Electricity and Gas (Internal Markets and Network Codes) (Amendment etc.) (EU Exit) Regulations 2020
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Lord Callanan
That the draft Regulations laid before the House on 6 July be approved.
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, when the transition period ends, direct EU legislation and EU-derived domestic legislation that forms part of the legal framework governing our energy markets will be incorporated into domestic law by the withdrawal Act, a subject with which the House is very familiar. My department is working to ensure that the UK’s energy legislation continues to function smoothly and supports a well-functioning, competitive and resilient energy system for consumers after the end of the transition period. This draft instrument is part of the wider legislative programme preparing for the eventuality that the UK does not reach a further agreement with the EU by the end of the transition period, or if any reached agreement does not cover these relevant policy areas.
Prior to the UK’s departure from the EU on 31 January, my department laid several statutory instruments in preparation for the eventuality that the UK left the EU without a withdrawal agreement. Of course, since these SIs were made, the UK has left the EU under the terms of the withdrawal agreement and, since then, new EU legislation has come into effect. This includes Regulation (EU) 2019/943 of the European Parliament and the Council of 5 June 2019 on the internal market for electricity, which I will refer to as the electricity regulation (recast), as well as Regulation (EU) 2019/942 of the European Parliament and of the Council of 5 June 2019, establishing a European Union Agency for the Cooperation of Energy Regulators, which I will refer to as the agency regulation (recast).
The Electricity and Gas (Internal Markets and Network Codes) (Amendment etc.) (EU Exit) Regulations make amendments, including some revocations, to the following new pieces of EU legislation: the electricity regulation (recast) and three of the EU electricity network codes. These amendments are required to fix deficiencies that would arise when this legislation becomes retained EU law at the end of the transition period under the terms of the withdrawal Act. It also revokes the agency regulation (recast), which will, of course, no longer be applicable after the end of the transition period.
The electricity regulation (recast) and the ACER regulation (recast) form part of a programme of legislation known as the clean energy package, created to further integrate markets across the EU. All of the clean energy package will have entered into force by the end of the transition period. The electricity regulation (recast) sets out the high-level principles and structures for the operation of EU electricity markets and defines relationships between EU bodies with a role in this area. The agency regulation (recast) sets out the role of the Agency for the Cooperation of Energy Regulators—ACER—to co-ordinate energy regulator implementation of the clean energy package and to resolve disputes between member state regulators.
The predecessor to the clean energy package was the third energy package, under which the EU electricity network codes were adopted. The codes introduce common technical rules to promote harmonised operation of energy markets across the EU, and this SI amends three of these codes: first, the High Voltage Direct Current Connections—HVDC—Code; secondly, the Demand Connection Code, or DCC; and thirdly, the Requirement for Generators, or RfG, Code.
This draft instrument makes corrections to deficiencies in the electricity regulation (recast) and three of the EU electricity network codes. The amendments are needed to make the legislation workable in a domestic context after the end of the transition period. These deficiencies include references to EU entity functions, such as the role of member states, and to EU institutions, such as the European Network of Transmission System Operators for Electricity. The deficiencies are removed or replaced with references to entities in Great Britain or other appropriate terms. For example, the term “Member State” is replaced with references to “the Secretary of State”. The draft instrument also revokes the agency regulation (recast) in full on the grounds that it includes obligations that would be inappropriate after the end of the transition period, with of course GB regulators no longer being members of ACER.
This draft instrument aims to maintain existing rules domestically while amending or removing provisions that will no longer function after the end of the transition period. As a result, it will help to maintain the operability and integrity of Great Britain’s energy legislation and maximise business continuity for market participants.
In conclusion, the regulations are an appropriate use of the powers of the withdrawal Act. They will maximise continuity in our energy regulation and business continuity for Great Britain’s market operators. They will also ensure that there is no uncertainty about the role and functions of Great Britain and EU bodies in the market or about the requirements on market participants as we leave the EU. With that, I commend the regulations to the House.
Lord Callanan (Con)
I thank the doughty band of noble Lords who have turned up for yet another of these technical regulations for their valuable contributions. I totally take on board the valid point of the noble Lord, Lord Oates: it would have made more sense to combine our Thursday afternoons into one extended Thursday afternoon and debate some of these regulations together. I am not sure why that did not happen—I think there was some sort of miscommunication between my department and the Whips’ Office—but he is right on this one. This is the last time I will ever agree with a point made by the Liberal Democrats; no such thing will ever happen again.
The Government have of course committed to achieving a smooth end to the transition period for our energy system. As such, a programme of legislation is required to ensure that retained EU law is workable and free of deficiencies by the end of the transition period, and this draft instrument falls within that category of legislation. A failure to address in full deficiencies in the retained EU legislation would create uncertainty and inefficiency in the operation of Great Britain’s market regulation, the role and function of domestic and EU bodies in the markets and the requirements on market participants. Such uncertainty could result in an increase in wholesale prices, which no one wants to see.
I must stress that this draft instrument, and the UK’s departure from the EU as a whole, does not and will not alter the fact that our energy system is resilient, robust and secure. That resilience is built on our diversity of supply. The UK has one of the most secure energy systems in the world, and the industry has well-practised contingency plans to keep energy flowing and to ensure that our energy supplies are safe. In Great Britain the Government have of course been working closely with the electricity system operator, National Grid ESO, and the regulatory body, the Office of Gas and Electricity Markets, to ensure that measures are in place to deliver continuity of supply and confidence in the regulatory framework in all scenarios. To answer one of the questions from the noble Lord, Lord Redesdale, Ofgem is responsible for regulations in this area, as the independent regulator, and it of course controls network operators and pricing in this space.
The Government are therefore confident that the UK’s electricity system will be able to respond to any changes safely, securely and efficiently, whether these changes are a result of leaving the EU or other challenges facing the UK today, such as the coronavirus pandemic. Our energy system will of course still be physically linked to the EU after the end of the transition period, through interconnectors, which bring significant benefits including lower consumer bills and security of energy supply.
Of course, our future energy relationship with the EU is currently being discussed as part of the ongoing negotiations. As set out in the UK’s approach to the negotiations, we are open to an agreement with the EU in this area that provides for efficient electricity trade. However, should we not have reached any further agreement with the EU by the end of the transition period, or if any agreement does not cover the relevant policy areas, there will continue to be significant value in increased interconnection and trade in electricity and gas with our neighbours. This instrument will help maintain the stable functioning of the domestic energy market by fixing deficiencies across retained EU and domestic legislation, while retaining regulatory functions required to keep the market working effectively.
Let me answer some queries. I will write to the noble Lord, Lord Oates, on his point about grid connections for renewables and give him further information. On the ETS, I have to say that I think Michel Barnier was being somewhat disingenuous with his comments in Dublin, because of course the UK has higher carbon pricing and a more efficient carbon trading market than the EU—if anything, we disadvantage ourselves with our higher carbon costs.
The noble Lord, Lord Redesdale, asked about pricing. We recognise, of course, the importance to businesses and households of having access to an affordable, secure and sustainable system of energy, and the UK’s exit from the EU will not alter this. Many factors impact energy prices, including fuel prices, exchange rates and generation mix. Great Britain will remain physically linked, as I said earlier, through interconnectors, and we expect any change in electricity prices as a result of changes to interconnector trading arrangements would fall within the normal range of market volatility.
The noble Baroness, Lady Bowles, and my noble friend Lady McIntosh also asked about interconnectors. The mechanisms for cross-border trade are not expected to fundamentally change after exit. The EU gas market is one of the world’s most developed and provides security through supply diversity, most of which, of course, is not dependent on the EU. The Government have taken steps to enable electricity and gas trade to continue and to maintain the effectiveness of domestic regulation, providing legal clarity for industry on the future operations of Great Britain and Northern Ireland’s energy markets.
The noble Baroness, Lady Bowles, asked about UK TSOs maintaining a relationship with European TSOs. The UK Government understand the importance of co-operation between system; discussions around the appropriate fora for this co-operation are ongoing and form part of the negotiations.
The noble Baroness, Lady Bowles, asked what happens when and if the EU changes the codes and regulations. I am afraid I will also give her the reply that this is subject to ongoing negotiations and I cannot comment further on it at the moment. However, we have amended REMIT in our first set of statutory instruments.
The noble Baroness, Lady McIntosh, correctly stated that this SI just affects Great Britain; it does not affect Northern Ireland or modify EU energy law as it applies to Northern Ireland. It will therefore have no implications for electricity trading through the single electricity market. The electricity trading technical notice makes it clear that trade on interconnectors will become less efficient if a free trade agreement is not agreed with the EU. With less efficient trade, there is of course the risk of increased costs.
Finally, I will write to the noble Lord, Lord Redesdale, with more information on the future of tariffs.
In conclusion, the draft instrument is required to ensure continuity for our energy system and certainty for market participants and consumers. In doing so, it will support the implementation of an effective legislative framework needed for reliable, affordable and clean energy. I commend these draft regulations to the House.