Sector insights

Brexit and the Energy & Utilities Sector


Written on 30 May 2018

Part 1: #REMIT

This series will cover some of the most relevant sector-specific challenges arising from Brexit. Each edition will focus on one particular topic and highlight the current changes and opportunities in the energy and utilities sector.

Background: EU internal energy market

A harmonised and liberalised EU internal energy market requires market access, transparency and regulation, consumer protection, supporting interconnection and adequate levels of supply. These measures have been addressed by the EU and aim to build a more competitive, customer-centred, flexible and non-discriminatory EU electricity market with market-based supply prices. It is said by the European Parliament that those measures “strengthen and expand the rights of individual customers and energy communities, address energy poverty, clarify the roles and responsibilities of market participants and regulators and address the security of the supply of electricity, gas and oil, as well as the development of trans-European networks for transporting electricity and gas.”

Why does it matter?

The InterContinental Exchange (ICE) in London is a leading global energy exchange. The UK facilitates one of the most liquid gas and electricity markets in the EU. Brexit, however, will cause the UK potentially dropping out of EU financial market regulations. Key to such a liquid market is that conditions apply that maintain UK’s leading role in energy trading. If this will be the case post-Brexit will depend on the Brexit negotiations and on the willingness of the UK to implement EU-compatible regulations. Energy trading is subject to certain regulations of which REMIT is one of the most important:

REMIT is directly applicable in all EU member states. The regulation established a common standard of transparency and stability across the common energy market. More specifically, all member states are subjected to centralised regulatory mechanisms, which aim at curtailing market manipulation and insider trading. REMIT provides inter alia for the obligation of market participants to register with their competent National Regulatory Agency, to report wholesale energy market transactions and to publish insider information. REMIT’s operation is monitored by the European Agency for the Cooperation of Energy Regulators (ACER).

Brexit will exclude the UK market from the common energy market of the EU, therefore also excluding it from the legislative framework and limiting its access to administrative bodies governing the common market.

Naturally, this brings about great uncertainty regarding to the rules that will govern the UK market and its access to the EU market once the UK will have left the union. Investors from abroad require a firm and safe regulatory framework before bringing their capital to infrastructure investments.

What are the next steps?

In a first step the EU Withdrawal Bill will transpose all EU regulations into UK law. Subsequently, it will grant authority to the competent ministers (Gregory Clark, Secretary of State for Business, Energy and Industrial Strategy) to alter and adapt the transposed laws. This will create a situation where all EU legislation will initially become UK law, although many of the provisions will become redundant as they either only apply to member states or concern EU institutions.

What changes will Brexit bring about?

In regard to REMIT it is still unclear which provisions will be repealed after they have been transposed into UK law. What seems quite certain is that the substantial part of the provisions will remain unchanged and will be translated into UK legislation, since the UK government used parts of the REMIT provisions as the basis for criminal legislation regarding insider trading and market manipulation in 2015. Nevertheless, all provisions concerning the cooperation of national regulatory agencies and ACER as well as the authority of ACER itself can no longer apply to the UK after Brexit, as the UK will have left the common market.

Consequently, ACER will not be able to monitor the UK market while OFGEM and other UK agencies will no longer have access to the information ACER holds. Therefore, it is likely that there will be a splitting of REMIT into parts concerning general anti-manipulation provisions, which will stay in place, and those parts relating to ACER, which will be repealed by new legislation introduced by the Department of Business, Energy and Industrial Strategy.

In the absence of REMIT, settlement of electricity and gas trading might be treated as financial instruments with a much higher regulatory framework and a different market landscape for current market participants. Investors from outside UK might lose their confidence in the UK market if no efficient market control instruments are in place, in particular the exchange of fundamental data to prevent insider dealing.

Thus far, the Government has failed to provide the public with information regarding the extent to which it plans to alter REMIT and, more importantly, the way it intends to structure the new provisions. It also remains particularly interesting to see whether or not the Government seeks to find a solution for UK agencies to cooperate with ACER after Brexit. The EU at least should address the risks resulting from Brexit for the energy market landscape adequately to the market participants. Efficient financial market and transparency rules are required to maintain London’s leading position in the energy trading market.

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*This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.