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a no-deal Brexit scenario: what is the effect on trading gas?

31 October 2018

It is in the interest of the UK and the EU to successfully negotiate a deal for Brexit. The UK government maintains that negotiations are progressing well in order to achieve a positive deal. However, it is possible that a no-deal Brexit is on the cards, and as a result the UK government has provided technical notes to prepare market participants for this.

Our update aims to provide those in the gas market with the current position of the gas sector, a summary of the technical notes and highlights as to what those in the sector can do to prepare for a no-deal Brexit.

The government’s technical note can be found here:

https://www.gov.uk/government/publications/trading-gas-with-the-eu-if-theres-no-brexit-deal/trading-gas-with-the-eu-if-theres-no-brexit-deal

Current position

In a previous article, we highlighted the extent to which the UK is reliant on the EU for its gas. The UK currently produces 43% of its gas needs from both the North Sea and the East Irish Sea, and significantly Norway and other EU members (the Netherlands and Belgium) provide 44% of gas to the UK and the remaining 13% comes from liquefied natural gas (LNG) tankers. Therefore, the UK is not as reliant on gas imports from the EU as it is with the electricity sector. The UK could increase LNG imports as well as the supply of gas from Norway, and combined with our current levels of domestic gas could produce enough for the UK to ensure a consistent supply. It is possible that a limited supply of gas from the EU could spark the need for a more sustainable form of gas such as Hydrogen. H21 Leeds City Gate has long-term ambitions to be the catalyst in having hydrogen as the key gas supplied to UK homes.

Trading gas if there is no deal in place:

Transmission operation

The interconnected member states (Ireland, the Netherlands and Belgium) and the UK regulators set the access rules for the interconnectors’ operators, whereas the trading of gas under these rules are governed by the EU Network Code on Capacity Allocation Mechanisms. Therefore, it is important that those interconnector operators continue to maintain relationships with the relevant EU national regulatory body to confirm that they intend to continue to use the Capacity Allocation Mechanism Code as the basis for trading. Additionally, interconnector operators should discuss with regulators to determine if the transmission system operator certification will need to be reassessed and if so, what is the process for this reassessment. The government has indicated that Great Britain will retain existing transmission operator certification and will minimise additional administrative requirements.

EU gas network code and regulations

The government has stated that the EU gas network rules will remain in place if there is a no-deal scenario and the EU regulations on Energy Market Integrity and Transparency will be maintained domestically with minimal changes.

The government’s suggested actions for businesses and other stakeholders

Interconnector owners/operators: will need to engage with the relevant EU national regulators regarding three key matters, to determine:

  1. what requirements there will be for re-approval for the access to the Capacity Allocation Mechanism Code rules;
  2. if gas continues to be traded on the basis of the rules; and
  3. whether or not there will need to be a reassessment of their Transmission System Operator certifications.

UK market participants: will need to engage with an EU regulation authority under the REMIT:

  1. to ensure trade with EU wholesale Energy Markets;
  2. to avoid any issue with cross-border trade; and
  3. for the purposes of market monitoring.

The government has advised industry participants to check their status of contracts and licences that might be impacted by Brexit.

Stakeholders: will be provided with information on contingency requirements for domestic market monitoring later on in the year.

Our suggestions for businesses

It is important for businesses to take note of the government’s suggestions regarding a no-deal Brexit. There are additional things that businesses can do to prepare for this:

  • have your pre-existing contracts reviewed to ensure that there is sufficient protection for the business. Areas of focus include: liability provisions, termination and inserting a Brexit clause;
  • identify your current contractual arrangements that go beyond 29 March 2019 and those that go beyond 2020. Identify who in the contract will be financially liable for costs associated with borders and delays;
  • consider who will bear the risk of a volatile pound? This is something that has been an issue since the referendum on 23 June 2016 and is something which will continue to affect international contracts in the aftermath of 29 March 2019;
  • ensure that the business has a strong understanding of its international arrangements, movements of good and services; and
  • have a grasp on the location of your workers and the movement of them between the UK and the EU, check the dependency of your business on foreign workers and look at implementing strategies to protect our work force through offering Visa support etc.

Written by Selina Hinchliffe and Andrew Douglas


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