The Impact Of Brexit On The Energy Sector | Dyball Associates

Brexit is coming, and the government are telling us to be prepared. While most of us aren’t sure what that really means, for the energy sector, being prepared is crucial.

Numerous studies have been commissioned on the likely effects of Brexit on the UK energy market. Most have noted that the outcomes will be largely negative. But what are the potential impacts, and what should we, as the UK’s energy industry, be thinking about?

The largest point of value to the UK’s energy sector comes from being a part of the Internal Energy Market (IEM). IEM participation gives the UK access to lower cost gas, access to gas storage and security of supply. For electricity, network codes and EU legislation means a more optimised use of our energy assets through market coupling, cross border balancing and capacity market trading.

In broader terms, being in the EU has made for a great climate for investment in the energy market. Financing for the energy sector has traditionally come at a low cost, due to access to a huge supply chain and skilled workers, as well as a level of certainty in the marketplace. We’ve also been able to exert a high level of influence over EU rules and policies, to ensure they are advantageous to the UK.

There are two clear scenarios in which the UK will leave the EU in terms of the energy industry. The first is that we retain membership of the IEM, like Norway has. The alternative is that we leave the IEM, as is the case, for example, in Switzerland. Both scenarios come with some associated risk, and not much in the way of benefits.

Continued participation in the IEM would require working closely with the EU. This would mean that EU rules and policies would still be applicable, but now the UK would have little or no say in how they are formed. Effectively, the UK would become a rule-follower rather than a rule-maker.

Leaving the IEM comes with a barrow-load of risks. From decreased ability to balance and ensure capacity of electricity to gas becoming more expensive and reducing in security of supply. Not much good news there. Let’s take a look at some of the potential consequences for the UK energy market.

A recent BBC report claims that the UK could be vulnerable to gas supply shortage and price hikes. The head of European industry body GasNaturally, Marco Alvera, told the BBC that during cold snaps, EU nations could restrict gas exports to the UK in lieu of prioritisation of their own citizens.

Right now, the UK only produces around 44% of its gas supply requirements. This is due to reducing capacity from the North Sea oilfields, meaning we are increasingly reliant on foreign gas to meet our demands. With more coal fired power plants closing down and our electricity production requiring a large amount of natural gas, this demand is likely to continue to rise.

Of the imported gas, 47% comes from European pipelines, with the lion’s share ultimately coming from Russia. As well as this, we import around 9% of our gas as liquified natural gas. This latest warning is in line with a 2017 House of Lords report that warned the UK could be more at risk of supply shortages in the event of extreme weather.

While the UK is better at generating electricity than it is at producing its own gas, we are still heavily reliant on third party sources. A report in the Guardian recently said that our reliance on imported electricity has limbed to a record high, with 7% of the total demand coming from Europe. This figure is anticipated to climb to 20% by 2025.

While it’s unlikely that the lights will go out, chances are prices will go up. There are currently four interconnectors linking the UK with other nations, to France, the Netherlands, Ireland and Northern Ireland. The Dutch and French ones are largely used to import power.

Right now, the EU does not charge any meaningful import duties on electricity but crashing out of the IEM with a bad deal could change all that. The situation in Ireland could be even more dire, as Northern Ireland and the Republic of Ireland are currently part of a single electricity market. A no-deal Brexit would throw this into chaos; it’s not clear at this stage what the implications for this would be.

The leaked no-deal planning report, Operation Yellowhammer, also specified worries about increased costs of energy prices in the event of no deal being reached. The level of increase is not clear, but some analysts have warned household bills could rise by as much as a third. Switching to a fixed rate deal sooner rather than later could be a good move for any household concerned about the situation. Fixes are available for one or two years and will mean your bills stay predictable regardless of the Brexit outcome.

According to the Guardian , a spokesperson for National Grid said it was “not anticipating any additional charges for interconnectors in the event of a no-deal Brexit”. However, there’s no plan in place to assure this, or to ensure the UK remains a part of the IEM.

Nevertheless, power will continue to flow across the interconnectors, and gas supplies will still be available. What will likely change is the cost of transporting these resources. For existing energy suppliers, keeping abreast of these changes is going to be crucial, as will be ensuring enough finance is in place to cope with the potentially higher cost of purchasing the supply.

For new entrants, this may seem like a bad time to enter the energy market , but in truth it’s no more risky than any other period in time. Although the UK will certainly be coping with some challenges over the coming months and years, all suppliers will be in the same boat. As such, a new energy supply company with a solid business model and the right support has just as much chance of succeeding as any other company does.

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