What would Brexit mean for UK energy policy?

No one can say for sure what will happen if Britain leaves the EU. Anyone who says they know is either over-confident or disingenuous. With that in mind, let’s examine some of the implications on energy policy if the UK votes to leave at the end of June. Energy is not going to be the deciding factor in the EU referendum but the consequences of Brexit could impact security, investment and climate change mitigation ambitions.

Interconnectors

Physical energy connections to the continent in the form of interconnectors have received most attention to date. Currently nearly 4GW of the UK’s capacity comes from interconnection and the good news is that these are going nowhere because they are subject to existing bilateral agreements.

But what about the proposed new interconnectors between Belgium, Norway and Denmark? The Government has put a lot of faith in new interconnection, with National Grid predicting it could provide almost 12GW by 2030. But according to the Energy Secretary this investment could all be at risk if we leave the EU. There is certainly an element of truth to this. The political uncertainty caused by Brexit could stall investment and energy trading. However, once the dust has settled fundamental economics would kick back in because the EU and UK have vested interests in selling and trading energy with one another, not to mention multi-national energy companies wishing to make deals.

The development of UK shale and offshore wind could emerge as exportable products means the Government will want to ensure they can sell to a nearby market. Meanwhile in the EU, any nearby energy source that is not Russian will be preferred. These may be subject to lengthy bilateral agreements that will still have to be approved by the EU, but the UK is a reliable partner so commercial arrangements are certain to flow.

Carbon trading and the ETS

It is not just energy that the UK and EU trade with each other. Carbon is also an important commodity that is traded. Although internally the EU Emissions Trading Scheme (EU ETS) is rarely seen as a success story, internationally it is the largest carbon market and is considered vital to getting a global carbon price in place to drive clean tech investment. The EU wants the ETS to succeed and therefore will not want to lose a trading partner in the UK.

However, domestically the EU ETS is often seen as hindrance on energy intensive industries, as recently highlighted by the potential closure of the Port Talbot Steelworks. The Government may be tempted to leave the EU ETS to ease the burden on UK Plc and give itself a quick good news story on lower energy bills. Any change to carbon taxation or the EU ETS would put the Government on direct course for a fight with the independent body that advises it on climate change. The Committee on Climate Change has made carbon trading and pricing a cornerstone of its carbon budgets and is widely cited as the cheapest and fairest way to decarbonise. There may have to be a battle within Whitehall for the carbon price and trading dream to stay alive in the UK. More likely is that the UK will remain a member of this body in line with Iceland and Norway’s membership.

EU targets and low carbon deployment

What is minutely easier to predict is what EU policies a Conservative Government would drop. The more right-of-centre Government that many political thinkers expect will form a Post-Brexit Government is likely to scrap EU emission and renewable targets. This will be met with quiet cheers from the Conservative backbenches, with the Government believing that the 2008 Climate Change Act can give it enough air cover in the short to mid-term.

But it can’t be a complete fire sale on the decarbonisation or renewable agenda. Although some Conservatives may not like renewables, it is an industry that is investing and creating jobs. Effectively killing any industry overnight will not be a great signal to the markets that will be in desperate need of certainty. The Government may look to create confidence by highlighting that the removal of EU State Aid approval means that they are able to give any level of support, to any technology, it so wishes. An excellent example of this the new nuclear build programme. The Government would be free to give whatever level of support it would like for Hinkley Point C. The question this then raises is, will this leave any money for anything else?

Climate change

There will also have to be a debate on the UK’s commitment to tackling climate change. Leaving the EU will result in the UK having to renegotiate its own climate change agreement under COP21. The agreement at COP21 is more ambitious than the statutory 2050 target as set out in the Climate Change Act. This means that if the Government wants to match COP21 it has got to go beyond the Climate Change Act in the longer term. This Government will no longer be able to hide behind Climate Change Act. This will make obstructing renewable deployment on a domestic front more difficult as it will hinder the UK’s previous bragging rights of being a “world leader” on tackling climate change and sure to be an area of scrutiny from the green lobby.

---

The debate that will follow Brexit will be fierce and the two year grace period negotiations subject to intense lobbying. The most obvious outcome is that there will inevitably be a hiatus, especially with investment as they will adopt a wait and see approach. It becomes clear then that it is extremely difficult to predict the precise impact of Brexit on energy policy, especially with a cursory glance. We at H+K would be happy to discuss any of these issues in much greater detail.  This blog is unlikely to answer your detailed and specific questions, we can just hope it has brought about a certain level of sophistication to your confusion.

Douglas McIlroy

Hill & Knowlton Strategies Search