Initial analysis on impact on energy sector after Brexit vote

Nick Butler provides a good blog on the Financial Times, however he refers to EU targets renewable energy without mentioning those for energy efficiency. Hopefully we will see one that includes energy efficiency and EiD welcomes any views from readers on the total impact.

 

Brexit: the impact on UK energy policy

At one level, the UK’s exit from the EU should have very little impact on the energy business. The price of oil, gas and coal is set by international markets not by the institutions in Brussels. The EU has never had the authority to determine the energy mix of individual member states and even under the latest plans for an “energy union” different countries would retain in full the ability to choose whether they want to develop shale gas or to eliminate nuclear power.

The proposed energy union is much more focused on developing common infrastructure and in ensuring that there is an open market across Europe. Presumably we will not now be part of that, although participation remains an option, for instance, in developing an advanced power grid across the North Sea if relations remain amicable. The member states of the Union manage to trade easily and successfully with Norway, which remains a non-member. There is no reason to think that the interconnection and trading links which already exist on straightforward commercial terms will not continue regardless of a UK exit from the European institutions.

On climate change, the EU has set targets for reductions in the emissions and the use of renewables but it is worth remembering that the policy and the targets were not imposed on a reluctant Britain. On the contrary, the UK led the way on environmental legislation and proposed many of the steps that Europe subsequently adopted. Many issues remain to be resolved in Britain and in other European countries but Brexit in itself would have very little effect.

The impact of Brexit will be felt less in terms of British interaction with Europe than within the UK itself. The crucial issue is the shape and composition of the next government following the departure of Prime Minister David Cameron.

To a degree that often puzzles business leaders, energy policy in the UK (and in many other countries) is shaped by the emotional attachments of individual leaders to particular forms of energy and their hostility to others. The choices are not always rational on any objective economic basis.

Until very recently, for instance, the country has invested heavily in expensive renewables such as offshore wind. For successive energy ministers, the climate change impact of shifting from coal to wind as a source of power generation has outweighed any considerations of cost and competitiveness. That has begun to change since the 2015 election but the shift to greater cost consciousness could easily be reversed by a new secretary of state. Alternatively, a concern with the impact of energy costs on industry could put even more pressure on wind suppliers to the extent of postponing or abandoning the new round of offshore wind projects that are supposed to be approved over the next few months. Nothing is certain until we see the shape of the new government.

Even more important is the future of new nuclear. As chancellor, George Osborne has been a powerful supporter of new nuclear, starting with the long-promised development at Hinkley Point. He has tolerated both a sharp rise in costs since 2010, even at a time when the price of every other form of energy has been falling, and successive delays that leave the project years behind schedule and billions of pounds over budget. On the assumption that he joins Mr Cameron in retiring in three months time, his successor may take a tougher line and pursue different options.

That new chancellor may also be less accommodating to the Chinese who want to own, build and operate their own nuclear station at Bradwell in Essex. A new UK government could well join every other major country in feeling that while some investment from Beijing is welcome, handing over a key piece of critical national infrastructure to Chinese control is a security risk that cannot be justified. Many of those associated with the Brexit campaign have been openly critical of the Mr Osborne’s policies on both Hinkley and Bradwell.

In summary, Brexit is unlikely to change much, if anything, in our energy relationships with our neighbours. Trade will go on. Oil and gas will still continue to be priced according to market circumstances at the global level. But within the UK’s own energy mix new ministers could radically alter the detailed balance. For investors this is another level of uncertainty to be added to all the risks around economic growth and the value of the currency. They will get no clear answers until a new government is formed in October.

One thought on “Initial analysis on impact on energy sector after Brexit vote

  1. With the Brexit vote signalling a lack of English fraternity towards our European neighbours, one has to wonder if French tax payers will now be even less keen than before the referendum to invest in a new nuclear power station in North Somerset.
    Nick Butler infers the phasing out by 2025 of unabated coal-fired generation may be put back on the table. He also disparages UK renewables capacity building even though we are trailing most of the EU27 in the proportion of electricity we get from renewables. And does not mention a likely rise in transport emissions, given the likely clamour to increase runway capacity now that we plan to trade more with far-flung continents and less with Europe.
    Brexit means that all our mitigation eggs are now in the Labour government’s 2008 Climate Change Act basket and its associated carbon budgets.

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