Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Energy industry considers Brexit impact

The government has joined a range of industry stakeholders in warning that a vote to leave the EU next month could ultimately come at a significant cost to UK energy users.

Energy Union

Decisions made at the EU level have a significant bearing on the UK’s energy system, driving the implementation of many of its rules, regulations and targets.

Over the past couple of years, the European Commission has been detailing plans for a new Energy Union: this will seek to harmonise the rules under which energy is bought and sold across the bloc.

Costs of Brexit

The government believes that the increasingly integrated nature of the EU’s energy markets is beneficial to UK consumers, helping to ensure energy security while keeping gas and electricity more affordable. In recent weeks, this view has been supported by a number of expert reports, which have analysed the potential consequences of Brexit.

A report by consultancy Vivid Economics, published on 24 March, warned that a vote to leave the EU was “very likely” to have a negative impact on UK energy systems.

The study, commissioned by system operator National Grid, said that Brexit could result in the UK leaving the internal energy market – and that this promised significant cost increases for consumers. Even if the UK remained in the single market, it could, the study claimed, be expected to lose influence over policy development.

The report suggested that two factors in particular would push up costs for the UK: exclusion from market coupling would, by the 2020s, add around £160million, as would the possibility that fewer interconnectors would be developed.

Vivid also warned that Brexit would increase costs to energy investors. It said that higher returns would be required to compensate them for the risk of less favourable post-Brexit arrangements.

Overall, Vivid estimated that by the early 2020s a vote to leave the EU would result in UK energy consumers being around £500 million worse off.

Government view

The publication of the report coincided with a major government intervention on why remaining in the EU was beneficial to the UK’s energy sector.

In a speech delivered on 24 March, energy and climate change secretary Amber Rudd backed the campaign to remain, saying:  “It has been estimated that a fully integrated internal energy market could save up to £50 billion per year by 2030. And that’s ignoring the benefits of new and tighter product standards in the future. That would mean lower bills not just for families and businesses across Europe, but right here.”

The library of the House of Commons has also undertaken research into Brexit, but focused instead on how it might impact the low-carbon transition. It said: “The driver for the focus on renewables in the UK has been EU targets, but it is difficult to say how much would change if those targets disappeared as a result of leaving the EU.”

Low-carbon transition

Two environmental think tanks have similarly warned that Brexit would make the low-carbon transition more expensive and less secure.

In a briefing paper published on 5 April, Green Alliance and E3G said that the most likely “leave” scenarios would substantially increase uncertainty for investors in energy projects.

They warned that, at worst, this could result in an investment hiatus. The briefing said that the UK had “led the world” in addressing climate change, and had been able to do so because of its position within the EU. Collective action had given all member states the confidence to reduce their emissions knowing that their competitiveness would not be undermined.

Two models

On 11 April, an academic initiative detailed the way in which the energy sector would be impacted by the different models that the UK could adopt in the event of Brexit.

Should it follow the Norwegian model, the UK would remain under the influence of EU energy policy but would have no representation in its institutions. It is suggested therefore that, even were the UK to leave the EU, it could still be required to adopt all future single market legislation.

Alternatively, the UK could follow the model of Switzerland, whose relationship with the EU is built on a series of bilateral agreements. This would have highly uncertain implications for the energy sector – but could, the paper said, ease some of the EU-driven pressure to remove polluting coal plants from the system.

Uncertain impacts

Despite the government’s warnings, there remains considerable uncertainty as to how, if at all, the UK energy sector would be impacted by Brexit. This reflects the fact that, notwithstanding the EU’s importance, key legislative drivers of policy actions have been implemented at the domestic – not the EU – level. Perhaps the most consequential impact of Brexit from an energy perspective would be the potential it would create for political upheaval at the national level.