Electricity and Gas (Internal Markets and Network Codes) (Amendment etc.) (EU Exit) Regulations 2020

Motion to Approve

Moved by

That the draft Regulations laid before the House on 6 July be approved.

My Lords, when the transition period ends, direct EU legislation and EU-derived domestic legislation that forms part of the legal framework governing our energy markets will be incorporated into domestic law by the withdrawal Act, a subject with which the House is very familiar. My department is working to ensure that the UK’s energy legislation continues to function smoothly and supports a well-functioning, competitive and resilient energy system for consumers after the end of the transition period. This draft instrument is part of the wider legislative programme preparing for the eventuality that the UK does not reach a further agreement with the EU by the end of the transition period, or if any reached agreement does not cover these relevant policy areas.

Prior to the UK’s departure from the EU on 31 January, my department laid several statutory instruments in preparation for the eventuality that the UK left the EU without a withdrawal agreement. Of course, since these SIs were made, the UK has left the EU under the terms of the withdrawal agreement and, since then, new EU legislation has come into effect. This includes Regulation (EU) 2019/943 of the European Parliament and the Council of 5 June 2019 on the internal market for electricity, which I will refer to as the electricity regulation (recast), as well as Regulation (EU) 2019/942 of the European Parliament and of the Council of 5 June 2019, establishing a European Union Agency for the Cooperation of Energy Regulators, which I will refer to as the agency regulation (recast).

The Electricity and Gas (Internal Markets and Network Codes) (Amendment etc.) (EU Exit) Regulations make amendments, including some revocations, to the following new pieces of EU legislation: the electricity regulation (recast) and three of the EU electricity network codes. These amendments are required to fix deficiencies that would arise when this legislation becomes retained EU law at the end of the transition period under the terms of the withdrawal Act. It also revokes the agency regulation (recast), which will, of course, no longer be applicable after the end of the transition period.

The electricity regulation (recast) and the ACER regulation (recast) form part of a programme of legislation known as the clean energy package, created to further integrate markets across the EU. All of the clean energy package will have entered into force by the end of the transition period. The electricity regulation (recast) sets out the high-level principles and structures for the operation of EU electricity markets and defines relationships between EU bodies with a role in this area. The agency regulation (recast) sets out the role of the Agency for the Cooperation of Energy Regulators—ACER—to co-ordinate energy regulator implementation of the clean energy package and to resolve disputes between member state regulators.

The predecessor to the clean energy package was the third energy package, under which the EU electricity network codes were adopted. The codes introduce common technical rules to promote harmonised operation of energy markets across the EU, and this SI amends three of these codes: first, the High Voltage Direct Current Connections—HVDC—Code; secondly, the Demand Connection Code, or DCC; and thirdly, the Requirement for Generators, or RfG, Code.

My Lords, I thank the Minister for his introduction of this statutory instrument. I am venturing into new subject territory and will take this opportunity to try to understand a little more about what is happening in this important sector.

This instrument follows the normal format of “Brexifying” that we have seen many times in various sectors, whereby although the legislation will continue to apply—in this instance, through the technical network codes—going forward the UK will have its own unilateral regulators making decisions and will be cut off from the EU bodies. That is the theory, although I am not sure how it will work in practice.

What will happen in the future if the EU makes changes? Will the EU-located interconnectors automatically follow the changes, so that any changes that the EU makes will effectively be imposed on the UK companies via licensing? Will the licences to UK industry have expiry terms that will automatically bring that about?

Somewhat interestingly, paragraph 7.2 of the Explanatory Memorandum says that the most significant amendments are updating definitions to work in a non-EU context—for example, replacing euros with sterling in the definition of “small enterprise”. I am sure that noble Lords can all agree that that is not earth-shaking as a most significant amendment. But then the Explanatory Memorandum goes on to refer to

“revoking articles relating to the cross-European coordination body … and removing obligations in the Connection Codes for GB bodies to provide information to EU institutions or to take account of their recommendations.”

That latter part leaves me wondering again. We might not provide information or have to follow recommendations, but will not changes creep into interconnection licences over time?

My Lords, I thank my noble friend and congratulate him on introducing what appear to be largely technical regulations. I have a couple of questions.

My understanding is that the regulations specifically do not apply to Northern Ireland and that it has been excluded. I wondered what the reasoning was for that. As we know, Northern Ireland is back in the news again because of the implications of the Northern Ireland protocol, but, given that an all-Ireland energy market will be in place anyway, what are the implications of Northern Ireland being specifically excluded from these regulations? I understand that the Explanatory Memorandum tells us that this might currently be useful for the Northern Ireland Executive but that they might seek to refer to the statutory instrument and apply it in their domestic legislation in the future. To me, that is particularly unfortunate. It would be helpful to know what the status of Northern Ireland, whose grid system and internal energy market are wholly integrated with those of the Republic of Ireland, will be. In my view, it would be better if all in the UK worked on the same basis from day one. Therefore, my first question is this: what are the implications for the UK’s internal market of Northern Ireland remaining in the all-Ireland energy market?

Secondly, under this statutory instrument, what is the legal position from 1 January for new interconnectors? For example, I understand that there is to be an interconnector bringing energy—presumably electricity and gas—from Denmark. What legal regime will apply? Will that be covered by the regulations before us today or will it be considered at a later date?

The rest of these regulations seem straightforward. I am grateful for the opportunity to comment on them and would be grateful to receive a reply to my questions.

My Lords, I plan to be brief at this point on a Thursday night because electricity markets are often seen as dry and boring. Considering the recent moves on Northern Ireland, it seems the Government are moving headlong to a no deal. This was counted as an outside possibility until now. If it does happen—and the legislation is preparing for it—the tariffs on electricity will go back to World Trade Organization, I believe. Can the Minister say which body will be responsible for the management of those tariffs and how they will be charged? With the French and Dutch interconnectors, we are looking at between 6% and 10% of our base load capacity coming from France especially, with the nuclear power stations there. Is it going to be National Grid, will it be Elexon? It does not seem clear in the Government’s memorandum, which gives the impression it is business as usual. Can the Minister say what calculations have taken place? Who calculates the tariff? Can the Minister give an indication of what the tariff will be? Obviously, he will have that information to hand. I see the Minister laughs, but I do not see why considering we are talking about only a few months to go and it is integral to the price of electricity in the country. Consumers will have to bear the burden of this tariff. Why has that not been worked out and understood? Surely, BEIS has undertaken that work.

Second, looking at the paperwork and working with some of the organisations, such as Elexon, it appears that most of the forward planning on electricity marketplaces is based on business as usual and that we will just slot in quite happily with the European marketplace. Under a tariff system, I am not sure that is feasible because there will be a price differential between member states and the UK. Therefore, we will not be able to take part in these organisations. Will the Minister give an indication of the future in a no deal situation for such initiatives as project air, which is looking at an integrated European marketplace?

My Lords, I welcome the customary clarity with which the Minister introduced the regulations and the contributions of all speakers to the debate so far. It is a rare pleasure to spend two consecutive Thursdays discussing electricity and gas regulations in the company of the Minster, the opposition spokesperson and the noble Baroness, Lady McIntosh. Great though that pleasure is, I am told you can get too much of a good thing, so I hope we will not put that adage to the test. There is a serious point because last week the noble Lord, Lord Grantchester, raised the issue of the interrelationship between the regulations we were discussing then and the regulations we are discussing now. They are different in many respects, but all relate to EU exit. I wonder whether it is worth taking some of these together in future. It might save the Minister time and allow us to consider the cumulative impact of these exit regulations. My noble friend Lady Bowles raised important questions relating to the impact that changes the EU makes in future may have on our supply companies, particularly in respect of the interconnectors. My noble friend Lord Redesdale made a critical point about if we find ourselves in a no-deal situation, which the Government seem to be rushing headlong into. It is critical that the Minister is able to answer us on the impact of tariffs and the impact on consumers. The Explanatory Memorandum states that these regulations are necessary because the uncertainty that would be caused without them could result in an increase in wholesale prices. Given the volume of electricity through the interconnectors, it would be good to know what the position would be if we are forced onto WTO tariffs. I hope the Minister will address those issues.

I find it somewhat depressing to read the Explanatory Memorandum’s description of what the relevant EU laws did before exit because it summarises them in terms of liberalising energy markets, encouraging co-operation and establishing EU level frameworks. We will lose all that whether we exit in an orderly way after the implementation period or in the disorderly and potentially illegal way which the Government seem set on. Whatever happens, we will also be losing the opportunity for the UK to play a leadership role in shaping energy markets across Europe, particularly to serve our climate goals, and that is a very sad eventuality.

My Lords, I thank the Minister for his introduction to the regulations before the House today and appreciate the amendments needed to the clean energy package in the changed circumstances if no agreement is reached with the EU.

On the face of it, the regulations appear straightforward and essentially technical, correcting deficiencies that would occur should there be no appropriate terms covering this matter between the UK and the EU. However, this is not entirely the situation, as the regulations apply to Great Britain only and not to the United Kingdom. This brings up the situation regarding Northern Ireland. All noble Lords who have spoken have been mystified about the effect on the internal market and the integrated energy market with the EU through interconnectors in general, with implications for Northern Ireland specifically.

I will not bring up the Northern Ireland protocol, which is already subject to continuous controversy, but merely the implications for this statutory instrument. Scotland has its own Parliament and Wales its Assembly. Northern Ireland now also has an operating Executive. Does the exclusion of Northern Ireland from these regulations signify some disagreement about them? Before the Minister replies, I appreciate that Northern Ireland has an integrated energy market with the Republic and is part of the island of Ireland’s energy market. How far are these network code formulations being revoked by these regulations imperative to the grid system and the smooth operation of the internal Great Britain market through interconnectors to the island? As the Minister knows, there are two interconnectors for Britain, one to the north and one between Wales and the Republic. Would operability be maintained with Great Britain should these codes not be revoked?

Will the Northern Ireland Government respond in some way with their own order before the end of the implementation period? I would have thought, from the island-of-Ireland perspective, that the harmonisation of its internal systems from day one would be essential, and that it would wish to implement merely the technical corrections of the regulations, should the future relationship between the EU and the UK not be concluded satisfactorily on the matter. I would be grateful if the Minister set the House at ease that the connection codes are to the relevant extent interoperable, since paragraph 2.6 of the Explanatory Memorandum states:

I thank the doughty band of noble Lords who have turned up for yet another of these technical regulations for their valuable contributions. I totally take on board the valid point of the noble Lord, Lord Oates: it would have made more sense to combine our Thursday afternoons into one extended Thursday afternoon and debate some of these regulations together. I am not sure why that did not happen—I think there was some sort of miscommunication between my department and the Whips’ Office—but he is right on this one. This is the last time I will ever agree with a point made by the Liberal Democrats; no such thing will ever happen again.

The Government have of course committed to achieving a smooth end to the transition period for our energy system. As such, a programme of legislation is required to ensure that retained EU law is workable and free of deficiencies by the end of the transition period, and this draft instrument falls within that category of legislation. A failure to address in full deficiencies in the retained EU legislation would create uncertainty and inefficiency in the operation of Great Britain’s market regulation, the role and function of domestic and EU bodies in the markets and the requirements on market participants. Such uncertainty could result in an increase in wholesale prices, which no one wants to see.

I must stress that this draft instrument, and the UK’s departure from the EU as a whole, does not and will not alter the fact that our energy system is resilient, robust and secure. That resilience is built on our diversity of supply. The UK has one of the most secure energy systems in the world, and the industry has well-practised contingency plans to keep energy flowing and to ensure that our energy supplies are safe. In Great Britain the Government have of course been working closely with the electricity system operator, National Grid ESO, and the regulatory body, the Office of Gas and Electricity Markets, to ensure that measures are in place to deliver continuity of supply and confidence in the regulatory framework in all scenarios. To answer one of the questions from the noble Lord, Lord Redesdale, Ofgem is responsible for regulations in this area, as the independent regulator, and it of course controls network operators and pricing in this space.

Motion agreed.

House adjourned at 5.19 pm.