Deal or no deal – what’s the most likely outcome for the UK Energy sector?

Deal or no deal – what’s the most likely outcome for the UK Energy sector?

Hosted in collaboration with German law firm Becker Büttner Held and following on from a similar event held in Brussels last year, we began by putting the Brexit process into perspective, looking at how far the discussions have progressed one year on. It quickly become evident that many of the questions and concerns raised 12 months ago remain live. Limited progress has been made in clarifying the future direction of the sector – and indeed the entire UK economy – something is needed to break the current political stalemate.

Deal or no deal – what’s the most likely outcome?

The question on the lips of the business community – whether or not Theresa May will be successful in driving through her much-criticised Brexit deal – formed the next topic of conversation. The triggering of Article 50 means that the clock is ticking on the UK’s withdrawal from the EU in March, with or without a deal. The possibilities of a second referendum or a general election were considered, but both options might require a delay to the exit date and that would require the agreement of the EU. If the deadlock cannot be broken, there is clearly a risk of a ‘no-deal’ Brexit which could be harmful for the energy sector and damaging to the UK economy as a whole.

What’s the likely impact on cross-border energy trade?

A no-deal Brexit would mean leaving the EU single market, including the single energy market. This would impact on cross-border trade which, in energy terms, means interconnectors. We discussed the inevitable decoupling of the GB electricity market from the EU’s Multi Region Coupling and the inefficiencies in trading that could be expected to result as well as the loss of ‘social benefits’ by consumers. A ‘no deal’ scenario would also represent a missed opportunity in relation to the pan-European balancing market, currently under development.

While this would likely result in additional costs for the UK energy consumer, it is important to be aware that it would by no means herald Armageddon and interconnector trading would continue on the basis of the less efficient system of explicit auctions, as was the practice pre-coupling.

Perhaps more significantly, the failure to secure a satisfactory Brexit deal could also have an impact on future prospects for interconnector development in terms of loss of EU funding as well as regulatory uncertainty. Whilst it seems that the principal driver for interconnector development, namely market price spreads, will remain, it may be that some of the many projects currently in development will not come to fruition.

Life outside the EU: possibilities for the sector

On a more positive note, freedom from EU legislative and policy constraints could provide the UK with more flexibility in meeting the challenges faced by the energy sector.

For example, a ‘no deal’ Brexit would leave the UK outside of the EU Emissions Trading Scheme and in need of an alternative means of meeting its carbon commitments. Whilst HM Treasury has a temporary fix for this, there may be an opportunity to reconsider the UK approach to climate change for the longer term. Given the urgency of reducing emissions, there could be scope for more radical approaches such as the cross-sector carbon tax and simplification of the regulatory regime proposed recently by the Policy Exchange.

In the face of ongoing political uncertainty, it will be interesting to assess the progress made at a future roundtable in 2019.