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 Whitehead Excerpts

Tuesday 26th February 2019 General Committees

[Dr Alan Whitehead (Southampton, Test) (Lab)]

It is a pleasure to serve under your chairmanship, Sir Graham; I am sure that you will have an interesting time chairing this debate on the five statutory instruments before the Committee. Perhaps I ought to say that I will not necessarily discuss the statutory instruments in the same order as the Minister, because I did not have any forewarning about the order that she would discuss them in. I am not criticising; I am merely saying that it may be difficult to establish the debate effectively, but I will do my best.

[Claire Perry]

Will the hon. Gentleman accept my apology for that omission? We have used the opportunity of many of our SI debates to have a very constructive conversation, so I apologise to him. I will take account of what he said, should we have the pleasure of doing this again.

[Dr Whitehead]

I thank the Minister very much for those comments. I sincerely hope that we will not have the pleasure of doing this again in a hurry because, among other things, I had to read all five SIs to get the sense of them. I have tried to place my concerns about them in descending order of importance. Therefore, I will not necessarily talk about them in the same sequence as the Minister, but I hope what I say will be reasonably intelligible.

Before proceeding, perhaps I ought to say that I appreciate the need to undertake code revision and to deal with the transmission code arrangements in such a way that they become properly operable within the UK on the day of a no-deal Brexit, which the Minister and I are both sincere in hoping will never come about. Nevertheless, we need to ensure that that is done, so far as is possible. This afternoon, I will talk not about that process itself, because it is necessary, but about some concerns over the nature of how it is being brought about in the SIs. The Opposition do not intend to oppose any of the SIs, but we do want to place on the record—and hopefully get the Minister’s comments on the record—our concerns over how the process has been brought about through the passage of the statutory instruments.

I will start with the draft Electricity Network Codes and Guidelines (System Operation and Connection) (Amendment etc.) (EU Exit) Regulations 2019, which take the regulations that have set common standards for transmission system operations across member states and translate that arrangement into a UK arrangement—a new arrangement as far as TSOs are concerned. As the Minister alluded to, that will cover transmission system operations not only in England, Wales and Scotland, but in Northern Ireland, which has a different transmission system operations arrangement and, indeed, a different regulator. It nevertheless comes under the draft regulations for the purpose of the legislation that is required to bring all of this within a UK-wide ambit.

As the Minister said, Northern Ireland and the Republic of Ireland have separate regulatory systems, but the transmission system and the energy market are completely integrated. Indeed, the Minister referred to the System Operator for Northern Ireland—SONI. That is not one of the few Japanese companies that is retaining its investment in Great Britain, but the operator of the Northern Ireland system. That operator has to operate in very close collaboration, including code congruence, with the system operator in the Republic of Ireland. That is because, among other things, two regulators deal with one grid and there is one single market as far as wholesale is concerned. That means that it is absolutely necessary that the codes between those two system operators are as congruent as possible in order to make the operation of a single grid effective.

It is quite clear that those codes will not be congruent in the case of a hard Brexit. As the explanatory memorandum to the SI makes clear, the network codes—“connection codes”—which come from the EU regulations are in the process of being incorporated into existing national regulatory frameworks, in order to make them accessible and familiar to UK parties. The document states—glass half full:

“The process of incorporation has been largely completed”.

An alternative way of saying that is: “the process of incorporation has not been completed”.

The Department states that it is the intention that those codes not incorporated already into a system to make them coterminous,

“will be created in domestic law under the powers of the Electricity and Gas (Powers to Make Subordinate Legislation) (Amendment) (EU Exit) Regulations 2018 as soon as practicable after exit day.”

That means that legislation to make those codes congruent will not be in place by exit day, nor for quite a while afterwards, because it will be a question of getting a new piece of legislation through this House to carry out the rest of the code congruence work.

Strictly speaking, that means that the single grid will operate on convergent codes and not be legally watertight. The Minister has effectively said this afternoon that, in practice, good will between all people will ensure that electricity continues to flow and the market continues to operate. However, we need to be clear that will be done essentially on a good-will basis and not on a legal basis. Considerable risks are attached to the fact that those codes will not be congruent. If there are major issues about code compliance on both sides of the border, as far as the grid is concerned, there will be no easy way to remedy that if there is a hard Brexit. That is my strong concern about the regulations.

I turn to the draft Electricity and Gas (Market Integrity and Transparency) (Amendment) (EU Exit) Regulations 2019. As the hon. Member for Kilmarnock and Loudoun said, that covers the implementation and scope of REMIT regulations. REMIT is a very effective system. It came into UK legislation via regulation and is therefore not the subject of a separate raft of legislation. Nevertheless, it operates very effectively as far as the UK is concerned. It is a system that aims to prevent market manipulation and insider trading in energy markets. It does so through the registration of participants, the reporting of energy data and the publication of inside information that would have an impact on prices. That registration, reporting and publication is done through EU agencies. The purpose of this SI is to transfer that into UK arrangements, so that, as much as possible, UK reporting and transparency work as they did previously in the EU.

However, it is clear from this SI that not everything that is currently undertaken by REMIT will be incorporated into UK legislation. It is stated that the regime that is being legislated for will commence four weeks after Brexit day, but will apply only to registration, inside information and transparency data. Other forms of reporting, such as data relating to transactions in wholesale markets, will not start until the regulator has reviewed the market data requirements. It is suggested that if the regulator decides to implement full market data reporting, as currently required under REMIT, a further three months’ notice of commencement will be given.

That means that only a part of REMIT will indisputably come into UK operation on a guaranteed basis. The regulator will have the opportunity upon review to translate the rest of the REMIT regulations into UK operation, but it may decide that the further pieces of reporting and data transfer relating to transactions in the wholesale market will not be part of the UK reporting arrangements. If that happens, there seems to be nothing that we in this House can do about it. Perhaps the Minister will indicate that there is something we can do about it. Perhaps she will say that we have effective legislative control over bringing the whole of REMIT into UK concerns, and that we are not just hoping that the regulator, which presumably will have concerns about resources, procedures and various other things, will complete the transfer. It would have been a good idea to undertake the whole of the transfer in this SI. I am not sure why there is only a partial transfer. I would be grateful for the Minister’s comments and reassurances on that.

The draft Electricity and Gas etc. (Amendment etc.) (EU Exit) Regulations 2019—the titles are getting a little more ragged as we get through the process—relates to the licence conditions concerning transmission and interconnections, which arise from the Gas Act 1986, the Electricity Act 1989 and the Utilities Act 2000. Those Acts all contain substantial references to EU directives. That is fine, as far as England, Wales and Scotland go, but there is a problem, in terms of translation, with Northern Ireland. I have already said that Northern Ireland has a completely coterminous grids arrangement with southern Ireland, and that there is a single energy market.

The explanatory memorandum states that no changes have been made to the definition of a single energy market,

“due to a practical need for the definitions of the SEM in Ireland’s and Northern Ireland’s legislation to continue to align, (which they currently do).”

It continues:

“This course of action will better preserve the stability of the SEM”.

Again, practically, that will mean that, if there is a hard Brexit, there will be a different regime concerning licensing and collaboration on licensing in Northern Ireland and in the rest of the United Kingdom. For Northern Ireland, a number of references to relations with the EU concerning those licences will be left in, as will EU arbitration arrangements. As the Minister mentioned, it may well be the case that, through good will, this actually works in practice. However, we ought to be very clear that there will not be congruity between the licensing arrangements—not in this instance between Northern Ireland and southern Ireland, but between Northern Ireland and the rest of the UK. I would be interested to hear whether the Minister thinks that that may create particular issues or whether she is confident that can be overcome at an early stage.

The fourth statutory instrument, the draft Gas (Security of Supply and Network Codes) (Amendment) (EU Exit) Regulations 2019, provides for co-operation to safeguard security of gas supply between member states and for solidarity between groups when a member state finds itself unable to supply households or essential services. Again, that is included in existing UK legislation through an EU regulation. At present, should the UK have a problem with our gas supply, there is a solidarity arrangement that requires other member states to come to our aid. Equally, if someone gets their gas supply cut off by the Russians, we have a reciprocal obligation, where we can, to come to their aid. I appreciate that that is not perhaps a central issue—the Minister and I have had discussions on this previously. The security of UK gas supplies is not a particularly interconnector, grid-based, serious European issue. Nevertheless, this SI cuts off all those methods of collaboration and solidarity—necessarily, because we will no longer have a member state’s obligation to act in solidarity or to come to other member states’ aid. However, we need to remember that they are required to come to our aid as well. The current regulations also include regional assistance arrangements. Since we will not be in any region, we cannot be part of any regional assistance arrangements either.

Will the Minister clarify whether she thinks that that is the end of the matter and the end of co-operation and solidarity, and that by simply revoking these arrangements in this particular SI, nothing of the sort will happen in the future? One hopes, in terms of common sense and fairness between ourselves and EU member states, that some sort of gas interconnection solidarity arrangement might continue. Does the Minister have any intention to pursue by other means such an arrangement, which could be beneficial both for us and for EU member states in the future, just as this arrangement has been beneficial for us in the past?

Finally—Sir Graham, you will be delighted that I am coming to the word “finally”—the Minister mentioned the unfortunate episode concerning the capacity market. She knows that we are talking today about what would happen in the event of a no-deal Brexit and about all these arrangements that currently pertain because we are a member state. The arrangements concerning the capacity market, which arise from state aid permission by the European Union in the first instance, also arise from the fact that we are a member state. If we are not a member state on 1 April, we will not be bound by those arrangements. In the event of a no-deal Brexit, does the Minister intend to restore the operation of the capacity market in the UK immediately, given that she would not be beholden to any UK arrangements concerning the operation of the capacity market on that date? Or does she intend to review the operation of the UK capacity market on the basis of what was decided in the European courts, regardless of whether we are bound by the state aid arrangements that pertained previously within the EU? I would be interested in hearing from the Minister whether she has any plans in that direction, and if so what they are.