72.The UK energy sector has extensive links with the EU through trade, directives and interconnection. Successive UK Governments have championed the liberalisation and decarbonisation agendas within the EU, including the development of the single market in energy. A larger, harmonised energy market with fewer trade barriers should in theory promote competition, reduce consumer prices, and increase security of supply. The 2013 House of Lords EU Sub-Committee D report, No country is an energy island: Securing investment for the EU’s future, concluded that there are “clear benefits to be derived from working within the EU on the energy challenge”.
73.With regards to climate change, the UK has committed itself to action through national and international means. Domestically, the UK has in place the Climate Change Act 2008, which includes a commitment to an 80% reduction in emissions by 2050 relative to 1990 levels. The Act also established a system of five-yearly “carbon budgets”, as stepping stones along the way. Internationally, the UK as an EU Member State is currently subject to a number of EU climate-related directives. It is also a signatory, through its EU membership, to the EU’s nationally determined contribution to the 2015 UN climate change agreement (the “Paris Agreement”).
74.The Committee on Climate Change (CCC) has published its assessment of the impact of the vote to leave the EU on UK climate policy. It noted that the UK, alongside other Member States, has played a key role in developing mechanisms to control emissions, particularly where a co-ordinated approach has made sense. It concluded:
If these mechanisms continue to be strengthened through the 2020s as required by the EU’s climate ambition they would cover 55% of the emissions reduction required in the UK to 2030. In areas where these are working effectively, the UK should either remain in these schemes (where coordination continues to make sense) or replicate them at UK level.
According to the CCC, areas of effective working include product and efficiency standards, the EU Emissions Trading System and sectoral targets, such as biofuels uptake.
75.In this chapter we set out our stakeholders’ views on the implications of the vote to leave on EU-derived energy and climate change policies, and for the UK’s role in international climate change negotiations. We particularly focus on seven areas:
At the end of the chapter we provide a brief summary of views on other EU-derived policies and legislation, comment briefly on the proposal to repeal the European Communities Act 1972, and set out some guiding principles for the exit negotiations.
76.The future of the UK’s involvement in the EU Emissions Trading System (EU ETS) prompted considerable debate among those submitting evidence. Under the ETS a cap is set on the amount of certain greenhouse gases that specific installations can emit. Over time the cap is lowered so that total emissions fall. Companies receive or buy emission allowances which they can trade with one another as needed. A robust carbon price within the System is an important driver for investment in climate change mitigation technologies.
77.At the start of the decade, fluctuations in the price of carbon in the form of EU ETS allowances resulted in uncertainty for investors in low carbon technologies. In response the then coalition Government introduced in 2013 a ‘Carbon Price Floor’ (CPF) of £16 per tonne. This means that UK industry effectively pays a top-up if the EU market price for carbon falls below this level. Following a fall in the EU market price of carbon to £4, the Government announced in 2014 that the UK’s CPF would be capped at £18 per tonne from 2016 to 2020 to limit the competitive disadvantage faced by business and to reduce energy bills for consumers. At the time of writing the EU carbon price was €6, or £5.30. This means that while companies based across the EU pay this amount to emit a tonne of carbon dioxide, UK companies also pay an additional £12.70 to HM Treasury for every tonne emitted.
78.Most respondents agreed on the principle of emissions trading as a cost-effective means of decarbonisation, although recognised the need for further reforms to the system. The EU ETS was described as “the single most important policy instrument for the potential reduction of greenhouse gases in Europe”, and it was pointed out that emissions trading would account for 50% of the emissions reduction required by 2020 under the Climate Change Act. In this section we discuss the benefits of remaining an active participant in the EU ETS, as well as alternatives such as developing a UK ETS that could link to the EU System or introducing carbon taxes.
79.On the benefits of remaining in the EU ETS, a key argument we heard was that the UK profited because it was a relatively small partner in the ETS and could take advantage of the cost-saving opportunities and increased liquidity that a larger market created. Given the UK’s influential voice in the development and refinement of the ETS, its remaining a part of the ETS was also considered beneficial to the System’s functioning. Stakeholders thought that the UK remaining in the System would help stabilise the long-term price signal for carbon and ensure the constant and cost-effective reduction of carbon in the European Economic Area. The Committee on Climate Change noted that the System makes up 82% of industry’s required emissions reduction by 2030 and concluded that “the ETS has the potential to be a least-cost approach without creating competitiveness challenges for industry”. It was pointed out that improvements in the System, such as clearer price signals and improved governance, were due to be introduced in phase IV (from 2021 onwards) and the UK should remain in the System to take advantage of these. The risks of remaining part of the EU ETS without a voice in its future development were played down, given that decisions about the next phase, applying from 2021 to 2030, would be made in 2017 when the UK as an existing EU member could still play a full part in negotiations and decisions. We were also reminded that UK-based energy intensive industries in construction product manufacturing tend to be part of large European or international companies, so leaving the EU ETS would be “highly complex in respect of their company carbon trading policies”. One environmental organisation cited some potential advantages of leaving the scheme, including an end to net carbon accounting so that emissions reduction had to be delivered domestically. But on balance it concluded that political reality, the possibility of lower climate ambition and the potential to improve the EU ETS meant the UK should remain in the System.
80.Stakeholders also considered the future of the CPF. We heard that any decision to leave the EU ETS might necessitate reform of CPF. If investors thought one price setting mechanism was more dependable than the other, “this could influence the bankability of carbon pricing as an investment signal if the CPF were used as a substitute for the EU ETS if we left the latter scheme”. The CPF was also considered to have led to higher generation costs, distorted price signals and unnecessarily large imports via interconnectors of cheaper electricity not paying an equivalent carbon price. The Government was therefore urged to ensure the CPF was more aligned long term with the EU ETS. Some called for its outright abolition, while others valued it for the signal it sent to other countries on the UK’s commitment to climate change, and the revenue it could generate to potentially replace EU funding for low carbon research and development.
81.We heard that the international direction of travel was towards global expansion of linked emissions trading schemes, and that the EU ETS was a key part of meeting short- and long-term emissions reduction targets. The most obvious alternative to remaining in the EU ETS is for the UK to establish its own ETS, linked into the wider EU ETS market, and potentially to other global ETSs. A linked system was considered by a number of stakeholders as the second-best option, and if pursued should be fully compatible with the EU ETS, bringing its features in line with EU directives, as Norway did prior to joining the EU ETS in 2007. When considering the merits of implementing a UK ETS linked to the EU System, decision makers were urged to bear in mind the ongoing implementation delays that Switzerland has experienced with its own linked system. It was also suggested that setting up a domestic scheme would be “costly and complex”.
82.EEF, representing manufacturers, said a linked system might not necessarily be the best course of action. Instead it recommended that Government and industry work together to assess the most cost-effective way of meeting emissions reduction targets, with any scheme aiming to better incentivise industrial decarbonisation, reflect the different abatement potential between sectors and the impact of embedded emissions from imports. Some of the energy intensive industries suggested that a range of alternatives might be available which could be more specifically designed around sectors of the UK economy. One suggestion was that sites or sectors could be given individual targets similar to the ‘Climate Change Agreement’ scheme. The British Ceramic Federation argued that a scheme based on site targets would “reduce the dependence on the vagaries of the market price of carbon and allows each installation and/or sector to agree a realistic long term target while protecting against loss of manufacturing to other countries”.
83.We also heard that carbon pricing could be implemented as a direct carbon tax. Whilst favouring the option to remain in the EU ETS for many of the reasons set out above, Citizens Advice noted that a direct carbon tax might be “administratively simpler, able to target (if desired) a broader set of greenhouse gas emitting activity, and should still have broadly similar economic and cost implications for both affected industry and for consumers”. We did however hear other concerns that a UK-only carbon tax would add costs to consumers and, without compensation, reduce the competitiveness of UK products.
84.The EU Emissions Trading System (ETS) is highly valued as a policy instrument for reducing greenhouse gas emissions across the EU. The System requires reform but stakeholders are optimistic that the next reformed phase of the EU ETS—with clearer price signals more closely aligned to the UK’s carbon price floor and improved governance—will better incentivise low carbon investment and reduce emissions. Several therefore make the case for the UK’s continued participation in the System after it has left the EU. Government should bear in mind the challenges associated with alternative options. These include the potentially costly and complex option to establish a UK ETS linked to the EU System, and the politically difficult creation of a direct carbon tax. Government must consider the impact of any alternative approaches on consumers and the competitiveness of UK industry.
85.The proposed EU Effort Sharing Decision would establish binding annual greenhouse gas emission targets for Member States and an EU-wide reduction target of 30% (relative to 2005 levels) by 2030. It would include emissions from most sectors not included in the EU ETS, such as transport (except aviation and international maritime shipping), buildings, agriculture and waste. On leaving the EU, the UK would not be bound by Effort Sharing, because it exists to distribute the EU’s collective target and European Free Trade Association (EFTA) states in the European Economic Area (EEA) have their own. We heard however that some such states (Norway and Iceland) intend to participate jointly in Effort Sharing, one reason being to take advantage of ‘flexibility mechanisms’ that may enable states to count emission reductions in another Member State towards their own national targets. The proposed UK contribution is a reduction of 37%, higher than the overall EU target of 30%. Stakeholders pointed out that any UK withdrawal from the scheme would therefore mean that remaining participants had to contribute more to meet the overall non-traded target. One respondent said that retaining the Effort Sharing Decision, alongside a joint ETS policy, would avoid a “burdensome process recalibrating […] already agreed and communicated climate targets”. Stakeholders also explained that the proposed UK target closely aligns with that in the UK’s domestic fifth carbon budget, and that the UK is likely to exceed its proposed EU target so remaining in the Effort Sharing scheme would be cost-effective and not pose a problem to competitiveness.
86.Stakeholders agree that there is little risk to the UK in signing up to its proposed contribution to EU Effort Sharing proposals up to 2030, as it aligns closely with the UK’s domestic targets. Renegotiating these proposals could be burdensome. We note that because of the UK’s higher than average contribution to the proposed target, the onus would be on the rest of the EU to step up its ambition and push forward more stretching emissions reduction targets for the remaining Member States.
87.Together, the emissions reduction achieved in due course through the EU ETS and Effort Sharing Decision make up the 40% reduction target set out in the EU’s Intended Nationally Determined Contribution (INDC) to the 2015 UN climate change negotiations in Paris (COP21). The EU’s 28 members submitted one collective INDC, and the UK’s pledge was part of this submission; there was no individual UK INDC. In October 2016 the European Parliament formally approved the agreement’s ratification, paving the way for the EU Council to adopt the Decision and, in parallel, for Member States to ratify the Paris Agreement individually. The Prime Minister announced in September that the UK would ratify it “before the end of the year”.
88.We heard that following the vote to leave the EU there were “no obvious implications” for the UK’s COP21 pledge, given that Parliament has agreed to the fifth carbon budget, which covers the UK’s required contribution to the EU’s INDC up to 2030. On the detail of reviews, modifications and future negotiations, we were also told that the UK could opt to complete the initial phase of the Paris Agreement—up to 2030—without modification; and that the decision over whether and how the UK and EU targets might subsequently diverge—during the second phase, post-2030—would not need to be decided until the 2023–2025 review of Nationally Determined Contributions (NDCs) for 2030, although the question could arise earlier in the 2018–2020 review.
89.One scenario for the second phase of the Paris Agreement also suggested was for the UK and the EU to reach an agreement on joint fulfilment, like that envisaged between the EU and Norway for 2030. Respondents also pointed out that while EEA countries such as Norway and Iceland expect to meet their 2030 targets as part of collective efforts with the EU and its Member States, they submitted their own INDC prior to the Paris negotiations. We were told that, given the UK will have probably left the EU when obligations under the agreement commence in 2021, it too would need to submit its own NDC in due course.
90.There were warnings about the potential implications of the UK leaving the EU bloc, such as a loss of influence in international negotiations. We were also told there would be “substantial benefits” in maintaining alignment with the EU on negotiation positioning. If the UK left, given that it has been reducing emissions faster than the EU as a whole, other EU states would have to increase their efforts to cut emissions, might struggle to deliver on their commitments, or might come under pressure to reduce them. A number of stakeholders referenced the UK’s leading role in recent climate change negotiations. Some advocated a continued joint approach with the EU; others thought the UK alone could continue to exert influence.
91.The recent vote to leave the EU does not change the UK’s requirement to reduce emissions in line with the Paris Agreement and domestic legislation. The required levels of emissions reduction through to the early 2030s, during the fifth carbon budget period, have already been set by the UK Parliament. We have highlighted the prevailing stakeholder view that the Government consider maintaining UK participation in the EU ETS and in the EU Effort Sharing process, both of which will contribute significantly to the EU’s Nationally Determined Contribution up to 2030.
92.The Government should explore the options for maintaining a relationship with the EU on climate change negotiations going forward. After 2030 there may continue to be value in pursuing the joint fulfilment of climate change goals. In this way the UK might retain its positive influence over EU nations and, by maintaining a progressive climate change agenda among that group of nations, exert greater influence elsewhere in the world too.
93.The Internal Energy Market (IEM, also known as the single energy market) is a long-term project to liberalise and harmonise the energy markets of individual EU Member States. Between 1996 and 2009 the EU adopted three legislative packages on market access, transparency and regulation, consumer protection, interconnection, and adequate levels of supply. These have enabled new gas and electricity suppliers to enter Member States’ markets, and have ensured that both domestic and industrial consumers are free to select their own suppliers. Related EU policies focus on the security of energy supplies and the construction of trans-European networks to transport gas and electricity. New ambitions to realise a ‘fully-integrated internal energy market’ were laid out in the EU Energy Union Strategy, launched in February 2015. The fully-integrated IEM will use interconnectors to allow unconstrained trade of energy across the EU, thereby maximising competition.
94.In this section we cover stakeholder views on the future relationship with the IEM, the related issue of European Network Codes which aim to harmonise cross-border trading of electricity and gas, and the special circumstances affecting Northern Ireland.
95.Almost 70% of respondents highlighted the UK’s relationship with the IEM as an importance influence on the future cost, security and decarbonisation objectives of the British energy system. 53% of respondents were in favour of continued access to the IEM or the single market more broadly. 17% noted the importance of the issue, but did not provide a clear preference for the UK’s future relationship. No respondents suggested that the UK should leave the IEM.
96.Respondents claimed that the IEM has provided policy stability, increasing the UK’s ability to attract new energy infrastructure investment, and that continued participation in the IEM would reduce any investment hiatus arising from exiting the EU. The IEM is expected to facilitate the continued use and future construction of interconnectors, and could help to reduce the loss of access to EU funds (discussed further in paragraphs 118 to 120). Stakeholders also thought that participation would enable the UK to capitalise on the economies of scale that a pan-European energy market affords, with noted financial benefits relating to energy storage, cross-border balancing, reduced system redundancy, market coupling and capacity market integration. These views reflect the findings of a Vivid Economics report commissioned by National Grid prior to the referendum. The report explored the potential energy sector impacts of a vote to leave, with a specific focus on the UK’s potential departure from the IEM. It concluded that the greatest risk was higher investment costs, and estimated that the foregone benefits of the IEM could cost the UK economy £500 million per year by the early 2020s. The UK Energy Research Centre and the University of Exeter Energy Policy Group considered Vivid Economics’ analysis to be “broadly plausible… [although] a lot of weight should not be put on a precise figure at this stage”.
97.Participation in the IEM is subject to the acceptance of a wide range of EU legislation and regulations, which the UK has to date played a leading role in developing. Stakeholders were concerned that this influence would greatly reduce if membership to the IEM were rescinded but access to the market retained. Respondents emphasised that while continued access to the IEM is important, this should not mean that the UK is bound by all future developments to IEM rules without the opportunity to shape them.
98.Looking forward, E3G told us that the existing Energy Community Treaty may provide a model for continued IEM participation. The Treaty allows some southern and eastern non-EU Member States to participate in the market, and counts Norway and Turkey amongst its observers. It requires non-EU countries to adopt the EU’s acquis communautaire related to energy, and in return provides technical and investment support with regards to energy security. National Grid proposed that any future relationship with the IEM should include: the free trade of energy; ongoing implementation of existing EU energy packages and network codes; and an agreement for the UK to help develop and to implement future EU policy, codes and market design. National Grid further emphasised that if such a relationship seems unlikely to be secured, the Government will need to conduct a detailed analysis to ensure that risks to the current energy policy framework are understood and minimised.
99.Stakeholders are in favour of continued UK access to the Internal Energy Market (IEM). In deciding the nature of the UK’s future relationship with the market, the Government will need to weigh the costs of associated legislation and regulation against the economic, security of supply and carbon reduction benefits afforded by IEM membership. We recognise that negotiations around this will be affected by broader issues, including freedom of movement. We note that:
100.The European Network Codes (ENCs) are intended to harmonise cross-border trading of electricity and gas. They govern both grid connection and system operation, and take precedence over domestic network codes where differences arise. The ENCs are being developed collaboratively by the Agency for the Cooperation of Energy Regulators (ACER) and the European Networks of Transmission System Operators for Electricity and Gas (ENTSO-E and ENTSO-G respectively), although ultimately it is ACER that makes final recommendations on the adoption of individual codes.
101.Respondents noted that abidance by the ENCs is expected to be a condition of participating in the IEM. Respondents had mixed views on the usefulness of specific ENC rules, and were divided on whether resignation from the ENCs (following the UK’s departure from the EU) would have a positive or negative impact on the domestic energy market. It was noted that large parts of the ENCs are not covered by domestic network codes, and so resignation would leave substantial gaps in the UK’s electricity and gas market design.
102.To date the UK has had considerable influence over the development of the ENCs—as for the IEM—which are modelled on the UK framework. This influence would reduce if the UK loses its representation on ACER, becoming a ‘rule-taker’. However, retention of member or observer status on ENTSO-E and ENTSO-G could allow the UK to participate in ENC development and consultation. In light of these concerns, several respondents recommended that Ofgem seek to retain membership of ACER and likewise National Grid seek to retain membership of ENTSO-E and ENTSO-G.
103.Continued participation in the Internal Energy Market is expected to entail compliance with the European Network Codes (ENCs). Ofgem and National Grid should therefore seek to retain membership of ACER, ENTSO-E and ENTSO-G so that the UK can continue to shape the development of new codes. If on the other hand the UK sought to resign from the European Network Codes, the Government must take care to ensure that resultant gaps in domestic network codes are filled. We set out further conclusions regarding ENCs in relation to interconnectors (see paragraph 117).
104.The governance and operation of Northern Ireland’s energy system differs significantly to that of Great Britain. Energy policy is devolved in the region, and the Northern Ireland and Republic of Ireland electricity markets operate as one under the Single Electricity Market of the island of Ireland (SEM). Northern Ireland is highly dependent on energy imports, with wind being the only indigenous resource exploited at commercial scale. It has an electricity interconnection with Scotland, and is projected to have an electricity supply deficit from 2021. The gas markets of Northern Ireland and the Irish Republic are operated separately, but the networks are physically connected. Northern Ireland has two gas interconnections with Scotland, which supply the majority of the island’s gas.
105.Respondents noted that leaving the EU will have substantial implications for Northern Ireland’s energy system. As an EU Member State, the Republic of Ireland will continue to be subject to IEM legislation, affecting the options available for ongoing operation of the SEM. An added complication is that the SEM is currently transitioning to the Integrated Single Electricity Market (I-SEM), a new model based on the IEM which is expected to deliver economic and security of supply benefits. I-SEM will entail greater physical and financial connection between the electricity systems of Northern Ireland and the Irish Republic, and market players are already making significant investments in preparation.
106.We heard calls for Government to carefully consider Northern Ireland’s particular position as a participant in the SEM, to avoid pursuing trade or energy policy negotiations that unintentionally disadvantage Northern Irish consumers, and to protect investor confidence by providing clarity on Northern Ireland’s ongoing energy policy as soon as possible. It was suggested that negotiations on Northern Ireland’s energy system may require a differentiated approach from Great Britain.
107.Northern Ireland’s electricity system is highly integrated with that of the Republic of Ireland, which will continue to be bound by Internal Energy Market (IEM) rules. The Government should carefully consider how any changes to the UK’s relationship with the IEM will have particular significance for Northern Ireland. It may be appropriate to differentiate between the approach taken for Northern Ireland and that for Great Britain.
108.The UK has been a net importer of energy since 2004. In 2015 the UK imported 6% of electricity consumption and 42% of gas. All electricity imports and 69% of gas imports arrive via interconnectors with Europe. Chatham House emphasised the important role of EU coordination in maintaining the security of energy supplies and price stability. Coordinated investment in infrastructure such as reversing-flow equipment has increased the efficiency of existing pipelines, and helped to ensure that storage facilities are adequately stocked. Coordination in diplomatic relations has increased the UK’s voice in negotiations with major fossil fuel producing nations.
109.The short-term impacts of the vote to leave on electricity and gas supply are expected to be limited. Stakeholders expected energy trading across interconnectors to continue, and noted that the UK has access to diverse gas supplies through pipelines with Europe, LNG terminals and domestic production. Looking forwards to the 2020s, respondents were concerned that increased investor uncertainty arising from exiting the EU may exacerbate existing difficulties in bringing forward new-build electricity capacity. Planned plant closures, delays to new nuclear, sudden reductions in renewable energy support and the failure of the Capacity Market to incentivise new gas had been recognised as serious threats to domestic electricity supply before the referendum.
110.In the longer term stakeholders were concerned that the UK’s departure from the EU could end its involvement with coordinated actions and processes, thereby undermining the security of fossil fuel supplies. Whilst the UK may develop bilateral agreements, its voice may have less diplomatic weight alone than as part of the EU bloc. It could also result in the UK’s exclusion from the EU’s proposed ‘solidarity principle’, a policy designed to ensure that Member States receive immediate assistance in the event of a gas supply crisis. Respondents considered this an important backstop arrangement, with AES UK & Ireland suggesting that if excluded, alternative back-up arrangements may be required to assure future investors of the security of gas supplies. Increased uncertainty could also delay the development of indigenous fossil fuel resources such as shale gas.
111.The UK is heavily dependent on Europe for its electricity and gas imports. Pan-European coordination has helped to improve the UK’s security of supply. The Government should seek to build investor confidence, to avoid exacerbating difficulties in bringing forward investment in new electricity capacity and new indigenous resources. The Government should also examine the role of the ‘solidarity principle’ in managing potential gas crises, specifically how the UK can continue to participate. If excluded from the ‘solidarity principle’ the UK Government must urgently investigate alternative back-up arrangements to ensure security of supply in the event of a crisis.
112.Interconnectors are high-voltage cables and major pipelines that carry electricity, natural gas or oil between countries. They enable energy to be shifted from areas of low demand and low wholesale prices to areas of high demand and high wholesale prices, facilitating cross-border trading and allowing variable renewables to be managed more cost-effectively. Interconnection construction costs compare favourably to those for new generation plant. Expansion of intra-European interconnections is central to the EU’s Energy Union Strategy, with a target for all Member States to have electricity interconnections equivalent to 10% of national generation capacity by 2020.
113.At present the UK has four electricity interconnectors with the EU, with a combined capacity of 4GW. Capacity is due to double by 2020, with construction of interconnectors to France, Belgium and Norway. Plans for additional electricity interconnections are being discussed with Denmark, Iceland and Ireland. The UK also has five natural gas interconnectors to the EU and Norway, as well as direct pipelines between some North Sea fields and non-UK facilities. These allow gas to be delivered to the EU from both the North Sea and LNG tankers at UK terminals.
114.We expressed our support for significant interconnector expansion in our report on Low Carbon Network Infrastructure, which emphasised the important role played by interconnectors in balancing the electricity system. Many respondents were in favour of greater interconnection, however some proposed that interconnector policy should be reviewed, in particular the 10% target. The UK Energy Research Centre considered the UK’s departure from the EU unlikely to halt the construction of new interconnectors.
115.As noted in paragraph 93, the IEM has been specifically designed to facilitate the use and expansion of interconnections. It is unclear what legal arrangements will be required to allow trading across existing and planned interconnectors if the UK resigns its IEM membership. The Government will need to take care to prevent trade from being distorted by any differences in energy market design, for example restrictions that undermine price-driven interconnector flows between the UK and Europe. Further, it is possible that the EU network codes and regulations which currently govern cross-border transactions and system operation will need to be retained—irrespective of our membership—in order for the UK and EU energy markets to remain operationally integrated. Existing gas (and planned electricity) interconnections between Norway and the UK demonstrate the potential viability for the UK of operations outside a direct EU framework. However trading across these has been heavily influenced by EU rules, with which Norway is largely expected to comply. Once outside the EU the UK may therefore be required to abide by EU interconnector regulations with limited power to influence their design.
116.Interconnections improve security of supply, facilitate cross-border trading and enable grid-balancing to be managed more cost-effectively. Substantial expansion of interconnection has been proposed for the coming decade, and we support this. The Government should continue to progress planned and proposed new interconnections with Europe.
117.The European Network Codes (ENCs) may need to be retained to ensure the functionality of energy trading and system operations across interconnectors with Europe. As noted in paragraph 103, Ofgem and National Grid should seek to retain membership of ACER, ENTSO-E and ENTSO-G so that the UK can continue to shape the development of new ENCs. If the UK resigns from the IEM and the ENCs, the Government must take care to ensure that interconnector trade and operations are not distorted by differences between European and UK energy market design.
The EU is also a major funder of low carbon research and development, with 85% of energy funds allocated through Horizon 2020 being earmarked for renewables, energy efficiency and smart grids.
119.Respondents welcomed the Government’s guarantee to underwrite the payment of Horizon 2020 awards made before the UK leaves the EU. However, they also highlighted the need for clarity on the retention of funds awarded by other schemes, and the UK’s longer term access to EU funds and financial institutions. Particular concerns were raised regarding funds for the demonstration of carbon capture and storage. Noting the dependence of some energy projects on EU finance, stakeholders emphasised that if access cannot be preserved, the Government should commit to replacing EU funds and institutions with credible alternatives. Suggestions included the reallocation of funds from the UK’s current contributions to the EU budget, reconsideration of the sale of the Green Investment Bank, and the utilisation of the British Business Bank to fill the gap left by the European Investment Fund (an EIB subsidiary that provides finance to start-ups and venture capitalists).
120.Several stakeholders specifically questioned the extent of EIB finance that the UK might be able to access after leaving the EU. The EIB does lend to non-EU Member States, but 90% of its funds are spent within the EU, based on EU priorities. The UK, however, is one of the Bank’s largest shareholders. E3G suggested that maintaining close links with the EU, and contributing to the EU budget, would increase the likelihood of being able to access EIB finance. RenewableUK noted that if the UK ceases to be an EIB shareholder then the scale of lending received will be considerably reduced. Participation in the Innovation Fund (the successor of NER300, which is administered by the EIB) is expected to be conditional on remaining within the EU ETS.
121.The EU has provided substantial financial support for energy infrastructure and R&D in the UK. The Government should provide clarity to Parliament on whether funds awarded from EU schemes other than Horizon 2020 will be retained and/or underwritten. The Government should also ascertain whether access to EU financial institutions and funds, including but not limited to the European Investment Bank, will be available to British applicants in the longer term. It should develop credible alternatives where this is not possible.
122.One of our previous inquiries, Investor Confidence in the UK Energy Sector, investigated stakeholder concerns about the impact of significant changes to energy policy following the 2015 general election. Submissions to the current inquiry indicated that investor confidence concerns not only persist, but are exacerbated by the additional policy uncertainty created by the EU referendum result. Since the referendum there have already been some suggestions of energy investment decisions being postponed. Looking forward, the Renewable Energy Association observed that investor appetite will also be affected by changes to passporting arrangements and financial regulation arising from the UK’s departure. A sustained period of uncertainty could lead to the deferral of investment in critical infrastructure, with ramifications for future energy security. It could also discourage international investors from developing associated manufacturing facilities in the UK. Stakeholders highlighted the need for assurances on the continuation of existing policy commitments and support mechanisms, as well as clarity on the Government’s long-term energy objectives once the UK has left the EU.
123.The vote to leave has reduced already-weak investor confidence in the energy sector. The Government should promote investment by providing clear signals on the direction of domestic energy policy to be followed throughout, and after, the exit negotiations, for example through the timely publication of a detailed Emissions Reduction Plan.
124.In this section we set out a brief overview of other EU-derived policy and legislation along with issues, raised by stakeholders, which the Government may want to consider as it develops its negotiating strategy.
a)Energy Efficiency Directive: The EU has set itself a 20% energy savings target by 2020 when compared to the projected use of energy in that year. We heard that:
b)Energy Labelling Framework Directive and Eco-design Framework Directive: Two directives that aim to increase the energy efficiency of products, reduce energy consumption, lower carbon dioxide emissions, increase environmental protection, provide consumers with information, and ensure common standards across the EU. We heard that:
c)Energy Performance of Buildings Directive: All new buildings must have nearly zero or very low energy need by 2020. We previously concluded: “Zero carbon homes was a positive and ambitious policy, which could have saved future homeowners money on their energy bills. It should be reinstated. Alternatively, the Government should set out a similar policy that will ensure that new homes generate no net carbon emissions and are inexpensive to heat and light.” We heard that:
d)EURATOM Treaty and regional management of nuclear waste: EURATOM aims to facilitate the development of Europe’s nuclear industries, and to prevent nuclear materials intended for civilian use from being diverted to military use. The feasibility of regional geological repositories for high-level radioactive waste is being explored. We heard that:
e)Regulation of Energy Market Integrity and Transparency (REMIT); Market Abuse Regulation (MAR): REMIT is designed to increase the transparency and stability of EU wholesale energy markets whilst combating insider trading and market manipulation. MAR addresses similar issues, but includes spot commodity contracts and emissions allowances. It has stricter monitoring and disclosure requirements than REMIT. We heard that:
f)Renewable Energy Directive: The EU has a target of 20% final energy consumption from renewables by 2020. It has a further target of 27% by 2030. The 2020 target includes overall national targets, and the UK has sub-targets for electricity, heat and transport. We recently stated: “If the UK misses or reneges on its commitment to the 2020 goals, this will undermine confidence in its commitment to future targets, including the 2050 decarbonisation objective. Whatever the Government’s plans, it must commit to and deliver on credible renewables commitments that maintain consistency with its long-term obligations”. We heard that:
g)Single market: The EU as one territory without any internal borders or other regulatory obstacles to the free movement of goods, and services, capital and people. The question of whether and how to retain access to the single market will be at the heart of the UK Government’s thinking. This will be influenced by wider considerations about the UK’s future relationship with the EU, particularly with regard to the free movement of labour. We heard that:
h)State aid rules: Designed to prevent Member States’ governments providing unfair advantage to specific companies or sectors over competitors in other Member States, unless the advantage is justified for general economic development. We heard that:
i)UK-Norway Framework Agreement on Cross-Boundary Petroleum Co-operation; Offshore Safety Directive (OSD): The Framework Agreement enables cooperation on cross-border North Sea oil and gas projects. The OSD aims to minimise risks from offshore oil and gas operations. We heard that:
j)Vehicle emissions regulations: EU legislation on mandatory emission reduction targets for new cars. By 2021, phased in from 2020, the fleet average to be achieved by all new cars is 95 grams of CO2 per km. We heard that:
125.A large body of climate-related EU legislation currently exists, and this has been transposed into UK law through the European Communities Act (ECA) 1972 and other parent legislation. The Government has recently announced that it will introduce a Great Repeal Bill, which will remove the ECA from the statute book, effective from the date upon which the UK formally leaves the EU. The Government’s intention is that at this point existing EU law would be converted into UK law. We heard some support for the general idea of grandfathering all energy-relevant EU policy into UK legislation, at least as a temporary measure, as this might provide policy stability and bolster investor confidence. However, subject to the details of the outcome of the exit negotiations, concerns have been expressed about the enforceability of retained legislation. Professor Andrew Jordan, from the University of East Anglia, said in July that:
were all the legislation to be grandfathered outside the EU framework—in other words, carried across but without the European Environment Agency, the European Commission and the European Court of Justice—there is a real risk it would become zombie legislation; it would not have that power behind it to keep it updated and properly enforced.
126.EU-derived legislation retained in UK law will need to be reviewed and amended in the light of the UK’s relationship with the EU once it has formally left. It is essential that Parliament has adequate time to fully scrutinise any proposed legislative changes. There are also questions about how relevant such laws will remain once the UK is no longer in the EU, and how enforceable they will be when the directives from which they are derived no longer apply and there is no longer any recourse to the European Court of Justice.
127.The UK’s departure from the EU is not expected to change the general direction of UK energy policy, since this is perceived to be driven primarily by the Climate Change Act 2008, and domestic concerns about supply security and affordability. However, the absence of external enforcement and accountability mechanisms could weaken the imperative to deliver on policy targets. EU energy and climate change policies have historically played an important role in underpinning UK policy and providing a ‘double-lock’ to decarbonisation commitments. This has bolstered investor confidence by providing policy stability beyond the five-year domestic parliamentary cycle. As the UK Government prepares for the exit negotiations, we set out the following guiding principles:
165 House of Lords European Union Committee, 14th Report of Session 2012–13, , HL Paper 161
166 Committee on Climate Change, , October 2016.
167 Agriculture, buildings, transport and waste
168 The gases and sectors covered are: carbon dioxide (CO2) from power and heat generation; energy-intensive industry sectors including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals; and commercial aviation; nitrous oxide (N2O) from production of nitric, adipic, glyoxal and glyoxlic acids; and perfluorocarbons (PFCs) from aluminium production
169 European Commission, ‘,’ accessed 27 September 2016
170 Carbon Capture and Storage Association ( para 8
171 House of Commons Library, , May 2014
172 Carbon Pulse, ‘,’ accessed 6 October 2016
173 Aldersgate Group () para 9
174 Aldersgate Group () para 16
175 Grantham Research Institute at the London School of Economics ( para 6. The UK accounted for only 11% of emissions regulated under the ETS between 2013 and 2015, compared with Germany’s 25%. See also Shell International Petroleum Co Ltd ( p2, and Greenpeace, ()
176 International Emission Trading Association (
177 See for example Ashden sustainable solutions, better lives (; Carbon Capture and Storage Association ( para 8; CPL Industries () para 3; E.ON ( para 16; European Federation of Energy Traders (
178 Committee on Climate Change, , October 2016
179 Engie ( para 4
180 Oil & Gas UK ( para 5b
181 Construction Products Association () para 9
182 Greenpeace (). Net carbon accounting is the process whereby the UK’s non-traded sector (agriculture, waste, transport, buildings) emissions are accounted for, but the emissions attributed to the traded sectors does not correspond to the actual UK territorial emissions in those sectors. Instead it corresponds to the UK’s share of EU ETS cap (the total emissions permitted in the European traded sector)
183 Citizens Advice (
184 E.ON (
185 BASF (
186 Engie ( para 5
187 Vattenfall (; see also Aldersgate Group () para 9
188 Grantham Research Institute at the London School of Economics (; University of East Anglia (; International Emissions Trading Association (; Citizens Advice (
189 European Federation of Energy Traders () para 2
190 European Federation of Energy Traders ( para 2
191 Aldersgate Group () para 18. See also Greenpeace (
192 EEF ( para 8
193 CF Fertilisers, (
194 British Ceramic Federation, ( para 18. See also The Scotch Whisky Association ( para 8
195 Citizens Advice ()
196 Mineral Products Association () para 21.4.3
197 European Commission, , accessed 29 September 2016
198 University of East Anglia, ()
199 University of East Anglia, ()
200 EDF Energy () para 19; Mineral Products Association, () para 23; Energy UK, () para 16
201 Vattenfall UK (). See also E3G () para 4
202 EEF () paras 11, 12; Energy UK () para 16; RSPB ()
203 European Commission, , 4 October 2016
204 The Guardian, , 20 September 2016
205 techUK () paras 4,5
206 University of East Anglia (
207 EEF () para 19
208 Greenpeace (
209 E3G (
210 Ashden sustainable solutions, better lives, (. The UK reduced its annual emissions by about 38 per cent by 2015 compared with 1990 whilst the EU’s emissions as a whole were 24.4 per cent lower in 2014 than they were in 1990.
211 Max Fordham LLP ( para 4; UK Health Alliance on Climate Change ( para 2
212 UK Environmental Law Association ( para 2.4.3
213 Engie () para 12; Energy UK ( para 14; Greenpeace (
214 Aldersgate Group ( para 24; UK Petroleum Industry Association (, EDF Energy ( para 18
215 The term ‘single energy market’ is interchangeably used by respondents to denote the IEM in its current form, and the IEM in its future fully-integrated status. For clarity we use the terms IEM and fully-integrated IEM throughout this report.
216 European Parliament, , accessed 27 September 2016
217 European Parliament, , accessed 27 September 2016
218 The EU Energy Union Strategy aims to coordinate the transition of the European energy system to one that is low carbon, competitive and secure. It is based around the five interrelated principles of: security of supply, a fully-integrated internal energy market, energy efficiency, climate action - emission reduction, and research and innovation. European Commission, , accessed 27 September 2016.
219 European Commission, A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy , February 2015.
220 Chatham House (); RenewableUK (); European Federation of Energy Traders (EFET) ()
221 E3G (), VPI Immingham (), National Farmers’ Union (), Chatham House (), The Scotch Whisky Association (), BEAMA (), Major Energy Users Council (), School of Law, University of Reading (), Gemserv (), UK Energy Research Centre (), Mineral Products Association (), techUK (), Valero Energy Ltd (), Citizens Advice (), EDF Energy (), Energy Intensive Users Group (), Low Carbon (), Energy and Utilities Alliance (), Chartered Institution of Building Services Engineers (), Energy Networks Association (), British Ceramic Confederation (), ENGIE (), Centre for Energy, Petroleum and Mineral Law and Policy (), Energy Policy Group, University of Exeter (), Aldersgate Group (), DONG Energy (), ADBA (), European Federation of Energy Traders (EFET) (), Renewable Energy Systems Ltd (RES) (), Sustainable Energy Association (), EEF, the Manufacturers Organisation and UK Steel (), Energy Institute (); The Renewable Energy Association (REA) (), Greenpeace UK (), E.ON UK (), Vattenfall (), RSPB (), National Grid ()
222 Carbon Connect (), ELEXON Limited (), InterGen (), Scottish Renewables (), RenewableUK (), Carbon Capture and Storage Association (), AES UK & Ireland (), ScottishPower (), UK Onshore oil and gas (UKOOG) (), Oil & Gas UK (), UK Environmental Law Association (), Scottish Centre for Carbon Storage ()
223 Chatham House (), Aldersgate Group (), European Federation of Energy Traders (EFET) ()
224 E3G (), Chatham House (), Aldersgate Group (), E.ON UK ()
225 E3G (), Chatham House (), European Federation of Energy Traders (EFET) (), E.ON UK (), National Grid ()
226 Vivid Economics, , March 2016
227 National Grid ()
228 UK Energy Research Centre (), para 9, Energy Policy Group, University of Exeter ()
229 E3G (), Chatham House (), UK Energy Research Centre (), EDF Energy (), Energy Intensive Users Group (), The Renewable Energy Association (REA) (), E.ON UK ()
230 ELEXON Limited (), Chatham House (), EDF Energy (), Energy Networks Association (), Aldersgate Group (), EEF, the Manufacturers Organisation and UK Steel (), ScottishPower (), UK Onshore oil and gas (UKOOG) ()
231 E3G (), Energy Community, Treaty Establishing the Energy Community,
232 UK Energy Research Centre, , May 2016
233 National Grid ()
234 Ofgem, , accessed 28 September 2016; Ofgem, , accessed 28 September 2016.
235 European Commission, , accessed 28 September 2016.
236 UK Energy Research Centre (), Citizens Advice (), British Ceramic Confederation ()
237 Centre for Energy, Petroleum and Mineral Law and Policy (), European Federation of Energy Traders (EFET) (), Vattenfall ()
238 E3G (), Citizens Advice (), EDF Energy ()
239 Citizens Advice (), European Federation of Energy Traders (EFET) ()
240 Chatham House (), School of Law, University of Reading (), Citizens Advice (), Energy Networks Association (), European Federation of Energy Traders (EFET) (), National Grid ()
241 The acronym SEM is used by some respondents to denote the EU single energy market. For the purpose of this report SEM always refers to the Single Electricity Market of the island of Ireland.
242 AES UK & Ireland ()
243 Eirgrid Group, , accessed 30 September 2016
244 Chatham House (), Ofgem, , accessed 30 September 2016
245 E3G (), Chatham House (), EDF Energy (), European Federation of Energy Traders (EFET) (), Renewable Energy Systems Ltd (RES) (), AES UK & Ireland ()
246 AES UK & Ireland ()
247 E3G (), Chatham House (), EDF Energy (), European Federation of Energy Traders (EFET) (), Renewable Energy Systems Ltd (RES) (), AES UK & Ireland ()
248 AES UK & Ireland ()
249 Department for Business, Energy & Industrial Strategy, , July 2016
250 Chatham House ()
251 E3G (), UK Energy Research Centre (), Citizens Advice (), Energy and Utilities Alliance (), RenewableUK (), National Grid ()
252 E.ON UK ()
253 Chatham House ()
255 Chatham House (), UK Energy Research Centre ()
256 Chatham House (), AES UK & Ireland (), E.ON UK ()
257 Chatham House ()
258 Chatham House (), BEAMA (), Aldersgate Group (); RenewableUK (), Policy Exchange, , June 2014
259 National Infrastructure Commission, , March 2016
260 UK Energy Research Centre (), Aldersgate Group ()
261 UK Energy Research Centre ()
262 House of Commons Energy and Climate Change Committee, Low Carbon Network Infrastructure, , June 2016
263 Carbon Connect (), Dr Feroze Duggan (), E3G (), National Farmers’ Union (), Chatham House (), The Scotch Whisky Association (), UK Energy Research Centre (), Citizens Advice (), Low Carbon (), Energy Networks Association (), British Ceramic Confederation (), Aldersgate Group (), RenewableUK (), Energy Institute (), Construction Products Association (), National Grid ()
264 VPI Immingham (), EDF Energy (), British Ceramic Confederation (), ENGIE (), InterGen ()
265 UK Energy Research Centre ()
266 European Federation of Energy Traders (EFET) ()
267 UK Energy Research Centre ()
268 Citizens Advice ()
269 Chatham House (), RenewableUK ()
270 Chatham House ()
271 European Investment Bank, , accessed 11 October 2016. Multi-criteria list filtered as follows: from - 2012, to - 2016, region - European Union, country - United Kingdom, sector - energy.
272 Shankleman, J., , 2 February 2016, accessed 11 October 2016
273 European Commission, , accessed 11 October 2016
274 European Commission, , accessed 11 October 2016
275 Chatham House ()
276 Aldersgate Group ()
277 HM Government, , 13 August 2016
278 BEAMA (), Aldersgate Group (), RenewableUK (), Carbon Capture and Storage Association ()
279 The Geological Society (), Energy Institute (), Carbon Capture and Storage Association (), UK Onshore oil and gas (UKOOG) (), Scottish Centre for Carbon Storage ()
280 E3G (), Citizens Advice (), RenewableUK (), Carbon Capture and Storage Association (), Greenpeace UK ()
281 E3G (), BEAMA (), RenewableUK ()
282 E3G (), Chatham House (), Scottish Renewables (), RenewableUK ()
283 Chatham House ()
284 E3G ()
285 RenewableUK ()
286 RenewableUK ()
287 House of Commons Energy and Climate Change Committee, Low Carbon Network Infrastructure, , June 2016
288 UK Energy Research Centre (), Chartered Institution of Building Services Engineers (), Aldersgate Group (), RenewableUK (), AES UK & Ireland (), The Renewable Energy Association (REA) ()
289 UK Energy Research Centre ()
290 The Renewable Energy Association (REA) ()
291 UK Energy Research Centre (), AES UK & Ireland (), Vivid Economics, , March 2016
292 Aldersgate Group ()
293 Energy and Utilities Alliance (), Institution of Building Services Engineers (), Carbon Capture and Storage Association (), AES UK & Ireland (), The Renewable Energy Association (REA) ()
294 Max Fordham LLP, () Chartered Institution of Building Services Engineers ()
295 Mineral Wool Manufacturers Association, (. See also Energy and Climate Change Committee, , Fourth Report of Session 2015–16, HC 552
296 Energy Intensive Users Group ()
297 University of East Anglia ( BEAMA (), Valero Energy Ltd (), Energy Institute ()
298 Environmental Change Institute, University of Oxford (
299 Dr Katherine Watts () para 20
300 E3G (), Chatham House (), BEAMA (), Citizens Advice (), E3GEnergy and Utilities Alliance (), Aldersgate Group (), E.ON UK ()
301 Committee on Climate Change, , October 2016
302 Energy and Climate Change Committee, , Fourth Report of Session 2015–16, HC 552, summary
303 Construction Products Association () para 7
304 UK Environmental Law Association ( para 2.5.2. See also Mineral Wool Manufacturers Association ( para 1
305 techUK, ( para 7, LendLease ( paras 7–9, Max Fordham LLP ( Chartered Institution of Building Services Engineers (), E.ON UK ()
306 Construction Products Association () para 7, Ashden sustainable solutions, better lives, (, Chartered Institution of Building Services Engineers (), Aldersgate Group ()
307 Citizens Advice (), Ricardo Energy & Environment (), Chartered Institution of Building Services Engineers (), BRUFMA (), Kingspan Insulation Ltd (), Sustainable Energy Association ()
308 EDF Energy (), Institution Of Mechanical Engineers (), National Grid ()
309 UK Environmental Law Association ()
310 Ricardo Energy & Environment (), Energy Intensive Users Group (), British Ceramic Confederation (), European Federation of Energy Traders (EFET) (), Vattenfall ()
311 Centre for Energy, Petroleum and Mineral Law and Policy (), European Federation of Energy Traders (EFET) ()
312 European Federation of Energy Traders (EFET) (), Vattenfall ()
313 The UK’s overall national target is 15%; its sub-targets are 30% renewable electricity, 12% renewable heat and 10% renewable transport.
314 Energy and Climate Change Committee, , Second Report of Session 2016–17, HC 173, summary
315 Committee on Climate Change, , October 2016
316 E3G (), Chatham House (), Citizens Advice (), EDF Energy (), Energy and Utilities Alliance (), Kingspan Insulation Ltd (), European Federation of Energy Traders (EFET) (), EEF, the Manufacturers Organisation and UK Steel (), Ecotricity (), Oil & Gas UK ()
317 E3G ()
318 Energy Institute, , (December 2015), pp 24–25
319 BEAMA (), Citizens Advice (), EDF Energy (), Energy Institute (), Oil & Gas UK (), National Grid ()
320 Citizens Advice ()
321 E3G (), Citizens Advice (), EDF Energy (), RenewableUK (), Carbon Capture and Storage Association (), E.ON UK ()
322 UK Energy Research Centre (); Treaty Series No. 20 (2007)
323 Oil & Gas UK (), (2016)
324 European Commission, , accessed 3 October 2016 2
325 Ashden sustainable solutions, better lives ()
326 E3G, (
327 Committee on Climate Change, , October 2016
328 They include the Large Combustion Plant Directive, the Industrial Emissions Directive, the Emissions Trading Directive, the Renewable Energy Directive, the Energy Performance of Buildings Directive, the Energy Efficiency Labelling Directive, the Energy Efficiency Directive and the Eco-design Framework Directive.
329 E3G (), EDF Energy (), Chartered Institution of Building Services Engineers (), Aldersgate Group (), European Federation of Energy Traders (EFET) (), The Renewable Energy Association (REA) ()
330 House of Lords, , 20 July 2016, p9
14 October 2016