Draft Electricity and Gas etc. (Amendment Etc.) (EU Exit) Regulations 2019 Draft Electricity network codes and guidelines (Markets and trading) (Amendment) (EU Exit) Regulations 2019 Draft Electricity and gas (Market Integrity and Transparency) (Amendment) (EU Exit) Regulations 2019 Draft Gas (Security of Supply and Network Codes) (Amendment) (EU Exit) Regulations 2019 Draft Electricity Network Codes and Guidelines (System Operation and Connection) (Amendment Etc.) (EU Exit) Regulations 2019

Alan Brown Excerpts

Tuesday 26th February 2019 General Committees

[Claire Perry]

I assure my hon. Friend that my Department has been at the forefront of preparation across Whitehall for the event of a no-deal Brexit. We have introduced a number of legislative instruments, some of which I have taken through the House myself, and we have done lots of work with third parties and stakeholders. The inescapable fact is that we do not have an agreement about an ongoing legal basis on which the single electricity market in the island of Ireland will operate, and that is a real concern. We can take legislative powers to mitigate the worst impacts of that, but they will not be taken before exit day because other even more urgent things are ahead of them in the queue. So to the extent of our ability, I agree that we are as prepared as we can be, quite rightly, for a no-deal Brexit.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

On that no-deal preparation, can the Minister confirm that a system to replace the REMIT reporting system that regulates the workings of the markets is still to be implemented?

[Claire Perry]

If I understand the hon. Gentleman correctly, he is referring to the capacity market in the UK. There are, indeed, technical challenges regarding the procedure of the capacity market, but I am not aware of any other regulatory concerns. I can assure the hon. Gentleman that one of the processes that has been working extremely well is that I and the relevant Ministers in the devolved Administrations are now speaking on an almost weekly basis to thrash through the elements of a no-deal Brexit and how they might affect us. I imagine that all would say we were well prepared.

[Alan Brown]

I am reading from paragraph 2.2 of the explanatory memorandum to the Electricity and Gas (Market Integrity and Transparency) (Amendment) (EU Exit) Regulations 2019:

“the REMIT Implementing Regulation, aims to prevent market manipulation and insider trading in the gas and electricity markets.”

That is what is in place now. Paragraph 12.3 explains that a domestic replacement system will need to be established and put in place, so does that not mean that there is a risk in that period of market manipulation and insider trading within the UK or GB domestic gas and electricity market?

[Claire Perry]

Part of the SI relating to the market integrity and transparency amendment will enable UK regulators—Ofgem and the utility regulator—to set up and operate domestic arrangements for market integrity and transparency that will mirror the EU regime. So one of the SIs before us today does indeed mitigate the risk the hon. Gentleman rightly identifies as unacceptable.

[Alan Brown]

What will the timescale for the replacement programme be? I note that there has been no formal consultation on the REMIT replacement, so what is the timescale for Ofgem implementing the new system?

[Claire Perry]

I hope I will answer the hon. Gentleman’s question during the rest of my remarks. My officials are scribbling frantically so that I can give a good response.

Returning to the first instrument, its principle is to amend and make workable the retained EU electricity and gas legislation that was created to harmonise energy markets and regulation across the EU. It also revokes the guidelines for trans-European energy infrastructure that set out processes for the development of EU infrastructure, as they will be irrelevant in a four-nation setting.

The second instrument amends retained EU gas legislation, ensuring that the regulatory framework relating to gas is maintained, including the technical EU network codes that govern the cross-border gas trade. That will maintain maximum business continuity and efficiency for UK gas operators and consumers. The instrument also maintains the framework for dealing with security of supply, such as matters relating to responding to gas supply emergencies, by updating the security of gas supply regulation to remove references to EU institutions.

The third instrument addresses EU electricity legislation relating to markets and trading, ensuring that these operate as part of domestic law. In particular, the instrument amends a wider package of rules, known as the EU network codes for electricity. It revokes the guidelines on the forward capacity allocation code and on capacity allocation and congestion management, which essentially govern how cross-border trade works within the EU’s internal energy market. Of course, it is a truism that the EU has made it clear that if we left without a deal we would no longer be part of that internal energy market, and that is where the potential legal risk to the single electricity market will derive from. The codes would have little to no practical application in UK law and are, therefore, being revoked by these statutory instruments.

We are, of course, keen to maintain cross-border trade and interconnector flow, which has been helpful in balancing our energy demand and keeping prices low. We are implementing alternative arrangements for cross-border trade with GB interconnectors, similar to those that were in place prior to the European market coupling. We have fall-back arrangements in place for the inter- connectors between the SEM and GB to ensure that trading can continue to take place in a no-deal scenario.

Excitingly, another aspect of the instrument is that it will amend the inter-transmission system operator compensation mechanism regulation, which established a mechanism to compensate national transmission system operators for hosting cross-border flows. Domestic UK legislation will no longer provide for such flow, because we cannot legislate for other countries; the cross-border elements will therefore be removed, while the provisions that relate to the setting of our own domestic network charges will be retained.

Similarly, the guideline on electricity balancing will largely be retained in Great Britain, with amendments to remove provisions that relate to a European platform for the exchange of balancing energy. The guideline will be revoked in Northern Ireland, because it does not apply to islands that are not connected with the rest of the EU.

The fourth instrument deals with EU legislation on the operation of the electricity system. Two of the EU regulations that it amends—the regulation establishing a system operation guideline and that establishing the emergency and restoration network code—concern the activities of energy system operators, which balance supply and demand on the system in real time and ensure that energy flows securely to customers across the UK.

Effectively, the instrument will amend the obligation on National Grid to co-operate with other system operators: it will require National Grid to assist the System Operator for Northern Ireland, with a similar reciprocal requirement on SONI, but will remove the obligation to co-operate with other system operators. Of course, it does not preclude such co-operation, which we encourage, but we do not believe that it is right for a GB system operator to be under a legal duty or commitment to co-operate that our EU neighbours would not legally require from their own system operators.

The unique shared arrangements that underpin the single electricity market on the island of Ireland require a different approach. In a no-deal scenario, EU regulations will oblige EirGrid, Ireland’s system operator, to endeavour to conclude a co-operation agreement with SONI because of the unique shared nature of the single electricity market. For Northern Ireland only, we are therefore retaining a similar requirement for SONI to ensure co-operation with EirGrid south of the border.

In addition, the instrument will revoke the connection codes, a set of three EU instruments for electricity. The codes will apply under EU law only from a date after exit and will therefore not be incorporated via the withdrawal Act. A similar issue will arise for some provisions of the gas transmission tariffs.

The last instrument deals with measures to ensure market integrity and transparency, which the hon. Member for Kilmarnock and Loudoun raised. It will amend retained EU law to ensure that UK regulators can maintain effective market surveillance and enforcement, and that market participants can continue to publish relevant inside information. In answer to his question about the REMIT programme, there will be no reduction in the abilities of UK regulators; post exit, regulators will rely on alternative but available sources of market data. We are assured that that will not affect their ability to keep the market under surveillance. The programme could run for up to two years, until we are assured that appropriate arrangements are in place.

[Alan Brown]

Will the Minister give way?

[Claire Perry]

I am coming to the end of my speech, but perhaps the hon. Gentleman would like to make a brief speech of his own.

In conclusion, although leaving the EU without a withdrawal agreement is not what the Government want or are aiming for, it is only prudent that we make the changes necessary to ensure that electricity and gas markets continue to function as normal, including doing all that we can to ensure the continuity of the single electricity market on the island of Ireland. I commend the draft regulations to the Committee.

--- Later in debate ---

[Alan Brown]

It is a pleasure to serve under your chairmanship, Sir Graham. I will make some general comments before addressing some of the individual statutory instruments. It seems to me that we have a UK Government energy policy that, in terms of new and nuclear energy, is in absolute tatters. It has completely fallen apart. UK Government policy will not allow onshore wind in Scotland. The Minister might have heard these comments once or twice before. Yet here we have no-deal preparation that undermines the collaborative approach of the EU internal energy market. That is a massive contradiction.

We have five statutory instruments before us. For each of those, no consultation has been undertaken, no impact assessment has been carried out, and we have only glib assessments of costs; most of the SIs say that the costs are less than £100,000. Is this lack of consultation and absence of impact assessments due to timescales and an actual lack of no-deal preparation undertaken by the Government, despite the fact that we have been pretending to prepare for this for the last two years? Is this why the Minister is one of the Cabinet Ministers who have been reported as demanding that the Prime Minister take no-deal off the table because it is so disastrous?

Turning to individual statutory instruments, I will start with the draft Electricity and Gas etc. (Amendment etc.) (EU Exit) Regulations 2019. Paragraph 2.3 of the draft explanatory memorandum states that if these amendments are not implemented, there may be “increased wholesale prices” for electricity. However, paragraph 12.3 confirms that there is no impact assessment. How do we know that not implementing this means that wholesale energy prices could increase?

The draft Electricity Network Codes and Guidelines (Markets and Trading) (Amendment) (EU Exit) Regulations 2019 confirms that Great Britain will be removed from the balancing guidelines. The explanatory memorandum states:

“CACM and FCA regulations are revoked”

as they provide for cross-border processes for trading in electricity via electricity interconnectors. What is the actual impact of the UK being taken away from these cross-border arrangements?

Paragraph 7.7 of the explanatory notes states that “alternative trading arrangements” can be put in place. What is the timescale for those alternative trading arrangements? What discussions have been had with the EU to allow cross-border trading to continue if there is no deal and we crash out on 29 March?

I have already touched on the draft Electricity and Gas (Market Integrity and Transparency) (Amendment) (EU Exit) Regulations 2019 in an intervention about REMIT, which prevents market manipulation and insider trading. The Minister argued that alternative domestic data interrogation will actually be used by the regulator for up to two years, allowing the regulator to ensure that there is no insider trading.

Paragraph 7.2 of the draft explanatory memorandum states:

“Replacement systems for secure transfer of sensitive market data will not be available at exit”,

and that

“registration and market data reporting requirements will not be commenced until additional implementation work is completed.”

That seems to be contradictory. How can we have absolute surety that systems will be in place to ensure the regulation and monitoring needed to avoid insider trading?

Paragraph 12.3 estimates that it will cost Ofgem £1.9 million, as well as annual running costs of £500,000, to set up a replacement system. What is the timeframe for setting up the new system? Who will actually pay for it? Will there be a direct Government grant to Ofgem, or will the cost be added to energy bills? What work has been done to date on the replacement system?

Paragraph 2.2 of the draft explanatory memorandum to the draft Gas (Security of Supply and Network Codes) (Amendment) (EU Exit) Regulations tells us that the draft regulations will facilitate “‘solidarity’ (gas sharing)” and will create a duty to

“collaboratively assess the risks to EU security of gas supply”,

and to create mitigation plans on an EU-wide basis. However, paragraph 2.3 suggests that not implementing the draft regulations would somehow

“threaten the continued secure and efficient operation of energy markets across the UK.”

Paragraphs 7.7 and 7.8 confirm that a no-deal scenario would revoke the solidarity of gas sharing and the collaborative risk assessment of gas supply to the EU. Why is walking away from that seen as acceptable to the UK Government?

In summary, no impact assessment has been provided for the potential withdrawal from the energy balancing markets for gas and electricity, there are no definitive proposals for how Ireland’s single market will work if there is a no-deal Brexit and there will be no consultation. That flags up the real risk of crashing out of the EU with no deal. That is why I agree with the Minister—that the Prime Minister should take a no-deal Brexit off the table as soon as possible. I look forward to her response.

[Claire Perry]

I thank hon. Members for an extensive delve into what are a series of deeply technical and quite complicated SIs. As always in this process, we have learned a lot. I will try to answer some of the specific questions raised.

The first, from the hon. Member for Southampton, Test, was on the risks and timing of the legal underpinning for the connections code. It is our intention to make further regulations, under the Electricity and Gas (Powers to Make Subordinate Legislation) (Amendment) (EU Exit) Regulations 2018, to incorporate those connection codes into domestic law. We absolutely appreciate the need for certainty, and we are therefore looking for a way to take forward the necessary provisions in a timely manner.

I can tell from the hon. Gentleman’s face that he does not think that that is acceptable. As I think he already knows, the process of triaging preparation for no deal has been very focused on the things we absolutely must do so as not to face a massive threat on day one, while there are other things that, although they might pose a legal question that might have to be addressed later, we can safely assume can be done.

The hon. Gentleman referenced good will, and in the absence of a legislative branch of Government in Northern Ireland, I pay tribute to the Northern Ireland Office and its civil servants, and indeed to the devolved Administrations, which have been incredibly helpful in working on this good-will basis. It is in nobody’s interests for a well-functioning single energy market or internal energy market to suddenly fail, and I think everyone is appraised of those risks.

The hon. Gentleman’s second point was on REMIT and why we are essentially having only a partial transfer. That is because Ofgem and the other utility regulators are confident that that is what they need to ensure appropriate scrutiny and appropriate levels of market information, and that there will not be a decrease in effectiveness on day one or during the period in which they will bring forward alternative arrangements.

The hon. Gentleman also raised the definition of the SEM. That will still refer to EU obligations due to a practical need for the definitions of the SEM to continue to align; as I mentioned, that is one of the few derogations, if you like. Our intention is to use the powers of the European Union (Withdrawal) Act to amend the definition of the SEM, in parallel with Ireland, once a new definition is agreed with Ireland in due course. As I have made clear, this is a contingent problem; it will not mean that energy will not flow in Northern Ireland on day one, but it may lead to legal uncertainty about the functioning of the market and concerns about future capacity market auctions. We are all keen to avoid that.

The hon. Members for Southampton, Test and for Kilmarnock and Loudoun raised the question of the removal of solidarity of supply. We have almost never had to rely on the solidarity regulation, at least in my reading of energy history, because we have one of the most globally developed gas markets in the world to provide security of supply through supply diversity. We are in an extremely fortunate position, not only because we can generate our own sovereign gas offshore and potentially onshore, but because in the past few years we have relied heavily on imports of liquefied natural gas, generally from diversified sources including Qatar, the US and our pipeline with Norway, which is not in the EU and is not subject to the solidarity regulation.

The hon. Member for Southampton, Test makes an extremely valuable point, however. It is absolutely our intention to work collaboratively with our closest neighbours, whether on energy policy or on climate change mitigation, and ensure that none of us faces a threat to security of supply—particularly from state agents that do not have Europe’s interest at heart. Even though we are removing the solidarity provision, which I believe has never been used, it is right to assume that we will continue to be good neighbours to Europe.

A question was asked about the capacity market. Of course, we have said that even in a no-deal Brexit we will still abide by state aid rules. We were instrumental in putting those rules into legislation; we believe in competition and not unfair subsidies of particular industries. Ofgem assures us that the current challenge is based not on the operation of the market but on procedure. We will keep working to ensure that the market is fully restored and continues to successfully deliver low-cost and low-carbon energy to the UK markets.

The hon. Gentleman also raised the differences in licensing between Northern Ireland and the Republic of Ireland. The Northern Ireland regulator is identifying the gaps in the licensing regime. We will consider amendments in due course, but since these are not “life and limb” regulations, it was considered acceptable to allow a short period of delay. However, we continue to work closely with the Northern Ireland civil service on these points.

The hon. Member for Kilmarnock and Loudoun raised impact assessments. He is right that the assessed costs of the draft regulations do not trigger a full impact assessment. The long-term economic analysis published last November and the document that we published today about the economic impact of a no-deal Brexit encapsulate his broader points about the possible impact of a disorderly Brexit on energy costs, among other things. It is perfectly right that we have not done an impact assessment for the draft regulations.

The hon. Gentleman also asked about the timescales for the alternative arrangements for cross-border trading. The Great Britain interconnectors to the continent are agreeing access rules with the regulators. Proposals went out for consultation earlier this year, and we have nothing to indicate that anybody wants to stop the free and fair trading of energy via those interconnectors, since all parties benefit from the arrangements.

[Alan Brown]

I accept what the Minister says about ongoing consultation with the regulators, but if there is a no-deal Brexit, what will be the expected timeframe for getting the trading arrangements in place? Obviously that will affect not only the existing interconnectors, but any business cases being proposed for new interconnectors. Everybody needs to know what the trading arrangements will be.

[Claire Perry]

The hon. Gentleman states very succinctly why there are

many uncertainties associated with a disorderly Brexit, only some of which the Government can mitigate with legislation such as that before the Committee. That is the reason for my strong view that the best way to avoid such consequences is to avoid a no-deal Brexit. I have said before and will say again that it is therefore incumbent on us all to vote for the deal before us, so that we can leave with a deal on 29 March, as we promised to those we represent. That offer remains on the table.