The government has been at the forefront of efforts to liberalise and develop cross-border energy markets, and is likely to continue following this policy. However, no matter how the UK's exit from the EU is negotiated and structured, in order to increase interconnectivity with continental Europe, co-operation with the EU internal energy market will be necessary (see News brief "Britain's new relationship with Europe: what could the future look like?").

If the UK were permitted to participate in the Energy Union following Brexit it would, irrespective of the Brexit model, need to negotiate an appropriate partnership with the EU and adopt and comply with the relevant EU legislation (see box "The Energy Union"). The difference, however, would be that the UK is unlikely to have a say in the formulation and interpretation of the rules, unless the UK manages to negotiate to remain part of the institutions that co-ordinate EU energy regulation, such as the Agency for the Co-operation of Energy Regulators (ACER), the European Network of Transmission System Operators for Electricity (ENTSO-E) and the European Network of Transmission System Operators for Gas (ENTSO-G). Any failure to co-operate might result in divergence of the British and EU energy regulatory regimes.

The Third Energy Package is a package of EU legislation that aims to liberalise European gas and electricity markets. Given the UK‘s liberalised energy policy, the UK is likely to continue to implement and be supportive of many of its aspects, including:

The government also appears committed to market-based interventions in energy markets and supports EU initiatives such as market coupling. Businesses should plan to continue to comply with these requirements.

If the UK were to remain part of the EEA, the EU state aid rules would continue to apply to energy infrastructure and support schemes in identical form, since the EEA Agreement contains a similar prohibition against granting financial assistance in a way that distorts competition and inter-state trade within the EEA.

Under other Brexit models, any subsidy granted by the government would not fall foul of the EU state aid rules. However, any subsidy would need to comply with the World Trade Organization (WTO) subsidy regime, which is similar in its intentions to the EU state aid rules. The WTO regime disciplines the use of subsidies and regulates the actions that WTO members can take to counter the effects of subsidies.

In whatever form Brexit takes effect, the UK's climate change goals are unlikely to change as they are established at a national level under the Climate Change Act 2008. However, there will still be important issues to settle. For example, at an international level, the UK's emissions reduction commitment would need to be disentangled from the EU target under the United Nations Framework Convention on Climate Change (UNFCCC) and the recent Paris Agreement (www.practicallaw.com/1-631-3947). The UK would also need to submit its own Nationally Determined Contribution in respect of its intended climate actions under the UNFCCC processes.

An important question is whether the UK will still be able to participate in the EU Emissions Trading System (EU ETS). If the UK were to use the Brexit model of EEA and European Free Trade Association (EFTA) membership (like Norway, Lichtenstein and Iceland), UK businesses would be able to participate in the EU cap and trade scheme, under which emissions covered by the scheme are capped at an EU-wide level and emission allowances can be traded among traders and operators. If the UK did not participate in the EU ETS, transitional and linking arrangements would be required, which would be particularly important for companies holding a surplus of allowances.

Unless the UK uses the EEA and EFTA membership Brexit model, once it exits the EU the UK would be released from its renewable energy targets under the Renewable Energy Directive (2009/28/EC) and from EU state aid restrictions, potentially giving the government more freedom both in the design and phasing out of renewable energy support regimes.

The availability of funding from EU institutions may affect the deployment of capital intensive projects such as offshore wind (see below). However, given that the UK would still be bound by national and international decarbonisation obligations, it is anticipated that renewable and low carbon energy development would continue to form part of government climate change policy (see "Climate change" above).

Operators of specified industrial and combustion plants are required under the Industrial Emissions Directive 2010 (2010/75/EU) (2010 Directive) to hold environmental permits that are granted subject to conditions seeking to control and gradually reduce emissions and discharges into the environment and the generation of waste. Within the energy sector, the 2010 Directive imposes strict emission limit values that have to be achieved through permit conditions, which may require investment in pollution abatement equipment or, where it is determined that this is not cost effective, the plants will close down.

This is having an effect on coal-fired power plants and many older gas plants, which are expected to close by 2023 as they have selected a limited life derogation and can operate without abatement equipment until the end of 2023. Following Brexit, it is unclear to what extent the 2010 Directive will continue to apply. However, it is likely that unabated coal-fired plants will close, particularly as the government is also proposing a policy, subject to consultation, to close all unabated coal-fired power stations by 2025.

There are a number of EU initiatives to promote investment in energy infrastructure which represent an important source of funding for UK projects. For example, total European Investment Bank (EIB) investments in the UK economy came to €7 billion in 2014, of which energy projects accounted for 50%.

Businesses that have projects which are already funded will need to examine the terms of their credit or investment agreements to establish the effect of Brexit. In particular, if it becomes unlawful for an EU institution to fund a project, a prepayment may be triggered, although participation may be transferable to any unaffected funder.

The impact on proposed EU-funded projects will depend on the timing of the changes to investment criteria and the project's nature, including if it furthers EU policy. For example, the European Fund for Strategic Investment supports cross-border projects, such as interconnectors and pipelines, and the EIB has to date provided €3.9 billion of funding for EFTA states.

A large number of multinational oil and gas companies operate in the North Sea. Without the free movement of persons, which is established in Article 45(1) of the Treaty on the Functioning of the European Union, it may be more difficult to manage flexible workforces, which can currently be moved from project to project within the EU depending on need.

The extent to which Brexit will have an impact on employment laws that are derived from EU directives is unclear. Regardless of whether the UK adopts the Brexit model of EEA and EFTA membership (in which case EU employment law directives would still apply), there may be political and commercial pressure to retain, for example, anti-discrimination legislation and the rules on the transfer of employees. One area that is likely to be reformed is the rules on holidays and working time, which have had a particular impact on the offshore sector.

In practice, the UK already has protections built into the system against security of supply risks. The existing import infrastructure allows multiple sources of supply through its three gas interconnectors and three liquefied natural gas (LNG) import terminals. As the infrastructure is already largely in place, operations and gas flows are likely to continue as normal, irrespective of Brexit.

Of greater significance will be issues such as the expiry of long-term supply contracts and current restrictions on selling capacity on a long-term basis or under bilateral contracts. The draft tariff network code on harmonising transmission tariff structures for gas will also, when implemented, restrict the price at which interconnectors can sell their capacity. Brexit may give rise to complex issues such as whether or not the interconnectors continue to be bound by these restrictions.

For Brexit to have an effect on UK gas prices, it would need to lead to consequences such as export tariffs being imposed on EU gas flowing to the UK, thereby increasing the cost of pipeline gas.

Although LNG import capacity is not fully used at present, this is more of a supply and demand issue and is unlikely to be connected to Brexit. LNG accounted for only 13% of UK gas supply in 2015 but there is room for this to increase given current spare capacity and with a fourth import terminal due to start up later this year (offshore Barrow-in-Furness). However, whether or not the UK will be an attractive destination for spare LNG volumes is more likely to be driven by the price of gas in the UK market than by any other factor.