How will Brexit impact the energy market?
The historic Brexit referendum happened just over a year ago and in the months since then, Article 50 has been triggered, formally starting the process of the UK leaving the EU bloc. The referendum result, which shocked many, was unprecedented and there are no case studies to compare the current situation to, making it difficult to judge how a whole range of markets will be affected, including energy.
Energy is crucial for modern life and how Brexit impacts on the UK’s supply of energy will undoubtedly influence multiple other areas, from industrial operations to residential builds. While the tagline from Brexit advocates was ‘taking back control’, what exactly does that mean for the energy market? There are four core areas to consider.
Participation in the Energy Union
One of the key risks of Brexit where energy is concerned is whether the UK will still be able to participate in the bloc’s Energy Union project.
Recognising the challenges the energy market faces around energy security, resilience and climate change, the Energy Union was set up to address a broad range of areas outside of country borders, allowing for greater action to be taken. Launching in 2015, the union has the aim of providing secure, sustainable, competitive, and affordable energy – something many businesses will be keen to see.
The Energy Union has commented that Brexit will not stop it from progressing towards its aims but has raised concerns that the UK could undercut EU markets. However, the UK has been at the forefront of developing cross-border energy markets and it’s unlikely that ties will be cut altogether, a level of co-operation will be required as a minimum. It’s an issue that will be addressed in the ongoing negotiations but it is still viable that the UK will participate in the Energy Union and need to comply with regulations.
As part of the EU, the UK does benefit from the cross-borders energy market. In fact, 5% of all cross-border electricity flows in the EU go into the UK. As a result, a conflicted or disorderly withdrawal from the bloc’s energy market could disrupt the UK’s current energy supply and see prices increase.
While there is potential for disrupted energy supplies to occur, it’s also important to recognise that as a net energy importer, the UK is an important market for suppliers, particularly low-carbon energy. As a result, there is a strong need for effective co-operation on both sides of the Brexit split.
Across many different areas, the concern that the UK will be affected by a withdrawal of EU funding has been key. And the energy market is no different.
There are several EU initiatives that are used to support investment in energy infrastructure, some of which are the source for projects currently in the pipeline in the UK. Projects that have already secured funding may be reassessed with Brexit in mind and there is potential for the investment needing to be repaid.
The exact changes of the investment criteria haven’t been set out yet but it could represent significant challenges for the UK. For example, projects that had been designed to improve energy security may now be at risk or require an injection from the government to ensure they still go ahead.
Impact on climate goals
The UK’s current commitment to emission reduction and the uptake of sustainable energy sources under the Paris Agreement are entangled with the rest of the EU. It means that there could potentially be changes to the UK’s climate ambitions, including those that have an impact on businesses. The EU Emissions Trading Scheme (ETS), for instance, caps the amount of greenhouse gases that can be emitted by installations that are part of it. It is possible that the UK could leave the ETS but three countries – Iceland, Norway, and Liechtenstein – are part of it without being in the EU.
While it is possible that the UK will change renewable and low carbon policies, it’s unlikely. As leaders in offshore wind and pioneering renewable solutions, as well as being bound by international obligations, it’s probable that the UK will stay on its current decarbonisation path.
While it’s true that the UK is in unchartered territory, the comments from both UK officials and EU leaders indicate that, as much as possible, the current energy collaboration will continue. Of course, it should be expected that some change within the energy market is inevitable but there’s reason to be optimistic.