In the coming week the referendum on remaining or leaving the EU will take place; this article seeks to suggest how other countries’ relations with the EU could potentially apply to the UK energy market.
The author does not believe that either of these models are likely to be used in the event of Brexit for two reasons. Firstly, because these models were formed as alternative to joining the EU rather than to facilitate exit from the EU. Secondly, both models include several parts that are highly objected to by Leave campaigners and by many politicians. The most obvious of those being free movement and EU control over UK legislation. That said, it is theoretically possible that a set of bilateral treaties, Swiss style, might be negotiated to avoid both freedom of movement and a guillotine clause, however, this is unlikely to be something EU officials would agree to.
Although I believe that both these possibilities are unlikely, they provide an interesting analysis on the choices available to the politicians in the event of Brexit and the effects it will have on the UK energy markets.
What Does the UK Depend on the EU For?
There are two parts to what the UK gets from the EU, the platform of regulations and so forth that allow the trading, and the goods and services that are traded in the single market. Also much investment comes from the EU. Whilst trade with EU states in gas, electricity and coal is likely to continue much as before after Brexit, there may be additional costs, duties, trade barriers that begin to apply over a period of time.
The UK produced in 2014  43% of the gas it used with another 13% imported using LNG tankers from outside the EU, the remaining 44% was imported from the EU and Norway. The gas produced in the UK is from the North Sea and East Irish Sea fields, it is thought the majority of gas from these fields has been exploited already. There is the, relatively recent, discovery of large quantities of shale gas under the UK, which could take up much of the slack, but this requires the UK government to open up this option more fully. Importing more LNG is plausible, particularly considering the present low prices.
The UK imported just under 6% of the electricity used in 2014 . Currently all imported electricity came from EU countries (although there are plans for UK-Norway Interconnector, operational from 2021). Given the state of the power stations in the UK, there may be concerns that not all of this could be consistently replaced by increasing the power generated at existing power stations in the UK.
Approximately 80% of coal used in the UK is imported, of that less than 2% is imported from the EU. It is likely that the UK could replace that EU coal from other sources without much difficulty, though likely at a slightly higher price.
EU regulations would need to be replaced by a structure of UK legislation if the UK leaves the single market. The directives of the EU would not need urgent replacement as they are written into the member states’ legislation. However, regulations, the next level down of EU legislation, automatically acquire legislative force in the member states of the EU, and therefore are likely to need replacement or at least some form of legislative action to re-cast in UK law.
Norway, along with Iceland and Liechtenstein, is part of the EEA (European Economic Area), through their membership of EFTA (European Free Trade Association). The EEA is the area where the single market operates, the majority of market related EU legislature applies to this area. It has all EU members and these three members of EFTA as signatories, only EU members have direct input on change to EU legislation that applies to the single market (and the rest of the EU legislation).
The regulations and obligations on all EEA members are the same whether they are EU members or not. This means that, if the UK were to opt for this model following Brexit, the energy market would continue trading under the same regulations as it presently does.
There is of course a catch: the UK would lose its formal access to the decision-making process creating the legislation that governs the free market. Its input would be limited to the decision shaping processes available to EFTA members.
Given this is the UK joining an already existent set of treaties, there would be a relatively short negotiation time as changes would be minimal. This would only require the agreement of all the states involved to the expansion of the relevant treaties and could take as little as a couple of years from decision to full implementation, though it could take more if further changes were required or some member states are not happy with this solution.
Switzerland has ten bilateral treaties with the EU . These treaties are broken into two groups, the seven original agreements (the Bilateral I agreements) and the later Bilateral II agreements. The Bilateral I agreements are connected by guillotine clause, this means that they all must come into and, more importantly, come out of application at the same time. The agreements are the following: Free Movement of People, Air Traffic, Road Traffic, Agriculture, Technical Trade Barriers, Public Procurement, and Science. The second set does not have any major connections with the energy industry.
If the UK goes for a bilateral treaty approach, the terms of the treaty(ies) will need to be negotiated as it is unlikely that neither the EU nor the UK will want the exact same deal as the EU has with Switzerland. This is likely to take a long time; the original set of Swiss bilateral agreements took 8 years from beginning of negotiation to coming into force. There were also several years between the referendum of the Swiss people on joining the EU and negotiations starting.
The UK will, in the Swiss model, have two ways of controlling the agreements. The first is in that it will be a new set of agreements so the UK government will be negotiating the agreements rather than joining them. The second is the guillotine clause that ensures the UK can leave but makes sure that the UK must be in or out so the UK can’t pick which deals it wants to remain in force.
The uncertainty surrounding what decision the people of the UK will make in the referendum has already had a visible effect on investment as choices are delayed until more knowledge is available. After a vote for Brexit, the uncertainty of which direction the UK government would proceed and what agreements it would be able to settle is likely to continue to depress investments. Given the number of UK power stations that are due to stop running over the next 10 years and the relative lack of replacements presently being built, this decrease in investment seems to come at a bad time for the energy sector.
In either model, less EU regulations would apply to the UK but the UK would lose its present control on changes to the legislation.
The UK is quite dependent on the single market for at least some of the gas and electricity demand, if necessary it is likely the UK would be able to replace the EU imports with imports from other places to some degree but not likely in entirety. Even if the UK entirely left the EU it could continue to import goods from the EU though probably there would be additional costs.
If either model is settled upon, trade is likely to continue under the same regulations but with even less security that the regulations being created are in the best interests of the UK.
June 2016 - Dan White
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