Lords consideration of the Electricity and Gas etc. (Amendment) (EU Exit) Regulations 2020 - Sep 3

Moved by

Lord Callanan

That the Grand Committee do consider the Electricity and Gas etc. (Amendment) (EU Exit) Regulations 2020.

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. 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 the relevant policy area.

I now turn to what this statutory instrument does. 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. Since then, the terms of the withdrawal Act mean that EU legislation, including new EU legislation brought in during the transition period, will continue to apply in the UK.

This includes three pieces of legislation. The first is 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). The second is 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 third is Directive (EU) 2019/692 of the European Parliament and of the Council of 17 April 2019, amending Directive 2009/73/EC concerning common rules for the internal market in natural gas.

The Electricity and Gas etc. (Amendment) (EU Exit) Regulations 2020 amends six previously laid SIs, which I will refer to as the principal SIs. These principal SIs prepared the UK to leave the EU without a withdrawal agreement. These changes take account of the three new pieces of EU legislation since those principal SIs were made. 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, hence the need for these regulations.

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—or ACER—to co-ordinate energy regulator implementation of the clean energy package and to resolve disputes between member state regulators.

The principal SIs were made between December 2018 and March 2019 and fixed deficiencies in domestic law and direct EU law, which would become retained EU law at the end of the transition period. These amendments included provisions relating to the original electricity regulation and the original agency regulation. These original electricity and agency regulations have now been repealed, as a result of the recast regulations entering into force on 1 January 2020 and 4 July 2019 respectively.

The principal SIs are now out of date, as they pertain to the original electricity and ACER regulations, which no longer exist because they have been recast by the European Union. This draft instrument fixes those deficiencies by changing references from the original regulations to the recast regulations, omitting now redundant provisions and making changes consequential on the amending gas directive.

The draft instrument also obviously amends references to “exit day” in the principal SIs to instead reflect the reality of the transition period. The draft instrument takes account of changes made to UK domestic law required to implement the new electricity regulation. Finally, it removes provisions relating to Northern Ireland wholesale electricity markets in the previous SIs to avoid any conflict with the Northern Ireland protocol, which requires EU law governing wholesale electricity markets to continue to apply in Northern Ireland after the end of the transition period.

The draft instrument aims to maintain existing rules domestically while amending or removing provisions that will no longer be functioning after the end of the transition period. As a result, this draft instrument will help to maintain the operability and integrity of the UK’s energy legislation and to maximise business continuity for market participants.

In conclusion, these regulations are an appropriate use of the powers of the withdrawal Act, which will maximise continuity in our energy regulation and business continuity for UK market operators and ensure that there is no uncertainty in the role and functions of UK and EU bodies in the market and requirements on market participants as we leave the European Union. I commend the regulations to the House.

2.37 pm

Lord Oates (LD)

My Lords, I am grateful to the Minister for introducing the regulations with his customary clarity, on what is a series of technical amendments. In truth, two things are going on in the regulations. On one hand, they perform the fairly benign process of tidying up existing statutory instruments, so that they make sense in terms of the withdrawal agreement and implementation period. On the other hand, they expose some profound issues about what our effective exit from the EU will mean for the UK and, in particular, for Northern Ireland.

Before I turn to those issues, I ask the Minister to provide some clarity on a number of issues of detail. First, how were the devolved Administrations consulted and what responses were received from them? The Explanatory Memorandum states that SIs made under the withdrawal agreement “do not require consultation”, but I assume that there is some mechanism for consulting the devolved Governments and I would be grateful if the Minister could explain how that takes place. We have an indication from the Explanatory Memorandum that the Northern Ireland Minister for the Economy made representations requesting changes, but can the Minister tell us if the views of the Welsh and Scottish Governments were sought and whether they made any comments?

The Explanatory Memorandum tells us that the Northern Ireland Minister requested that changes with respect to Northern Ireland were included as part of this instrument. Can the Minister confirm that these changes have been made? It was a little ambiguous to me in the Explanatory Memorandum. Specifically, in addition to the changes relating to the implementation period and the Northern Ireland protocol in the withdrawal agreement, the Northern Ireland Minister for the Economy requested changes to the gas legislation as a consequence of the gas directive. Could the Minister explain what those changes were and what impact they will have?

Underlying this is how GB and Northern Ireland energy markets will work in conjunction with EU energy markets after the actual exit from the EU at the end of the implementation period. Paragraph 2.13 of the Explanatory Memorandum states that without the amendments contained in this SI there would be

“uncertainty and inefficiency in the operation of GB and NI’s market regulation, the role and functions of UK and EU bodies in the markets, and requirements on market participants.”

I notice particularly that the plural of “market” was used:

“the role and function of EU bodies in the markets”.

Does this refer not just to the NI market but to the GB market as well? If so, can the Minister clarify what the role and function of EU bodies would be in respect of the GB market after the end of the implementation period? The Explanatory Memorandum goes on to state that without these changes the uncertainty caused

“could result in increased wholesale prices”.

Can the Minister explain how this would occur?

The heart of the matter relates to the impact on Northern Ireland. It is spelled out in paragraph 2.11 of the Explanatory Memorandum, which explains that EU law will continue to apply directly in Northern Ireland in so far as it applies to the electricity market. However, as we know, EU law will apply directly in respect of many other things beyond the electricity market, but that is not a matter for this regulation.

It is worth reminding ourselves that as a result of the withdrawal agreement, for the first time in our history an overseas entity in which the United Kingdom has neither representation nor legislative authority will be applying law upon the territory of the United Kingdom. We need to remind ourselves of that astonishing fact at every opportunity because it underscores the extent to which the people of Northern Ireland were let down by this Government in the Brexit negotiations.

We also need to remind ourselves of it because it underlines how integrally involved we have been, we are and we will continue to be with the European Union, whether in energy markets—as we are discussing today—or across the whole economic landscape. The real difference is that we will be doing so as bystanders rather than contributors. Even now, the Government seem to be indulging in a fantasy that we can be part of a European electricity trading market without being willing to sign up to its rules. As Michel Barnier noted in an address to the Institute of International and European Affairs in Dublin yesterday:

“In the area of energy, the UK is asking to facilitate electricity trade without committing its producers to equivalent carbon pricing and state aid controls.”

I would be grateful if the Minister could confirm whether this is actually our negotiating position and, if it is, why we have adopted such a patently ludicrous and unrealistic position.

The tragedy is that, today, we face an unparalleled threat as a result of the climate emergency, and at that very point we are removing ourselves from a position of influence in an energy market on our doorstep with hundreds of millions of people. British influence could have operated in that market to continue to drive action on the climate emergency and to clean up energy production, not just in the UK but across the European continent. Instead, we spend our effort and our energy in preparing to mitigate the impact of leaving the European Union, and doing so while surrendering the sovereignty of one part of our United Kingdom and imperilling the economic well-being of the others.

Behind these rather arcane regulations—and indeed all the EU exit regulations that come before us—lies a much bigger issue and a much bigger tragedy. It is a failure of ambition and a loss of confidence in our country’s ability to play a leading role for good within an international organisation such as the European Union, and, sadly, as a result, means a diminished role for Britain in the world.

The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)

I call the next speaker, the noble Baroness, Lady McIntosh of Pickering. Lady Pickering, are you there? I think I will move on to the next speaker and we will try to connect to the noble Baroness, Lady McIntosh, later. I call the noble Baroness, Lady Burt of Solihull. Are you there, Lady Burt?

2.44 pm

Baroness Burt of Solihull (LD) [V]

I am indeed.

My Lords, this is the latest in a depressingly long line of SIs we have had to cover to prepare for the increasingly likely eventuality of a no-deal Brexit. Today, we are amending six statutory instruments which themselves amended a range of primary and secondary legislation under the withdrawal Act. On the face of it, it all seems pretty straightforward—amending definitions and removing cross-references to EU regulations and copious replacements of “exit day” with “implementation period day”. To me, it does not matter which term is used: we will be gone, and in my view we will be the poorer for it.

There has been no consultation on this legislation: the withdrawal Act does not require consultation, so why bother asking anyone for their views? It rankles with the Liberal Democrats—and, I expect, with Members of other parties—that the withdrawal agreement seems to have the power to ride roughshod over the views of anyone affected. Take Northern Ireland, for example. Can the Minister clear up some ambiguity about what is happening there? This has already been referred to by my noble friend Lord Oates. Did the Northern Ireland Minister for the Economy request amendments to this SI in respect of Northern Ireland? If so, what were they and did she get them, or will they be encapsulated within legislation to come, perhaps under the Northern Ireland protocol?

The Northern Ireland situation looks complex because of the single electricity market on the island of Ireland. This, clearly, is what happens when you try to cut the threads of a complex relationship. In the words of the Explanatory Memorandum:

“This uncertainty could result in increased wholesale prices and threaten the continued efficient functioning of the Single Electricity Market”.

It is a mess, and a mess of our own making.

Finally, no impact assessment has been done because the effects identified are considered negligible. In the context of small tweaks to minor legislation, they probably are, but in the wider context of the effects of operating the energy sector inside or outside the EU, I strongly disagree. Without a crystal ball, no one can really say what untold damage our exit will do to the sector and to the consumer.

I hope that the points argued in paragraph 12.4 of the guidance will come into force. It is assumed that if a free trade agreement and a Northern Ireland protocol come into force,

“this SI will not enter into force in its current form and will have no material impact.”

Amen to that—anything is better than the spectre of a no-deal Brexit.

The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)

We shall see whether we can get the noble Baroness, Lady McIntosh of Pickering. She is here; excellent.

2.49 pm

Baroness McIntosh of Pickering (Con) [V]

I am delighted to speak to the regulations before us this afternoon and I thank the Minister for making such a clear introduction. My questions are not dissimilar to earlier contributions, so I will be very specific. My main concern is the legal position of Northern Ireland under the protocol on 1 January 2021 and the single electricity market on the island of Ireland.

Clearly, the regulations before us are welcome as they will retain in UK law the EU provisions as they currently stand. Can my noble friend the Minister clarify specifically what the position will be on the electricity supply and the wholesale cost of supply for households as well as businesses in the event of a no-deal Brexit being reached by 31 December 2020? Although these regulations are welcome, as I understand it, they cover the legal situation as is. I hope that my noble friend will put my mind at rest and that there will not be a legal vacuum on 1 January 2021 in the event of no deal.

As my concerns are similar to those raised by other colleagues, I will limit my contribution to that specific question.

2.51 pm

Lord Fox (LD)

My Lords, I congratulate the previous speakers on their speeches and the Minister on his comprehensive description, particularly of the tidying-up part of this statutory instrument. He was less forthcoming —indeed, less fulsome—on the Northern Ireland part, which was probably reflected by the previous speakers. I will not repeat their questions but I will repeat the eloquent point made by my noble friend Lord Oates.

Far from taking back control, energy consumers, including electricity consumers, in the Northern Ireland part of the island of Ireland are ceding control of their market to a foreign power in which they have no representation at all. If the Government indeed sought to take back power, they have not only failed but failed hugely in this regard—and this is just one of the many things we will see. We will see further statutory instruments that extract Northern Ireland from the United Kingdom and create a separate part of the United Kingdom internal market. Clearly, there will be two parts of the United Kingdom internal market—a very serious issue when you think about the union and the integrity of the United Kingdom. We should be under no illusions that although the Minister spoke little about this matter, it is extremely serious and disappointing.

We get little chance to talk about electricity. I know that the Minister is always keen to tell us about BEIS’s plans and the future of electricity strategy. Bearing in mind the thoroughness of my colleagues, who asked most of the questions required of this statutory instrument, I will add a few. I understand that the Minister may not be thoroughly prepared to answer them; I would be happy to receive a letter if he is prepared to write one in response.

The purpose of this statutory instrument is to deliver an orderly market, but of course there is no market if we do not have sufficient supply and adequate and efficient transmission of that supply across the country. I have a couple of questions specifically on those points. First, on the 2030 target for the growth in offshore wind energy, the offshore wind sector deal settled on 30 gigawatts by 2030. The Minister’s party’s manifesto talks of 40 gigawatts by 2030 and, as I understand it, plans are afoot in the industry to deliver 30 gigawatts, not 40. Perhaps the Minister can say which of these plans is actually the target for 2030 and communicate to the rest of the industry that it is indeed the plan. As the Minister knows, the climate change committee said that there should be 70 gigawatts by 2050. We need to know what the critical path to getting to that total is.

On transmission, it is clear that to deliver green, carbon-free energy across the country there needs to be significant change to the transmission grid across the United Kingdom. As it happens, tomorrow is the closing date for Ofgem’s response deadline for its five-year price control plans. As I understand it—I am informed by members of the industry—the industry is saying that if the current nature of the Ofgem pricing plan remains, investment in the grid over the next five years will be reduced by 40%; I am not sure whether the Minister picked that up. For those 30 extra gigawatts of energy in 2030 to be transmitted across the country, we do not need less investment in the national grid—we need more.

So, what is the Minister’s response to the Ofgem consultation, which takes very literally its economic and efficiency responsibilities to mean the lowest possible price now? The Minister knows that paying a low price now can mean paying a high price a lot later. We do not want to be playing catch-up with the grid in five years’ time to deliver the energy we so desperately need to meet our climate change requirements. Can the Minister undertake to answer these questions, because this statutory instrument will be entirely theoretical if we do not have the energy we need in the places we need it and on time?

2.56 pm

Lord Grantchester (Lab)

I thank the Minister for his explanation of the regulations. As has been said, they are essentially technical amendments to six EU exit orders that have already gone through both Houses and which were also mainly technical in nature. As has also been said, the regulations do not make any policy changes, whereby the annexes confirm the statements necessary under the 2018 withdrawal Act and that consultations and impact assessments are not required—and that the time when issues over this procedure can be taken up has probably passed as well. As was commented on earlier, the devolved Administrations appear to have given their approval. However, it would be good to get the Minister’s confirmation.

The Explanatory Memorandum provides an excellent appraisal of the background regulations that became known as the third energy package 2009, which, together with the 2019 updates and the directives, became the clean energy package. The EM states that these amending instruments amend primary as well as secondary legislation. Usually, any secondary legislation that amends primary legislation is taken very seriously by your Lordships’ Secondary Legislation Scrutiny Committee. That the committee has made no mention of this is probably because these regulations only amend other regulations, as in the Explanatory Memorandum, and not any primary legislation that was the subject of previous orders that have already been dealt with. Can the Minister confirm this position and state which items of primary legislation are ultimately part of this jigsaw?

It looks like these regulations include crossover with the order scheduled for next week dealing with the internal markets and network codes, yet it is not clear whether the orders mentioned in paragraph 6.2 of the Explanatory Memorandum—S.I. 2019/531, S.I. 2019/532 and S.I. 2019/533—have a relationship with both these regulations and next week’s order other than superficial technicalities. If there is anything material to add to our understanding, it would be most helpful to hear it from the Minister.

I note that the regulations and the order due next week will keep the UK in line with the EU and in close association with the internal energy market, which must be of benefit to both the UK and the EU in maintaining flexibility of supply, reducing costs for the wholesale market and keeping prices for the consumer at a minimum. Can the Minister confirm that this remains a priority for the Government and a key objective of the discussions with the EU to bring a successful outcome to the end of the implementation period? Judging from the intervention of the Northern Ireland Minister, the devolved Administrations wish to see the internal energy markets, including the island of Ireland energy market and the EU and the UK energy markets, aligned.

3.00 pm

Lord Callanan (Con)

My Lords, I thank all noble Lords for their valuable contributions to the debate. The Government are 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 from deficiencies by the end of the transition period. This draft instrument falls within this category of legislation. Failure to address in full the deficiencies in retained EU legislation, or to ensure that the relevant aspects of the Northern Ireland protocol are able to work properly, will create uncertainty and inefficiency in the operation of both Great Britain and Northern Ireland’s market regulation, the role and functions of domestic and EU bodies in the markets, and requirements on market participants. This uncertainty could result in an increase in wholesale prices.

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 and secure. This 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 been working closely with the electricity system operator, the national grid, and with the regulatory body, Ofgem, to ensure that measures are in place to deliver continuity of supply and confidence in the regulatory framework in all scenarios. The Government are therefore confident that the UK’s electricity system is 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 still be physically linked to the EU after the end of the transition period through interconnectors, which bring significant benefits, including lower consumer bills, as well as security of energy supply.

In response to the questions from the noble Lords, Lord Oates and Lord Grantchester, it is indeed the case that our future energy relationship with the EU is 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 in this area that provides for efficient electricity trade. Noble Lords will understand that I am unable to go into any further details of our negotiating position at this stage because the negotiations are confidential. 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 area, there will continue to be significant value in increased interconnection and trade of 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 the regulatory functions required to keep the market working effectively.

I will move on to the specific questions I was asked, all of which were of a similar nature. The noble Lords, Lord Oates and Lord Grantchester, and the noble Baronesses, Lady Burt and Lady McIntosh, asked whether the devolved Administrations have been engaged. It remains the case that devolved Administration ministerial consent is not required for these SIs because energy is not a devolved matter for either Scotland or Wales. However, BEIS regularly engages on EU exit and energy matters, and both Governments were informed about the SIs before they were laid in draft.

The situation with Northern Ireland is slightly more complicated. In preparing the electricity and gas amendment regulations, BEIS consulted and worked closely with the Northern Ireland Department for the Economy to get its views on the changes required, and Northern Ireland ministerial consent for the SI was provided. BEIS also engaged with the Utility Regulator on the content of the SI. I cannot remember who asked the question, but the specific request from Northern Ireland was to remove the provisions contradicting the protocol as described above.

The noble Lords, Lord Oates and Lord Fox, and the noble Baronesses, Lady Burt and Lady McIntosh, referred to the single electricity market and Northern Ireland. I can confirm that it is the UK Government’s long-standing position that by far the best outcome for electricity in Northern Ireland is to maintain the single electricity market across the island of Ireland. This has consistently been supported by both the Irish Government and the EU Commission. Continuation of the single electricity market has been achieved through the Ireland/Northern Ireland protocol to the withdrawal agreement, and nothing in this legislation affects that. As to what would happen to the single electricity market if we do not reach any further agreement with the EU, the provisions for the market were established under the Ireland/Northern Ireland protocol to the original withdrawal agreement and that provides the basis for the single electricity market.

The noble Baroness, Lady McIntosh, asked about the impact on prices. Many factors impact energy prices, including fuel prices, exchange rates and energy mix. As I said earlier, we will continue to be physically linked to the EU post exit through a number of electricity and gas interconnectors. We expect that any change in electricity prices in Great Britain as a result of changes to interconnector trading arrangements would fall within the range of normal market volatility. Therefore, we do not expect any significant impact on prices.

Again, with regard to gas markets, the mechanisms for cross-border trade are not expected to fundamentally change after exit. The UK gas market is one of the world’s most developed and provides security through supply diversity, most of which comes through LNG tankers, and is therefore not dependent on the EU.

The UK 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 operation of Great Britain and Northern Ireland’s energy markets.

To go into a bit more detail for the benefit of the noble Lord, Lord Oates, and the noble Baroness, Lady Burt, the SI will help support the continued operation of the single electricity market by removing the provisions relating to electricity in Northern Ireland, so that they do not come into force at the end of the transition period and therefore contradict the Northern Ireland protocol. The Northern Ireland protocol provides for a limited set of EU law provisions relating to wholesale electricity markets, carbon pricing and industrial emissions to apply to Northern Ireland at the end of the transition period to ensure the continued operation of the single electricity market. The Northern Ireland Executive are responsible for implementing the Northern Ireland protocol in relation to the single electricity market, as energy is a transferred matter, with my department—BEIS—continuing to provide support where appropriate.

The noble Lord, Lord Grantchester, asked about the difference between the two SIs. They both make technical changes to ensure that retained EU law will work in a domestic context, minimising impact on businesses and consumers should the UK reach no further agreement with the EU or if any agreement does not cover the relevant policy area after the end of the transition period. Most of the changes are minor—for instance, removing references to member states or EU bodies, which will of course be no longer appropriate in the circumstances.

The noble Lord, Lord Fox, in his typically genius way, used the word “electricity” in the title of the instrument to ask a whole series of unrelated questions on targets for offshore wind capacity. I am very happy to write to him with a proper answer to those questions and on the details of the Ofgem consultation, which are, as I am sure he will understand and realise, unrelated to these regulations. As always, however, I commend him on his ingenuity.

In conclusion, this draft instrument is required to ensure continuity for our energy system and certainty for both market participants and consumers. In doing so, it will support the implementation of an effective legislative framework needed for reliable, affordable and clean energy. It is my pleasure to commend the draft regulations to the Committee.

Motion agreed.