The pooling of energy resources, starting with coal, was one of the basic building blocks of the European Union (EU), and the common energy policy is today central to the security and sustainability policies of the member states.
After more than 40 years of membership, the UK’s withdrawal from the EU will fundamentally alter the country’s regulatory framework for the energy sector. The UK’s departure will also impact the balance of power within the EU and future policy developments.
The extent and exact nature of the impact will depend on the nature of the final agreement negotiated between the two parties on the future relationship between the UK and the EU. We now know that there will be a period of delay until at least the end of the year before formal negotiations on Brexit start with the official triggering of Article 50 TEU, but the exact timings of when negotiations will begin remain uncertain. Moreover, the continued uncertainty on the long-term economic climate means trepidation remains in the investment market.
Developments in the UK
For all the UK government’s emphasis on ‘business as usual’, the month following the 23 June referendum has been an unsettled month for the sector. A major reorganisation of the energy and business departments by the incoming UK Prime Minister Theresa May has added a further new dimension to a changed political context. This has impacted confidence and investment.
However, as the dust is beginning to settle, there are some positives emerging for investors looking at the longer term – not least in the shape of the new ministerial team in London, whose views and experience augur well for continued action on supporting UK energy investment, and bringing down emissions.
Restoring confidence while reordering departments – a month in UK (energy) politics
Investor confidence in the energy sector has been hit hard in the wake of Brexit. This is to be expected for a number of reasons: the cost of sterling has fallen, resulting in higher import and manufacturing costs; there’s a sense of going into the unknown, as the UK’s energy policy has been driven by EU objectives for years; and from a clean energy perspective, the run up to the referendum saw the link between the anti-EU and climate-sceptic lobbies emphasised frequently, leading to concerns that a post-Brexit administration would see ‘green’ policies dismantled.
In addition to the economic and investment concerns prompted by Brexit, the dramatic changes to the framework in government are also giving industry reason to pause. The decision to subsume the Department for Energy and Climate Change (DECC) into the newly created Department for Business, Energy and Industrial Strategy (BEIS – pronounced “bees”) has met with a mixed reaction.
Time will tell whether the removal of “climate change” from the department’s title results in less emphasis on decarbonisation as some fear, or whether, as is being suggested by others, including Lord Stern (author of the government-commissioned review on climate change), the merger could elevate developing clean energy solutions to industrial strategy status.
The UK government is aware of the need to restore confidence and has already tried to convey consistency in policy despite the department merger. In a briefing circulated in the wake of the reshuffle, it was emphasised that the new department would absorb DECC’s functions and priorities wholesale, taking action to ensure security of supply, tackle climate change and meet the UK’s carbon targets through “efficient procurement of low carbon generation…in ways that keep the cost of action as low as possible”.
We’ve also heard assurances from Chancellor Philip Hammond that large-scale infrastructure projects, including the Hinkley nuclear reactor, will go ahead. This ‘business as usual’ stance in terms of energy policy is also reflected in the experience and priorities of the new ministerial team.
Alongside strong beliefs in regeneration and decentralisation, Secretary of State for the new Department, Greg Clark has long supported a balanced energy mix and the role clean energy can play in the UK economy. As Shadow Energy Secretary before the 2010 general election, he was responsible for drafting Cameron’s pro-climate action ‘greenest government ever’ manifesto. His supporting ministers Margot James, Nick Hurd and Jesse Norman also have a strong track record in supporting clean energy as well as pro- environment and efficiency measures.
Perhaps the most exciting and reassuring development for the energy sector following the change of government is the focus paid to Industrial Strategy and the influence that Theresa May’s new Chief of Staff, Nick Timothy, will have in trying to catalyse economic growth and injecting confidence in the economy post Brexit. Mr Timothy is reportedly a believer in supporting big infrastructure projects that help transform economies and communities, and the direction we’ve seen the May administration take over the last week reinforces the importance that her Government will place on infrastructure projects in propelling the economy.
Ambitious moves like the industrial strategy should be welcomed and supporting initiatives could be announced in the Treasury’s Autumn Statement to Parliament and Emissions Reduction Plan in an attempt to boost confidence in the sector. Letting the new department know the action necessary to mitigate the effect of Brexit will be vital in ensuring that investment in the UK energy sector is maintained and developed in the new political context.
However, while much can be done domestically, overarching uncertainty will remain in areas driven by EU membership as we approach the trigger point for Article 50 (yet to be formally confirmed but expected to be early next year).
Brexit and EU energy policies
While the impact of Brexit on the energy sector has to be evaluated for each piece of legislation, some initial considerations and potential scenarios to keep in mind as the negotiating guidelines are drawn up and the process begins are outlined below.
Energy market
Given the nature of its liberalised energy policy, the UK is likely to continue to implement and be supportive of many aspects of the EU’s Third Energy Package (an EU legislative package with the central aim of liberalising European gas and electricity markets). These include the ownership unbundling requirements, which require the separate ownership and operation of electricity/gas transmission systems from any generation, production and supply interests; maintaining a level playing field; etc.
Renewable energy and energy efficiency
Unless the UK remains part of the Internal Energy Market (for example through membership of the European Economic Area (EEA)), the country will post-Brexit no longer be bound by targets set in both the Renewables and Energy Efficiency Directives, and no longer take part in shaping policies in this area.
The UK was an active voice at EU level for less stringent renewable energy and energy efficiency targets, favouring market incentives over regulation. Some have questioned whether, free from the EU, the UK may choose to loosen national regulations in this area in order to gain a competitive advantage. However, due to its commitments toward decarbonisation, at the international level as part of the United Nations Framework Convention on Climate Change (UNFCC), but also at national level, it seems unlikely that the UK will completely abandon current renewables and energy efficiency policies as they will be crucial for the country to achieve its broader decarbonisation goals.
State aid
After a Brexit, EU rules regarding state aid for energy infrastructure or support schemes would no longer apply to the UK, unless the country chooses to be part of the EEA which comprises similar provisions. The UK would however not be completely free regarding its subsidy policy as it would still have to abide by the World Trade Organisation rules, which provide much of the substance of the EU rules.
Nuclear
The UK has always been a strong supporter of nuclear energy considering it as an effective way to provide green and secure energy to the country. The departure of the UK from the EU will weaken the pro-nuclear voice in the EU, at a time when the sector is facing challenges from environmental and security advocates.
Several nuclear energy projects with a European dimension are currently in the pipeline in the UK. The most prominent is the Hinkley Point C nuclear power plant, which is underwritten by the French government and state-owned energy company EDF. Ahead of a crucial meeting of the EDF board on Thursday, the French Economy Minister has stated that France will move ahead with the project in spite of Brexit, but uncertainty remains as to whether the French unions will give the green light.
Energy infrastructure projects
Several energy infrastructure projects in the UK are eligible for financial support from the EU, notably those recognised as “Projects of Common Interest”. These include for example the interconnection between Zeebrugge in Belgium and Richborough in the UK as well as the internal line between Richborough and Canterbury. Brexit would mean that their eligibility would have to be reviewed, with some projects possibly removed from the list. Projects which already received funding might have to make a prepayment according to the terms of the initial investment agreement with the EU. If a cross-border project is considered necessary to further EU policy, it might not be affected by Brexit as some non-EU countries are eligible to receive funds for such projects. The UK’s proximity to Ireland might in that case be an advantage.
Energy security
The UK benefits already from a number of existing electricity and gas interconnectors to secure supply of energy to its territory, such as IFA and BritNed. Operations through the auctions system will most likely not be affected by a Brexit, notably as the country enjoys a diversified energy mix with imports from the EU being lower than the EU average.
Nonetheless, a complete departure from the EU would in principle mean in the long term that the UK would no longer benefit from the “solidarity principle”, which means that in case of a risk to energy supplies, the country could not count on its neighbouring EU member states to provide for reverse gas flow for example. The UK might seek therefore to develop further indigenous energy sources, such as shale gas. Another option would be to negotiate energy agreements directly with non-EU suppliers, although the UK will not benefit from the same kind of leverage as the EU to ensure the respect of the terms of the agreement.
Climate issues
The UK has always advocated for ambitious decarbonisation targets, both at international and national level. In 2008, it became the first country to set a long-term binding law cutting emissions by 80% by 2050 and created a voluntary carbon emissions market before the EU launched its own system. With regard to the UK’s international climate change obligations, it is bound together with the other EU member states by the terms of the United Nations Climate Change Conference agreements – of which the latest, the Paris Agreement, is yet to be ratified.
Brexit could force a review of the plan the EU submitted in Paris so as to separate the UK’s commitment and recalibrate the commitments of the remaining 27 member states.
One tool for decarbonisation is the international carbon trading system. The UK is a pioneer in this area and set up its own voluntary carbon emissions market in 2002, three years before the EU set up the EU Emissions Trading Scheme (ETS). The UK will likely desire to continue participating in the ETS following Brexit, especially since some companies based in the UK could still have a surplus of allowances. Norway, Iceland and Lichtenstein currently participate in the ETS through the provisions of the EEA and European Free Trade Association (EFTA). Should the UK opt for another model of relationship with the EU, it would have to negotiate transitional agreement to be linked to the ETS.
Moving forwards
Membership of Europe’s Internal Energy Market and access to the European Infrastructure Bank are significant to policy certainty and the overall investment environment in the UK. They will be critical issues for negotiation over the coming years.
Business should be looking to engage with BEIS in the UK over the next six months to shape the framework under which negotiations will progress. This is key to ensuring ministers are fully aware of the implications to the sector when drawing up their negotiating ‘heads of terms’ before Article 50 is formally triggered.
The EU position will also be defined over the coming months within the European Commission, Council and Parliament. The pieces of the puzzle are complex, involving the variety of formal and informal, institutional and party political working structures. Business should ensure close monitoring of the specific energy-related developments, and pro-active engagement with the key players to ensure their perspective is understood and taken into account during these complex re-negotiations. UK businesses should also bear in mind that they can no longer count on the UK governmental channels to shape EU policies to the same extent as previously, and adjust their lobbying strategies accordingly. The same holds true for EU trade associations, which will surely not give the same weight to the interests of their UK members moving forward.