Brexit -Deal or no deal, what will the implications be for the UK Energy Sector?

What will a Deal mean for the energy sector?

The trade negotiations have been fraught and ill-tempered from the start with both sides battling to gain the upper hand over the other.

On the EU side, they have tried to impose and tie the UK to rules that would go against the whole point of Brexit while the UK has been holding its ground over contentious issues such as fishing waters and state aid.

Prime Minister Boris Johnson declared that ‘trade talks were over’ after his October 15^th deadline passed with no result. 

Back to the negotiating table

Despite this, there is a sliver of hope remaining that a deal may be reached after the EU’s chief negotiator, Michel Barnier made the explicit admission that the EU would have to compromise on its red lines and respect British sovereignty.

“We will seek the necessary compromises on both sides. To do our utmost to reach an agreement, we will do so right up until the last day that it’s possible to do so. We want a deal that will be mutually beneficial to both parties in respect of the autonomy and sovereignty of both sides. A deal reflecting a balanced compromise. An agreement is within reach,” said Barnier.

The move has raised hopes that a deal could be achieved within the next fortnight.

Follow the EU energy rules?

If a deal is reached between the two sides, then the energy sector is likely to experience little in the way of disruption as the UK will no doubt agree to abide the current EU imposed rules on energy.

If anything, the UK is likely to become similar to Norway, another nation that heavily trades energy with the EU and is not a member of the bloc. It too is required to abide by EU rules and is a member of the IEM.

The UK’s continued membership of the IEM, on the other hand, is up for debate as after the end of the transition period the UK will no longer be a part of the European Economic Area (EEA). All members of the IEM are EEA members.

With the UK currently relying on imports of electricity and gas from places such as France and Holland (7.5% of total electricity demand) and with it having plans for more interconnectors with Denmark and it makes sense for the UK to abide by the current rules.

The UK also exports energy to the Republic of Ireland, and it would be in the EU’s interest to not disrupt this less they wish to endanger the energy security of one of its members.

If a deal is reached, then the UK is likely to have conceded to the EU that it will continue to follow its rules albeit with no longer the ability to influence the rules. 

What would a No Deal mean?

According to market analysts, a no-deal Brexit is likely to have a limited impact on the UK energy sector, at least initially.

If the talks result in a clean break from the EU then the UK energy sector will be faced with a variety of challenges such as making the nation more vulnerable to supply disruption or being more exposed to rising wholesale energy costs.

Without a deal, the flow of gas and electricity via the interconnectors with the EU is unlikely to experience much in the way of disruption as the operators of the pipelines use a privately owned PRISMA system that delivers services for both EU and no-EU member nations.

The EU does not place tariffs on gas and electricity from other World Trade Organisation members, so the flows between the UK and the EU should not have additional tariffs imposed on them.

The biggest issue of a no-deal could be the risk to the UK’s energy security. At times of high demand such as in a particularly harsh cold winter, the EU is likely to prioritise supply to its members which could, in turn, put added strain on UK supplies.

A major benefit of a no-deal is that it will force the UK government to invest more in the nation’s energy infrastructure. Boris Johnson just recently said that he aims for the country to become a powerhouse for wind energy.

Perhaps the biggest risk of a no-deal is that the added uncertainty it will impose on UK businesses already suffering from the severe impacts of the coronavirus pandemic. 

Further Reading

The Impact of Brexit On The Energy Sector

Covid-19: Energy demand and prices rebounded in the third quarter

Energy Price Cap Extended to the end of 2021 to support struggling consumers

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