Brexit white paper – what should the automotive, diversified industrials, and energy sectors expect? - briefing by Hogan Lovells

Lawyers from the Hogan Lovells Brexit Taskforce have drawn together analysis on what the automotive, diversified industrials, and energy sectors should expect from the forthcoming publication of the Brexit white paper.

- What should the automotive sector expect?

- What should the diversified industrials sector expect?

- What should the energy sector expect?

The government's Brexit white paper - what should the automotive sector expect?

What are the main concerns of the industry?

"Unrestricted single market access is one of the top concerns for the automotive industry," says Oliver Wilson, Senior Associate at Hogan Lovells. "We've seen participants in this sector voice their concerns clearly over the importance of barrier-free access to the bloc, as the industry relies heavily on integrated supply chains and close cooperation when it comes to setting and enforcing regulatory standards. Maintaining the status quo is a priority for this industry."

Tariffs/Customs checks

The manufacture of vehicles depends on cross-border sales of component parts.  This means that the motor industry sees any suggestion of import or export duties, or any transit delays caused by customs checks, as potentially extremely damaging to the industry.

Regulatory alignment

The automotive industry has been one of the UK's biggest manufacturing success stories in recent years, helped significantly by regulatory convergence.  The primary concern is that, if requirements diverge, manufacturers are going to have to comply with two sets of rules if they want to continue to supply both the UK and EU markets.  This is likely to increase inefficiency and costs. 

There are two other key issues, however. 

First, EU law allows a vehicle type approval given by an authority in one member state to be valid across the EU, without the need for further approval in a market to which the vehicle is exported.  In the absence of a specific deal, this will end when the UK leaves the EU, meaning that new approvals from the VCA (the UK's type approval authority) would not be valid in the rest of the EU (it's unclear whether the UK would continue to recognise approvals from authorities in remaining EU states).  Not only would this lead to more bureaucracy for the industry, there is also a concern that it could cause manufacturers to shift their vehicle development out of the UK.

Second, UK experts' involvement in setting technical standards has helped to make sure that those standards are appropriate to the UK market, whilst also maintaining that industry expertise.

What would we like to see in a solution?

Leaders of the UK's automotive industry will be keen to see that the government is listening to concerns over potential customs checks and the impact they would have on the supply chain. They will expect to see detailed proposals as to how the government intends to set out future customs arrangements between the UK and Europe, both in the short- and long-term, with a view to maintaining trade ease across the border.

With regard to regulation and law-making, there is scope for the automotive industries of the UK and Europe to operate to a single set of technical regulations, which would provide substantial efficiencies for manufacturers. Industry participants will want to see that the government is maintaining the UK's seat at the table when it comes to technical discussions around standards.

Sector-specific laws will also be a focus area for British manufacturers. Where the loss of recognition of type approvals is a real possibility, the government will need to demonstrate that it is working with European authorities to maintain the status quo, at best, or alternatively to agree special rules for mutual recognition of type approvals from the VCA and the EU27's certifying authorities that will be effective in minimising bureaucracy for the automotive industry.

The government's Brexit white paper - what should the diversified industrials sector expect?

What are the main concerns of the industry?

"Regulatory assurances, and the continuation of the status quo, are among the top concerns of representative of the diversified industrials sectors ahead of the government's Brexit whitepaper," opines Jacky Scanlan-Dyas, Partner at Hogan Lovells. "We're seeing companies really press the government for answers and information when it comes to the UK's participation within European markets, particularly in terms of energy, and transport and logistics.

"The general picture is good, but the devil is in the details. Finding the best solutions for these industries may take some time."

The EU regime

Representatives of energy, transport and logistics, and public procurement sectors, who have many vested interests in the continuation of the existing regulatory and trade agreements with the EU, have expressed concerns as to whether a no-deal scenario will negatively impact the progress of current projects.

For the energy sector, divergence from EU law could mean approvals of projects and licensing is disrupted. Tendering rules and bids to work on public projects are at risk of upheaval in the view of public procurement professionals. Trading and transport routes between the UK and Europe, particularly in the context of landing rights, border and port investments and open skies agreements, are all among discussion points for logistical industries.

What would we like to see in a solution?

For energy, transport and logistics and public procurement industries particularly, representatives are keen to see that the government's white paper adequately clarifies the future of agreements already in existence between the UK and Europe, whilst also acknowledging any anticipated changes that could impact current agreements and relationships.

Being able to prepare for the next steps of the negotiations is crucial for diversified industrials sectors; industry leaders will be focusing on the details that give a clearer picture of life after Brexit, particularly when it comes to trading and the continuation of current initiatives across the UK and Europe.

The government's Brexit white paper - what should the energy sector expect?

Analysis by Alex Harrison, Partner at Hogan Lovells.

Background

UK electricity and gas trade with the EU27 is worth approximately EUR 6 billion annually. 80% of that trade is natural gas. The UK imports gas from the EU27 but the UK is significantly more reliant on imports of gas from Norway and LNG historically from Qatar. The UK also imports electricity from the EU 27 (currently from France, Ireland and the Netherlands) with net imports equal to about 7.5% of total UK consumption and expected to increase if planned new interconnector capacity is delivered. The UK exports some gas to Belgium and a significant amount of gas to Ireland (56% of its consumption) as well as electricity to France, Ireland and the Netherlands (although electricity exports are usually lower than electricity imports from these countries as UK wholesale electricity prices tend to be higher than those in the EU27).

London had a leading role in electricity, gas, coal, oil and emission rights trading in Europe. Approximately 25% of global oil trading is conducted in London and the UK hosts one of the most liquid gas and electricity markets in the EU covering physical trading, energy derivatives and clearing services. The London based InterContinental Exchange (ICE) is one of the leading global energy exchanges and a main trading place for European energy futures. London also plays an essential role in determining essential energy market reference prices such as "Brent oil" and "NBP gas".

Impact of a no deal scenario

If the UK leaves the EU and Euratom on 29 March 2019 without a deal on transition or future trading arrangements (and unless both sides agree otherwise) all EU rules in the field of energy market regulation will cease to apply to the UK; UK based operators will cease to participate in the rules that allow for physical interconnection of our electricity and gas markets: UK Guarantees of Renewable Origin will no longer be recognised by the EU27; and the UK will need to agree a new nuclear safeguarding regime to replace Euratom.

A Brexit crash landing is the worst case scenario for the UK's energy markets. It's unlikely to mean that the lights go out, but it may well result in an increase in wholesale electricity prices and wholesale electricity price volatility. Interconnectors are not expected to stop flowing, but they will no longer do so on a frictionless basis. The UK will be free to choose its decarbonisation trajectory and pathway. The EU may allow some level of access to the Internal Energy Market, but this is likely to be on a rule-taker basis. The EU has no tariff on electricity or gas imports from other WTO members, and as such flows of electricity and gas between the UK and the EU27 would be tariff-free. However, this does not automatically extend to the supply of energy plant and materials across EU/UK borders, which would be subject to tariff barriers. The continuation of London's leading role in European electricity, gas, coal, oil and emissions trading will depend on whether a market access solution can be agreed for financial services, but on a crash-landing the immediate consequence is that UK authorised firms may be unable to trade freely in the EU Single Market. Gas will need to continue to flow to Ireland given its high dependency on the UK, and a bespoke arrangement will be needed to provide for this.

Brexit White Paper

There is broad support from the energy industry for maintenance of the status quo in relation to energy. The market is keen to understand from the Brexit White Paper the terms on which the UK will be permitted to retain access to the EU Internal Energy Market post Brexit; the access rules that will apply for inter EU/UK interconnection post Brexit; what post Brexit role Ofgem (the GB energy market regulator) will play in ACER (the European Agency for the Cooperation of Energy Regulators) and National Grid (the GB transmission system operator) will play in ENTSO-E and ENTSO-G (the European Network of Electricity and Gas Transmission System Operators); and whether the UK will continue to be committed to the EU's decarbonisation targets and the EU Emissions Trading Scheme post Brexit.