Brexit planning: A guide to navigating potential energy market disruption
As the EU referendum nears, the issues surrounding a potential Brexit are moving up the political agenda. While the outcome is difficult to predict, how might a Brexit affect the UK energy sector and what should energy companies and their customers be considering in their contingency planning?
While much of what would happen in the event of a ‘no’ vote is uncertain, we know that there would be a two-year notice period allowing time for the UK to make an orderly exit, probably followed by an extended period in which the detail of the new relationship would be developed. On the face of it, this would provide time to plan, but inevitably, could lead to an extended period of uncertainty.
For the UK energy sector, this uncertainty will be unsettling for investors at a time when a step change in investment is needed to meet the twin policy objectives for energy security and climate change. Moreover, the new feed in tariff/contract for difference subsidy regime and capacity mechanism are still bedding down, major uncertainty persists on a nuclear new build programme and the outcome of the Competition and Markets Authority’s energy market investigation is still awaited.
For these reasons, we can expect the UK Government to want to act quickly following a ‘no’ vote to secure the UK’s ongoing relationship with the EU and to clarify any areas of change in energy policy.
It is perhaps ironic that the Brexit issue has come to the fore at a time when the so-called “Third Package” of EU liberalisation measures for the sector is being implemented; in particular, EU Network Codes that (amongst other things) are intended to facilitate cross-border trading in electricity and gas across the sub-sea interconnectors which link Great Britain to the rest of the continent.
Given the price differentials between British and Continental energy markets, not to mention the energy security benefits of interconnected networks, cross-border trading is beneficial to UK consumers, especially at a time of lower security margins and focus on prices and suppliers’ margins. Any decision to exit would trigger negotiations over the basis of the UK’s relationship with the EU post-exit and it is inconceivable that this would not include the continuation of cross-border trading.
A Brexit could, however, offer an opportunity for the UK to walk away from one or more of the EU’s 2020 (and 2030) energy and climate change targets. Unless the UK opted to join the EAA post exit, EU Climate Change targets would cease to bind it. As attractive as this might sound to some, the UK committed to legally-binding carbon reduction targets in the Climate Change Act 2008 and reduced carbon targets would require a shift in policy. However, without the mandatory EU renewable energy targets, there could be more flexibility as to how the UK meets its carbon budgets. Greater room for manoeuvre could allow more cost effective reductions in carbon emissions.
If a Brexit takes place, we can expect the UK to have less influence over EU energy policy in future and this is perhaps the most significant risk for the sector. To date, the UK has been a major influencer of EU policy in key areas such as energy and climate change. Without the influence of its economic liberalism, EU energy markets may become less competitive, which could have adverse consequences for energy companies and their customers.
So, early days, but energy companies, and especially energy-intensive industry, will want to keep a weather eye on the referendum debate. There is much at stake, and what the sector needs now, more than ever, is a steady hand on the tiller and a clear line of sight to any choppy waters ahead.