Brexit and the Irish electricity sector – what are the potential impacts?Wednesday, 27 March 2019
Electricity is one of the many sectors of the Irish economy where the withdrawal of the UK from the European Union is likely to have a material effect. Our wholesale electricity market is a particularly important consideration in this context, given that it operates on an ‘all island’ basis. The introduction of the new wholesale electricity market arrangement for Ireland and Northern Ireland (the Integrated Single Electricity Market or I-SEM) on 1 October 2018, which represents an alignment of our wholesale market with other European electricity markets, and is aimed at achieving a more integrated, open and efficient pan-European electricity market, is all playing out just as Brexit, paradoxically, is simultaneously threatening to pull the UK in an entirely opposite direction. Which leads to the question - what are the considerations to be borne in mind and the potential implications for the Irish electricity sector of Brexit?
An indigenous creation or governed by EU law?
It is worth noting that Ireland's all-island wholesale electricity market, first established in 2007, was not created by the EU per se but rather is an indigenous development set up bilaterally by the British and Irish Governments and subsequently signed into law in both jurisdictions. One might argue that in these circumstances, at least in the short term, the I-SEM might be somewhat insulated against the broad ranging and potentially severe repercussions of Brexit. That though only paints half the picture because the adoption of the I-SEM, the EU’s ‘Target Model', is all about integration with Europe and the detailed policies that have facilitated its introduction - and operation - are largely driven by a combination of EU law and by EU institutions.
Furthermore, whilst this wholesale electricity market may have been initially established on a bilateral basis, it very much subject to EU law in many respects. Therefore, maintaining the I-SEM in its current form post-Brexit would effectively mean part of the UK continuing to be subject to EU law. The UK Withdrawal Agreement acknowledges this in terms of formally recognising the single electricity market on the island of Ireland and the fact that certain associated EU laws shall need to continue to apply in order for the wholesale market to continue to fully function in its current form.
A no-deal Brexit (which at the time of writing is looking like a real possibility) could however seriously impact the operation of the I-SEM and there are diverging views on both sides of the Irish Sea as to how it would play out. One suspects in the short-term the situation could be managed to a degree – and that the Irish and UK Governments both fully appreciate the importance of this. An example of this in the Republic is provision in the draft 'Brexit Bill' which would allow the Commission for the Regulation of Utilities to amend existing licences to ensure the market is protected.
On the face of it however, it seems that inevitable questions and issues will need to resolved post-Brexit (whether a hard or soft Brexit) through the introduction of suitable new mechanisms. In a hard Brexit scenario, we could possibly ultimately see the adoption of certain aspects of the integrated Nordic power systems.
Setting the new rules going forward
In order to achieve the free flow of energy across borders envisaged by the EU’s Third Energy Package, common rules are required for the treatment of electricity when it comes to matters such as interconnectors, capacity allocation and the balancing of supply and demand.
Existing policies, codes and practices help facilitate much of this integrative process but the question arises as to how future policies, codes and practices will be rolled out where Britain’s regulators and system operators are potentially operating independently? Would Britain agree to be a 'rule-taker' when it comes to future electricity market design and codes, or, could leeway be provided to allow Britain participate in such design and rule-setting through remaining a member of the institutions which coordinate EU energy regulation?
From an island of Ireland perspective, were a divergence to emerge and were Republic of Ireland (ROI) and Northern Ireland (NI) participants in the I-SEM no longer faced with a common set of rules, an inevitable imbalance and market distortion could be anticipated.
On the theme of imbalance and market distortion, Brexit, and particularly a hard Brexit, is likely to have implications for the direction of flows of electricity through the interconnectors between ROI and the UK. The extent of this - and the ramifications for Irish electricity consumers - remains to be seen.
Import tariffs and shortage of supply
One inescapable fact is that ROI is exposed when it comes to our lack of self-sufficiency in meeting our energy needs. Whilst the continued roll-out of renewable generation in ROI undoubtedly improves this self-sufficiency from an electricity generation perspective, ROI still imports a significant portion of its gas requirements from Britain, which in turn feeds into our electricity production.
In a doomsday scenario post-Brexit, the country could be faced with tariffs on these gas imports or indeed a reduction or cut off in supply from Britain in the event, for example, of an energy shortage over there.
One would hope that the likelihood of this scenario playing out is relatively low, guided by the precedent of non-EU member states such as Norway, which are key trading partners of the European Single Electricity Market and where such tariffs have been avoided.
This is augmented by an apparent strong political will on both sides of the Irish Sea to maintain the special energy relationship between the UK and Ireland.
A key ingredient in determining how the above Brexit scenarios play out will, unsurprisingly, come down to whether Britain exits the EU without a withdrawal agreement and transition period, or, whether a ‘softer’ agreed Brexit is the ultimate outcome.
While the risks of a hard Brexit have now significantly increased, there does appear to be a realisation and understanding at British government level that energy, and in particular electricity, should be treated as a special case. It is acknowledged that energy is a vital public service and that maintaining reliable and affordable energy supplies is essential for the normal functioning of an economy.
One would hope and assume that, whatever the Brexit outcome, there is an appreciation that the greater the divergence between the UK and Europe (and between NI and ROI) from an energy / electricity perspective, the greater the likelihood of adverse impacts on society through higher energy prices and disruptions to energy supply - and that common sense will come to bear (although the conduct of the Brexit process would not necessarily inspire confidence).
To strike a positive note in conclusion, it should also be noted that post Brexit, the UK’s electricity network will clearly remain physically connected to the EU and the UK continues to move towards greater interconnection with its European neighbours, regardless of Brexit. An example of this from an ROI perspective is the planned Greenlink undersea interconnector between Wexford and Pembrokeshire (Wales), expected to be operational in 2023, as well as the much debated and long awaited North-South interconnector, which will run from Co. Meath to Co. Tyrone.
For further information on the possible impact of Brexit on the Irish energy market, contact Gavin Blake or any member of the ByrneWallace Energy Team.