The Future of the All-island Single Electricity Market Post- Brexit
Dr. Tanya Harrington (Powerscourt Group)
Introduction
The Single Electricity Market (SEM) has a proud 12-year long track-record of delivering secure electricity supplies to citizens on the island of Ireland. It is emblematic of EU energy policy for regional governance in terms of the degree of integration of regulatory decision-making across two jurisdictions. A no deal Brexit poses a fundamental challenge to the continuance of the SEM. Its persistence is predicated on maintaining full customs and regulatory alignment on the island of Ireland post Brexit. This is what the backstop mechanism ensures. Given the current political turmoil in Westminster, the future of the SEM and options for its future governance are now a matter of live policy discourse.
The cross-jurisdictional electricity market on the island of Ireland has evolved to implement European and domestic energy policy goals. It was established at a time when the EU energy policy and legislative framework was increasingly aimed towards the progressive development of a single EU-wide internal energy market through the interim step of creating regional energy markets. This policy objective was successively confirmed in EU energy legislation up to and including the most recent Clean Energy for All Europeans legislative package.
In a number of cases, this regional approach to market integration has built on earlier initiatives taken by individual Member States in cooperation with others. These are: the Nordpool Spot market comprising Norway, Denmark, Sweden, Finland, Estonia, Latvia, Lithuania, Germany and the UK (established in 1996 as a joint Norwegian-Swedish power exchange); the Iberian Energy Market (MIBEL), established in 2007; and the SEM integrating Ireland and Northern Ireland, also established in 2007. The theory behind the regional market approach is that more compatible arrangements can lead to the application of similar rules for all market players and as a consequence promote more efficient trade, with optimised outcomes for citizens. Over time, regions or markets would become more closely integrated and form a single EU-wide energy market.
The SEM was legally established pursuant to the agreement of a Memorandum of Understanding (MoU) between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Ireland (2006) which paved the way for domestic legislation in each jurisdiction in 2007. Critically, while EU membership has provided an essential context for the conception and implementation of the SEM, Brexit, of any sort, does not directly affect the existing legal structure underpinning SEM. Rather, it is the prospect of regulatory divergence that poses the greatest threat to the continuance of the SEM.
How is the SEM Governed?
The SEM combines what were two separate jurisdictional electricity markets into one wholesale electricity market on the island of Ireland, jointly administered and governed by the SEM Committee. In law, the SEM Committee is simultaneously two committees of each Regulatory Authority (Utility Regulator (UR) in Northern Ireland/ Commission for the Regulation of Utilities (CRU) in Ireland) which corporally meet as one and make decisions as a single decision-making authority.
So, in statute the SEM Committee is simultaneously two separate Committees, of CRU and UR, but consists of the same personnel and operates as a single decision-making authority with the ability to take decisions by simple majority.
This novel de minimus institutional design for cross-jurisdictional regulatory governance was essential to the successful establishment and early functioning of the SEM Committee as the institution providing regulatory oversight of the single wholesale electricity market. Today, the SEM is one of the most progressive examples of cross-jurisdictional regulatory governance in a single ‘region’.
Withdrawal Negotiations
Given its unique characteristics and fundamental importance to citizens and businesses North and South, the necessity to preserve the SEM has been politically prioritised by negotiators for the EU and the UK throughout the entirety of the Article 50 negotiation process.
In its second iteration (19 March 2018) the draft Withdrawal Agreement reached accord on the policy objective of maintaining the SEM (Article 6), a commitment echoed in the UK Government’s Chequers Paper, which states,
“The Government is committed to facilitating the continuation of the Single Electricity Market (SEM) between Northern Ireland and Ireland. This is an example of North-South cooperation that has benefited consumers and the economies of Northern Ireland and Ireland. Negotiators have already made good progress on a legal provision to underpin the SEM in the Withdrawal Agreement and the UK will work with the EU to ensure that the SEM is maintained in any future scenario.”
Article 11 of the final Withdrawal Agreement (November 2018) makes explicit provision for the continuance of the SEM on the island of Ireland. It states,
“The provisions of Union law governing wholesale electricity markets listed in Annex 7 to this Protocol shall apply, under the conditions set out therein, to and in the United Kingdom in respect of Northern Ireland.”
In addition, Annex 7 of the Withdrawal Agreement confirms that EU law shall apply,
“to and in the United Kingdom in respect of Northern Ireland insofar as they apply to the generation, transmission, distribution and supply of electricity, trading in wholesale electricity or cross-border exchanges of electricity…[and are deemed] necessary for the joint operation of the single wholesale electricity market in Ireland.”
Yet, as we fast approach 29 March 2019, the probability of the highly undesired scenario of a no deal Brexit is increasing. This begs the question, whither the SEM post a no deal Brexit?
Future Institutional Design for Cross-Jurisdictional Regulatory Governance (pre-Brexit)
Prior to the Brexit referendum, I identified two possible options for the future institutional design of the SEM, firstly that of evolutionary, incremental institutional change across three possible future scenarios: (1) the establishment of a single all-island regulatory body on the island of Ireland with an aligned institutional form; (2) the establishment of an all-islands regulatory body across the entire UK and Ireland; and (3) the development of a multi-lateral regional regulatory governance arrangement to take in neighboring jurisdictions and secondly, the option of revolutionary change brought about by the disestablishment of the SEM, due to the delayed delivery of the much need North-South electricity interconnector.
Securing Institutional Stability: Addressing new uncertainties (post-Brexit)
Following the UK’s decision to leave the EU, the potential range of options for the future institutional design of cross-jurisdictional regulatory governance for the SEM have narrowed due to a number of freshly created challenges. These include a new and radically altered unfavourable political context, fresh risks of regulatory and policy divergence between the UK and Ireland as a remaining EU Member State and the as yet unknown nature of the UK’s future relationship with EU.
Future Institutional Design for SEM Regulatory Governance (post-Brexit)- Short-term Measures
If Prime Minister May succeeds in securing a parliamentary majority to ratify the Withdrawal Agreement and the attendant Political Declaration, then there is sufficient legal certainty for the continuance of the SEM post Brexit.
However, in the event of a no deal Brexit,the UK, in addition to being outside the Single Market and Customs Union, would no longer be part of the framework of EU law, becoming a ‘third country’. This would present a range of technical, commercial and regulatory challenges to the functioning of the SEM. This prospect has been confronted in both the UK Government’s Technical Notice on Electricity Trading (12 October 2018) and more recently in the Irish Government’s Brexit Contingency Plan (December 2018). In this scenario, it is not possible to rule out the prospect of the disestablishment of SEM due to political risk.
To address this risk, the Irish Government has published the General Scheme of the Miscellaneous Provisions (Withdrawal of the United Kingdom from the European Union on 29 March 2019) Bill, otherwise known as the Omnibus Bill 2019. The Bill sets out proposed legislative measures aimed at limiting the immediate damage of a no deal Brexit. In terms of the SEM, Part 4 of the Bill proposes that the CRU will have the necessary powers to make changes to the licence conditions of SEM participants to facilitate Ireland meeting its obligations under the EU energy acquis.
This contingency measure will be temporary in nature, will require advanced Ministerial approval and will only be commenced once the absolute necessity for this provision has been established. It effectively offers a glide path out of a crash-out Brexit for the SEM.
Future Institutional Design for SEM Regulatory Governance (post-Brexit)- Medium-term Measures
In the event of a no deal Brexit and following the expiry of extraordinary measures to limit the damage of such an event, I suggest that the possible solutions to the challenge of developing an evolved regulatory governance framework for the SEM may be found at two levels of governance: the domestic and the supranational.
At the domestic level, innovative solutions could be found within the UK’s European Union (Withdrawal) Act 2018. Under Clause 10, given the acknowledged unique constitutional status of Northern Ireland, consideration could be given to the existing provisions of Good Friday or Belfast Agreement of 10 April 1998 between the Government of the United Kingdom, the Government of Ireland and the other participants in the multi-party negotiations (the “1998 Agreement”), which is annexed to the British-Irish Agreement of the same date (the “British-Irish Agreement”), including its subsequent implementation agreements and arrangements, to see if the existing provisions enable the creation of ‘new arrangements’ that would ensure the smooth continuance of the SEM.
Secondly, consideration could be given to fresh constitutional solutions involving greater devolution of powers to NI to manage regional level regulatory oversight. Is not yet clear if the constitutionally challenging Clauses 11 and 12 of the UK’s European Union (Withdrawal) Act 2018 could make this option even more difficult than it first appears. Both routes are problematic and arguably raise constitutional questions more profound than Brexit itself.
Thirdly, and perhaps more usefully, accelerated consideration could be given to the scope offered by existing multilateral regional energy governance arrangements, which facilitate mixed membership, for example, Nordpool (EU Member States + Norway), the Pentalateral Forum (EU Member States + Switzerland) and/ or the Energy Community (EU Member States + 9 other States). Nord Pool AS runs the largest market for electrical energy in Europe, measured in volume traded (TWh) and in market share; it operates in Norway, Denmark, Sweden, Finland, Estonia, Latvia, Lithuania, Germany and the UK and is a Nominated Electricity Market Operator (NEMO) in 15 European countries, while also servicing power markets in Croatia and Bulgaria. The Pentalateral Energy Forum is the framework for regional cooperation in Central Western Europe (AT-BE-DE-FR-LU-NL-CH) towards improved electricity market integration and security of supply; the initiative aims to give political backing to a process of regional integration towards a European energy market. The Energy Community of South East Europe is an international organisation established between the European Union (EU) and a number of third countries to extend the EU internal energy market to Southeast Europe and beyond; with their signatures, the Contracting Parties commit themselves to implement the relevant EU energy acquis communautaire, to develop an adequate regulatory framework and to liberalise their energy markets in line with the acquis under the Treaty.
Further research is required to map the typology of these examples of regional energy cooperation with a view to ascertaining if they provide potential solutions to any future regulatory governance gap that might emerge for the SEM. This would involve mapping the regulatory governance framework of each model, specifically the nature of the governing body structure, its role, the regulatory tools at its disposal and its external and internal governance arrangements.
Conclusions
The very best outcome is that the Withdrawal Agreement is ratified by the UK Parliament and it comes into force. However, the current political crisis has afforded us an opportunity to consider future governance challenges for the SEM. While the Omnibus Bill 2019, when enacted, will provide a precautionary, time-limited solution to a no deal Brexit for the SEM, in my view, further work is urgently required to identify a medium-term robust governance solution for this market.
The EU has a long history of mastering differentiated integration. In a similar vein, the UK has evidenced its ability to master territorial differentiation within the UK through devolution and the conferral of a unique constitutional status to Northern Ireland under the Good Friday Agreement 1998.
These capabilities need to be harnessed in order to build ‘flexible and imaginative’ solutions for the island of Ireland. We must embrace the opportunity to solve these known challenges and design a future energy regulatory governance framework that continues to deliver for citizens and businesses, North and South.
Dr. Tanya Harrington is Head of Government Affairs and Regulation at Powerscourt Group. Previously, she established and ran Forum Consulting. She has been the Director of the NTR Foundation, a Ministerial Advisor in the Department of Transport and the Department of Communications, Energy and Natural Resources, Head of Energy for IBEC and a policy analyst at the IIEA and the European Commission. Tanya holds a BA (Hons.) (UCD), a MSSc. (QUB) and a Doctorate in Governance (QUB).