European Union: "No-Deal" Brexit And Gas Sales Contracts

Last Updated: 14 March 2019
Article by Garret Farrelly

Today, 5 March 2019, the Commission for the Regulation of Utilities (the "CRU") released an information note 1  (the "Information Note") regarding the gas market in Ireland in the event of a "No-Deal" Brexit.  The Information Note confirms that gas will continue to flow between Ireland and Great Britain notwithstanding a "No-Deal" Brexit.  This complements the statement given by Leo Varadkar recently where he stated "for the last two years we have also been preparing for the possibility that the UK leave the EU without an agreement.  We are doing all we can to avoid a no deal scenario, but we need to be ready in case it does happen". 

Part of this preparation included the publishing of the provisions of the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019 (the "Bill") (please see here for a link to our previous article on the Energy aspects of the Bill).

However, many noted that the Bill only covered powers relating to the integrated Single Electricity Market and that provisions relating to gas supply were notably absent.  The Information Note is therefore a welcome addition to Ireland's post-Brexit planning.

Are there still implications for the Gas Market after today?

If the UK leaves the EU on 29 March 2019 (the "Withdrawal Date") without a deal then, even with the Information Note, all EU rules relating to gas market regulation will cease to apply to the UK.  Notwithstanding this position, the Information Note confirms that trade across the interconnector between the islands of Great Britain and Ireland will continue to be facilitated by Prisma, the European trading platform.  Gas will therefore continue to flow into Ireland.

However, companies with gas sales agreements should be aware of the following:

  • UK as a third country: market based participants based in the UK who want to continue trading wholesale gas products after the Withdrawal Date will need to register with the CRU 2.  Currently the UK has stated 3  that there are no planned changes to trading arrangements, approval process or requirements for EU-market based participants trading in the UK.  However, participants should be mindful that the UK will no longer be bound by EU law and may, therefore, seek to make changes to trading arrangements in the future.  In addition, the UK will need to update their network codes and participants should watch these closely for any changes that may impact the deal that has been brokered under their gas sales agreement;
  • Pricing: the price of gas in Ireland tends to be based upon the marginal cost of gas imported from the UK (with the effect that the price is usually based upon the price at the UK's national balancing point (the "NBP") plus transportation costs and a margin).  While the EU has no tariff on gas imports from WTO members 4 , the cost to supply materials / services to the UK may increase.  This may result in the cost of wholesale gas at the NBP increasing and, therefore, the cost of gas in Ireland increasing as well;
  • Force Majeure: if in the worst case scenario there is an unexpected impact on the gas markets following the Withdrawal Date or an increase in prices, it should be noted that force majeure clauses in gas sales agreements typically restrict the events that may be considered a "Force Majeure".  Events that affect the profitability of a contract are not generally considered a force majeure event and it is therefore unlikely that the force majeure protections in a gas sales agreement would be available to the parties; and
  • Frustration: as with force majeure, frustration applies to set-aside a contract where performance becomes impossible, illegal or fundamentally different to what was agreed.  Again, it is therefore unlikely to be an available remedy to a party affected by a "No-Deal" Brexit.

Given Ireland's high dependency on gas imports from the UK, it is hoped that any unexpected disruption to the gas market following the withdrawal date will be minimal.  Participants should continue to be aware of any changes in the lead up to the Withdrawal Date though and be prepared for an increase in costs and potential changes to the network codes in the UK.

Footnote

1. https://www.cru.ie/wp-content/uploads/2019/03/CRU19022-Notice-to-Industry-on-Disorderly-Brexit-1.pdf

2. https://ec.europa.eu/info/sites/info/files/file_import/energy_market_en_0.pdf

3. 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

4. Details on tariffs can be found at http://tariffdata.wto.org/ReportersAndProducts.aspx

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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