Following on from our insight report on the 17th March, which highlighted the key changes announced in the UK Government budget and the impact on the UK energy markets, the continued uncertainty over the impact of policy changes and the development of a low-carbon energy sector remain one of the key concerns to UK consumers.
However, whether you sit firmly in the “stay” or “leave” camp as we move towards June 23rd it is clear that a vote to leave the EU will see the UK Government continue its ambitions towards carbon reduction, with a continued impact on the UK energy markets. However, given the current targets and supporting market schemes are largely interlinked with UK policy, a Brexit is likely to cause significant pressure on the UK Government to address how this separation will be managed. This fear over a potential “Brexit” is therefore a significant risk to UK consumer energy spend as the regulatory environment will need to change to reflect a stand-alone UK carbon reduction model. Regardless of whether you believe in the much publicised (and possibly slightly over embellished) arguments from both camps all energy consumers should start to address the key risks and opportunities that may occur in June. A recent poll by the Telegraph (updated 25th March 2016 – showing the average of the last 6 polls) shows that 51% of the UK population currently wish to remain, with 49% wishing to leave. Whilst the “remain” camp has always maintained a lead over the alternative, this has diminished in recent months as we see growing concern over the role of Europe in leading the UK.
For energy consumers the challenge of continuing to adapt to the ever changing political and legislative landscape remains a key focus. However, whilst the UK Government budget has made significant changes to the energy markets, June 23rd will create two vastly different legislative scenarios’ which will significantly change the concept of how carbon reduction will be managed and which supporting schemes will survive.
A “Brexit”, in whatever form, is unlikely to change the UK’s climate change goals as these were established at a national level under the Climate Change Act 1998. However, should we exit from the EU then important issues will need to be addressed such as disentangling our emissions reduction commitment from the EU target under the United Nations Framework Convention on Climate Change (UNFCCC) and the recent announcements made under COP21 in Paris.
Therefore, it is likely that the UK will remain focused on delivering against key carbon reduction targets and by implication the energy markets will remain a key focus in supporting these reductions. However, a number of key areas would be evident.
Therefore, whilst a Brexit is likely to remove some of the more cumbersome red tape which has been the cause of much argument, it is likely that the energy markets will continue to be driven by the same low-carbon ambitions as the UK has been a leader of policy in respect to the out-turn of COP21 (which in turn has been a major influencer into EU energy policy). Whilst the UK’s exit from the EU may take many years to actually conclude, there is a potential for June 23rd to introduce two very different scenarios’
Traditional risk management techniques tend to focus solely on the selection of a supplier and the tactical execution of energy on the wholesale markets. The rather subdued and passive wholesale market prices of late have perhaps changed the nature of risk management as many consumers continue to take advantage of lower short-term prices or hedge longer term based on appealing long term prices. Therefore, consumers can often lose sight of the longer term political policy risks which are evident in a fundamental change in the UK’s membership in the EU.
More recently the issue of risk management has expanded to include non-commodity costs (those non-energy costs which are made up of levies, taxes and infrastructure costs which make up as much as 50% of a delivered energy bill).
Aside from the wholesale and non-commodity risk management argument, there is also a strong argument that every energy consumer should have a viable strategy to deal with future changes to the political and legislative landscape. This has become ever increasingly evident given the fear of a “Brexit”, with the corresponding risks associated with not only remaining part of the EU (and its corresponding policies) but also the very real fear that we may see the UK exiting its current arrangement based on the forthcoming vote.
Beond is working with our clients to deliver:
Publishing and providing insight into key news (through our Strategic Insights) and through our regular monthly communications – alongside our market risk reports.