Utility Week

Customers UTILITY WEEK | 6TH - 12TH JULY 2018 | 25 Analysis F or the energy sector, there is little inherent immediate upside to the UK's looming exit from the EU. Unlike motor manufacturing, for example, the threats that the sector faces are not potentially existen- tial though. Nevertheless, the integration of the energy market has been one of the European project's lesser sung success stories, widely agreed to have contributed to lower customer bills and improved security of supply. Aer the passage of the EU Withdrawal Act though, the prospects of the UK remain- ing in the EU's single market have dimmed with knock-on consequences for its ongo- ing participation in the IEM (internal energy market). The House of Commons' decisive rejec- tion of a bid by MPs to keep the UK within the European Economic Area (EEA), which shares the same membership as the IEM, has narrowed the chances that Britain can remain as tightly integrated with the EU's energy market. Making plans Whether it likes it or not, the industry has to plan for life aer Brexit. However, the energy sector is as much in the dark as the rest of the business commu- nity about what this future looks like. A white paper setting out the UK's options was due to have been published by now to inform the government's negotiations at the Council of Ministers summit last week- end. However, the mooted white paper is not now expected to be published until later this month. Joanne Wade, chief executive of the Asso- ciation for the Conservation of Energy, says: "The Brexit fog is greater than it was last year. We still don't know whether we have the workforce that we need and what the relationship [with the EU] is going to be – and the date is getting ever closer." Utility Week recently produced a special report outlining the key regulatory issues surrounding Brexit for the energy industry – and how progress might be achieved on future co-operation. The UK's continued participation in the EU ETS (Emissions Trading System) is one of the key uncertainties for the industry. Energy UK has said that the industry needs to know the direction of travel on the UK's participa- tion by the end of October if there is to be enough time to prepare. Leaving the ETS The EU ETS was launched in 2005 to reduce emissions from industry. Under the ETS, heavy industrial users of energy and power stations must buy certificates for the emis- sions that they produce. And emissions trading is one of the key mechanisms that the UK government will use to meet its commitments under the Paris agreement to cut emissions. The ETS currently has 31 members, cov- ering all the states in the EEA. And securing links to the ETS outside the EU's structures is tough. This is illustrated by the experience of Switzerland. Despite being landlocked within the EU, the country is only now on the verge of securing agreement on linking its own ETS to the wider system aer several years of negotiations. The likelihood that the UK could remain in the ETS has "significantly lessened", says Anthony Froggatt, a senior research fellow in energy and environmental issues at the secu- rity thinktank Chatham House. The UK could seek to join one of the num- ber of alternative ETSs across the world, but none are reckoned by experts to be as closely aligned with the UK as the EU's. Noting that the Australian ETS is the only one that is "outright compliant" with the UK's existing systems, Silke Goldberg, a part- ner at solicitor Herbert Smith Freehills, says: "It will be difficult to find another market to link with post-Brexit." Another potential avenue is for the UK to levy a carbon tax, which as a fiscal measure is beyond the EU's competence. However, carbon taxes are less inherently stable than ETSs because they can be more easily reversed by governments, warns Frog- gatt: "A carbon tax is less politically stable than being part of a trading system." The situation is further complicated by the imminent end of the third phase of the ETS in 2020. If the UK is to exit the EU ETS by the end of this decade, there is little time to put alternative arrangements in place. The least complicated option is to find a way of remaining in the EU ETS. The "pink- ing" of the government's red lines in the prime minister's March Mansion House speech on removing the UK from the jurisdic- tion of the ECJ increases the prospects that the UK could stay in the ETS, says Froggatt. And, the UK's overperformance on tack- ling carbon emissions may give the British government some leverage in its efforts to secure continuing participation in the ETS, one of the EU's key tools for meeting its Paris agreement climate change targets. Shane Tomlinson, director of environ- mental consultancy E3G, says: "The UK is more than pulling its weight and will con- tinue to do so in terms of emissions reduc- tion, so there is quite a lot of goodwill for the UK to remain part of ETS." The full report is available to download at https://utilityweek.co.uk/exclusive-report- making-best-brexit/ Brexit: looking for the upside The UK's continuing participation in the internal energy market and the Emissions Trading System after it leaves the EU is in doubt. David Blackman considers the possibilities.

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