Brexit: can the energy sector learn from financial services?

By Alex Harrison

It seems axiomatic that immediately prior to the UK’s exit from the EU on 29 March 2019, the UK's domestic laws (in England and Wales, Scotland and Northern Ireland) will be aligned with EU law.

Assuming a crash-landing "no deal" scenario can be avoided, any future trading arrangement between the UK and the EU27, will need to provide a framework through which agreed levels of market access can be maintained and post Brexit divergences between UK and EU law and regulation can be managed.  This is a particular concern in areas that are highly regulated and where businesses may need licences to provide goods or services on a cross-border basis.

In the area of financial services, firms have "passporting" rights, which allow UK firms to provide services into the EU (and vice versa) without having to apply for licences in other member states.  These passporting rights will be  lost after Brexit.  Hogan Lovells has been working with The International Regulatory Strategy Group (IRSG) to develop a framework which will allow UK and EU financial services firms to continue to have access to each other's markets after Brexit, based largely on there being continued regulatory alignment.

It’s a blueprint that could be easily applied to the energy sector (and potentially other sectors).

There is an immediate cross-over between energy and financial services in relation to London's leading role in electricity, gas, coal, oil and emission rights trading in Europe, but the potential application of this model to the energy sector goes much broader than that.

The IRSG Report proposes that there should be a Free Trade Agreement between the UK and the EU, which would provide for:

  • mutual market access on the basis of regulatory alignment and supervisory co-operation;
  • a new forum for ongoing regulatory alignment, to allow the UK and the EU can work together to implement new global and international standards; and
  • the creation of a new dispute resolution body, based on an agreed judicial structure, to determine whether material divergence has taken place, and – if so – the impact that should have on market access.

The remit of the dispute resolution body would be limited to determining whether a party is in compliance with the agreed terms of the Free Trade Agreement. These findings would be binding on the UK and the EU27 and would require them to take any consequential steps outlined in the Free Trading Agreement (e.g. the withdrawal of access rights), but neither party could be compelled to change its law.

The key thing here is the introduction of an institutional framework for managing future material divergence (either because the UK changes its laws or regulation to move away from the EU or because the EU changes its laws or regulation and the UK does not follow suit). The proposal creates a flexible approach that can adjust on an issue by issue basis rather than a rigid outcome pre-baked at the date of Brexit.

In the energy context, this would avoid the UK becoming a "rule-taker rather than a rule-maker" (accepting EU energy market rules as they evolve going forwards and the power of corresponding EU institutions on UK subjects) by allowing the new forum for regulatory alignment and dispute resolution body to opine or rule against agreed divergence principles set out in the Free Trade Agreement on, for example:

  • crucial Internal Energy Market design issues such as market coupling and integration post Brexit;
  • any potential material divergence between UK and EU electricity and gas network codes;
  • new access rules for inter-country interconnection between the UK and the EU27;
  • any proposed material divergence by the UK from the EU energy and climate targets and any required UK reporting on renewables, energy efficiency, energy infrastructure and greenhouse gas emissions; and
  • the impact of any UK decision not to participate in the EU Emissions Trading Scheme.

There is huge mutual benefit to the UK and the EU27 in terms of market efficiency and security of supply in retaining the UK's access to the Internal Energy Market. This blueprint for regulatory alignment provides a means of doing so whilst allowing the UK to retain sovereignty over its laws and the EU to prevent "cherry-picking".

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