Brexit: What should energy companies do now?

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Answers to key questions from the energy sector.

The UK will Leave – What next?

  • The UK voted to leave the EU and will soon engage the Article 50 TFEU exit process
  • It is paramount that energy businesses can take informed decisions and mitigate potential risks in an inherently uncertain period until changes to UK law and new EU trade arrangements are clear
  • Staying on top of things will require significant resource for a considerable period
  • We appreciate that coming to terms with the new reality and taking appropriate steps is more likely to be a cost to business than an opportunity 

General Changes to UK Law

What general changes to UK legislation can we expect?

Before the referendum, several legislative changes were suggested in a roadmap, which set forth priorities . It would be expected that these would come into effect before the next general election in 2020 and in any case within the period of the two-year Article 50 TFEU process. These contain: 

  • A European Union Law (Emergency Provisions) Bill, which would seek to end the European Court of Justice's control over national security and the use of the EU’s Charter of Fundamental Rights to overrule UK law. The bill would amend the European Communities Act 1972 and would probably be limited to areas which will not form part of the final UK-EU settlement.
  • A special Finance Bill, which would abolish the 5% rate of VAT on household energy bills before the next general election. This would be done by amending the Value Added Tax Act 1994. 
  • An Asylum and Immigration Control Bill, which would end the automatic right of all EU citizens to enter the UK freely on the basis of the right to free movement. It has been proposed that EU citizens would be subject to UK law rather than EU immigration legislation. The Bill would create a points-based immigration system in which the possession of suitable skills is a key element for those wishing to enter the UK. 
  • A Free Trade Bill, which would require the UK to leave the EU's common commercial policy. This would seek to put the UK Government in a position to set its own trade policy. It would also mean that the UK would have to renegotiate new trade instruments with EU and non-EU countries.
  • A European Communities Act 1972 (Repeal) Bill, which would repeal the European Communities Act 1972. This would mean that EU Treaties would cease to be part of UK law and the jurisdiction of the European Court of Justice over the UK would end. The UK would cease to make contributions to the EU budget. However, it is expected that through the Repeal Bill EU law would be transferred into domestic law, with Parliament being in a position to decide which provisions to keep and which to remove.

Changes to UK Energy Law

What changes in UK energy legislation can we expect?

  • Compared to the rest of the EU, UK energy law does not tend to be heavily modelled on the structure of EU directives but has rather led thought on the development of the rules on the internal energy market. 
  • Even if the UK developed a trade arrangement not based on the EEA or the Energy Community relationship, the discontinuation of the application of the EU Directives is unlikely to have a material impact on the legislative landscape in the UK. The next points provide explanation on how closely UK legislation is influenced and modelled upon EU secondary legislation. 
  • EU regulations are directly applicable and do not require implementation into UK legislation (although UK legislation in the field of energy as well as industry documentation has often been changed to reflect the their application). These regulations include the EU Network Codes, which have a significant impact on the operation of the UK's national transmission infrastructure. As a result, when the application of the regulations fall away, UK legislation will have to fill the gap left behind. 
  • The operation of cross-border infrastructure is likely to remain heavily influenced by EU law irrespective of the type of trade agreement eventually reached. Operating infrastructure in compliance with both an UK and EU regime will only work if the operating regime satisfies both systems. As a result, the operation of cross-border infrastructure will require the de facto adherence to EU legislation. Experience with interconnectors between EU member and Norway or Switzerland are instructive on this point. 

Exit Timing and Replacement Trade Agreement

Could the UK exit the EU before a replacement trade agreement is agreed?

  • According to Article 50 TFEU, EU law shall cease to apply to the UK as of the date the withdrawal agreement comes into force or, failing that, two years after the notification given to the European Council, unless the UK and the Council unanimously decide to extend this period.
  • The withdrawal process is initiated by the Member State giving a withdrawal notification to the European Council. The European Council then issues guidelines for the negotiations between the EU and the Member State concerned, with the aim of concluding an agreement setting forth concrete withdrawal arrangements. These should also include the future relationship between the departing state and the EU. The timeframe for negotiation of this agreement is two years. However, the European Council and the Member State concerned can jointly decide to extend this period.
  • Should negotiations take longer than two years after notification and the UK and the Council cannot agree to extend this period, membership ends automatically and the UK will no longer be subject to EU law even without a replacement agreement. In addition, agreements between the EU and third countries or international organisations would also cease to apply to the UK.
  • During the negotiation period, the UK may consider taking steps to weaken the effect and applicability of EU law on the UK, e.g. the proposed change to the European Communities Act 1972 in order to reduce the influence of the European Court of Justice on UK courts.
  • It is also conceivable that secondary EU energy law which needs to be transposed in the two year period may be delayed until further agreement on the nature of a future trade agreement. 

Type of Trade Agreement 

What type of trade arrangement is expected between the UK and the EU?

  • There are a variety of cooperation models with the EU, both general and energy specific, to consider in the context of a future UK - EU trade agreement. These include multilateral treaties, such as the Energy Community Treaty, EFTA or EEA, and different bilateral treaties covering different types of association. 
  • As yet there is no clear position on the preferred structure for the new trade agreement, however it is generally accepted that the trade agreement could take one of six forms.
1. Membership of the European Free Trade Association (EFTA) and the European Economic Area (EEA), (e.g. Iceland, Lichtenstein and Norway) 
  • This would include EU legislation providing for the four freedoms and cooperation in other areas, including energy. As EEA and EFTA States are part of the Internal Energy Market (IEM) and as there is currently an on-going process of incorporating the Third Energy Package into the EEA Agreement, this is unlikely to be a realistic option, as it would impose EU obligations on the UK without it being able to control these.
2. Bilateral agreements with the EU (under EFTA membership), (e.g. Switzerland, an EFTA State which is not part of the EEA).

  • The UK would not have to automatically implement new EU legislation and agreements, instead these would be negotiated on an individual basis. Switzerland does not accept EU competition law and state aid rules, except in a few cases, however it does contribute to the EU budget. Switzerland and the EU are currently negotiating an energy agreement which would regulate cross-border electricity trading, secure free market access and guarantee Switzerland’s membership in the various committees, including recent legal developments in the EU such as the third energy package.
  • This approach would result in a large number of agreements, which are often complex and incoherent. Fresh negotiations will need to be undertaken whenever a change in EU legislation occurs, leading to uncertainty for businesses. 
3. Association Agreement with membership of the Energy Community, (e.g. Albania, Bosnia and Herzegovina, Ukraine)
  • Generally accepted as a means of facilitating future membership of the EU, the Energy Community is an international organisation established between the EU and a number of third countries. Its aim is to extend the EU internal energy market by the implementation of the acquis communautaire into the national legal systems of the parties.
  • The UK may seek to cooperate with the EU on energy matters via membership of the Energy Community, however it will be bound by EU legislation without being able to control it. Furthermore this means of cooperation will only cover the energy sector, requiring further means of cooperation in other sectors, such as bilateral treaties.
4. Association Agreement with Custom Union (e.g. Turkey)
 

5. A single bilateral free trade arrangement with the EU (e.g. South Korea, Canada).

  • This would provide access to the Internal Market for both goods and services to a greater or lesser extent. Such an agreement would be concluded under WTO limits, and would have the advantage that the UK would be independent of EU rules and the EU budget, however it would have influence over Internal Market rules and may be concluded subject to certain conditions by the EU.
6. Reliance on WTO membership only 

Investor Protection

Will the UK's exit‎ affect my investor protection rights?

  • Investors have been relying on the EU law protecting legitimate expectation, as well as on bilateral investment treaties and multilateral treaties such as the Energy Charter Treaty for protection against discrimination. 
  • The 1994 Energy Charter Treaty dealing specifically with inter-governmental cooperation in the energy sector has been signed by 51 countries across Europe and Asia and the European Union as a whole. It aims to create rules to be observed by all participating governments to minimise the risks associated with energy-related investments and trade, and to promote efficient energy use. The UK is also an individual signatory to the Energy Charter Treaty, thus their rights and obligations in this position would remain intact. 
  • Since the investor protection rights provided for in EU legislation (and which have not be transposed into national law) would cease to apply, the UK would be dependent on having bilateral and multilateral international investment treaties in place. To date, the UK has not concluded such treaties with all EU Member States. Thus, if it were to maintain current investor protection rights, the UK would have to renegotiate and conclude bilateral treaties with several major EU states (such as France and Germany) which could take up a significant amount of time. 
It is therefore possible that the new trade agreement will require the UK to establish additional bilateral investment treaties or accede multilateral treaties to be able to offer the same amount of investor protection provided through its membership in the EU.

EU ETS

What will happen to the EU Emissions Trading Scheme (ETS) when the UK exits? Will I be able to keep my EUAs?

  • The answer to this question is highly dependent on the type of trade agreement, as the difference in the EU ETS memberships of Norway and Switzerland show. 
  • In general, it is not mandatory to be a member of the EU in order to participate in the EU Emissions Trading Scheme. In the past, the EU has considered linking the ETS to trading systems of non- EU Member States, such as Switzerland. Other non-Member States are already members of the system (Iceland and Norway). 
  • However, as experience has shown (for example with Switzerland), negotiations to reach a linking agreement might take up significant amounts of time, during which the UK might not be part of the ETS.
  • If the UK leaves the ETS, it would have to set up its own registry for the trading of emission certificates. The UK has had this experience through the pre EU-ETS trial scheme.
  • However, the UK exiting the ETS would pose a number of significant practical problems. The second largest emitter would leave the EU ETS and steps would need to be taken to avoid operators defaulting on the EU ETS obligations (because of a limited ability to enforce them after an exit). 
  • A cancellation of EUAs with the aim of re-establishing such allowances in a linked UK scheme also has no precedent in the EU Emissions Trading Directive. 
  • Whilst there are only few long-term forward transactions in EU allowances that exceed the Article 50 TFEU negotiation period, the UK's exit is more likely to affect a change in law provisions under EUA trading agreement as they are usually heavily linked into EU obligations and references. 

Impact on Existing Contracts

Does the UK's exit give me or my contractual counterparties the right to renegotiate or terminate contracts?

  • According to Article 50 TFEU, EU law shall cease to apply to the UK as of the date the withdrawal agreement comes into force or, failing that, two years after the notification given to the European Council, unless the UK and the Council unanimously decide to extend this period.
  • Prior to the referendum, there had been some limited discussion on whether the legislative changes resulting from the exit could cause termination of agreements or entitle parties to renegotiate their agreements. It has been suggested that the changes are unlikely to trigger force majeure and material adverse change provisions in standard commodity trading agreements like ISDA and EFET. 
  • There will be multiple issues to consider, including governing law, the reliance of one party on the application of certain EU secondary legislation during the term of the agreement, the way in which EU secondary law may still apply on the basis of a trade agreement and the effect of the change in law on the ability to perform obligations under the contract. Whilst in many cases, the change may not have sufficient impact to give grounds for termination, in some cases it may well be relevant especially where EU secondary law had a greater impact on how the obligations ought to be performed. 
  • Changes in law clauses frequently require both parties in a contract to remedy the issue in good faith or to amend the respective provisions of the contract. In very rare cases, if performance of the obligations of either one or both of the parties under the contract is deemed unlawful or impossible by the change in law (frustration or illegality of the contract), there might be the possibility to terminate the contract. 
  • However, in most cases, termination is permitted as ultima ratio only, with contracts providing for the obligation of the parties to firstly renegotiate or remedy the issue. If, through the change in law, the performance of obligations under the contract is merely hindered or deemed more difficult, this will most likely not give rise to a right to terminate the contract, but instead to a duty of the parties to renegotiate and amend the provisions in question. In any case, it is important to review contracts to see which ones may be affected, whether a change in law clauses is present and for which remedies it provides.

Community Funding

My UK-based projects are currently benefiting or are planned to benefit from the Connecting Europe Facility and/or other European Union (EU) funding, will my position be affected?

  • A project which is already funded would need to examine the terms of its credit or investment agreement(s) to ascertain the impact of the UK leaving the EU and to make appropriate adjustments addressing it. If the funding by an EU institution becomes unlawful, a prepayment under the credit or investment agreement(s) may be triggered (though it is conceivable the participation may be transferrable to an unaffected funding institution). 
  • The impact on a proposed EU-funded project will depend on the timing of the changes to investment criteria and the project nature (notably, if it furthers EU energy policy, such as in the case,of the UK-EU interconnector projects). The approach to the British energy infrastructure plans currently listed as eligible for financial support as projects of common interest could therefore vary depending on their remaining relevance for the EU. 
  • Whilst Brexit does not in principle affect demand or technical reasons that justify the importance of the project in the first instance, it is possible that some of projects, e.g. demonstration projects for particular types of energy generation or storage may not be treated any more as projects of common interest or as eligible for EU funding. Others could still be treated as such, but would receive lower priority for their implementation. For those of greater interest to the EU, their position is likely not to change (though it would entail continuing application of the EU rules). Funding (in particular, by way of grants or subsidies, but also by the European Investment Bank) for new projects may be difficult to obtain. 
  • The funding status and opportunities would generally stay the same in case of the UK remaining within the EU internal energy market in the form of an EFTA or EEA relationship. The Energy Community has a separate list of priority projects with slightly varying rules. 

Data Protection

I am using customer data from different operations in the EU Member State(s), what happens now?

  • The UK data protection regime is based on EU Directives. By 2018 the EU data protection framework is expected to be replaced by the new, directly effective General Data Protection Regulation that sets higher standards of data protection. 
  • In case of the UK not re-joining the European Economic Area (EEA), the situation would largely depend on the result of negotiations with the EU, with the UK having the right to adjust its framework as it deems fit. However if the EU Commission and the EU Court of Justice would not regard the UK data protection regime as "adequate" (i.e. broadly equivalent to the one of the EU), the EU data protection regime would restrict transfers of personal data to the UK. 
  • So, the UK implementing the EU regime to avoid disruption of flows of data between the UK and the EU/ EEA member states appears quite likely (as the standard lower than the current EU regime would most certainly not be regarded as adequate). Not doing so would make UK businesses less attractive as commercial partners in comparison to their EU counterparties. 
  • In the interim, companies that move personal data from the EU to the UK would need to implement their own compliance mechanisms (e.g. standard contractual clauses approved by the EU Commission), something that is likely to be (or be perceived as) administratively burdensome. Furthermore, in situation where, for example, a UK business operates through a branch in an EU Member State or outsources data processing to a EU service provider, some data processing aspects will be regulated by both UK and EU data protection law and are subject to enforcement by both UK and EU data protection authorities. 
  • The current mechanisms applicable to transfers of data to other countries (e.g. USA) are not really attractive, as they may be difficult to apply given the scope of data flows between the UK and other EU/EEA countries.
  • In contrast, in case of the UK staying within the EEA, the (then) current EU data protection regime would continue to apply. 

Competition Law

We are a UK energy business having or contemplating M&A and joint activities in the UK and the EU. Will the competition law regime change?

  • The EU exit is likely to have limited impact because the EU competition rules apply equally to non-EU companies who carry out business in the EU or whose activities affect trade in the EU. Furthermore, the UK competition legislation largely mirrors the relevant EU legislation, so, in absence of changes post-exit, the UK competition framework would largely remain the same (with some conceivable changes, notably in certain implementation practices of the UK competition authorities). Obviously, the UK (including UK businesses) would have no impact on EU competition decisions that may have profound implications on the operations of the UK companies.
  • In case of the UK not re-joining the EEA (under a Norwegian type solution), EU competition law would not apply in the UK anymore and the UK courts and competition authorities would cease to be bound by case law of EU courts. The UK businesses would remain subject to the EU competition law to the extent that their conduct has effects in the EU. The UK would cease to fall within the jurisdiction of the EU merger control regime. In case of mergers involving the UK businesses that raise competition concerns, this would result in the need for having two parallel reviews by the EU and UK authorities. 
  • For mergers that do not raise competition concerns, the impact would vary. Many mergers that currently meet thresholds for a mandatory EU filing would continue to do so. Some mergers involving parties with activities focused in the UK would either benefit by not having to make filings (as the thresholds would not be met) or the impact would be negative, as they would need to make multiple filings under the national merger control regimes of the EU Member States. In addition, anticompetitive conduct that has effects in the EU is currently normally investigated by one EU authority (i.e. UK competition authority, other Member State competition authority, or the EU Commission). 
  • This would not be the case anymore, as parallel investigations would be possible. In terms of the State aid, the UK would be outside the State aid control system that entails the prohibition and repayment of any aid granted by the EU Member States which is likely to distort market competition. Though the full advantage of it is unlikely to be taken, this would allow the UK Government to have greater freedom in giving aid to UK businesses.
  • In contrast, in case of the UK staying within the EEA, the situation would broadly remain the same, but with some differences. The EU Commission would continue having the right to review mergers between parties (exceeding certain thresholds), including the effects of those mergers on competition in the UK. 
  • It is also conceivable that mergers between the parties having significant operations in the UK and another EEA member state would be notifiable to the EFTA Surveillance Authority. Therefore, depending on the countries involved, in cross-border transactions, there would be a need for multiple filings, something that will create additional risk (including facing fines and other remedies under different regimes) and add cost to affected UK businesses. 
  • The enforcement of the competition prohibitions on anticompetitive agreements and abuse of dominance would become more complicated by the addition of the EFTA Surveillance Authority to the list of authorities with enforcement powers in respect of the UK (i.e. EU Commission, the UK Competition and Markets Authority and other UK sector-specific regulators). The EFTA Surveillance Authority would have the power to take over investigations initiated by a UK competition authority, leading to possible multiple investigations.
  • Private damage actions for breaches of competition law (in which the claimant relies on an existing infringement decision) will be affected insofar as the EU infringement decisions will cease to have a binding effect on the UK courts. In such situations, claimants are likely to look to other jurisdictions when choosing the forum for bringing such claims.

Trading and Passporting

We conduct our European energy trading business through our UK entity. We have relied on our UK entity's energy and financial services licenses and authorisations. We have thereby avoided local establishment in a number of other EU member states. Will this change?

  • There is generally no passporting in the context of energy regulatory obligations. In a number of cases, for permanent energy trading and supply activities in other EU Member States, local licenses or establishment is still required. However, it is to be noted that often the rules of non-EU members are stricter and it is conceivable that depending on the outcome of the type of trade agreement to be agreed, there may be more obligations for companies with their seat in the UK to continue trading in EU Member States. 
  • The key mechanism for the cross-border provision of financial services within the EU (and the EEA) are the various passports under the EU directives. The passporting mechanism allows entities established in one EU/EEA member state to provide their services to all other EU/EEA member states, either through a branch or on a cross-border basis. 
  • Though the approach to entities from the EU Member States and the EEA member states, respectively, is not always identical, the provision of financial services by UK entities would be least impacted if the UK were to re-join the EEA, as the UK could continue to take advantage of the passport system and would be required to maintain existing regulatory frameworks. 
  • The market for financial services between the EU and the EEA is however becoming more and more fractured. This may lead to the UK gradually losing access to the EU market for financial services. 
  • In case of the UK not remaining in the EEA, there would be no passporting, therefore access in terms of financial services would become significantly constrained (largely due to the EU Member States´ right to regulate their financial sectors for prudential and other reasons). In case of no passport, it would be necessary to consider how business model and group structures would need to change. The need for an EU subsidiary that could provide financial services into the remainder of the EU under the passport system could become relevant in this scenario.

Enforcement

Will the UK's exit have consequences for an enforcement of legal awards?

  • Judgements in civil matters are recognised and enforced between EU Member States without any intermediary procedure being required. This is provided for in the Recast Brussels Regulation, which has direct effect in the UK.
  • As a regulation, it will cease to apply to the UK as of the date that the withdrawal agreement comes into force or, failing that, two years after the notification given to the European Council, unless the UK and the Council unanimously decide to extend this period. This would mean that UK courts would no longer automatically recognise legal awards issued by EU Member States, and vice versa.
  • In that case, the new model for the enforcement of legal awards will depend on the future relationship between the UK and the EU and whether the UK will accede to some other international agreement governing the questions of jurisdiction and enforcement. A potential agreement to accede to would be the 2007 Lugano Convention, which contains jurisdiction and enforcement provisions similar to those of the Brussels Regulation. It would also be a possibility for the UK to negotiate individual treaties with other states to determine the rules for the enforcement of foreign legal awards. However, if the UK decides not to enter into any international agreement, this could mean that the enforceability of UK judgments in other states would depend on the law of the individual state. 
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