How will brexit impact the energy sector ?

Following last June 23rd, Europe does not have the same face anymore. Brexit has brought about significant uncertainties regarding the impact of a major European country leaving the European Union. Although it remains difficult to fully apprehend the consequences of the referendum, UFE has tentatively analyzed its possible repercussions on the energy sector…

In order to evaluate its consequences, it is worth making a twofold observation : in the short term, Brexit will have a significant financial impact as the United Kingdom recently lost its triple-A credit rating (downgraded to AA), thus leading to higher internal interest rates. Furthermore, the important fall in value of sterling will increase the price of imports for the UK. Besides, the evolution of UK-EU trade relations remains unclear considering that both partners will have to renegotiate the terms of their relationship. Four scenarios consequently seem to emerge, from the strict implementation of the WTO framework to an ad hoc bilateral agreement with the EU, a decision to join the European Free Trade Association, or, in the most elaborated way, a decision to join the European Economic Area (Norwegian-type relationship). Measuring the real consequences of the UK leaving the EU will depend on the scenario chosen.

Consequences on the electricity sector

Brexit will first lead to an increase in the cost of equity, which might put a stop to ongoing and/or foreseen projects. The United Kingdom is likely not to receive funds from the European Investment Bank anymore (€7bn in 2014, including more than €3bn in the energy sector). This could be preoccupying as investments are needed in the electricity sector, especially as the UK is in the midst of renewing its portfolio, shifting away from coal, significantly deploying RES (offshore wind in particular) and nuclear energy, thus requiring about £80bn of investments by 2020. Crucial for ensuring the balance of the UK electricity system, imports of electricity (20 TWh, representing about 5% of the demand) will also become more expensive, noting that at least 6 of the 9 ongoing interconnection projects could face severe delays. Following warnings by several experts even before Brexit, the UK security of supply in electricity could be further weakened by 2020.

Consequences on climate and environment

Brexit could also “free” the UK from its commitment made under the Union in terms of GHG emission reduction, energy efficiency and renewable energy. However, as these targets are above all sui generis (2008 Climate Change Act), it is very unlikely that the UK puts them into question unless facing a major financial crisis. As Amber Ruud stated at the Business and Climate Summit held on June 29 : « [w]e made a clear commitment to acting on climate change. That will continue ». As far as the Paris agreement is concerned, the UK will also probably be taken out from the EU’s INDC and will thus have to formally renew its commitments. If the UK would then not be counted as the second biggest emitter in Europe, its national objective under the Paris agreement will probably be higher as it will be based on its national average. The UK could also lose access to the European ETS, knowing that intermediary solutions remain possible (Art. 25 of the Directive). Whatever the terms, losing one of the most active actor in the fight against climate change has led to the decrease of the EUAs under 5€, undermining a bit further the solidity of the said mechanism.

Towards a new cost-sharing configuration ?

On a political level, Brexit is likely to weaken France’s institutional influence. When looking at the power-sharing within the EU, France is indeed losing a key ally. The United Kingdome’s energy mix is similar to the French one, combining both RES and nuclear energy. The UK is also one of the rare voluntarist voice regarding CO2, together with France and Sweden in favor of a carbon price corridor, and a strong supporter of capacity mechanisms (the UK model combines energy only market/ capacity mechanism and contracts-for-difference). With the UK leaving the Union, the efforts shared by the remaining Member States under the EU targets (emissions reduction, energy efficiency, RES) may have to be reviewed, in particular for the GHG emissions, thus leading to possible difficult renegotiations. One remaining question relate to the forthcoming Presidency of the EU. Though the Lisbon Treaty does not provide any legal instrument that would oblige the UK to give up its presidency for the second semester in 2017, it seems that several Member States have voiced their concern and mentioned possible alternatives. A lot of uncertainties remain, with such shift in the European political chess taking place in this very untimely moment for the European energy sector.

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