Brexit could have significant implications for the energy sector. Domestic energy law and regulations are heavily influenced by EU rules and legislation, as countries across the European bloc look to increase energy interconnectedness. Unwinding elements of this will take some time and could be counterproductive to energy security and sustainability goals for both the UK and the EU.
While negotiations have provided no further clarity on the relationship with the UK’s neighbours once it leaves the EU, policy think tanks and industry sources have provided assessments over the summer of the potential impacts of Brexit.
Brexit disadvantages the northern green economy
Research released on 16 August by IPPR North has revealed that, if the negotiated Brexit deal includes complete withdrawal from Euratom and energy research programmes from across Europe, it could threaten the growth of the green economy in the North of England. This could leave the region, which generates over 50% of green jobs in the country, exposed.
From the perspective of funding, the North of England is heavily dependent on European Development Funding. It currently receives 45% of ERDF funds disbursed in England – the largest portion received of any region and equivalent to over £75mn. The researchers called on the government to develop a “long-term, coherent industrial strategy” to counteract the impact of losing EU policy support for renewable and low carbon energy projects in the North. Providing such support is the only way the UK could achieve its international climate objectives, IPPR claimed.
Similarly, withdrawal from the EU’s Euratom body would create significant instability for the nuclear industry, which is heavily present in the region. A new set of standards for all existing trade deals, or a series of bilateral regulatory agreements would need to be established. However, either option is set to be a complex and time-consuming process, potentially creating greater complexity through the arrival of various arrangements and could end up being a less favourable deal for the UK.
The think tank also summarised the opportunity to focus on inward investment in the Northern energy sector, whilst future trade agreements are uncertain. The announcement of a new industrial strategy is consequently very timely, as a coordinated response from industry to match international competitors, who are promoting their domestic industries under the same global decarbonisation mission, is “crucial” to the long-term survival of the economy.
Centrica boss warns of elevated energy import prices
Ian Conn, Centrica Chief Executive, urged Britain to retain influence on EU energy policy post-Brexit as the remaining member states will determine the country’s energy prices. The UK’s dependency on imported gas is set to increase from half to around two thirds of consumption by 2025, some of which is imported from EU nations. Similarly, there are plans for as many as 12 interconnectors to trade electricity, mainly with EU nations, and imported power could more than triple by the mid-2020s. Conn cautioned that imports could be subject to tariffs should the UK leave the single energy market.
Conn underlined that continuity of energy policies would ensure stability and foreign investment into the UK’s energy system, according to Bloomberg. On Brexit Conn said: “We need to think about it long term and realize it will cost us quite a lot up front, will take a lot longer than two years, and getting a payback will require material changes to our productivity and the economy.”
EIB halts funding for British projects
In other developments, it was recently reported in The Times that the European Investment Bank (EIB) had imposed a moratorium on any new long-term loans to the UK following the Brexit referendum. Even though the UK has a 16% share in the EIB, it requires EU membership to benefit as it is an EU body. Unless negotiations can establish a continued membership, the UK will be forced to end its involvement by 2019.
The energy sector has been the largest receiver of funding from the EIB, having received £0.9bn of the total £1.8bn lent to the UK in 2017. Disengagement will inevitably impact the delivery of new projects, particularly offshore wind projects, and the cost of their financing.
Lawrence Slade, Chief Executive of Energy UK, said it was vital that the government provided alternative funding: “Leaving the EU will remove some significant sources of funding for energy projects. That is why it is essential that the government’s industrial strategy provides a long-term, stable and predictable framework and that companies have access to the funds.”
A Treasury spokesman said that it was working with the EIB to resolve the situation and ensure that UK companies can access EIB funding while it remains a member of the EU and said that it will act to support business investment by authorising the British Business Bank to increase its funding.
Maintaining the SEM
One issue the UK government is clear on is that it is in favour of the continuation of the Single Electricity Market (SEM) between the Republic and Northern Ireland after Brexit in a Brexit position paper, published on 16 August. The continuation of the current agreement would procure the trading of gas between the UK and the island of Ireland, which is “critical for security of supply and efficient market operation”. The Irish government has made parallel calls as the SEM enables Ireland and Northern Ireland to maximise market efficiencies and ensure affordable electricity for consumers.
Ireland’s heavy reliance on gas imports through the UK means that cutting trading arrangements would isolate it from gas supply unless economically recoverable gas was found elsewhere. Alternatively, infrastructure for different trading arrangements, for example LNG ports or interconnection with other gas markets beyond the UK, would need to be built in future, to boost gas security. The paper found this was the best option for the electricity market in Northern Ireland, at least in the medium term, given the size and isolation of the market.