knowledge 15 January 2021 |

Energy’s Brexit Withdrawal Symptoms Lessened by the Trade and Co-operation Agreement

Which withdrawal symptoms?

Ireland is heavily dependent on imports from the United Kingdom for energy goods (ie gas and other goods from which energy and electricity can be generated), and electricity. In 2019, Ireland imported 39% of its gas through its two gas interconnectors, which link Ireland to the UK by a single entry point in Scotland.¹ The operation of these interconnectors is underpinned by bilateral agreements made by Ireland and the UK in 1993 and 2006. In Ireland, they are further regulated by the European Union (Internal Market in Natural Gas) Regulations 2020, which apply EU rules to Irish gas transmission lines to and from third countries. Until the UK withdrew from the EU on 1 January 2021, gas interconnectors had to be operated in accordance with EU law in the UK, as well as in Ireland. However, after 1 January 2021 this obligation ceased. As a result, there is a large degree of uncertainty about how gas trading across interconnectors and gas imports will operate in the long-term post Brexit.

The fate of the Irish electricity market is also linked to Britain. Much of Ireland’s electricity is generated from gas which comes from the UK.² The Irish electricity market is connected to Europe solely via electricity interconnectors with the UK (ie the Moyle interconnector which connects Antrim and Scotland; and the East-West Interconnector connecting Dublin and North Wales). Ireland shares an all-island wholesale electricity market with Northern Ireland, the Integrated Single Electricity Market (the “I-SEM”). This was established following the signing of a Memorandum of Understanding by the UK and Irish governments in 2006; and is supported by parallel legislation in Northern Ireland and Ireland. Until 1 January 2021 the I-SEM was governed by EU law in Ireland and Northern Ireland. Since then, the Protocol³ has become applicable. This has made some EU laws which govern wholesale electricity markets⁴ applicable in the UK (in the context of Northern Ireland). Nevertheless, as for the gas sector, uncertainty remains as to the long-term operation of (i) electricity interconnectors; (ii) wholesale energy market product trading; and (iii) the I-SEM.

What is the Trade and Cooperation Agreement; and what does it say about energy?

The Trade and Cooperation Agreement is a bilateral agreement between the EU and the UK, which seeks to create a new framework for energy cooperation. It recognises that the UK will no longer participate in the EU’s internal energy market or EU trading platforms. It creates new mechanisms to support cooperation on renewable energy (in particular in the North Sea) and tackle climate change. It includes substantive provisions to support liberalisation, and sets out principles to govern energy and environmental subsidies. As in the other areas, the provisions on energy do not replicate the full benefits of the Single Market for the United Kingdom, taking into account its third-country status.

The Agreement consists of seven key Parts (further divided into Headings, Titles, Chapters and Sections), three Protocols and a number of Annexes. Parts I, II and Annexes ENER 2-4 are relevant to energy. Part I sets out the provisions on governance and establishes joint governance bodies such as the Partnership Council; Trade Partnership Committee; Trade Specialised Committees including a Specialised Committee on Energy; and other Specialised Committees. Part II covers trade in goods and services, as well as a broad range of other areas, such as investment, competition, tax transparency, energy, air and road transport. Annexes ENER 2-4 provide guidance on energy goods, hydrocarbons and raw materials; energy and environmental subsidies; the non-application of third party access and ownership unbundling rules to infrastructure; and the allocation of electricity interconnector capacity for the day-ahead market timeframe.

How does the Trade and Cooperation Agreement lessen withdrawal symptoms for those operating in the gas sector?

The Trade and Cooperation Agreement provides clarity and positive affirmations on key areas of concern. The UK and the EU have agreed to cooperate and share information. In making plans to address identified risks to gas supply, there is an obligation on the both parties not to endanger security of supply of the other Party.⁵ These obligations extend to electricity supply. For those trading across gas interconnectors, the UK and the EU have agreed:

• That the maximum level of capacity should be made available (allowing for secure system operation and efficient system usage).

• That capacity allocation mechanisms and congestion management procedures are market-based, transparent and non-discriminatory; and auctions are generally used for the allocation of capacity at interconnection points.

Both parties have also agreed to endeavour to offer standard capacity products which consist of corresponding entry and exit capacity at both sides of the interconnection point and to ensure that interconnector usage procedures are coordinated.⁶

How does the Trade and Cooperation Agreement lessen withdrawal symptoms for those operating in the electricity sector?

It lessens withdrawal symptoms for those operating in the electricity sector by providing some assurances on interconnector operations. In this regard, the UK and the EU have agreed:

• To ensure that capacity allocation and congestion management on electricity interconnectors is market based, transparent and non-discriminatory.

• That the maximum level of electricity interconnector capacity is made available and curtailment is non-discriminatory and restricted to emergency situations.

• That information on capacity calculation is published.

• That network charges should not be charged on individual transactions on electricity interconnectors, and there should be no reserve prices for their use.⁷

The UK and the EU have also agreed to coordinate capacity allocation and congestion management; to agree the costs of hosting cross-border flows of electricity;⁸ to cooperate on network development;⁹ and to finalise electricity trading arrangements for the day ahead market within 15 months.¹⁰

Conclusion

The post-Brexit legal framework is continuing to evolve. Much remains to be ironed out, however, the Trade and Co-operation Agreement represents a big step in the right direction.