Consequences of Brexit for UK energy markets

March 2016 has proved to be a pivotal month for the future of the UK energy and carbon markets – the announcement of key changes to energy policy in the UK Government budget, growing fears over a June 23rd “Brexit” and the closure of UK coal generation. Should consumers fear the potential of a Brexit in June?

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.

Is “Brexit” something UK consumers should fear?

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.

  • If the UK was to exit and remain part of the EEA (European Economic Association – which is a likely scenario in the event of an exit) then the EU State aid rules would continue to apply to energy infrastructure and support schemes in identical form – albeit funding may prove problematic.
  • The future of coal generation is likely to continue to remain exactly “as-is” due to the continued enforcement of the IED (Industrial Emissions Directive) regardless of our status in Europe. The UK Government is also introducing local policies to close all un-abated coal-fired generation by 2025.
  • Our status as participants of the EU-ETS and ESOS may change should we exit Europe. Whilst ESOS has not required significant cost or investment to comply, those consumers who are current participants of EU-ETS will need to monitor this carefully in the event of a Brexit.
  • Existing interconnector capacity is likely to remain in place but investment in new capacity, supported by EU funding, may cause issues and the long term structure of contracts to deliver gas through interconnector capacity may require further thought as the EU may impose export restrictions on flows into the UK. A Brexit is likely to make investors nervous which may in turn stall investment in new generation technologies.
  • Amber Rudd recently announced that the UK faced an “electric shock” outside of the EU, pointing to research suggesting energy costs could increase by £500m a year from 2020. However, based on a broad estimation of domestic consumers (and ignoring the non-domestic consumers) this would amount to circa £20 a year per household! Beond has chosen not to commentate on the various financial fear statements announced by either side of the argument due to their spurious assumptions and misleading fear mongering.

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’

  • The UK’s continued participation in Europe will ensure that we remain driven by EU energy and carbon policy – with a continued drive towards a harmonised EU single market. We will see continued change as the fledgling low-carbon sector continues to balance economic recovery, global alignment and the best methodology for delivery reductions given the relative cost of energy to major economies.
  • A UK Brexit isn’t likely to change the UK’s ambitions towards a low-carbon future. However, several issues would need to be disentangled such as the EU-ETS scheme and the removal of our wider targets from EU policy. This would leave the UK slightly more autonomous in respect to funding and support for our industry.

How can Beond help your organisation understand the best way to navigate the complex future?

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:

  • Strong insights into market conditions, legislation, regulation and political insight – helping to navigate the key risks to an energy and carbon consumer.
  • Working to provide bespoke energy risk strategies which adapt the issues directly to an organisations risk profile and exposure.

Publishing and providing insight into key news (through our Strategic Insights) and through our regular monthly communications – alongside our market risk reports.