Will leaving the EU affect the UK’s Energy?


There is currently much debate in the UK about whether to leave the EU or to remain as the referendum looms on the 23rd June 2016. The two political sides make strong arguments defending their positions and attacking the opposite arguments as 'ridiculous' or 'absurd', but until the day comes and the people of the UK have their chance to 'speak' nobody will really know what the outcome of a 'leave' vote will be unless the voters vote for it, and even then not until the dust has settled over the next few years. In this article, Paul Cassar considers some of the potential impacts of Brexit on UK energy.

LEAVE or REMAIN

In March 2016 Vivid economics provided a report on behalf of National Grid on the impact of Brexit on the UK energy sector. The result of which ranges from 'we don’t honestly know', to could be up to additional costs of £500m per year by early 2020s [1].

This document has been addressed by both 'REMAIN' and 'LEAVE' campaigners. Amber Rudd, UK energy secretary, taking the worst case scenario, claims that it’s "the equivalent of British bills going up by around £1.5m each and every day", whilst the supporters of LEAVE immediately dismissed the report out of hand by calling it 'absurd'.

The truth really is we will not know how this is going to play out in the long term IF the UK votes to leave the EU. We do know that there has been a great deal of uncertainty over investing in UK energy with the referendum looming and that may well continue over the next few years if an exit strategy needs to be negotiated which includes gas, power and carbon emissions. Every current energy interaction with the EU is likely to need to be re-negotiated. By comparison, it took Switzerland (a non-member) 12 years to negotiate most of its bilateral agreements with the EU.

Electricity

Because of aging stock, decommissioning of coal power generation, a hesitant government along with weak and often confusing investment signals, the next decade will see a significant increase in the amount of investment needed to bring the UK power generation capacity up to meet demand.

EDF has publically stated that whether the UK is in or out, it will still build and maintain the nuclear power plant at Hinckley Point, even though the FID has been put off until September 2016, and there is ongoing uncertainty about the potential costs and risks of the investment. In the light of such uncertainty, Brexit may prove the final nail in the coffin for the EDF investment. Whilst a decision not to go ahead would be embarrassing for the UK Government, and probably make it harder for the UK to meet its carbon emission reduction targets, it is uncertain whether the new Hinckley plant would actually lead to higher or lower costs for UK consumers, due to concerns about the high strike price agreed for nuclear in the context of falling energy and renewable investment costs.

There has been much foreign investment in the UK energy sector over recent years with much more still in the decision process even now. Over the last five years the UK has secured long-term loans of over €9 billion for energy projects from the European Investment Bank (EIB) of which it is a major stakeholder. The UK's relationship with the EIB is likely to change though if it leaves the EU because there are no non-EU member states as stakeholders in the bank. Will a leave vote affect the terms of the loans?

The UK will need to seek investment somewhere in the region of £18 billion/year over the next four years [2] and beyond. The cost of that investment is very likely to go up if the UK leaves the EU because of greater risks associated with investment and the likely devaluation of the UK Pound. An alternative view suggests that, removed from some of the constraints of EU regulation, the UK will find it easier to attract additional foreign investment, although this view is not held by many experts.

Gas

Over the past 40 years or so there have been ever increasing and growing energy links between the UK and Europe. More interconnectors have been built for both gas and electricity, enabling flows from a cheaper to a more expensive market whichever side of the sea that happens to be at the time and there are a lot more planned. With the UK out of Europe there would be greater uncertainty as to whether these planned interconnectors will be built. This could have quite an effect on security of supply, as well as markets. A key issue will be the extent to which the UK, if leaving the EU, remains part of the single internal energy market (as in the Norway model proposed below).

The UK does have its own domestic production of gas though, along with established LNG agreements with various countries outside of the EU. Fracking also appears to be gaining momentum, despite local opposition, which may well reduce dependence on European supply.

Brexit Models

A recent research paper from Chatham House "UK Unplugged? The Impacts of Brexit on Energy and Climate Policy" [3] examines amongst other things five possible models that could be used to negotiate the UKs relationship with the EU. As the UK may be the first full member state to leave the EU there is no exit model available to follow.

The following table from the above paper covers the key points of those models:

Model Key Elements
Norway
  • Membership of EFTA and EEA
  • Fully integrated in EU single market
  • Adopts vast majority of EU energy legislation, but with significantly less influence over its contents and with no formal voting power
  • Contributor to EU budget – £106 per capita 2011
Energy Community
  • Adopts the acquis communautaire relating to energy
  • Access to single energy market
  • No formal or limited opportunity to shape EU energy and climate legislation
  • No contribution to EU budget
Switzerland
  • Membership of EFTA, but not of EEA
  • Sector-specific bilateral agreements with the EU
  • Small contribution to EU budget – £53 per capita 2011
  • Participant in EU energy market; some harmonization of rules and standards required
Free trade agreement/Canada
  • Comprehensive free trade agreement with the EU allowing access to internal market for goods, and to a lesser extent services
  • Conditional market access
  • No access to EU energy-related finance programmes
  • No contribution to EU budget
No deal/WTO
  • No agreement; trade regulated under WTO rules
  • Conditional market access
  • No access to EU energy-related finance programmes
  • No contribution to EU budget
Remain in the EU
  • Fully integrated in EU single market
  • Bound by EU energy and climate legislation
  • Directly involved in EU energy and climate policy-making with full voting rights
  • Eligible for all EU and EIB funding mechanisms
  • Net contributor to EU budget – £128 per capita 2011

The only model not taken into account is the bespoke or UK model which is probably the more likely one. All of the exit models above are likely to pose challenges for both the UK and the EU.

A UK out vote really will be the beginning of political debate the like of which no one has ever seen in Europe. It may shake the very roots of the EU if it loses a major contributor to the Union in both terms of finance (£8.5 billion net 2015) as well as political.

Policy

The UK has had a major part to play in the EU energy policy, particularly in the area of energy market liberalisation and emissions trading, where the UK experiences have in part been used as a model for wider EU action, a position strongly supported by successive UK government.

Outside of the EU, the UK is unlikely to have significant influence on EU energy policy. Even if part of the negotiated package was to stay as a signed up member of the single internal market (as in the Norway model), the UK is unlikely to have voting rights over legislation it would then be bound by. So if the UK continued to have market relations with the EU it would lose its voice within the bureaucratic walls. Leaving the EU would give the UK more freedom to implement its own energy policy, and potentially decide on changes to its recent focuses on sustainability (climate change mitigation), security and affordability, although it is unclear if any likely UK government (at least made up of the three main political parties in Westminster) would wish to change its support of this policy direction.

Conclusion

If the UK votes to leave the EU on 23rd June initially nothing on the surface is really going to change. The next few years will include endless debates, meetings, bargaining, agreements and disagreements until an exit deal is reached and approved by all member states of the European Parliament.

Initially the UK will still contribute to the EU Budget and the EU will continue to pay out its subsidies, although over time this may change, depending on the exit model agreed. EU laws and policies will still be made but the voice of the UK will slowly dwindle into the distance.

While there may be other arguments relating to sovereignty, migration and a range of different issues, in terms of energy, the UK has been at the centre of the EU to assist in creating liberalised markets and combat climate change. The UK and other EU energy markets are closely integrated. How the UK may fare outside of the EU is highly unclear. It would be an interesting time of transition over many years as adjustments are made in terms of trade, markets and even the size of the UK – will it remain a United Kingdom – how will that effect the UK energy markets, investments and supply?

As always in these matters there is a lot more at stake than meets the eye and the unfolding of a Brexit could present many more challenges than the politicians who are driving this change can possibly foresee.

June 2016


Footnotes

  1. http://www.vivideconomics.com/wp-content/uploads/2016/03/VE-note-on-impact-of-Brexit-on-the-UK-energy-system.pdf
  2. https://view.officeapps.live.com/op/view.aspx?src=https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/446642/National_Infrastructure_Plan__Pipeline_-_FOR_PUBLICATION.xlsx
  3. http://www.europeangashub.com/custom/domain_1/extra_files/attach_639.pdf

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