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Following the result of the general election on December 19th, 2019, any doubt over the eventuality of Brexit actually happening has disappeared. The UK will be leaving the European Union on the 31st of January 2020.

The impact of Brexit on the energy sector was not given significant consideration by the public or politicians during the referendum campaigns, and even now it is extremely unclear what the implications are going to be – partly because we do not yet know if the will be an exit deal or not.

The UKERC Phase 4 ‘Brexit & Beyond: UK Net Zero Energy Policy’ project has, however, identified some implications of leaving.  Indeed, just the threat of leaving without a deal in a few weeks is having a detrimental impact on consumers – given the threat of rising prices in the medium term – although probably not by a significant amount. Perhaps more importantly, a ‘hard’ Brexit is likely to impede the government’s ability to meet net zero targets.

Integration between the UK and European energy markets is still essential

In terms of implications for consumer prices, it is worth highlighting that, outside of the EU, the UK is unlikely to be part of the Internal Energy Market (IEM) and therefore alternative trading arrangements would have to be put in place. In the event of a no-deal this has already been confirmed by the Government’s ‘No-Deal Readiness’ report from last week. The signing of a deal, would enable the UK to remain in the existing operational framework, at least until the end of 2020 during the transition period.

However, as the recent political declaration notes a future relationship should include mechanisms to ensure ‘as far  as  possible  security  of  supply and  efficient  trade  over  interconnectors  over different timeframes’ – so clearly no guarantees.  However, although electricity will continue to flow to and from the continent and the Republic of Ireland, a new arrangements that might be necessary for the day ahead market are less efficient. Inevitably, in a less than optimum market, prices are likely to rise (see UKERC research from 2018 attempting to quantify this impact).

Furthermore, while the UK has been pre-occupied with Brexit, the integration of Europe’s power markets has continued, and a new era of more economic market trade has begun. Called XBID, the more efficient trading arrangement from 2018 is being applied to the intraday markets in ten countries, with another wave due to join later this year. This will enable more effective electricity trading for those exchanges that are being undertaken on an hour by hour basis, which will reduce prices.

These trading arrangements will also become increasingly valuable as power systems decarbonise and become more reliant on variable renewable energy sources, particularly on solar and wind. Indeed in the UK, the renewable share of electricity generation was 33 percent in 2018 and 40 percent in the third quarter of 2019, up from 29.2 percent in 2017 and only 2.6 percent in 2000 , and similar increases have been seen across many EU Member States.

Given growth in variable renewables, being able to efficiently and cheaply move power across countries, via interconnectors, from where the wind is blowing or the sun is shining to where it is needed, will be an increasingly important part of decarbonisation for the UK and EU. Prior to the referendum the UK had ambitious plans to expand its interconnector capacity to the continent and one of these has come to fruition: early this year the Nemo link to Belgium started operating.

Furthermore, there are projects under construction to France, Denmark and Norway, which, if all completed, would more than double the UK’s interconnection capacity. However, a further three additional connections to France that were under development have now been suspended in part due to uncertainties over Brexit.   

Carbon Prices

In addition to the operational regime and availability of interconnectors, the delivery of the government’s Net Zero Carbon policy, may also be affected by new carbon pricing policies. As the UK leaves the EU, it will no longer be part of the Union’s Emissions Trading System (ETS) but the Government has yet to make clear its final position on carbon pricing outside of the EU.

On the one hand the October Political declaration stated that, ‘the Parties should consider cooperation on carbon pricing by linking a United Kingdom national greenhouse gas emissions trading system with the Union’s Emissions Trading System’.

On the other hand, under a no deal scenario the UK will leave the ETS and the Government has put in place plans for a Carbon Emissions Tax, at £16 per tonne (the current EU ETS price is €22 (£20 at the time of writing) per tonne of CO2). The new tax will cover the majority of the sectors covered by the ETS, but significantly (in terms of meeting zero carbon targets) leaving aviation aside. The proposed new tax will raise over £2 billion per year for the Treasury, which may therefore make it reluctant to abandon this new revenue stream.

A carbon emissions tax raised further political questions, not least about how such new money should be spent. It is also likely to be opposed by many, including the Scottish Government given that the UK wide carbon tax takes away their responsibility from an area which should have passed from Brussels to Edinburgh. While establishing a taxation regime is simpler than starting a trading regime, it is less politically robust and can be easily cancelled as administrations change as was seen in Australia.  This can also result in investment uncertainty.

Conclusion: clashes between Brexit and our climate ambitions?

There are many other areas within the energy sector that may or will be affected by Brexit many of which have been covered in previous UKERC-funded study. For example, currency exchange, availability of workers for large scale construction projects like Hinkley Point, tariffs on equipment and border delays, reduced research and investment funds as well as leaving the Euratom Treaty (the treaty establishing the European Atomic Energy Community), will greatly impact the industry.

However, as the UK Government starts gearing up to hosting the 2020 Conference of the Parties of the UNFCCC, the Prime Minister has recently stated that his vision for Britain is one where the country leads the world in reducing Greenhouse Gases. This Government or its successors, would do well to remember that fully decarbonising the UK economy by 2050 will be a monumental challenge, but one which will be made easier with close co-operation with the EU.