Brexit - Energy & Natural Resources
Critical issues for businesses to consider:
- All Island Wholesale Electricity Market: The Integrated Single Electricity Market (I-SEM) encompasses the Republic of Ireland and Northern Ireland. Whilst the Withdrawal Agreement states that the I-SEM shall be preserved, a No Deal Brexit could leave key elements of the I-SEM with no legal basis, in which case the market may no longer be able to function. This would very likely have a detrimental effect for businesses, in the form of higher electricity prices, as alternative market arrangements on the island of Ireland (perhaps akin to the interconnected Nordic power systems) are implemented.
- Security of Energy Supply: Approximately half of our gas imports and three quarters of our oil imports are imported via the UK. A No Deal Brexit, in particular, could jeopardize these supply lines continuing to operate in a fluid manner. In a worst case scenario this could lead to energy supply shortages and/or spikes in the price of energy. It could also result in ROI having to source its energy needs from other, more volatile and unstable markets.
- EU State Aid Rules: Whilst the Withdrawal Agreement contains obligations whereby EU law would be maintained by the UK from a state aid perspective, this could be superseded down the line by alternative negotiated arrangements. In the event of a ‘No Deal’ Brexit, there is a degree of comfort in the form of the UK's European Union (Withdrawal) Act 2018, under which EU state aid rules are to be transposed into UK legislation. Further to this Act, draft Regulations in respect of state aid were laid before UK Parliament in January 2019. Under the draft Regulations, it is envisaged that the Competition and Markets Authority will take on the role of enforcement and supervision in respect of state aid. Again however, there is an inherent risk that the UK might adopt a different legislative course in the future. The bottom line is that Irish energy companies could, in theory, find themselves at a competitive disadvantage to UK energy companies were the UK ever to diverge from EU state aid rules and favour domestic energy businesses.
- Tariffs on Energy Imports: Brexit, in particular a No Deal scenario, could result in the imposition of tariffs on energy imports from the UK. The likelihood of this taking place however is low. Comfort can be taken from EU trading arrangements with the likes of Norway, Switzerland and Russia, countries which are integral to the EU's energy markets and which do not face the imposition of tariffs.
- Uncertainty / Investment Delays: No different to other sectors, investors in the energy sector don't like uncertainty. The longer Brexit runs, with the possibility of a significant extension beyond 29 March 2019, the greater the likelihood that there will be delays to, and potential cancellation of, key energy infrastructure projects.