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24 June 2016

Brexit will have far-reaching consequences but the UK energy sector should not radically alter

The result is in. In a historic referendum, the ‘Leave’ campaign took the win early this morning with 52% and cemented the UK’s decision to leave the European Union. It is an unprecedented event – the consequences of which will take some time to emerge. But what might Brexit mean for the UK energy industry? 

First and foremost, Brexit will create economic uncertainty - especially in the near term. Investors may demand higher returns to compensate for these newly created risks and uncertainties – or decide to defer some of their investment decisions.  Higher borrowing costs coupled with a weakened currency pushing up the costs of imported goods may have an inflationary impact on the system in the near term.  However, the hope is that any deferral of investment decisions – which in turn could lead to a tighter system in terms of security of supply as well as higher prices more generally - would only be temporary until the market has had time to respond.
 
As for the energy markets, we are very unlikely to see any major changes to current systems and regulations in the immediate future - especially given the time it will take to negotiate an exit.   Even in the long run, the UK energy industry is unlikely to undergo any radical changes as a direct consequence of the ‘Leave’ vote.
 
The key question is whether the UK will remain part of the European Internal Energy Market (IEM) or not. Under the scenario of the UK not remaining in this single market, it may lose the opportunity for further integration with European Markets and forgo (some of) the benefits associated with it (examples include market coupling, cross-border balancing, capacity market integration and security of supply).
 
However, this scenario is unlikely, given the level of integration existing already today and further planned progress before any exit negotiations would conclude. In any case, a degree of continued adherence to EU market and environmental rules will be inevitable, with a key example being that of Nord Pool which successfully operates across EU and non-EU states
 
Will Brexit mean less commitment to climate change?  Probably not, as the UK already has more stringent targets in place (established under the Climate Change Act 2008) than imposed by the EU Directives and would still be bound by international agreements such as the Paris Agreement.  That said, in a recent survey by the Energy Institute an “overwhelming majority” anticipated negative effects as a result of Brexit in terms of "securing energy supplies, renewable energy development, climate change and sustainability”.  On the flip side, it may also have positive effects such as the removal of commercial and regulatory barriers to innovation.
 
Similarly, while the impacts on the gas industry will be multi-faceted, they are unlikely to provoke radical change. Brexit may slow, halt, or possibly reverse the path towards more efficient use of infrastructure and resources between the UK and Europe, ultimately to the detriment of the consumer.  By the same token, geopolitical considerations may need to be re-assessed with regards to the UK’s strategic storage needs.
 
In summary, despite the significant and wide-reaching consequences that will ripple through the UK economy more generally, the UK power and gas sectors are unlikely to undergo fundamental additional changes in the near term as a direct result of Brexit. Continuing to be a part of the single Internal Energy Market should be a key objective.
 
But first, the dust needs to settle on this historic decision.
 
We will be publishing a series of articles on Brexit and exploring its implications. Watch this space!