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Electricity and Gas etc. (Amendment etc.) (EU Exit) Regulations 2019

Volume 796: debated on Tuesday 26 February 2019

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Electricity and Gas etc. (Amendment etc.) (EU Exit) Regulations 2019.

Relevant document: 16th Report from the Secondary Legislation Scrutiny Committee (Sub-Committee A)

My Lords, I will also speak to the other four statutory instruments listed on the Order Paper.

As we approach EU exit, the department is working to ensure that our energy legislation continues to function effectively after exit day, ensuring that consumers continue to benefit from reliable, affordable and clean electricity and gas. A significant part of the legislation that governs our energy markets takes the form of direct EU legislation. This will be incorporated into domestic law as retained EU law upon our departure from the EU by the European Union (Withdrawal) Act. These instruments amend EU regulations that will become retained EU law and address a range of highly technical issues, from cross-border trade to the energy market objectives of regulators.

The instruments simply remove inoperabilities in retained EU law in the event that we leave the EU without a deal. In the main, they remove references to the EU and EU institutions that would make no sense following EU exit. This ensures that, in the event of a no-deal exit, we would retain the regulatory functions and frameworks needed to keep Great Britain and Northern Ireland’s electricity and gas markets working effectively, facilitating continuity for UK industry and consumers. This is a sensible contingency to minimise uncertainty and disruption to our energy markets.

The instruments make similar amendments to legislation applying to Northern Ireland and Great Britain, although they are not always identical. This will ensure a consistent approach to retained EU legislation that previously applied across the UK while still recognising the unique nature of the single electricity market on the island of Ireland. On the single electricity market, let me be clear that the Government will take all necessary steps to seek to ensure that it can continue in a no-deal scenario. These instruments help to facilitate that. In preparing this legislation, the department has worked closely with Ofgem in Great Britain, and the Department for the Economy and the Utility Regulator in Northern Ireland.

In sifting this and related instruments, the Secondary Legislation Scrutiny Committee Sub-Committee A reported that the draft regulations,

“are necessary to enable UK energy markets to operate effectively if there is no agreement with the EU”,

and that,

“the proposed changes … do not appear to present significant policy or regulatory changes”.

The Electricity and Gas etc. (Amendment etc.) (EU Exit) Regulations amend and make “workable” the retained EU electricity and gas legislation that was created to harmonise energy markets and regulation across the EU. They also revoke guidelines for trans-European energy infrastructure which set out processes for development of EU infrastructure, as these will be redundant in a domestic setting.

The Gas (Security of Supply and Network Codes) (Amendment) (EU Exit) Regulations amend retained EU gas legislation. They ensure that the regulatory framework relating to gas is maintained, including the technical EU network codes that cover the cross-border gas trade. This will maintain maximum business continuity and efficiency for UK gas operators and UK gas consumers. It also maintains the framework for dealing with security of supply, such as responding to gas supply emergencies by updating the security of supply regulation to remove references to EU institutions.

The Electricity Network Codes and Guidelines (Markets and Trading) (Amendment) (EU Exit) Regulations address EU electricity legislation relating to markets and trading, ensuring that they operate as part of domestic law. In particular, this instrument amends a wider package of rules, known as EU network codes for electricity. It revokes the guideline on forward capacity allocation and the guideline on capacity allocation and congestion management. These codes govern how cross-border trade operates within the EU’s internal energy market. The EU has been clear that, were the UK to leave the EU without an agreement, we would no longer be part of the internal energy market. These codes would therefore have little to no practical application in UK law and are being revoked. Alternative arrangements for cross-border trade are being put in place by GB interconnectors similar to those that were in place prior to European market coupling. Fallback arrangements will be in place for the interconnectors between the single electricity market and GB to ensure that trading can continue to take place in a no-deal scenario.

This instrument also amends the inter-transmission system operator compensation mechanism regulation, which established a mechanism to compensate national transmission system operators for hosting cross-border flows of electricity. The cross-border elements are removed as they cannot be provided for by domestic UK legislation. Provisions relating to the setting of domestic network charges are retained.

The guideline on electricity balancing will be largely retained in Great Britain, with amendments made to remove provisions relating to a European platform for the exchange of balancing energy. In Northern Ireland, the guideline on electricity balancing will be revoked as it does not apply to islands not interconnected with the rest of the EU.

The Electricity Network Codes and Guidelines (System Operation and Connection) (Amendment etc.) (EU Exit) Regulations deal with EU legislation relating to the operation of the electricity system. Two of the EU regulations amended by this instrument—system operation guideline and emergency and restoration network code—concern the activities of electricity system operators, which balance supply and demand on the system in real time and ensure that electricity flows securely to customers across the UK.

The instrument amends the obligation on National Grid to co-operate with other system operators. It requires National Grid to assist SONI, the Northern Ireland system operator, with a similar reciprocal requirement on SONI. It removes the obligation to co-operate with other system operators. This does not preclude such co-operation happening, which we would encourage. However, we do not think it would be right that the GB system operator would be under a legal duty to co-operate that would not be legally required by our EU neighbours.

The unique shared arrangements underpinning the single electricity market on the island of Ireland mean that a different approach is required. In a no-deal scenario, the EU regulations oblige EirGrid, Ireland’s system operator, to endeavour to conclude a co-operation agreement with SONI because of the shared nature of the single electricity market. Therefore for Northern Ireland we are retaining a similar requirement for SONI to endeavour to conclude an agreement with EirGrid.

In addition, the instrument revokes the “connection codes”—a set of three EU instruments for electricity. These codes apply only under EU law and from a date after exit, so will not be incorporated via the withdrawal Act. A similar issue arises for some provisions of the gas transmission tariffs.

Finally, the Electricity and Gas (Market Integrity and Transparency) (Amendment) (EU Exit) Regulations deal with measures to ensure market integrity and transparency. They amend retained EU law to ensure that UK regulators can maintain effective market surveillance and enforcement, and that market participants will continue to publish relevant inside information.

In conclusion, while leaving the EU without a withdrawal agreement is not what the Government want or are aiming for, these regulations make the necessary changes to ensure that the electricity and gas markets continue to function as normal, including the continuation of the single electricity market on the island of Ireland. This will maximise business continuity for UK market operators, facilitate the continued efficient international trade in energy and ensure that consumers continue to benefit from reliable, affordable and clean electricity and gas. I beg to move.

I think we are down to the hard core now.

If I were a member of the EU 27 and I were sitting over there listening to this, I would detect a pulling up of the drawbridge, because that is what it feels like. Of course we are doing no such thing, because for UK consumers to continue to have the electricity and gas they need, they will rely very much on the interconnector and on gas pipelines, and on the island of Ireland there is an integrated supply. So it is with great regret that we are having this debate.

Even though we are debating what would happen in the event of a crash-out, for us to participate in the single European energy market seems very unlikely, no matter what deal Mrs May and others manage to hatch. This points the way not just to the future of this country’s energy market in the event of a crash-out but to what sort of market we will have and how we intend to regulate it even in the event of a deal. Again, that is regrettable.

Even if we are not within the energy market, our electricity system will remain contiguous with that on the continent of Europe thanks to interconnection, and our gas system will remain plugged into European gas networks. It seems to me that completely absenting ourselves from balancing and suchlike is not where we want to be—although I understand that that is what we would do in the wake of an emergency. I would like some assurance from the Minister that this is not where we want to be in the event of a negotiated exit or no-deal exit.

We are placing consumers at some risk, not least around the point of no longer participating in balancing. If there are outages or if supplies go down in one place, we have been able to use the European energy market to fill in and take more power quickly through interconnection. On security of supply for British consumers, we will be absenting ourselves from having that option. In the event of a crash-out or of not having made an appropriate deal to remain part of the energy market, consumers will be at more risk of blackouts and interruption of supply. Perhaps the Minister would like to comment on that point.

Ofgem clearly has an important role, and I have the same questions that I have asked Ministers lots of times. Does Ofgem have the capacity and capability to do that? If not, is it likely to have it at the end of next month, or when will it have? What extra requirement is needed for Ofgem?

I note that we have in the SI a requirement to commence registration four weeks after exit day. It is not clear to me what happens in the four weeks between exit day and the registration of suppliers. Where are they legally? Are they in limbo? I await the Minister’s answers.

I am grateful to the Minister for his full and thorough explanation of the regulations before the Committee. Once again, I note that this instrument is brought forward under a no-deal scenario, such that it merely transposes existing regulations into UK jurisdiction with no appreciable policy differences. I am therefore happy to approve the instrument: it does exactly what it says on the tin.

However, I would add that, as they would normally be negative instruments, I am grateful to your Lordships’ Secondary Legislative Scrutiny Committee for recommending that they be upgraded to the affirmative procedure. I agree that they are important for the internal energy market and, more importantly, for the all-Ireland energy market.

We are nevertheless concerned that, in future scenarios, interconnectors will become a key feature in the supply of electricity to the UK and to the EU. How it will operate effectively into the future is a matter of anxiety.

At present, it is an integrated seamless supply, and the single energy market should be able to operate unimpeded in any situation after withdrawal. Last week, Munir Hassan, head of clean energy at CMS, told Utility Week that even in the event of no deal the internal energy market “just has to continue”. In view of this, and of the fact that the internal energy market is seamless, will it be a bit less easy to understand the nature of the electricity market should frictions be put in place with changes between the all-Ireland energy market and the UK, and across the interconnectors into the EU? Is the Minister confident that these regulations and others will enable all that to happen with seamless continuity?

As a result of these regulations, powers will be transferred to UK organisations such as the Gas and Electricity Markets Authority, represented by Ofgem. I Fourth Delegated Legislation

Committee ask again: what organisational and budgetary support will be offered to these groups by the Government to allow them to cope with every necessary increase in workload?

There is also concern over how the all-Ireland energy market will operate in relation to the EU internal market through southern Ireland and into the internal energy market of the UK. I agree that the regulations are largely technical in nature but they assume agreement. We can agree to a grid agreement update, but this nevertheless brings philosophical anxiety.

Lastly, there is concern that the Explanatory Memorandum has not been amended in relation to the upgrade to an affirmative instrument. Under a negative instrument, there are often sections dealing with compliance with the European Convention on Human Rights, but that has not been included. These points may not be strictly material to the upgrade, but nevertheless it would be informative to understand from the Minister why there has not been a redrafting in relation to the affirmative procedure.

My Lords, as I made clear, these are pretty technical regulations that are designed purely for no deal. We laid a package of five instruments to resolve those inoperabilities across the body of retained EU law. As I think the noble Lord, Lord Grantchester, implied, although the committee that looked at them—I am trying to remember which committee it was; I think it was the Secondary Legislation Scrutiny Committee—recognised that they were absolutely necessary, it felt that the cumulative effect of all five warranted the affirmative rather than the negative procedure. That is why we are here today. Whether that means that the Explanatory Memorandum needs an upgrade, I really cannot tell him. I will write to him and deal with that point if it needs dealing with.

The broader question from both noble Lords, but particularly from the noble Lord, Lord Fox, is whether we would continue to participate in the internal energy market in the event of a deal. In the political declaration we agreed that we should put in place mechanisms as part of the future relationship to ensure as far as possible continued efficient electricity and gas trade over the infrastructure linking the UK and the EU, supported by technical co-operation. Further details are obviously a matter for negotiation. It is our position to seek a deal, and I reiterate that the regulations are for a no-deal scenario only.

It is worth reminding the noble Lord, Lord Fox, if he was being overly negative, that interconnectors are already in place between the UK and France and other countries. There is advantage for both parties in continuing to make use of them.

We use electricity at different times and, therefore, when we have a surplus, we can export it to them and vice versa. I cannot see that that will not continue to happen and bring benefit to consumers.

I move to the question of registration and the remit of Ofgem. Ofgem and its counterpart in Northern Ireland, the Utility Regulator, intend to continue to recognise registrations made by each other and by EU regulators, so we believe this will have no impact on the regulators’ ability to regulate. I hope that they will continue to be able to do the job that they do very well at the moment. We have engaged extensively with them and are confident that they will be able to meet their obligations within existing budgets. Where new systems are required, such as reporting mechanisms under the remit, the cost can be recouped through fees.

Finally, the noble Lord, Lord Grantchester, asked about Ireland and the single electricity market. We are confident that new arrangements can be put in place for trading in a no-deal scenario that will minimise disruption to the single electricity market. We have been working very closely with colleagues in the Northern Ireland Civil Service, the Northern Ireland Utility Regulator, Ofgem, systems operators and interconnectors to understand what day one arrangements for trading between the SEM would be in a no-deal scenario—not only the SEM within Ireland but interconnectors going to and fro between the two countries.

I think that deals with the points made by both noble Lords, and I therefore commend the first of the five regulations.

Motion agreed.