Lobby spread 2
Policy & Regulation
Policy & Regulation
Referendum special report
“Leave or stay, the UK is connected to Europe when it comes to energy”
T
he UK leads EU energy liberalisation. While EU requirements have driven amendments to our domestic energy laws, the basic structure that is in place now is a home-grown affair that has provided the template for, rather than being led by, the process of EU liberalisation. As such, the effect of a Brexit on the regulatory regime governing the UK energy sector would likely be relatively minimal, at least in the short term. Of course, when our regulatory regime was first developed, Great Britain was much more of an energy island than it is now. Not only are we physically interconnected to mainland Europe, there are also well-established “If the energy operations across the industry wished trading continent involving physical to carry on as and virtual products. it is now after As with any other commodity, the sale or trade of gas and a Brexit, it electricity into Europe must is difficult to be carried out under EU rules. see how EU If the energy industry wished rules could be to carry on as it is now after a Brexit, it is difficult to see how avoided” EU rules could be avoided. We do not yet know what the UK’s relationship with Europe would look like were the Leave vote to prevail. However, no matter how absolute the separation, the idea that we would be completely free to do as we please in areas such as state aid if this were to happen is at best an oversimplification. When it comes to exports and imports, and certainly for piped gas and power, there is no immediately obvious alternative market to the EU that we could trade with. Even if we were to abandon all compliance with EU rules (and thereby any trade with the EU), the UK is a signatory to the World Trade Organisation (WTO) which has its own prohibitions on government subsidies that adversely affect the trading interests of the other 160odd WTO members. Investors will still want to be sure that the WTO rules are not being breached, particularly because, at least according to some commentators, they are less lenient than those of the EU. Lis Blunsdon, of counsel in the energy and infrastructure practice at international law firm Orrick
12 | 17th - 23rd June 2016 | UTILITY WEEK
European environmental and water directives have played a pivotal part in the development of today’s water sector.
W
hen the UK joined the then EEC in 1973, it was dubbed the “dirty man of Europe” because of it was the only country in western Europe that failed to control pollution from cars, power stations and farming, tried to undermine European pesticide controls, and evaded nitrate regulations and bathing water directives. Fast forward 43 years and the UK is leading in areas of environmental protection, water quality and tackling climate change. The membership of the EEC and then the EU has been a major part of this, with legislation, directives and fines from Brussels pushing the British government to tackle what was a perennial pollution problem. Green Party MP Caroline Lucas praises the efforts of the EU to help clean up Britain, and Europe, saying it “has a strong track record of tangible environmental improvement”. This record includes the introduction of the Water Framework Directive (WFD), the Bathing Water Directive, Urban Waste Water Treatment Directive, and the Drinking Water Directive among others. The Bathing Water Directive,
for example, has helped see Britain improve its wastewater treatment processes. In 1990 before the directive was introduced, less than one-third of bathing waters met the standards. This now stands at over 95 per cent. Many within the sector view a exit from the EU as a threat to the good work that has been achieved in partnership with Europe. Friends of the Earth states that leaving the EU in favour of a position in the European Economic Area (EEA) means that key elements of the WFD and the Bathing Water Directive would no longer apply. Nexus Water chief executive goes further, saying that the government would be unlikely to give these issues the same focus with no “ongoing impetus from the EU” and that as a result the UK may see standards fall. Also defending the role the EU has had in improving UK water quality is Hugo Tagholm, chief executive of Surfers Against Sewage. He says: “In 2016, European legislation continues to underpin the next phase of our water quality campaigns to stop marine sewage disposal
“It’s independence versus the economic gains of co-operation.” Michael Grubb, professor of international energy and climate change policy, University College London
Brexit and the EU ETS The EU Emissions Trading System (ETS) puts a cap on the carbon dioxide (CO2) emitted by business and creates a market and price for carbon allowances. It covers 45 per cent of EU emissions, including energyintensive sectors and approximately 12,000 installations. An exit from the EU would not automatically result in the UK leaving the EU ETS, nor remove the carbon price floor introduced by the UK government. In fact, a House of Commons briefing paper has stated that the UK is “directly involved” in plans to expand the EU ETS to include nations such as China, so would be likely to remain part of the scheme.
Price of carbon: €6.10/tCO2 via coastal combined sewer overflows.” These standards and fines for breaches have been part of the reason the Thames Tideway Tunnel is being developed, in a bid to prevent pollution flowing into the River Thames from combined overflow sewers when they are unable to handle surface water run-off in periods of heavy rain. The project is not said to be under threat from a possible Brexit, but the risk of fines for future pollutions spills would be removed. However, not all agree that leaving the EU would be a bad thing. Anthesis associate director Andrew Noone states that some of the directives – because they have to apply across all the member states – are broad based. He highlights that the WFD has been “good for mainland Europe” but has created unforeseen consequences for the UK due to its island nature. On top of this, he says the
EU Drinking Water Directive is largely irrelevant to the UK because “we are world leaders” in this area. Leaving the EU would potentially allow the UK to set its own, tailored standards – without abiding to general EU legislation – to improve water quality. As with so much in the EU referendum debate, the outcome in the event of an exit is unclear. A lot will depend on what “out” looks like (see page 10) as to what regulations will remain in force or fall away. But there is a risk that EU laws which have seen Britain shift from the dirty man of Europe to one of the environmental pioneers will disappear and standards will slip. The contrary to this is that without restrictive and limiting EU legislation, the UK can push forward with its water quality standards. An exit vote could give with one hand and take away with the other.
Bathing water quality for 9,594 bathing water sites 100 90 80 70 60 50 40 30 20 10 0
Poor quality or non-compliant At least sufficient quality or compliant with mandatory values Excellent quality or compliant with guide values Closed or banned 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
of counsel, Orrick
What Brexit means for water
% of all bathing waters
Opinion Lis Blunsdon,
Not enough samples
The trend is based on bathing water sites (12 member states) where quality observations exist for all years from 1991 to 2015. Source: WISE bathing water quality database data from annual reports by EU member states). Source: European Environment Agency
Opinion Dr Vladimir Parail, Senior consultant, Oxera
“Brexit would allow the government to level the energy playing field – with tariffs.”
S
urprisingly, despite the UK being part of the EU single market, there is currently no level playing field for UK generators to compete with their EU counterparts. Thermal generators in Europe have an advantage over their UK peers due to lower CO2 taxes, transmission, and balancing charges. If the UK left the EU and was not successful in negotiating a free trade agreement, the government could, in theory, level the playing field by imposing a tariff on electricity imports, making “Thermal it more expensive for foreign generators to export electricity to generators the UK. The rationale behind this in Europe could be that, if tariffs are inevihave lower table, it is better to impose them CO2 taxes, in a way that mitigates existing transmisdistortions to trade. sion, and The estimated result of such a levy is that energy imports to balancing the UK would fall by roughly one- charges” third. Lower imports would need to be compensated by higher domestic generation, allowing room for new capacity investment or delayed retirement of old capacity. By using the levy to reduce reliance on imported energy, the UK government would be ensuring greater security of supply through additional flexibility to increase imports if a supply crunch occurred. Any measure to increase security of supply would be helpful at a time when security margins in generation have been falling rapidly. However, increasing security of supply by these means would come at a cost — both measurable and intangible. In the first instance, import tariffs would increase the cost of electricity to British consumers by an estimated £140 million a year. A more significant concern is that introduction of import tariffs would be likely to cause problems in other areas of negotiation with the EU. Once implemented, this could set a precedent for similar levies across other sectors and make any trade agreement
UTILITY WEEK | 17th - 23rd June 2016 | 13
Policy & Regulation
Referendum special report
“Leave or stay, the UK is connected to Europe when it comes to energy”
T
he UK leads EU energy liberalisation. While EU requirements have driven amendments to our domestic energy laws, the basic structure that is in place now is a home-grown affair that has provided the template for, rather than being led by, the process of EU liberalisation. As such, the effect of a Brexit on the regulatory regime governing the UK energy sector would likely be relatively minimal, at least in the short term. Of course, when our regulatory regime was first developed, Great Britain was much more of an energy island than it is now. Not only are we physically interconnected to mainland Europe, there are also well-established “If the energy operations across the industry wished trading continent involving physical to carry on as and virtual products. it is now after As with any other commodity, the sale or trade of gas and a Brexit, it electricity into Europe must is difficult to be carried out under EU rules. see how EU If the energy industry wished rules could be to carry on as it is now after a Brexit, it is difficult to see how avoided” EU rules could be avoided. We do not yet know what the UK’s relationship with Europe would look like were the Leave vote to prevail. However, no matter how absolute the separation, the idea that we would be completely free to do as we please in areas such as state aid if this were to happen is at best an oversimplification. When it comes to exports and imports, and certainly for piped gas and power, there is no immediately obvious alternative market to the EU that we could trade with. Even if we were to abandon all compliance with EU rules (and thereby any trade with the EU), the UK is a signatory to the World Trade Organisation (WTO) which has its own prohibitions on government subsidies that adversely affect the trading interests of the other 160odd WTO members. Investors will still want to be sure that the WTO rules are not being breached, particularly because, at least according to some commentators, they are less lenient than those of the EU. Lis Blunsdon, of counsel in the energy and infrastructure practice at international law firm Orrick
12 | 17th - 23rd June 2016 | UTILITY WEEK
European environmental and water directives have played a pivotal part in the development of today’s water sector.
W
hen the UK joined the then EEC in 1973, it was dubbed the “dirty man of Europe” because of it was the only country in western Europe that failed to control pollution from cars, power stations and farming, tried to undermine European pesticide controls, and evaded nitrate regulations and bathing water directives. Fast forward 43 years and the UK is leading in areas of environmental protection, water quality and tackling climate change. The membership of the EEC and then the EU has been a major part of this, with legislation, directives and fines from Brussels pushing the British government to tackle what was a perennial pollution problem. Green Party MP Caroline Lucas praises the efforts of the EU to help clean up Britain, and Europe, saying it “has a strong track record of tangible environmental improvement”. This record includes the introduction of the Water Framework Directive (WFD), the Bathing Water Directive, Urban Waste Water Treatment Directive, and the Drinking Water Directive among others. The Bathing Water Directive,
for example, has helped see Britain improve its wastewater treatment processes. In 1990 before the directive was introduced, less than one-third of bathing waters met the standards. This now stands at over 95 per cent. Many within the sector view a exit from the EU as a threat to the good work that has been achieved in partnership with Europe. Friends of the Earth states that leaving the EU in favour of a position in the European Economic Area (EEA) means that key elements of the WFD and the Bathing Water Directive would no longer apply. Nexus Water chief executive goes further, saying that the government would be unlikely to give these issues the same focus with no “ongoing impetus from the EU” and that as a result the UK may see standards fall. Also defending the role the EU has had in improving UK water quality is Hugo Tagholm, chief executive of Surfers Against Sewage. He says: “In 2016, European legislation continues to underpin the next phase of our water quality campaigns to stop marine sewage disposal
“It’s independence versus the economic gains of co-operation.” Michael Grubb, professor of international energy and climate change policy, University College London
Brexit and the EU ETS The EU Emissions Trading System (ETS) puts a cap on the carbon dioxide (CO2) emitted by business and creates a market and price for carbon allowances. It covers 45 per cent of EU emissions, including energyintensive sectors and approximately 12,000 installations. An exit from the EU would not automatically result in the UK leaving the EU ETS, nor remove the carbon price floor introduced by the UK government. In fact, a House of Commons briefing paper has stated that the UK is “directly involved” in plans to expand the EU ETS to include nations such as China, so would be likely to remain part of the scheme.
Price of carbon: €6.10/tCO2 via coastal combined sewer overflows.” These standards and fines for breaches have been part of the reason the Thames Tideway Tunnel is being developed, in a bid to prevent pollution flowing into the River Thames from combined overflow sewers when they are unable to handle surface water run-off in periods of heavy rain. The project is not said to be under threat from a possible Brexit, but the risk of fines for future pollutions spills would be removed. However, not all agree that leaving the EU would be a bad thing. Anthesis associate director Andrew Noone states that some of the directives – because they have to apply across all the member states – are broad based. He highlights that the WFD has been “good for mainland Europe” but has created unforeseen consequences for the UK due to its island nature. On top of this, he says the
EU Drinking Water Directive is largely irrelevant to the UK because “we are world leaders” in this area. Leaving the EU would potentially allow the UK to set its own, tailored standards – without abiding to general EU legislation – to improve water quality. As with so much in the EU referendum debate, the outcome in the event of an exit is unclear. A lot will depend on what “out” looks like (see page 10) as to what regulations will remain in force or fall away. But there is a risk that EU laws which have seen Britain shift from the dirty man of Europe to one of the environmental pioneers will disappear and standards will slip. The contrary to this is that without restrictive and limiting EU legislation, the UK can push forward with its water quality standards. An exit vote could give with one hand and take away with the other.
Bathing water quality for 9,594 bathing water sites 100 90 80 70 60 50 40 30 20 10 0
Poor quality or non-compliant At least sufficient quality or compliant with mandatory values Excellent quality or compliant with guide values Closed or banned 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
of counsel, Orrick
What Brexit means for water
% of all bathing waters
Opinion Lis Blunsdon,
Not enough samples
The trend is based on bathing water sites (12 member states) where quality observations exist for all years from 1991 to 2015. Source: WISE bathing water quality database data from annual reports by EU member states). Source: European Environment Agency
Opinion Dr Vladimir Parail, Senior consultant, Oxera
“Brexit would allow the government to level the energy playing field – with tariffs.”
S
urprisingly, despite the UK being part of the EU single market, there is currently no level playing field for UK generators to compete with their EU counterparts. Thermal generators in Europe have an advantage over their UK peers due to lower CO2 taxes, transmission, and balancing charges. If the UK left the EU and was not successful in negotiating a free trade agreement, the government could, in theory, level the playing field by imposing a tariff on electricity imports, making “Thermal it more expensive for foreign generators to export electricity to generators the UK. The rationale behind this in Europe could be that, if tariffs are inevihave lower table, it is better to impose them CO2 taxes, in a way that mitigates existing transmisdistortions to trade. sion, and The estimated result of such a levy is that energy imports to balancing the UK would fall by roughly one- charges” third. Lower imports would need to be compensated by higher domestic generation, allowing room for new capacity investment or delayed retirement of old capacity. By using the levy to reduce reliance on imported energy, the UK government would be ensuring greater security of supply through additional flexibility to increase imports if a supply crunch occurred. Any measure to increase security of supply would be helpful at a time when security margins in generation have been falling rapidly. However, increasing security of supply by these means would come at a cost — both measurable and intangible. In the first instance, import tariffs would increase the cost of electricity to British consumers by an estimated £140 million a year. A more significant concern is that introduction of import tariffs would be likely to cause problems in other areas of negotiation with the EU. Once implemented, this could set a precedent for similar levies across other sectors and make any trade agreement
UTILITY WEEK | 17th - 23rd June 2016 | 13
