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Brexit: Energy Trade Agreement

  • United Kingdom
  • Brexit
  • Energy and infrastructure - Clean energy

12-01-2021

 

From 1 January 2021, the Trade and Co-operation Agreement (the “Agreement”) governing the relationship between the UK and the EU came into effect. The Agreement details the commitments made by both parties and the obligations placed upon each party, in particular highlighting the obligation on the parties to co-operate in relation to economic and security issues, participation in EU programmes, institutional arrangements and dispute settlement. For details on the Agreement generally and its application to businesses, please go to Eversheds Sutherland’s Brexit hub.

Title VIII (Part 2) to the Agreement (the “Energy Title”), together with the related annexes, sets out the agreement between the parties in relation to energy. The Energy Title highlights the parties’ commitments to continue the fight against climate change, including cooperating on renewable energy generation.

Much of the Energy Title is confirmation of the pre-Brexit position, particularly with regard to ensuring fair competition in markets for electricity and natural gas. The Energy Title requires both parties to ensure that their respective regulatory frameworks for the production, generation, transmission, distribution or supply of electricity or natural gas are non-discriminatory, ensuring fair competition in the electricity and gas markets. This includes confirmation that the parties must ensure that customers are free to choose, or switch to, the electricity or natural gas supplier of their choice.

Trading arrangements and interconnectors

Under the EU legislative regime, cross-border flows across electricity interconnectors will no longer be governed by EU legislation, however such cross-border flows remain important to ensure secure electricity supplies in the UK. With that in mind, the parties have agreed that a new model of efficient electrical trading across interconnectors will need to be developed. Whilst these arrangements were not in place on 1 January 2021, the parties have agreed a timetable for developing this new model:

 

  • by April 2021, the transmission owners of each party will need to have prepared outline proposals for the procedure, including a cost-benefit analysis
  • within 10 months of the date of the Agreement, a proposal for technical procedures needs to have been developed
  • by April 2022, the new model needs to be operational.

 

REMIT

Prior to 1 January 2021, market participants in the UK were bound by the EU’s Regulation on Energy Market Integrity and Transparent (“REMIT”), which prohibits insider trading and energy market manipulation and provides that the market will be monitored by national regulatory authorities (“NRA”). The Agreement requires each party to prohibit market manipulation and insider trading on wholesale electricity and natural gas markets and monitor trading activity on these markets. It also requires the parties to cooperate with a view to detecting and preventing trading based on inside information and market manipulation and, where appropriate, exchange information including on market monitoring and enforcement activities.

However, it is important that market participants understand the rules that apply to them with effect from 1 January 2021. On 4 January 2021, Ofgem issued a direction to market participants in Great Britain confirming that, until further notice, those market participants already registered with the Northern Ireland Authority or another NRA of an EU Member State are exempt from registering with Ofgem (as the NRA of Great Britain). However, market participants currently registered with Ofgem who wish to enter into transactions or place orders to trade in wholesale energy products where delivery is in the EU, will be required to re-register with an NRA of an EU Member State. The majority of the existing REMIT regime is already maintained domestically in Great Britain, in particular the existing prohibitions and obligations in relation to insider trading and market manipulation. Aside from any potential re-registration requirements, market participants in Great Britain are, at least for the time being, not likely to notice a practical difference in how the regime is applied post-Brexit.

Emissions trading system

The end of the transition period also signals the end of the UK’s involvement in the EU emissions trading scheme (“EU ETS”). As confirmed by the Energy White Paper, published in December 2020, the EU ETS is being replaced by a UK Emissions Trading Scheme (“UK ETS”). On 17 December 2020, the UK Government issued guidance setting out who the UK ETS applies to and what is required of businesses that are covered by the new regime. The scheme has been designed to “increase the climate ambition of the UK’s carbon pricing policy, whilst also protecting the competitiveness of UK businesses”. It is important to note that businesses already participating in the EU ETS must comply with their obligations under that system for the 2020 compliance year. The UK Government has issued further guidance on compliance with the EU ETS obligations in 2021.

Changes to electricity and gas licences

During December 2020, Ofgem consulted on proposed licence modifications required as a result of the transition period coming to an end. The consultation closed on 24 December 2020 and a response from Ofgem is expected in January 2021.