In the event of a no-deal Brexit, the consequences for the UK energy sector could be far-reaching - impacting everything from the trade of electricity, power supply in Ireland and climate change agreements
With the ceaseless ticking of the Brexit clock and discussion in Parliament at deadlock, it seems increasingly likely the UK is heading for no deal – leaving those in the energy industry contemplating what happens next.
Role of EU in UK energy industry
Energy is more reliant than many industries on seamless transportation across country borders.
Many of the UK’s biggest energy suppliers are either controlled or owned by European companies.
These include German companies E.ON and Innogy, which owns Npower, the partially French state-owned Électricité de France (EDF) and Spanish electricity utility company Iberdrola – parent company of ScottishPower.
Similarly, since North Sea oil and gas production peaked in 1999, the UK has become increasingly reliant on imported energy and has been a net importer of energy since 2004.
In 2017, imports were double the volume of exports and contributed to 36% of the country’s energy needs.
According to the latest House of Commons briefing paper on the topic, “the UK’s dependence on imported energy looks set to continue to increase in the future”.
In the same paper, it’s noted that in 2017, nearly half (49%) of the UK’s net electricity exports came from France, 46% from the Netherlands and 5% from the interconnectors - cables enabling energy to flow between networks - with Ireland.
This could prove particularly costly if the UK was to leave the EU without a deal.
A briefing from global natural resources consultancy Wood Mackenzie says: “The most notable risk to the UK energy market from a no-deal scenario is principally linked to the economy.
“The consensus of no-deal scenarios suggests weaker economic growth and a fall in sterling, which would weaken demand and increase the cost of energy imports respectively.”
The reliance of the UK energy industry on production and trade with EU member states makes the process of leaving the EU without a deal all the more complicated.
The UK energy market under WTO rules
Ardent Brexiteers are pushing for the UK to rejoin the World Trade Organization (WTO) as an independent member in the event of a no-deal exit.
In such an event, Wood Mackenzie notes: “The UK would subsequently revert to WTO rules and would set its own schedule for tariffs on goods traded with “most favoured nations” (MFNs).
“We assume the UK would adopt the tariff schedule that currently applies to MFNs as part of the EU.
“The EU tariff on liquefied natural gas (LNG) and natural gas with MFNs is 0%. It seems very likely this would be the default.”
Government guidance to energy industry stakeholders in the event of a no-deal scenario advises that energy generators wishing to export to the EU “may wish to consider how they market their exports”.
Departure from the EU without a deal would mean leaving the Internal Energy Market (IEM), which allows for efficient trade of energy between EU members as a result of compliance over EU energy rules and regulations.
It’s recommended that stakeholders seek “alternative trading arrangements” before the leaving date of 29 March 2019.
UK market participants will also need to register under the Regulation on Energy Market Integrity and Transparency (REMIT) with an EU regulatory authority “for the purposes of market monitoring to avoid a disruption to cross-border trade”.
Wood Mackenzie adds: “The mature UK upstream sector requires continual investment but may face challenges with the supply of labour, services and financing.
“While upstream operators are used to dealing with significantly higher levels of political risk and uncertainty – they do so when the perceived returns are high.
“But in a mature upstream sector with limited prospectivity, competing globally for investment, fiscal stability and cost certainty are critical.
“Gas and power interconnector operators have been asked to prepare for no deal, but the post-winter timing will help to mitigate any potential short-term risk on flows – with the expectation that any issues would be resolved quickly given the impact to both sides.”
Potential impact of no-deal Brexit on UK’s energy industry infrastructure
The inter-connected nature of energy pipelines and transmission links are inevitably going to be complicated by a no-deal scenario.
The UK is already committed to several projects that tie its energy supply to mainland Europe.
A one-gigawatt (GW) electrical interconnector that stretches across the seabed between Richborough Energy Park, in Kent, and Zeebrugge, in Belgium, is close to completing construction and is expected to begin commercial operations this year.
It is one of 11 proposed cables, or interconnectors, between the UK, Ireland and continental Europe.
Imports along these lines could supply a fifth of the UK’s electricity by 2025, according to government estimates.
But despite more efficient electricity links with Europe, the trade of electricity across them could become harder if the UK leaves the EU without a deal.
Energy experts from Wood Mackenzie say: “With several new transmission links in progress, the UK’s power system is set to be more closely integrated with the wider European network even if the country as a whole is not.
“The limited capacity of existing transmission links, retirement of coal-fired generation and the higher power prices all make the UK an attractive destination for power flows.
“But uncertainty over the post-Brexit direction of UK energy policy must raise some doubt over the attractiveness of new interconnectors.
“In addition to influences on the fundamental drivers of interconnector flows, a no-deal Brexit would also immediately decouple the UK from Europe’s IEM, meaning that cross-border flows of electricity would no longer be governed by EU rules on efficient trade and cross-border cooperation.”
In order for energy flows between mainland Europe and the UK to continue post-Brexit, alternative no-deal arrangements would be required ahead of the leaving date of 29 March.
Papers published by the UK government last October state “there are no plans to change either the domestic approval process or the requirements for access rules in the UK”.
It adds: “In Great Britain, the government has worked with Ofgem and National Grid to ensure existing measures are in place to deliver continuity of supply.
“Consumers need to take no action, but trade on interconnectors will be less efficient.”
Worries for Ireland and the Single Energy Market
The existing Single Electricity Market (SEM) arrangement – a bilateral agreement between the UK and Ireland – is underpinned by Ireland’s involvement in the IEM.
The IEM, which is followed by all EU states, Norway, Iceland and Lichtenstein, requires members to follow EU regulations on industrial emissions and state aid.
A no-deal Brexit would result in the UK leaving the IEM and could run the risk of upsetting arrangements with Ireland under the SEM.
A leaked draft of a notice about the impact of a no deal on the SEM, seen by the BBC, warned that such a scenario would leave an “insecure, isolated Northern Ireland market” - and would run the risk of power shortages, blackouts and a possible 34% rise in energy prices in Ireland.
Keeping the SEM operating, regardless of the Brexit deal outcome, is therefore described as a priority in the paper but there is acknowledgement that “there is a risk that the Single Electricity Market will be unable to continue”.
Commenting on this issue in September last year, Brexit Secretary Dominic Raab said: “We have got interconnectors and the regulatory measures that the government can take to make sure that Northern Ireland maintains the energy supply it needs.”
In a London School of Economics blog, Meabh Cormacain manager of the Northern Ireland Renewables Industry Group, says: “A coherent approach on the island would support the Republic of Ireland’s compliance with EU legislation in a cost-effective manner.
“Not only this, but avoiding a two-speed market may well require coherent energy, climate and environmental policies across the island of Ireland.
“Certainty on these and other issues is, to date, elusive. In principle, there is UK-EU agreement that with regards to the SEM, EU law governing wholesale electricity markets will apply to Northern Ireland.
“However, the supporting text has yet to be agreed and we still appear to be a long way from agreement on the detailed policies, codes, regulations and practices required to underpin the electricity market on the island.”
Implications of a no-deal Brexit on the nuclear energy industry
The British nuclear industry has similar concerns and, although some agreements have been ratified to ensure the sector can continue to operate without disruption post-Brexit, there are still some concerns for industry representatives.
A spokesperson for the Nuclear Industry Association, the trade body for the civil nuclear industry in the UK, said: “Movement of people, goods, and services are essential to civil nuclear as for many other sectors.
“There still remains a lack of detail from government on how this would work in a no-deal scenario, and it’s critical this is fully detailed before March 2019.
“In order to maintain our international status for scientific research and innovation, our involvement in programmes such as ITER [International Thermonuclear Experimental Reactor, an international nuclear fusion research and engineering project] should also be protected.”
Particular concerns over a no-deal Brexit relate to Britain’s loss of membership of the European Atomic Energy Community (Euratom) – a participatory agreement between EU member states to efficiently distribute nuclear energy across Europe and sell surplus power to non-member states.
“Therefore, the most desirable and least disruptive course of action for both the UK and the EU is to conclude a sensible, rational long-term agreement, one which also spells out our future relationship with Euratom.
“We will continue to work closely with both the UK government and the European Commission to encourage the smoothest possible transition out of Euratom and support a successful conclusion of negotiations.”
UK’s commitment to climate change under a no-deal Brexit
The European Union Emission Trading System (ETS) sets out greenhouse gas emission targets for EU member states and ensures unified action on climate change across Europe.
Although government officials have reiterated the UK’s commitment to tackling climate change, it is unclear what the “high standards” referenced in the Brexit White Paper are and whether this would include the commitment to cutting emissions and increasing efficiency by 20% by 2020.
An open letter to European Commission President Jean-Claude Juncker and UK Prime Minister Theresa May from leading stakeholders in the energy sector, including EDF, Energy UK and Renewable UK, called for a unified approach to negotiating energy and climate change agreements.
The letter, sent on 4 September 2018, states: “Dynamic and forward-looking co-operation between the EU and the UK on climate change and energy policies, standards and clean energy infrastructure would keep costs down and increase the pace of the low-carbon transition.
“As such, within the Brexit negotiations we are calling for a comprehensive climate and energy chapter, and that this be prioritised in the future relationship negotiations.”
It lists several recommendations, including no tariffs on energy trading, co-operation on the Paris Climate Agreement and co-investment on clean energy projects.
However, leaving the EU without a deal in place would mean no guarantees.
Wood Mackenzie notes: “In the absence of the ETS, the UK government intends to introduce a new carbon tax (at £16/tCO2) in addition to existing carbon price floor costs, to maintain a cost of emissions similar to pre-Brexit ETS levels.
“While various options exist for the development of enduring emissions tax or trading arrangements in the UK, we expect coal to remain at a disadvantage to gas up until the fuel’s mandated phase-out in 2025.
“A properly functioning carbon pricing mechanism will also be necessary to lessen the subsidy requirements of renewables – with potential impacts on the economics of both new and existing projects.”
Gas trading as an indicator of the post-Brexit energy sector
The consultancy firm also points to the trading points for natural gas as indicators to the direction the UK energy sector is heading post-Brexit.
Investors could be enticed away from the volatile British National Balancing Point (NBP) to Dutch gas traded on the Title Transfer Facility (TTF).
It adds: “Liquidity at NBP is an interesting measure to watch. On one hand, traders may accelerate the march to TTF if they don’t want to take the extra currency risk.
“On the other, LNG imports into Europe are expected to rise – and some traders may be attracted to the possibility of additional volatility at NBP.”