Simon Porter discusses the possible changes to energy sector regulations and how this will impact legal professionals.
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How Brexit might affect legal professionals in the energy sector

Posted by: Simon Porter 04/08/16

Much of the UK’s energy policy is derived from the EU legislation that surrounds the European Energy Market (EEM), something the UK has been pivotal in establishing. Building this liberal pan European market has resulted in the UK energy sector having a strong interdependence on the EEM.1 This has allowed for increased energy security, as the UK relies heavily on energy imports, both in terms of fossils fuels (gas and oil) and EU generated energy through interconnectors (Figure 1).

Figure 1.

The need for the energy sector to adhere to this legislation has fed demand for compliance professionals over the years, with continual tweaks to the numerous layers of energy management regulation.

The result of the June 23rd referendum however, has inevitably thrown up high insecurity, shrouding the future of the UK energy market and its surrounding policy in uncertainty. An example to draw on is oil prices becoming volatile immediately after the Brexit vote (something that could be detrimental to the UK, if the price of sterling is hit quicker than the oil price).2

The uncertainty runs deeper when considering the renewables sector, which has enjoyed strong growth in response to the demand for renewable energy infrastructure, as a result of both EU and global climate targets (Figure 2). With the UK committing to a 15% reduction in emissions, compared to the 1990 level by 2020.3 Assuming that article 50 will be triggered in the near future, the UK will be removed form the EU’s 2030 climate and energy framework; however, the UK already has its own legislation in place, in the form of the climate change act.1



Figure 2.

On the belief therefore, that the post referendum government will not be climate change sceptic, demand for investment in the UK renewable sector will continue (Figure 3), but some delays and cancelations to existing projects may well be a reality.4 With much of this investment coming from within the EU (namely Dong Energy and Siemens), it is reasonable to infer that the uncertain future of UK ventures by some of these companies, will lead them to turn to legal expertise.

There has even been suggestion that green energy firms are optimistic, that the market is ultimately driven by the UK’s need to replace and update its existing infrastructure, opposed to the need to meet the goals set by regulation.5

There is no doubt that the legal consequences of Brexit on the energy sector will be complex, particularly from a compliance and regulatory point of view. This is mainly due to organisations having to invest resources into responding to different levels of regulation, covering fuel extraction, energy generation, transmission, distribution and storage. Consequently, depending on negotiations post the triggering of Article 50, there could in theory, be a push for the removal of much of the ‘red tape’ derived from EU energy policy.6

Although it is hard to see a future where energy regulation is slashed, pending a decision on whether to continue along EU derivatives or form our own policy, there will inevitably be some level of rewriting, removal and drafting of new energy policy (hence the current uncertainty within the market).

A key area of change to consider post Brexit is the restructuring of the energy tax landscape, keeping companies on their toes.6 This means that organisations within the energy sector, will want to be up-to-date when considering tax relief and investment of resources. Particularly in energy sectors undergoing encouraged growth, as a result of government aid schemes (e.g. renewables subsidies and recent tax breaks to the oil and gas industry).

Figure 3. 

Depending on the strength of the influence Brexit has on the energy market, different levels of tax cuts can be expected to affect energy prices, in order to lessen the impact of inflated energy costs to the consumer’s pocket.4 Although it is not anticipated that Brexit will reduce energy demand, reducing state aid constraints would allow more freedom for the energy market, and encourage consumer demand, potentially making the UK more appealing to investment in the long run. 

An optimistic view therefore, would be that tax and policy changes resulting from a need for more independent trading to sure up the energy market, could ultimately fuel demand for law professionals at UK energy companies6. However, these scenarios are subject to the political and economic environments that the UK establishes over the next two to three years, post the triggering of Article 50.

Following on from the theme of an increasingly liberalised post Brexit energy market, greater potential for consolidations within the energy sector may arise, with the prospect of the UK redrafting policy relating to M&A.7 The outcome depends heavily on what policy the UK adopts for market regulation, and whether it keeps the EU merger regulation (EUMR) or bases policy on it to some degree.

The most likely scenario will see the UK remaining, to one extent or another, part of the EEM. In chief, the UK has invested strongly in the EEM in the past, and has benefitted from an increasingly interconnected international market, so a total withdrawal would be an extreme step to take.

There are a number of proposals on the table for interconnections between Denmark, Iceland and Belgium for example, with the intention of further diversifying and securing our energy supply.8 Continuing along this process is expected, although with some inevitable delay while negotiations of the UK’s new role in the EEM take place, giving an encouraging view of the future of EU energy sector consolidation.

To summarise, Brexit will not reduce the UK’s demand for energy, as consumers dependence on energy will continue. Coupling this with a general trend in increased demand for investment in the UK energy sector, linked to the ‘trilema’ of addressing energy cost, security and decarbonisation, gives cause for healthy optimism.9

There is no denying the high uncertainty, particularly in this limbo period before Article 50 is triggered. However, there is no reason why the legal sector cannot exploit the current market concerns, and rally to deal with the demands for clarification of the changes ahead. To bolster this further, energy policy (particularly security and cost related) was high on the agenda leading up to June 23rd, and should remain a key point for discussion and resolution in the coming months/years, providing a strong demand for legal expertise.6

 

 

Sources

1 https://www.chathamhouse.org/sites/files/chathamhouse/publications/research/2016-05-26-uk-unplugged-brexit-energy-froggatt-raines-tomlinson.pdf

2 http://www.theweek.co.uk/brexit/60838/oil-dips-back-below-50-on-wider-economic-worries

3 http://www.osborneclarke.com/connected-insights/blog/energy-legal-implications-brexit-your-business/

4 https://www.theguardian.com/environment/2016/jun/28/leave-vote-makes-uks-transition-to-clean-energy-harder-say-experts

5 http://www.ft.com/cms/s/0/c304fd50-3ed7-11e6-9f2c-36b487ebd80a.html#axzz4DXJtQ3aL

6 http://www.twobirds.com/en/news/articles/2016/uk/energy-management-implications-of-a-brexit

7 http://www.allenovery.com/SiteCollectionDocuments/Brexit%20Implications%20for%20c ompetition%20law%20enforcement.pdf

8 http://www2.nationalgrid.com/About-us/European-business-development/Interconnectors/

9 http://www.raeng.org.uk/publications/reports/a-critical-time-for-uk-energy-policy

 

 

 

 

 

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