Lords motion to approve the Electricity and Gas (Internal Markets and Network Codes) (Amendment etc.) (EU Exit) Regulations 2020 - Sep 10

Moved by

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.

4.51 pm

Baroness Bowles of Berkhamsted (LD) [V]

My Lords, I thank the Minister for his introduction of this statutory instrument. I am venturing into new subject territory and will take this opportunity to try to understand a little more about what is happening in this important sector.

This instrument follows the normal format of “Brexifying” that we have seen many times in various sectors, whereby although the legislation will continue to apply—in this instance, through the technical network codes—going forward the UK will have its own unilateral regulators making decisions and will be cut off from the EU bodies. That is the theory, although I am not sure how it will work in practice.

What will happen in the future if the EU makes changes? Will the EU-located interconnectors automatically follow the changes, so that any changes that the EU makes will effectively be imposed on the UK companies via licensing? Will the licences to UK industry have expiry terms that will automatically bring that about?

Somewhat interestingly, paragraph 7.2 of the Explanatory Memorandum says that the most significant amendments are updating definitions to work in a non-EU context—for example, replacing euros with sterling in the definition of “small enterprise”. I am sure that noble Lords can all agree that that is not earth-shaking as a most significant amendment. But then the Explanatory Memorandum goes on to refer to

“revoking articles relating to the cross-European coordination body … and removing obligations in the Connection Codes for GB bodies to provide information to EU institutions or to take account of their recommendations.”

That latter part leaves me wondering again. We might not provide information or have to follow recommendations, but will not changes creep into interconnection licences over time?

For example, we have withdrawn from the EU bodies that establish the capacity allocation codes, but as we have interconnectors with various EU member states—Ireland, the Netherlands and Belgium—will not EU changes to capacity codes be used for dealing with the UK, or rather, in this context, merely GB? What is the effect of data not being given to the EU bodies about the UK when changes are made? Will we be left following rules made absent any information about the UK side of things? Do we care about that or is it inconsequential, or is it up to commercial organisations to work it out?

Returning to the present rather than future changes, on the BEIS website is a very helpful list of all the things that companies need to do. As guidance for stakeholders, it is meant for businesses, but these matters will greatly affect the public if they go wrong, and we are only a few months away from the end of the implementation period.

Therefore, can the Minister advise us of the level of fulfilment of these requirements by industry? Is a smooth transition already ensured, and what are the risks if things are not completed? It is not much comfort being informed that deficiencies in our law have been fixed; I expect that the public will be a lot more concerned about deficiencies in gas and electricity provision not being fixed. For example, how are the arrangements progressing for how operators engage with relevant EU operators to ensure that their transmission system operator certifications remain valid? How are the registrations under REMIT progressing? How are the parties importing or exporting gas to or from the UK proceeding with ensuring that they understand the customs procedures that are in place in both jurisdictions? And how are disputes to be resolved, as the rules on those have also been removed?

I realise that I have asked a lot of questions, but I have done so to make the point that the Explanatory Memorandums explain nothing in terms of comprehension of the practical consequences that the public, and indeed noble Lords, might wish to know. After all, the purpose of EMs is to make legislation, including its effects, clear for the public. I hope that my questions give the Minister an opportunity to provide more information on both commercial progress and the legislative consequences.

4.56 pm

Baroness McIntosh of Pickering (Con) [V]

My Lords, I thank my noble friend and congratulate him on introducing what appear to be largely technical regulations. I have a couple of questions.

My understanding is that the regulations specifically do not apply to Northern Ireland and that it has been excluded. I wondered what the reasoning was for that. As we know, Northern Ireland is back in the news again because of the implications of the Northern Ireland protocol, but, given that an all-Ireland energy market will be in place anyway, what are the implications of Northern Ireland being specifically excluded from these regulations? I understand that the Explanatory Memorandum tells us that this might currently be useful for the Northern Ireland Executive but that they might seek to refer to the statutory instrument and apply it in their domestic legislation in the future. To me, that is particularly unfortunate. It would be helpful to know what the status of Northern Ireland, whose grid system and internal energy market are wholly integrated with those of the Republic of Ireland, will be. In my view, it would be better if all in the UK worked on the same basis from day one. Therefore, my first question is this: what are the implications for the UK’s internal market of Northern Ireland remaining in the all-Ireland energy market?

Secondly, under this statutory instrument, what is the legal position from 1 January for new interconnectors? For example, I understand that there is to be an interconnector bringing energy—presumably electricity and gas—from Denmark. What legal regime will apply? Will that be covered by the regulations before us today or will it be considered at a later date?

The rest of these regulations seem straightforward. I am grateful for the opportunity to comment on them and would be grateful to receive a reply to my questions.

4.59 pm

Lord Redesdale (LD)

My Lords, I plan to be brief at this point on a Thursday night because electricity markets are often seen as dry and boring. Considering the recent moves on Northern Ireland, it seems the Government are moving headlong to a no deal. This was counted as an outside possibility until now. If it does happen—and the legislation is preparing for it—the tariffs on electricity will go back to World Trade Organization, I believe. Can the Minister say which body will be responsible for the management of those tariffs and how they will be charged? With the French and Dutch interconnectors, we are looking at between 6% and 10% of our base load capacity coming from France especially, with the nuclear power stations there. Is it going to be National Grid, will it be Elexon? It does not seem clear in the Government’s memorandum, which gives the impression it is business as usual. Can the Minister say what calculations have taken place? Who calculates the tariff? Can the Minister give an indication of what the tariff will be? Obviously, he will have that information to hand. I see the Minister laughs, but I do not see why considering we are talking about only a few months ago and it is integral to the price of electricity in the country. Consumers will have to bear the burden of this tariff. Why has that not been worked out and understood? Surely, BEIS has undertaken that work.

Second, looking at the paperwork and working with some of the organisations, such as Elexon, it appears that most of the forward planning on electricity marketplaces is based on business as usual and that we will just slot in quite happily with the European marketplace. Under a tariff system, I am not sure that is feasible because there will be a price differential between member states and the UK. Therefore, we will not be able to take part in these organisations. Will the Minister give an indication of the future in a no deal situation for such initiatives as project air, which is looking at an integrated European marketplace?

5.02 pm

Lord Oates (LD)

My Lords, I welcome the customary clarity with which the Minister introduced the regulations and the contributions of all speakers to the debate so far. It is a rare pleasure to spend two consecutive Thursdays discussing electricity and gas regulations in the company of the Minster, the opposition spokesperson and the noble Baroness, Lady McIntosh. Great though that pleasure is, I am told you can get too much of a good thing, so I hope we will not put that adage to the test. There is a serious point because last week the noble Lord, Lord Grantchester, raised the issue of the interrelationship between the regulations we were discussing then and the regulations we are discussing now. They are different in many respects, but all relate to EU exit. I wonder whether it is worth taking some of these together in future. It might save the Minister time and allow us to consider the cumulative impact of these exit regulations. My noble friend Lady Bowles raised important questions relating to the impact that changes the EU makes in future may have on our supply companies, particularly in respect of the interconnectors. My noble friend Lord Redesdale made a critical point about if we find ourselves in a no-deal situation, which the Government seem to be rushing headlong into. It is critical that the Minister is able to answer us on the impact of tariffs and the impact on consumers. The Explanatory Memorandum states that these regulations are necessary because the uncertainty that would be caused without them could result in an increase in wholesale prices. Given the volume of electricity through the interconnectors, it would be good to know what the position would be if we are forced onto WTO tariffs. I hope the Minister will address those issues.

I find it somewhat depressing to read the Explanatory Memorandum’s description of what the relevant EU laws did before exit because it summarises them in terms of liberalising energy markets, encouraging co-operation and establishing EU level frameworks. We will lose all that whether we exit in an orderly way after the implementation period or in the disorderly and potentially illegal way which the Government seem set on. Whatever happens, we will also be losing the opportunity for the UK to play a leadership role in shaping energy markets across Europe, particularly to serve our climate goals, and that is a very sad eventuality.

I want to take this opportunity to raise one issue relating to grid connections. I accept that this is not directly related to the regulations, so I will understand if the Minister cannot answer it, but I have had concerns raised with me about the difficulty of getting grid connections for renewable projects in rural areas, particularly agricultural land using solar and solar from rural schools. Can the Minister tell us something about this?

Finally, I asked the Minister last week whether it is the case, as Michel Barnier said in his speech to the Institute of International and European Affairs in Dublin, that 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. In what I can only imagine was an oversight, he failed to answer that question, so can he do so now?

5.07 pm

Lord Grantchester (Lab) [V]

My Lords, I thank the Minister for his introduction to the regulations before the House today and appreciate the amendments needed to the clean energy package in the changed circumstances if no agreement is reached with the EU.

On the face of it, the regulations appear straightforward and essentially technical, correcting deficiencies that would occur should there be no appropriate terms covering this matter between the UK and the EU. However, this is not entirely the situation, as the regulations apply to Great Britain only and not to the United Kingdom. This brings up the situation regarding Northern Ireland. All noble Lords who have spoken have been mystified about the effect on the internal market and the integrated energy market with the EU through interconnectors in general, with implications for Northern Ireland specifically.

I will not bring up the Northern Ireland protocol, which is already subject to continuous controversy, but merely the implications for this statutory instrument. Scotland has its own Parliament and Wales its Assembly. Northern Ireland now also has an operating Executive. Does the exclusion of Northern Ireland from these regulations signify some disagreement about them? Before the Minister replies, I appreciate that Northern Ireland has an integrated energy market with the Republic and is part of the island of Ireland’s energy market. How far are these network code formulations being revoked by these regulations imperative to the grid system and the smooth operation of the internal Great Britain market through interconnectors to the island? As the Minister knows, there are two interconnectors for Britain, one to the north and one between Wales and the Republic. Would operability be maintained with Great Britain should these codes not be revoked?

Will the Northern Ireland Government respond in some way with their own order before the end of the implementation period? I would have thought, from the island-of-Ireland perspective, that the harmonisation of its internal systems from day one would be essential, and that it would wish to implement merely the technical corrections of the regulations, should the future relationship between the EU and the UK not be concluded satisfactorily on the matter. I would be grateful if the Minister set the House at ease that the connection codes are to the relevant extent interoperable, since paragraph 2.6 of the Explanatory Memorandum states:

“The Codes introduce common technical rules aimed at further integrating energy markets across the EU”.

I am presuming that the revocation of obligations on Great Britain institutions and businesses to share information with EU institutions on the connection codes will not in any way lead to future problems in the Northern Ireland energy market. However, what tariff is likely to apply in the event of no deal? What will its effect be on consumer pricing?

It would be helpful if the Minister could clarify the situation and further explain how the island of Ireland, the larger part of which will remain in the EU, will operate in conjunction with the GB internal energy market in the event that negotiations between the UK and the EU are unsuccessful. What is being planned now that this Government propose unilaterally to disregard elements of the withdrawal Act? Quite naturally, there is now heightened anxiety over the situation.

5.11 pm

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.

Motion agreed.