REA Response to the BEIS committee Inquiry: Brexit negotiation priorities for energy and climate change policy

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1 REA Response to the BEIS committee Inquiry: Brexit negotiation priorities for energy and climate change policy 1. The Renewable Energy Association (REA) is pleased to submit this response to the above inquiry. The REA represents a wide variety of organisations, including generators, project developers, fuel and power suppliers, investors, equipment producers and service providers. Members range in size from major multinationals to sole traders. There are around 700 corporate members of the REA, making it the largest renewable energy trade association in the UK and the only body to represent all forms of energy including power, heat and transport. 2. The REA has established a cross industry Brexit steering group in order to examine both the risks and opportunities presented by Brexit. This group is pan-technology across all the sectors the REA represents, as well as including input from our Finance Forum and legal members. As such, the REA are well placed to comment on this inquiry and would welcome the opportunity to further expand on the evidence provided below in an oral evidence session with the committee. 3. This response builds on the evidence provided in our previous submission to the Energy and Climate Change Select Committee. Since the completion of that inquiry, the Government has provided some assurances in relation to the Great Repeal Bill and the industry has had further opportunity to consider what Brexit could mean for their organisations. 1) What should be the Government s priorities on energy and climate change when negotiating the UK s exit from the EU? 4. Within the REAs previous response to the ECCC we highlighted the importance of ensuring long term stability for the energy sector. The industry has therefore gained confidence from Theresa May s announcement about the Great Repeal Bill, which should ensure that EU Regulations and Directives are copied into UK law at the point of the UKs departure. As such the industry is now primarily concerned with how this conversion is facilitated and subsequent risk of a post-brexit divergence between the EU and UK energy systems once we have left. Such a situation could prove costly, affecting the UKs energy trading arrangements, security of supply and our ability to maintain strong decarbonisation targets, while also reducing investor appetite for UK renewable projects. 5. The priority for the Government must now be to ensure an agreement that mitigates the energy industry exposure to future risk resulting from energy system divergence. The most straight forward way of doing this would be to secure continued membership to the Internal Energy Market (IEM) which would maintain the UKs commitment to existing network codes, the EU ETS, climate obligations, trading arrangements, as well as contributing to both investor confidence and provide security of supply. Therefore, for the sake of industry stability, the Government must now clearly state how they intend to negotiate their position in relation to the IEM, and where full membership cannot be achievable, state what mechanisms could be put in place to avoid energy system divergence in the future. 6. At the same time the Government must act to reaffirm support for existing renewable support mechanisms so that deployment and business as usual may continue. A successful 6 Spring House, Graphite Square Tel: Vauxhall Walk, London SE11 5EE

2 and diverse renewable energy industry can play a crucial role in the Governments Industrial Strategy, providing for domestic growth, new jobs and the creation of new export opportunities for the future. 2) What would the impact be on the UK leaving the Internal Energy Market? How important is continued UK participation in the Internal Energy Market? What model should this participation take? 7. Continued full membership of the Internal Energy Market (IEM) would provide both stability and a high level of confidence to investors. Failure to secure some form of beneficial agreement could lead to divergence of the EUs and UKs energy systems, which is likely to be costly for the UK, requiring the development of a parallel regulatory regime, as well as restricting our ability to import or export energy with Europe. We have already seen that uncertainty in this regard, and the potential for a policy vacuum, has hindered investment decisions, restricting the pipeline for future renewable energy projects in the UK. 8. Furthermore, ensuring our energy systems remains aligned will benefit the transfer of the UKs leading clean technology expertise. For example, the growth of energy storage and the development of decentralised energy solutions are being seen across Europe. Our ability to trade into this market and make the most of our growing clean technology expertise will therefore be enhanced by maintaining access, as well as continuing to be able to influence the design of a European wide energy system. 9. By far the simplest way of realising the above advantages at both the point of leaving the EU, and in the future, is to retain membership of the IEM, although it is understood by the industry that full membership may not be politically viable. However, given the UKs geographical proximity, existing interconnectors and historical involvement in developing the trans-european system, it is expected that a beneficial arrangement with the IEM could be secured if full membership is not possible. 10. Third Party Access to the IEM The Regulations forming the development of the trans-european energy infrastructure (Ten-E) are administered through ENTSO-E and ENTSO-G in terms of grid development, while the strategic framework and Regulation are provided by the Agency for the Cooperation of Energy Regulators (ACER). These European Bodies do have provisions for non-member state observer status, which may allow the UK to maintain connection with the IEM, while operating a parallel regime. Further reassurance is also provided by the EUs recently launched Clean Energy Package, where the proposed amendments to the Internal Market Directive is meant to provide a level playing field for Third party participation, suggesting the UK may maintain involvement with the energy market even if outside of the EU. However, such access to European bodies will come at a cost of losing at least some, if not all, of the influence and say we currently hold as a full member of the IEM in terms of informing its future development. 11. As such, in the immediate term, it is essential that the UK Government remains fully engaged in the development and ratification of the EUs Clean Energy Package. It is in the UKs interest to ensure this package reflects how we wish to see the IEM develop, so that it may be easily adopted into UK law at the point of departure and that ongoing implementation and development of the IEM does not disadvantage renewable projects in the UK. 12. Ireland Single Electricity Market Page 2 of 7

3 The involvement of the Republic of Ireland (RoI) and Northern Ireland (NI) in the Internal Energy Market must also be a key consideration in the UKs future arrangement with the IEM. As the RoI will continue its membership of the EU as NI departs, the two members of the All Island of Ireland Single Electricity Market (ISEM) are likely to operate under diverging regulatory regimes. This could cause significant difficulties for both ROI and NI, with the potential for additional trading tariffs and complications of operating a duel currency market. This will likely raise costs for both countries which ultimately shall be passed onto consumers. It should also be remembered that for a significant proportion of its Energy supply, NI is dependent on the ROI and that if two separate markets were to emerge it would likely put NIs security of supply at risk. As such, the difficulties of not having full access to the IEM can be expected to be played out with particular intensity in Northern Ireland. The Government should address this issue within their negotiating strategy and state their intention to commit to keeping the ISEM operational. 13. Overall, The Government must now state clearly their intentions in relation to the IEM and set out what mechanisms they wish to put in place to avoid the UKs divergence from the European system. It shall be important that whatever arrangement we have, also secures us some say in the definition of future IEM development. 3) What should be the Government s priorities on the EU Emissions Trading System? How viable are alternative options? 14. It is important that the UKs relationship with the EU ETS is quickly resolved to ensure the UK retains involvement in the emission trading scheme. The UKs ability to account for its own carbon emissions, and therefore meet our legally binding Carbon Budgets is predicated on our involvement and obligations under the EU ETS. It is also noted that a well functioning EU ETS is desirable for driving cost effective decarbonisation across the EU and helping foster a consistent level playing field in which UK industry can operate. If the EU ETS can deliver an effective carbon price by 2020, our involvement should put the UK at a distinct advantage with a well developed renewable industry and plans to phase out coal by The optimum outcome will see the UK remain a full active participant to the EU ETS. Given the UKs prominent role in both developing and pushing for its reform, it is expected that the UK will maintain some form of access to the EU ETS, as well as be able to have a say in its future development. 16. The EU ETS does provide for linkages with non-member state equivalent schemes and it may be possible for the UK to develop its own scheme which trades into the EU ETS if full membership is not possible. However, it is expected that the cost of doing this could be substantial, and would require the development of our own regulatory body to ensure its operation. Furthermore, the development of our own system could be complicated by the timing of our departure. The current suggested time table for Brexit would see the UK leave the EU just as phase III of the EU ETS is implemented and as negotiations over Phase IV get underway around 2019/2020. Notably it is hoped that a more robust Phase IV ETS, which is expected to be operational in the 2020s, will mean the UKs Carbon Price Floor may no longer be required. As such the UKs involvement in negotiations will be essential for maintaining the political will within the UK for a carbon trading scheme that reflects a more level playing field across Europe. 17. As such, while it may be possible to be involved in the EU ETS while not being a full member of the scheme, we believe that full involvement in the EU ETS should be maintained to meet our own emission obligations and ensure the delivery of a system that reflects the carbon price effectively across Europe. Page 3 of 7

4 4) Which aspects of EU policy should be maintained? Should energy-relevant EU policy be grandfathered into UK law? If so, how could it be updated and enforced? 18. There is a significant body of EU energy Directives which are now codified into British legislation as part of their implementation, as well many EU Regulations which are given primacy in the UK due to the European Communities Act (1972) (ECA). For example, The EUs Third Energy Package is well advanced in terms of being implemented into the UK, while the EUs Network Code Regulations form a basis which determines how the UK is able to generate and trade with the EU. Added to this is the recently launched Clean Energy Package, designed to see further development of the EUs Internal Energy Market. All such Directives and Regulations should continue to be implemented in the UK to avoid the costs and potential disruption caused by the development of parallel regimes. 19. Given this level of complexity in how UK and EU energy legislation intertwines, The Great Repeal Bill has provided some confidence to the industry, avoiding the prospect of there being significant policy gaps caused by the repealing of the ECA. It does, however, remain unclear how this complicated task will be achieved. Clarity needs to be provided in regards to how the Great Repeal Bill will work, as it is likely that some editing to Regulations and Legislation will be required to ensure they make sense in the context of UK Law. For a start, Regulations which refer to EU enforcement bodies will need to be amended, and possibly see UK equivalent bodies either assigned or set up. As such, while it is reassuring that there should be little actual change in how the energy system operates at the point of departure, there will be an extended period of uncertainty as it becomes clear what the Great Repeal Bill has meant for these Regulations. 20. Going forward there is significant risk of divergence as EU and UK energy systems develop in parallel. The launch of the Clean Energy Package at the end of November demonstrates that EU energy policy will not be standing still during the process of negotiating the UKs departure, indeed its ratification is likely to happen sometime around the proposed date of departure in 2019/2020. Following this, the UK will need a system for keeping our energy systems aligned, including with the latest Renewable Energy Directive Target of 27% of energy coming from renewables by As new EU rules are implemented, the UK must consider their implications and will likely need an ongoing process for copying over legislation in order to avoid disrupting our trading arrangements or creating uncertainty. 21. In addition to this, it is currently assumed that the system for copying exiting rules into UK law, and the subsequent changes that will be required to maintain parallel regimes, are likely to be facilitated by secondary legislation, which avoids a significant level of parliamentary scrutiny. While this may allow for an efficient transfer of rules, the industry must be aware of what emergency breaks maybe in place if changes are made which could disadvantage UK projects, especially if the UK no longer has significant say in the development of these rules at the European level. 22. Waste Management As mentioned within our previous response to the ECCC, there are also particular complexities in relation to EU Waste Directives and the implementation of the European Commission s Circular Economy Package. In addition it is evident that Local Authorities in particular could be hit by a sudden policy vacuum in regards to waste management, as they will be left without guidance on recycling and food waste collection requirements. Given the lack of resources already effecting this area, it is important that Government continues to commit to the implementation of the circular economy and make progress with existing recycling and food waste targets. Page 4 of 7

5 5) How best can investor confidence be maintained in the face of considerable uncertainty surrounding the negotiations and, post-brexit, the potential absence of EU policies and legislation? 23. In terms of energy policy, investor confidence will be maintained by minimising the potential for future risk and market change. As such, the Government must now make clear how they intend to create a stable policy environment before, during and after the Brexit process. A clear statement in regards to their intention to retain alignment with the EU energy system well after departure from the European Union would provide confidence that there will not be any fundamental changes or policy gaps that could jeopardise future operations in renewable projects. 24. Commitment to long term decarbonisation targets also provides a clear signal of intent to investors. Given both the passing of the 5 th Carbon Budget and ratification of the COP 21 climate agreement, there is confidence in the Governments long term ambition to decarbonise the UK energy system. However, this is currently being undermined by the evident policy gaps (particularly in regards to heat and Transport), as identified by the Committee on Climate Change, which suggest that Government is unable to set out how they plan to meet their obligations. Therefore, the Governments Carbon Budget Emission Plan, due early 2017, must be used to clearly set out how they intend to meet their Carbon Budgets, as well as how this plan relates to meeting their further obligations under the EUs RED 2020 and 2030 targets, as well as the COP21 agreement. 25. It should be noted by the committee that investor confidence in the renewables industry will also be heavily determined by factors outside of Energy Policy. Continued alignment with EU financial regulations, including passporting arrangements and ensuring currency stability, are essential for investors to continue to be able to reach finical close and provide confidence that future returns will be achievable despite the changing political arrangement with the EU. 6) How would possible new restrictions on trade and movement of labour affect the security of energy supply and prices and the attraction of inward investment into energy infrastructure and facilities? Restriction on Trade 26. As with all industries, the effects from restrictions on trade are dependent on the nature of the agreement the UK can secure with the EU. Given the current political narrative, it is assumed by the industry that the de facto outcome is a transitional arrangement based on World Trade Organisation rules. While it is unclear exactly what tariffs could result from WTO arrangements, the renewables industry can expect to see increased costs. This is especially true for technologies which rely on imported Feedstock, such as Biomass, as well as machinery from abroad. Tariffs will likely increase the cost of developing and operating projects in the UK, pushing electricity prices and consumer bills up, while also making the UK less attractive for future investment. 27.It is also worth noting that currency devaluation has already had a significant impact on renewable projects. For projects where they have already invested heavily in machinery that is manufactured abroad, a significant proportion of upfront expenditure has been made in Euros. Such projects have, as a result, become significantly more expensive and their expected returns lowered, often to the point of making some projects commercially untenable, pushing them out of the market. For others, this has meant having to hedge well in advance their exposure to the Euro, effectively locking in the loss. Such financial uncertainty has meant that, while developers may be able to finish current projects, there is little appetite to look at further projects down the pipeline. Page 5 of 7

6 Movement of People 28. There is a risk that restriction in the movement of people could limit the ability to bring foreign expertise into the country who are required for the development and construction of renewable projects. While it is not expected that future restrictions will stop the ability for such skilled labour to enter the UK, it is a concern that any future requirements could see a substantial increase in the administrative process and cost associated with employing them. Many renewable companies and large utilities already employ significant numbers of European workers, especially if the company is foreign owned or the technology itself is imported. Aside from this, some developers have also reported difficulties in recruiting foreign workers because of the general perception that the UK is now a less welcoming place or that their legal status could quickly change in the future. This combines to make it harder to recruit the expertise and talent needed to develop renewable projects in the UK. As such, Government should provide confidence through early assurances that skilled labour involved in strategically important industries, such as energy, will not face unduly restrictive immigration regimes. 29. Equally it should also be noted that the UK itself benefits from the export of home grown research and skills in renewables. The UK has leading expertise in areas of clean technology development, including Energy Storage and decentralised energy systems. These are energy solutions which Europe, and the rest of the world, are already looking to import from the UK. As such, future restriction on our own ability to work in Europe could also affect the export potential for UK based renewable technologies and knowledge. 7) How can the UK maximise future opportunities to cooperate with international partners to retain its standing as a hub for low carbon innovation? 8) How can the UK retain its influential voice in 1) international climate negotiations and 2) future changes to EU rules and regulations? 30. The Government cannot afford to be seen to be rowing back on existing decarbonisation obligations, including those of the 2020 and 2030 EU Renewable Energy Directive targets or COP 21 Agreements. To do so would undermine our position as leading on Climate Change and developing low carbon solutions. While the ratification of COP 21 and the 5 th Carbon Budget are very significant steps, the Government must now back these up with a realistic and comprehensive emissions plan that addresses the policy gaps we are seeing in regards to Heat and Transport. Without this we risk undermining our Carbon Budgets and authority in international negotiations. 31. Secondly, Government needs to ensure the development of a thriving and successful renewables industry in the UK if it hopes to continue to be seen as a centre for low carbon innovation. The UK has leading expertise in a range of renewable technologies; this includes Advanced Conversion Technologies (Gasification and Pyrolysis), Anaerobic Digestions, Deep Geothermal, Energy Storage, Solar, Biomass Conversion and many others, all of which have potential to play crucial roles in the UKs industrial strategy and be valuable export industries for the future. However, many of these industries are currently foundering due to an extended period of policy uncertainty, cuts to support and protracted policy barriers to deployment. Unless we can ensure these industries are successful in the UK today, it will be difficult for the UK to present itself as a true hub for low carbon innovation in the future. As such, along with providing certainty during Brexit, the Government must commit to existing support mechanisms today and be making crucial decisions about removing market barriers so that Business as usual deployment and renewed investment in renewables can take place now. By fully establishing these industries today, the UK puts itself in a very strong position for both encouraging economic growth as part of a comprehensive industrial strategy and being able to demonstrate our expertise to the rest of the world. Page 6 of 7

7 32. Finally, the Government must maintain some form of voice within European Bodies if it is to ensure that the UK continues to have a say in regards to the development of future EU rules and regulations. As already noted in this response, by leaving the Internal Energy Market we risk having to implement changes without any say in order to maintain our ability to trade energy with Europe. While it is unlikely that we will be able to maintain the same influence as we have today, any agreement we have with Europe should ensure some form of say in the future of the Internal Energy Market rules as a key third party market participant. 9) What are the implications of the UK s exit from the EU on the both the UK s and the EU s COP21 pledges? What will be the UK s future role within the United Nations climate change processes? 33. Given both the passing of the 5 th Carbon Budget and ratification of the COP 21 climate agreement by the UK Government, there is reassuring evidence to suggest that the Government are committed to its climate obligations under the Paris agreement. As discussed, this must now be backed up with a clear Emissions Plan and energy policy designed to deliver the required emission reductions. As such, while the UKs Commitment is currently part of the EUs target, it is expected that, post-brexit, the UK will continue to meet its current COP 21 commitment alongside the EU Bloc, even if submitting separately. This arrangement will likely put the UKs progress under greater global scrutiny, and therefore our ability to continue to have an influential role at future COP events will also depend on being able to fully demonstrate our commitment to our obligations. December 2016 Page 7 of 7