Brexit and EU Energy Directives – what should we expect?

When having a conversation with an energy professional, there’s a good chance that what they’re talking about has been derived through and/or heavily influenced by the broad raft of EU Directives that the UK has implemented over the past 43 years.

There’s an oft-cited statistic on this – that “approximately 80 per cent of environmental regulations in member states derive from EU law.” And in the context of the energy trilemma, the impact of this cannot be understated, with the UK having seen huge benefits through the EU such as liberalised energy markets, interconnection with the continent for bumping up capacity, harmonised policy and code, and a continent-wide level playing field for business to operate in.

Brexit has of course raised a significant question mark over the future of these benefits. And in light of the unsettling amounts of policy uncertainty currently being seen, creeping capacity issues (with a recent IMechE report predicting a 40-55 per cent electricity supply gap by 2025, based on current policy projections), and a National Grid estimate of a potential post-Brexit 5 per cent rise in fuel bills due to the incurred costs of decreased coupling and reduced cross-border balancing, the UK has a delicate balancing act ahead in determining the post-Brexit policy environment.

Not throwing the baby out with the bathwater

So what’s the outlook for EU-borne legislation? Taking a few example directives/policies, we may be able to set the scene under which its future will be decided. Some of these include:

• EU-ETS (derived through the Emission Trading Directive)
• Industrial Emissions Directive (“IED”)
• ESOS – Article 8 of the Energy Efficiency Directive (“EED”)

Most prominent of these is the EU-ETS scheme – the world’s largest carbon market. Despite a flood of UK MEP resignations in Brussels over the fortnight following the Brexit vote (and his own personal attempt, much to the dismay of Brussels), Tory MEP Ian Duncan, who leads the EU-ETS file in the European Parliament, has since recommitted to reform the scheme, stating:

“The energy question is bigger than the EU, bigger than Europe. It’s a global question and we shouldn’t look at it solely through [the lens of] a regional entity.”

The desire of the European Parliament towards keeping the UK on board should be expected when an exit would only add to the oversupply of permits within the current ETS framework, further diluting a scheme which has already seen a number of well-publicised setbacks.

“Moreover, since the UK’s utility companies are some of the largest buyers of Carbon allowances for the ETS, withdrawal of these players could damage the functioning of the ETS market.” – Richard Power is a partner at Clyde & Co

Although the success of the scheme in reducing EU emissions has often been brought into question (with the bloc seeing a net decrease in emissions but no causal link being established to the scheme), its benefits to the UK should not be understated.

The greatest of these is a relatively low cost of compliance in balancing emissions to meet carbon budgets – an important point to consider when the fifth budget has just been approved. But while the mutual-interest for UK involvement is present from a practical viewpoint, the scheme may still however fall victim to political barriers in the negotiations to come.

The Industrial Emissions Directive 2010, which incorporated the IPPC and six other directives into a broad framework regulating the issue of permits to industrial polluters, would also likely be put under the microscope. The possibility of diluting its strict permitting regulations will be taken as good news by the fledgling fracking industry but bad news by environmental lobbyists, and the government, as part of their ongoing commitment to gaining gas-independence, may want to take full advantage of this.

A prominent scheme that derived from the EED has been ESOS, which could also be targeted for reform (we are yet to hear the results of the energy tax consultation which proposed building a compliance framework around ESOS) due to its practical business value, low compliance costs and the business potential of energy efficiency (a Carbon Trust study demonstrated an average return of 48 per cent for energy efficiency retrofits, compared to an average 12 per cent return for a typical business investment – a fact that BEIS are well aware of).

Such a reform of the scheme may bring the potential of incentive mechanisms and tax-breaks which would aim to scale Phase 2 uptake of energy management/efficiency; as we saw with Phase 1, the “cost exercise” was just a self-fulfilling prophecy for those that did not take the recommendations any further.

So where does this leave us?

Summarising, the outlook for EU energy legislation seems largely positive. A ground-up replacement of it with fresh frameworks seems highly unlikely, even in the instance that the UK leaves the Internal Energy Market (IEM). As well as being a huge strain on national resource, it would be a setback to the skills-base of the workforce and destabilising to an investment climate that has enjoyed a large-degree of harmonisation across the EU.

And ministers, whether pro-EU or not, will still have to recognise that even a stripped-down trade agreement with the EU would still require compliance with its regulatory regimes.

There will at the very least be a push to reform the legislation, especially since there has been ministerial criticism of the EU Directive system as being “so rigid that it is spirit crushing.” The approval of reforms and funding geared towards the Heat Network Regulations should be taken as a clear statement-of-intent: that government will be favouring a ‘scalpel rather than sledgehammer’ approach to EU energy legislation.

Painting with a broad stroke – similar mutual benefits may become apparent in the process of judging the other Directives by their individual merits, such as (for example), the Renewable Energy Directive or the EPBD (the latter of which gives rise to EPCs and DECs).

With investor funds such as the CDP now representing in excess of $100 trillion to a global market, the government would be shooting itself in the foot if it was to have a bonfire of climate legislation, or reform/legislate on an ideologically-driven, anti-Green agenda as has often been seen before with Conservative governments that are looking to make short-term savings with little view to the long-term.

By Ryan Gordon, energy auditor, SSE Energy Solutions