Supreme Court Ruling On Brexit—Implications And Next Steps

The Supreme Court has given its much anticipated majority ruling1 on whether the UK Government has the power to give notice pursuant to Article 50 of the Treaty on European Union of the United Kingdom's intention to withdraw from the European Union, without an Act of Parliament providing prior authorization. Answering that question in the negative is perhaps the first concrete step in starting to give effect to the June 23, 2016 referendum decision to leave the European Union.

In making its ruling, certain of the Lords2 made it clear that the case had "nothing to do with issues such as the wisdom of the decision to withdraw from the European Union, the terms of withdrawal, the timetable or arrangements for withdrawal, or the details of any future relationship with the European Union. Those are all political issues which are matters for ministers and Parliament to resolve."

The majority also pointed out that "It is common ground that UK domestic law will change as a result of the UK ceasing to be party to the EU treaties and the rights enjoyed by UK residents granted through EU law will be affected." This article briefly considers this from the perspective of the energy sector—what is currently in place and how it will be affected as these political issues start to be debated, negotiated and ultimately resolved.

Development of Extensive Links With the EU

On 22 January 1972, the United Kingdom signed the Treaty of Accession pursuant to which it acceded to the European Communities Treaties on 1 January 1973. On that date, EEC law took effect as part of the domestic law of the United Kingdom, in accordance with the European Communities Act 1972 which had been passed only ten weeks earlier.

Since then, the UK energy sector has developed extensive links with the EU through trade, directives and interconnection. It is well understood how successive UK Governments championed both liberalization and decarbonization agendas within the EU, including the development of the single market in energy.

The 2013 House of Lords EU Sub-Committee D report, No country is an energy island: Securing investment for the EU's future, concluded that there were "clear benefits to be derived from working within the EU on the energy challenge" and a larger, harmonized energy market with fewer trade barriers was understood, in theory, to promote competition, reduce consumer prices, and increase security of supply.

In practical terms, the UK is (currently) part of the EU's Internal Energy Market, which enables harmonized, tariff-free trading of gas and electricity across Europe. According to energy regulator Ofgem, the market appears to be competitive and outperforms virtually all relevant European and US benchmarks, with low levels of concentration, robust market entry and exit, and low levels of vertical integration.3

The UK's gas market is amongst the most mature and liquid gas markets in Europe and is physically integrated through three interconnectors (IUK, BBL and Moffat) with only small wholesale price differences and little congestion. The UK is a net importer of gas and therefore security of gas supply will be a consideration. As for the upstream sector, this is less influenced by EU legislation than the downstream sector, as many of the rules of the Third Energy Package do not apply to it. The UK will have to decide whether to continue to apply the (relatively few) EU Directives relating to oil and gas to the UK Continental Shelf or whether to develop its own domestic legislation.

The UK's electricity sector is mature, unbundled and interconnected to the EU, even though it is "relatively illiquid" (although this is something the regulator is looking to improve). The UK has been an active supporter of the EU's Third Energy Package, committed to decarbonization, demand reduction and supporting the integration of renewables into the system. It has supported market-based interventions such as market coupling, which is aimed at using cross-border transmission capacity efficiently. It is also physically interconnected through four interconnectors (IFA, BritNed, Moyle and East West) and is still planning further links.4

As for nuclear energy however, there is the potential for a significant impact. The European Atomic Energy Community (Euratom) has a separate legal personality from the EU, but its Member States and institutions are the same.5 Changes to the current status will require detailed and considered transitional arrangements as new agreements with the various EU Member States and other countries who have Nuclear Cooperation Agreements within the Euratom framework.6

The value of EU membership and participation in the IEM for the UK energy sector can therefore be understood at both a macro and micro level. Internal energy market participation has brought advantages in terms of investor confidence and certainty and access to and influence on energy policy, amongst other benefits. At the sector level, it has provided access to lower-priced gas, maintained security of gas supply, provided liquid markets and...