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Electricity and Gas (Powers to Make Subordinate Legislation (Amendment) (EU Exit) Regulations 2018

Volume 793: debated on Tuesday 30 October 2018

Considered in Grand Committee

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That the Committee do consider the Electricity and Gas (Powers to Make Subordinate Legislation) (Amendment) (EU Exit) Regulations 2018

My Lords, the regulations were laid before the House on 5 September. As we approach EU exit, my department is working to ensure that our energy legislation continues to function effectively after exit day. In recent years the EU has introduced through the third energy package a suite of legislation governing the energy systems of member states. Much of this is technical legislation, known as European network codes and guidelines which apply to energy operators and regulators.

To maximise continuity, the European Union (Withdrawal) Act 2018 will incorporate the majority of this legislation into domestic law when we leave the EU. This instrument is the first of a package of energy-focused regulations amending this retained EU law to ensure that the UK’s energy legislation and markets work effectively after exit. This instrument does so in two ways: first, by ensuring that directly applicable EU law concerning electricity and gas will be effectively incorporated into domestic law; secondly, by enabling the UK Government and the Northern Ireland Executive to amend elements of this retained EU law in a simple and proportionate way, ensuring that our energy legislation can keep up with the rapid pace of technological advances and market developments. To do so, this instrument will transfer legislative functions conferred by four EU regulations from the European Commission to the UK Government and Northern Ireland Executive under the powers of Section 8 of the withdrawal Act.

The first power being transferred by this instrument is a limited ability to create European network codes. The withdrawal Act will incorporate all direct EU legislation so far as is operative immediately before exit day. This means that provisions in force on exit day but applying from a later date will not be incorporated. This is the case for several European network codes. Without government action, this could create gaps in the energy regulatory framework, leading to uncertainty and detriment to industry, which has adapted rules and practices to comply with the network codes. It is therefore important that the UK can incorporate these missing provisions promptly through legislation. This is accomplished by Part 2 of the instrument, which will revoke the European Commission’s power to make new codes and instead substitute limited powers for the Secretary of State and the Northern Ireland Department for the Economy to make regulations bringing into domestic law provisions corresponding to the codes or parts of codes not captured by the withdrawal Act. These statutory instruments will themselves be subject to the affirmative procedure to ensure effective parliamentary scrutiny.

Secondly, this instrument will enable amendments to network codes by transferring powers currently held by the European Commission to the Secretary of State and the Northern Ireland Department for the Economy. These powers would be exercised using subsequent affirmative statutory instruments.

Thirdly, as well as powers relating to network codes, this instrument will transfer to the Secretary of State and the Northern Ireland Department for the Economy powers to amend definitions and reporting requirements under the EU regulation on wholesale energy market integrity and transparency, known as REMIT. REMIT prohibits insider trading and market manipulation in wholesale energy markets and provides energy regulators with valuable tools to fight these crimes. The power to amend definitions is limited and may be used only to ensure coherence with other relevant financial services and energy legislation, or to take into account developments in wholesale energy markets.

The fourth power under this instrument concerns the security of gas supply regulation, which creates common standards and indicators to measure threats to gas security and defines how much gas is needed to maintain security of supply. The regulation contains templates for risk assessments, preventive action plans and emergency plans to be carried out by the Government. Further, the regulation contains powers for the European Commission to amend these templates using delegated acts. This instrument transfers these to the Secretary of State. Powers to amend the security of gas supply regulation and REMIT would be exercised through subsequent negative statutory instruments. This is appropriate as these powers permit only narrow amendments to very limited provisions of these regulations.

This instrument extends to Northern Ireland. As energy is a devolved matter, this instrument transfers powers variously to the Secretary of State and to the Department for the Economy in Northern Ireland, respecting the devolution settlement. In addition, my department has consulted with the Northern Ireland Department for the Economy throughout. While this instrument permits the Secretary of State to exercise its powers in respect of Northern Ireland, this would occur only in respect of a reserved area such as international relations, or when the Department for the Economy determines that it is unable to act in the absence of Northern Ireland Ministers. Each time this occurs, it would be accompanied by a ministerial Statement explaining why it was necessary.

In conclusion, the regulations are a sensible and necessary use of the powers of the withdrawal Act that will maximise continuity in our energy regulations as we leave the EU. I commend the regulations to the House.

It is left to me to start this rather technical discussion. On this occasion, I will stick to a rather strategic level, if the Minister does not mind. First, it has been the Government’s intention in our EU negotiations to remain in the single energy market, which I hugely welcome. I would be interested to understand from the Minister whether there has been any progress on that; whether that might appear in the political declaration of our future relationship in the withdrawal agreement; whether the Government are still keen to do that; and, if we are successful despite our red lines and the Government’s general intention to come out of the single market, whether the instruments would be necessary if we remain in the EU internal energy market.

Moving on from that, we have interconnectors. On codes and other technical matters, once we leave, if we are not part of the internal energy market, we will no longer have access to discussions on or information around codes used by that market. I would be interested to understand what effect that will have on interconnectors between us and the European Union at that time. Certainly the Select Committee that I chair was very concerned about the inefficiencies in trading—not so much around interruption of supply but around increases in energy prices due to inefficiencies because of the relationship not being as smooth as it was before—that might come about from that.

I want to ask a fundamental question. As the Minister mentioned, the secondary legislation concerns Northern Ireland as well. As he knows, the island of Ireland has a completely integrated energy market—a so-called single energy market. What preparations have the Government made, particularly in the case of no deal, so that this energy market for electricity and gas can continue to function, with powers coming back to the UK and such disintegration—that is, no longer being completely under the purview of the internal energy market? Will that single energy market in Ireland still work despite the fact that the network codes will change? This system seems fundamental to Northern Ireland’s energy needs, let alone those of the Republic.

My Lords, I thank the Minister for his introduction to the regulations—the first of many to come concerning the UK’s exit from the EU. The Committee will consider many technical energy matters. It will not be entirely simple to identify the crucial elements and their implications. However, I will echo the remarks of the noble Lord, Lord Teverson, on the more challenging aspects of the regulations on wider-ranging topics, such as the internal energy market and the position of the island of Ireland.

On the face of it, the instrument seems simple enough. It moves powers held by the European Commission to a domestic authority, giving the Secretary of State power to alter them—in this case, referring to European network codes and guidelines—and adopt the amendments overall as “retained direct EU legislation”. Later amendments that will not come into force by 29 March 2019 will not be regarded as retained direct EU legislation. They will be resolved, perhaps even revoked, by exit day under separate secondary legislation, along with elements of retained EU law where the Secretary of State considers that the EU instruments retained in law will not be capable of operating in isolation from the rest of the EU instrument. Powers are also taken in the SI to amend the provisions of REMIT, an EU regulation concerning wholesale market integration and transparency, to apply internally to the UK and not to have to report to EU authorities.

Some amendments will be made by affirmative procedure and some negative. As your Lordships’ Secondary Legislation Scrutiny Committee concluded, all is so clear, so far. Perhaps the Minister can confirm first whether all these amending instruments will be amending only: that is, not enabling new powers through secondary legislation. That does not seem to have been commented on.

More importantly, this question brings up the whole issue of the internal energy market. Unlike Euratom and other bodies established by treaty, the IEM is merely a collection of agreements among member states on how the European energy market is to be conducted. It has been stated many times that it would be advantageous for membership of the IEM to be retained, or a close association with it. How far could any statement go when it is not really a distinct entity? This order would be regarded as a contingent action, to be effected and commenced if no suitable alternative arrangement for energy trading through interconnectors can be put into place—rather like the contingent nature of the Nuclear Safeguards Bill, now an Act, as the Minister will remember. Can the Minister clarify whether this is the Government’s intention or whether, as the memorandum seems to suggest, the order will apply regardless of any deal and be part of a signal to break with the IEM under all scenarios? Will he also clarify the Government’s general intention toward the internal energy market?

Very pertinent in this respect is the position regarding Northern Ireland. Ireland, north and south of the border, already operates under an all-Ireland grid. Given the possibility that Northern Ireland will not operate its own grid requirements at Brexit, is it intended to break up the Ireland grid? While paragraphs 7.12 and 7.13 of the Explanatory Memorandum deal with the position as now, when there is not a functioning Executive, is it intended that Northern Ireland will function on different codes from the rest of Ireland at Brexit? Can the Minister explain what is intended and how it will work on a United Kingdom basis with Northern Ireland and the Irish grid?

While an effective system must be in place upon Brexit, does this order—while enabling continuity for UK authorities—close the door on options for a better working of the energy system after Brexit through close association with the internal energy market? Can the Minister provide the Committee with any further clarity? If any of his remarks can assure the Committee on this point, I can confirm the order today.

My Lords, I am grateful to both noble Lords for their comments. As the noble Lord, Lord Grantchester, rightly said, this is possibly the first of many statutory instruments that will come before the House, possibly as negative orders. He will remember that, if I have this right, I wrote to him and to the noble Lord, Lord Teverson—or if I did not, I copied a letter that my right honourable friend Claire Perry sent to colleagues in another place—about these orders back in August of this year. I will double check whether I did. All I know is that she wrote on 14 August; I thought that I had copied that letter but if not, I will make sure that I have.

The reason why I mentioned it is that I have given a commitment to write to noble Lords as other orders come forward. As I made clear in my introductory remarks, these orders merely give certain powers to the Secretary of State to make powers that previously existed with the EU. Obviously, those powers are to make further orders that will come forward. It is, one might say, quite a complicated landscape and—both noble Lords will have heard the discussions on earlier orders—we might have found it easier and speedier if I had written to them in advance. I thought that I had.

Further orders will come forward and I will write to noble Lords. Some of the orders will be affirmative and some will be negative. All will go to the appropriate committees, which might suggest that some that we had thought were possibly negative should be treated as affirmative. If that is the case, Her Majesty’s Government will obviously take that on board and deal with them as appropriate as they come before this House. As I said, I will make sure that I write on those.

The noble Lord, Lord Teverson, asked whether this instrument would still be needed in a deal scenario as opposed to a no-deal scenario. These regulations are a deal/no-deal instrument. The powers will be needed in all scenarios. In a deal scenario, they could be used to keep pace with EU amendments to the network code. We need them whatever happens.

Let me deal with some of the other points. First, what effect will EU exit have on the interconnectors? The Government and Ofgem are already working with the interconnectors to ensure that new access rules, which set the terms and conditions for trade, can be approved by Great Britain by 29 March 2019. We understand that the interconnectors are already engaging with EU member state regulators, who will need to approve the access rules to the same timeframe.

Will the single electricity market in the island of Ireland still function after EU exit? Negotiations have already made good progress on legal provision to underpin the single electricity market in the withdrawal agreement. The UK will work with Ireland and the EU in an effort to ensure that the SEM is maintained in any future scenario, including the unlikely event that we do not reach a deal. Given the benefits to consumers and the economy of a more efficient shared market, it is strongly in the interests of all parties to agree to a means to ensure the continuation of the SEM. We have long-standing and ongoing bilateral relations with Irish energy officials.

I accept that these regulations are pretty technical and that further SIs will come forward in due course. The noble Lord, Lord Teverson, invited me to take a more strategic approach and view the whole of the negotiations in the round, but I do not think that this would be the time or the place to do that. We will continue with our negotiations and I am sure that they will have the appropriate outcome in due course. Meanwhile, it is necessary to get these regulations on the book so that we are in a position to make the appropriate changes and to take the appropriate powers at the right time. I commend the regulations to the Committee.

Motion agreed.

Sitting suspended.