RWE (BES0029)

1.      Background

1.1.   RWE welcomes the opportunity to comment on this inquiry into the implications of leaving the EU for energy security.  

1.2.   RWE is a leading integrated generation and trading business, employing around 18,000 people globally and revenues of €19.6 billion in FY 2016. The UK activities of RWE Group are RWE Generation UK plc and RWE Supply & Trading GmbH.

1.3.   RWE Generation UK is the largest fossil-fuelled power station operator in the UK - owning, operating and maintaining a portfolio of around 8.5 gigawatts (GW). In 2016, the portfolio generated 43.3TWh of electricity, almost 15% of all electricity generated in the UK. 

1.4.   RWE Supply & Trading (RWEST) is a leading European energy trading house and the interface between the RWE Group's operating companies and global wholesale markets for energy and energy-related raw materials. 

1.5.   We have set out our responses to the specific questions below.

2.      What are the implications of the UK's withdrawal from the EU for the UK's energy security?

2.1.   The UK can leave the EU and the Internal Energy Market (IEM) with little or no risks to energy security. Should the UK leave the IEM, power and gas will still flow across the interconnectors, though it may not be as ‘seamless’ as it is today. Market coupling – a process whereby transmission capacity is allocated implicitly across borders, and prices converge (until constrained by the level of interconnector capacity) allows power to be efficiently traded. Coupling pools liquidity across several markets, increasing access to products and more competitive prices.  However, as noted in section 3 below, day-ahead price coupling in power was already in place across much of Europe on a contractual basis prior to the relevant EU legislation entering into force. 

2.2.   If UK is outside or partially excluded from IEM, we could see the re-introduction of explicit import and export transmission tariffs on power, which were abolished as part of EU’s Third Package. However, it is worth noting that the UK power prices are already decoupled from the rest of Europe due to the imposition of the Carbon Price Floor. Power will still be traded across the interconnectors, but on an explicit, rather than implicit basis. 

2.3.   With regards to gas, both the UK and the EU in aggregate are net importers of gas, therefore it makes economic sense for them to continue promoting efficient flows of gas. Whilst the imposition of customs duties cannot be completely discounted, the EU currently imposes no tariffs on natural gas or LNG imports from major producer third countries (USA, Algeria, Nigeria, Qatar, Trinidad and Tobago, Libya, Russia) and WTO rules do not include any trade tariffs on natural gas or LNG either. So this seems an unlikely outcome. As such, tariff barriers do not seem to be a credible threat to the efficient flows of gas between the UK and continental Europe/Ireland post Brexit. While any new arrangements relating to customs clearance may create added bureaucracy, hopefully only temporarily, we also do think these are not a credible threat. 

2.4.   Assuming there is no deterioration in the efficient flows of gas between the UK and the EU and no significant changes in UK gas demand or global gas supply dynamics, the UK should continue to be regarded as an attractive market to supply gas to post Brexit. As such, the supply flexibility and market liquidity on which the UK relies so heavily for security of supply should not diminish, or be any different to what it would have been, had Brexit not happened. 

2.5.   EU Regulation 994/2010 concerning measures to safeguard security of gas supply currently applies in the UK, but is in the process of being amended and the amendments are expected to come into force and take effect before 29th March 2019. The Regulation includes many of the good practices the UK has followed for years, such as risk assessments and emergency planning. But the amendments now extend these practices on a regional level and introduce the concept of EU Member States providing solidarity in the face of gas emergencies. Should the amended Regulation not be applied post Brexit, the UK may miss out on the possibility of closely assessing supply risks, collaboratively developing preventative action plans and implementing emergency procedures with its interconnected EU neighbours. The UK would also not be able to rely on EU solidarity whereby EU states could interrupt gas supplies to their non-protected customers (customers other than households and essential social services) in order to free up gas to send to the UK to enable it to continue supplying gas to its protected customers. Equally however, the UK would not be obliged to provide solidarity to its interconnected EU neighbours. As solidarity is a last resort measure which is not defined in detail and which may never be used, it is questionable how much added security the amended Regulation really would provide over and above what the current Regulation provides now. 

3.1.   The UK could remain part of the IEM post Brexit. The EU codes that create common rules for gas and power market design are all expected to be in force by the time of ‘Brexit’ (March 2019) although may not be fully implemented. As regulations they will apply directly. However, some modifications to national codes (e.g. GB Balancing and Settlement Code) will be required in order to demonstrate compliance. 

3.2.   Iceland, Norway and Liechtenstein are members of the European Economic Area (EEA) and the European Free Trade Association (EFTA) but not the EU. EEA members adopt the internal market rules, and in doing so participate fully in the IEM. 

3.3.   Price coupling in power is conducted at an EU level on the basis of common methodologies and processes laid out in the Capacity Allocation and Congestion Management (CACM) code. However, market coupling was already in place across much of the EU on a day-ahead basis prior to the CACM code entering into force (July 2015), but on a contractual rather than legislative basis. 

3.4.   Our key priorities in terms of co-operation are to ensure stability in the legal and regulatory framework, in order to maintain investor certainty and to ensure the UK is able to maintain the efficient flow of tariff-free power and gas across borders. Continued UK membership of the IEM would ensure this, though it may not be prerequisite. 

3.5.   The question as the whether the UK will be allowed to remain part of the IEM is really a political one. For example, Switzerland is not a member of the EU or EEA, but is in EFTA, and as such it has in place bilateral agreements with EU in different policy areas. In energy it has a partial agreement - it has been excluded from day-ahead market and intraday market coupling with its neighbours for political reasons, but intraday market coupling is in place to allow for the exchange of ancillary services.[1] 

3.6.   Another key issue to resolve is jurisdiction. The UK has ruled out the jurisdiction of the European Court of Justice, which is a key pillar of the internal energy market. A dispute resolution mechanism and a broader governance framework will therefore need to be developed. The EFTA Surveillance Authority and Joint Parliamentary Committee is an example of this, which is responsible for legislative monitoring, implementation and enforcement for non-EU, EFTA members (Iceland, Norway, and Liechtenstein). 

3.7.   However, it remains unclear whether the UK will be able to leave the single market and customs union – as is its stated intention – but remain fully part of the IEM; politically, this seems unlikely.  

3.8.   A further priority is the ability to maintain access to supply chain products in the energy industry, free of tariff and non-tariff barriers.  However, at the time of writing we do not yet have a clear picture of the implications of ‘Brexit’ for our  supply chain.   

3.9.   Finally, and more broadly, it is also a priority to ensure access to a skilled and mobile labour force. As a pan-European, German-owned company, we value within-company mobility, both in terms of ensuring efficiencies across the company (i.e. specialists might reside in the UK or elsewhere and travel to where they are needed, reducing costs to the company and to consumers) and for skills and career development. 

4.1.   The UK currently has 4 GW electricity interconnection, of which 3GW is with Continental Europe, and 1GW is with Irish Single Electricity Market. 

4.2.   Recognising the benefits of interconnection with other markets, the EU has an indicative target to have interconnection equivalent to at least 10% of installed power capacity by 2020. The EU is looking to increase this target to 15% by 2030. 

4.3.   The ‘Connecting Europe Facility’ (CEF) for Energy has been established to provide financial grants to EU’s Projects of Common Interest (PCIs) under the Trans-European Networks for Energy Regulation (TEN-E). A total of €5.35 billion has been earmarked for energy infrastructure projects in the CEF between 2014 and 2020.

4.4.   In addition, the TEN-E Regulation introduces a binding overall time limit of 3.5 years to obtain the necessary permits for interconnection, with a single, ‘one stop shop’ for all permitting procedures. 

4.5.   Given the EU target, funding and enhanced regulatory support, there are a further 16 electricity projects in the pipeline, including interconnection to Iceland (see Annex 1 for full list existing / planned projects and their current status). Of those projects, Ofgem have determined 9 projects (10.7GW) in the consumer interest and therefore eligible for ‘cap and floor’ regulated support.[2] The estimated investment cost of these projects is over £8bn.

4.6.   Technically, as noted in section 2 and 3 we see no reason why energy will not continue to flow across these interconnectors post Brexit. Indeed, power still flows between the EU and Switzerland (which is not part of the EU), the difference is that it is via explicit commercial contracts rather than implicit market coupling. 

4.7.   However, the institutional arrangements for interconnection are in-part driven by EU regulation. There is a question, therefore, as to whether the UK should aspire to maintain such targets and preferential support for interconnection post Brexit. It is our view that, while interconnection between markets under the right circumstances can improve market efficiency, the benefits of UK-EU interconnection are potentially overstated, and we do not think it would be prudent for the UK to ‘over rely’ on interconnection with EU in terms of security of supply. 

4.8.   Delivering security of supply through interconnectors is dependent on a capacity surplus in continental markets to ensure delivery at times of system need. As illustrated in Annex 2, this may not be the case in the future, particularly for the incremental capacity envisaged in the pipeline and since there have been significant falls in capacity margins in Germany and elsewhere in response to increased renewables penetration and nuclear plant closures, while recent concerns about nuclear safety has resulted in temporary capacity restrictions in France. 

4.9.   Finally, it is also worth noting that conditions under the IEM mean that energy imported into the UK via interconnectors are excluded from paying network charges after paying generation charges in its own domestic market. This is to avoid transmission charges or policy costs being used as a proxy for import tariffs and to encourage the free flow of energy. Arguably, this leads to competitive discrepancies based on competition and climate change policy rather than pure market pressures. Leaving the IEM could present the opportunity to reconsider the policy and regulatory distortions faced by GB generators and electricity traded over the interconnectors.

5.      What is EU funding used for in relation to energy infrastructure and research?  Can it be effectively replaced by existing UK schemes

5.1.   According to Chatham House, EU loans and grants provide financial assistance worth approximately £2.5bn per year to the energy sector in the UK.3 

5.2.   An example of such funding is the aforementioned ‘Connecting Europe Facility’ (CEF) for Energy, which has committed just over 80m euros for 8 interconnector projects in pipeline (see Annex 1).  The majority of these projects are expected to come online after March 2019. If funding has not yet been allocated, then there is a question as to whether the CEF funding is guaranteed post Brexit. In August 2016, the Chancellor of the Exchequer announced that all structural and investment funds signed before

November 2016 would be fully funded even after the UK’s departure from the EU.[3]  However, as noted in section 4, we think that the benefits of interconnection are overstated and we think that such grants (either funded via EU or UK) would not necessarily be efficient use of public funds. 

6.      What measures would allow the continuation of the Integrated Single Energy Market on the island of Ireland after Brexit?

6.1.   RWE does not own or operate any assets in Ireland or Northern Ireland, therefore we do not have strong views on this particular topic. However, we note that the arrangements may mirror or incorporate the arrangements in place for UK and EU. 

7.      What are the implications of the UK's withdrawal from Euratom?  Will it affect the UK’s security of supply?

7.1.   RWE do not own or operate nuclear power station facilities in the UK. Nonetheless, UK withdrawal from Euratom poses a severe risk to the free movement of goods and skills within the nuclear sector, and will have a detrimental impact on nuclear research. Ideally, the UK should find a way to remain within Euratom. If this is not possible, then transitional arrangements should be encouraged to allow time to negotiate successor arrangements. 

8.      What can the UK learn from other non-EU countries' experience of trading energy with the EU?

8.1.   As noted in Q3, there remain barriers to trade between the Swiss energy sector and the EU’s single electricity and single gas markets. The European network codes are not applied in Switzerland. In practice this means for example that Switzerland is not part of some of the electricity market coupling initiatives. While the Swiss gas market is not particularly big, its power market could play a more important role in the EU energy system. This is because it contains flexible generation assets able to contribute flexibility into neighbouring markets and it is located in the middle of Europe’s meshed network. Integrating the Swiss power system into the EU energy market would benefit EU consumers: after all the barriers in place may mean that instead of Swiss power plants, demand peaks are met by more costly power plants elsewhere. Swiss generators, as well as public authorities, are lobbying heavily to gain better access to the EU electricity market in order to maximise their income. Despite the potential benefit for EU consumers, negotiations of an “electricity agreement” are being held back for political reasons, as EU authorities are putting them in the context of wider negotiations on the EU-Swiss relationship, also covering policy areas unrelated to energy markets (e.g. freedom of movement of labour). 

8.2.   Norway is part of the European power market, but not part of the EU gas market. It is integrated in the Scandinavian power market “Nordpool” and it is applying EU electricity legislation.  Its gas sector is treated as a non-EU gas source, so EU legislation does not apply. This is unlikely to constitute significant barriers to trade. However, the Norwegian gas market differs significantly from GB as Norway is a net exporter of gas and gas consumption levels in GB are a lot higher.

Annex 1. List of existing and planned interconnectors with GB (electricity)

Annex 2. RWE Analysis of generating margins in Central Western Europe

Based on publically available information, the generating margins in neighbouring countries are expected to reduce significantly over the next several years.  The figures below show the development of firm capacity margins (excluding wind, solar and interconnectors) from 2012 to 2023, when these capacity margins are anticipated to be negative across the whole region.  Therefore, each market becomes dependent on wind and interconnection.  However, in the event of coincident system stress events, interconnectors may not be able to provide the security of supply that is anticipated.

Source: EntsoE Mid-Term Adequacy Forecast 2016, BNetzA Kraftwerksliste, 16.11.2016, BNetzA Zu-und Rückbau Liste

16.11.2016, KWSAL 10.11.2016, TenneT Report Monitoring Leveringszekerheid (combined with RES info from CBS); RTE Bilan electrique 2011-2015; RTE Bilan previsionnel (edition 2016) 1 Excludes interconnection, solar and wind. 

2 CWE=Central Western Europe

25 August 2017