits. We share concerns that not enough is being done to protect UK industry from carbon leakage, in particular due to the unilateral UK Carbon Price Floor. (Paragraph 65)
9.The 5th Carbon Budget adopted in 2016 was calculated assuming ongoing UK participation in the EU ETS. If the UK leaves the EU ETS, the Carbon Budget will need to be revised upwards in order for the UK to remain on a cost-effective path to meeting our target of an 80% emissions reduction by 2050. (Paragraph 70)
10.We recommend that—if the UK leaves the EU ETS—the Government revises the 5th Carbon budget, on the advice of the Committee on Climate Change. (Paragraph 71)
11.It is not clear that there are as yet any alternative options to membership of the EU ETS that could deliver our emissions reduction target at least cost. The most realistic aim should be a more ambitious EU ETS, with permit prices and the UK carbon price floor aligning across the EU to ensure the most cost efficient and competitive reduction in overall carbon emissions. (Paragraph 75)
12.We recommend that the Government seeks to retain membership of the EU ETS until at least end of Phase III in 2020, and that it seeks to negotiate longer term membership of the EU ETS on the condition of commitment to future reform. (Paragraph 76)
13.If sufficient reforms to the EU ETS do not appear achievable, we recommend that the Government considers alternative options, such as establishing a separate UK system linked with wider international schemes. We further recommend that the Government should not seek to leave the EU ETS until it has established clear and well-tested alternative approaches which can deliver our emissions reduction targets at low cost and without destabilising investment or undermining the UK’s commitment and ambition to tackle climate change. (Paragraph 77)
Euratom
14.The Government’s objective to leave the jurisdiction of the European Court of Justice means that it is politically unfeasible for the UK to remain a member of Euratom in the long term, but a temporary extension to our membership—if legal—would allow time for new arrangements to be put in place. We are not aware of any substantive arguments in favour of leaving Euratom made either during the referendum campaign or afterwards. This outcome seems to be an unfortunate, and perhaps unforeseen, consequence of the Prime Minister’s decision to leave the jurisdiction of the European Court of Justice. Safeguarding nuclear energy is a public policy area with a unique level of risk and therefore requires a robust legal regime. We note that the necessity of leaving Euratom is subject to legal uncertainty, but that uncertainty puts the continuing operation of the nuclear industry in the UK at risk. The Government therefore has a responsibility to resolve this matter as urgently as possible. (Paragraph 85)
15.Exclusion from Euratom’s research programmes could disadvantage national nuclear research, limit the UK’s future access to global developments in fusion, and reduce the substantial business opportunities for UK firms supplying Euratom research projects. The Government should explore options to maintain the benefits of our existing research cooperation with Euratom, such as third party membership. Special consideration should be given to funding arrangements that would allow continued operation of, and access to, world-leading research projects including JET and ITER. (Paragraph 95)
16.The nuclear industry has expressed strong concerns that new arrangements will take longer than two years to set up. Ministers have not been able to allay these concerns. An interval between the cessation of our Euratom membership and the entry into force of new arrangements could severely inhibit nuclear trade and research cooperation. We recommend that the Government seeks to delay our departure from Euratom. This would give the nuclear industry a realistic window for setting up alternative arrangements—including safeguards and international nuclear cooperation agreements—so as to minimise any disruptions to trade and threats to power supplies. (Paragraph 99)
17.If the option of remaining a Euratom member proves untenable, we recommend that the Government seeks a transitional agreement to retain our existing arrangements until new arrangements can be put in place. The duration of this agreement may need to be longer than the three year transitional period proposed by the European Parliament. (Paragraph 100)
Investor confidence and the future UK energy system
18.We recommend that the Government provides a clear and long term vision for the UK energy sector to support investor confidence, and this should underpin its negotiating objectives on energy and climate change. (Paragraph 114)
19.The UK energy sector currently receives substantial funding from the EU, for infrastructure projects and for research and development. Maintaining collaboration with the EU in funding and research and development is important for investment in, and long term development of, our energy system. These are also opportunities for the UK to increase domestic funding and wider international collaboration in the energy sector to support the UK as a leader in low carbon technology. We recommend that the Government should seek ongoing access to EU financial institutions and funds and continued collaboration on science and technology. Where this is not possible, we recommend that the Government seeks to develop credible alternatives to ensure that the UK does not lose out in these areas. It should also seek to expand domestic opportunities for research and development, and wider international collaboration. (Paragraph 120)
20.Leaving the single market may increase overall energy costs through additional tariffs or other barriers to wider supply chains. (Paragraph 123)
21.We recommend that the Government, as part of its negotiations, seeks arrangements to ensure that the UK energy sector can access a skilled and mobile workforce, while recognising public concerns about migration levels. (Paragraph 128)
Wider European legislation: energy efficiency and consumer protection
22.A reduction in VAT on energy efficiency products would support consumers in using less energy. This would help to address both fuel poverty and decarbonisation objectives. We recommend that the Government reduces VAT on energy efficiency products after the UK leaves the EU. (Paragraph 137)
23.EU-derived polices have contributed to significant improvements in the energy efficiency of buildings and products, with benefits in terms of emissions reductions, reduced household bills and consumer protections. A small number of organisations have called for changes to EU energy efficiency policies, but in general there is widespread support for maintaining the status quo. The Government should consider retaining the majority of our EU-derived energy efficiency regulations, due to their economic, social and commercial benefits. (Paragraph 140)
24.Industry would in particular prefer European energy product standards to be retained. These are likely to be applied in practice, due to the continuing need to trade with EU countries. If our formal standards diverge too far from those applying in European countries, there is a risk that the UK could become a dumping ground for energy inefficient products. (Paragraph 141)
25.We recommend that the Government retains or mirrors European energy product standards for the immediate future at least, and should also, as far as possible, maintain routes to influence their development, for example through active UK participation in the European standards bodies. Any potential divergence from European energy product standards should be carefully evaluated, to avoid undermining consumer protection and competitiveness. (Paragraph 142)
Cross-cutting issues for energy and climate change policy
26.We agree with stakeholders, and the Secretary of State, that business as usual should generally be the way forward as far as possible for energy and climate change policy. (Paragraph 145)
27.We recommend that the Government seeks to avoid disruption to the energy sector and the domestic climate change agenda. Arrangements mirroring the status quo should be implemented as far as possible. Furthermore, the Government should seek to provide clarity, stability and foresight on domestic policy to support investment, including a long-term vision, sectoral aims and dedicated funding. (Paragraph 146)
28.Brexit must not be allowed to distract the Government from the delivery of essential and long-term domestic policy decisions such as the Clean Growth Plan. These are of paramount importance to the sector. Many witnesses asserted that the Government can and should boost investor confidence across the energy sector by providing clarity, stability and foresight on the direction of, and future changes, to its long-term domestic policy. Given that the Government will retain control over domestic policy throughout the negotiations, there is no justification for further delay to decisions which are necessary to facilitate much-needed investment in the UK energy market. The Government must continue to advance the delivery of domestic energy and climate change policy without delay, including publication of the Clean Growth Plan. (Paragraph 147)
29.Whilst the details of our exit agreement will necessarily remain uncertain for the immediate future, we are disappointed that the Government has been unwilling to announce its overall objectives in respect of energy and climate change. Such an indication would better enable stakeholders to adjust their investment and operational plans. We recommend that the Government publishes its overall objectives in the field of energy and climate change policy without delay. (Paragraph 149)
30.It is right for the Government to note the benefits of UK participation in EU energy and climate change initiatives for the remaining 27 Member States. However, given the stated position of the European Council, the Government should be realistic and not rely on these benefits to provide undue leverage. (Paragraph 153)
31.We recommend that the Government prioritises the establishment of new joint dispute resolution and enforcement arrangements with the EU. (Paragraph 154)
32.We welcome the Government’s published intention to retain UK participation in European regulatory bodies. We recommend that the Government seeks to maximise the extent of our influence in these bodies, such as in respect of voting rights and participation in working groups. (Paragraph 156)
33.We further recommend that the Government seeks to maximise other opportunities to retain influence in EU and European bodies, for example through membership of the European standards bodies, regulators’ associations and industry associations, and by increasing the resources of the UK energy and climate change delegation in Brussels. (Paragraph 157)
34.In all cases, it will be important to engage proactively with the development of new EU policies throughout the negotiation period, to ensure that the laws we adopt under the Great Repeal Bill support our national policy ambitions and represent a good deal for the UK energy industry. We recommend that the Government engages proactively with the development of new EU policies throughout the negotiation period. (Paragraph 158)
35.We welcome the Government’s intention to retain existing EU law at the point of departure, through the Great Repeal Bill. We recommend that existing membership of energy-specific institutions, such as the Internal Energy Market and the EU ETS, be retained, at least as a transitional arrangement, until alternatives can be developed in detail. (Paragraph 161)
4 May 2017