Weighing up the impact of Brexit

Issues affecting electricity generators and the energy market as a whole.

13th July 2016

How is the UK’s exit from the EU likely to affect the energy security, decarbonisation and inward investment picture over the next 2 years?

The 24th June saw the UK Referendum result fall down on the wrong side as far as most big businesses are concerned. Key utility providers, most of whom are owned by companies based in other member states, were understandably vocal ‘Remainers’. Their shares were also the hardest hit – losing, on average, nearly 7% on the day the results came out.

What Brexit really means for the UK energy market over the short, medium and long-term, is very difficult to discern at this stage. So at times like this it makes sense to look at the practicalities of what our exit from the EU will mean for energy players on the ground. Will the changes dampen activity and choke off investment in the UK?

Staff freedom of movement restrictions
Changing rules on freedom of movement of Europeans employees in and out of the UK for companies like Total and Gaz de France (moving in numbers to and fro from France for example), would inevitably create a major complication and increase costs of doing business over here. These two firms have a significant presence in the UK’s fledgling onshore shale sector, where a lower pound would also reduce anticipated returns, potentially setting up a negative double-whammy for inward investors into new areas.

Would the same go for Danish Dong Energy in offshore wind farms for example? Dong has already invested £2.7bn building four offshore windfarms off our shores and is set to spend the same again on two further mega farms including the Walney Extension which will offer 660MW when completed by 2019.

Interconnections set to go ahead.
The EU vision of Energy Union by interconnecting up all members states with a view to strengthening their energy security, has only been adopted piecemeal to date. Several member states continue to resist EU-wide schemes in many crucial policy areas which means that UK-European continental interconnection projects are not going to be unduly affected. Quite the reverse in fact. .

There have been no statement made to put a stop to plans to planned UK-EU member states interconnections. The recent UK Network Infrastructure Commission (NIC) report recommends a near tripling of Interconnector capacity by 2030/1. Right now we have access to four live interconnections (2 from Ireland, 1 from France and 1 from the Netherlands) delivering up to 4 GW. But at least five more are already in plan to go live by 2021 (from France, Norway, Denmark, Ireland and Belgium). .

After 2021 there could be more from Norway and even Iceland, potential taking interconnection capacity to 11.3 GW - nearly tripling current capacity in under 10 years. Will any of these interconnections be used as bargaining chips if the UK decides to seek independent trading agreements with each member state rather than following the EEA/Norwegian model?

Infrastructure investment as political football?
So by 2030/31, in the NIC model we are looking at overall GB power capacity offered up by interconnectors moving from 3.8% to 10.8%. Obviously any back- sliding on plans for these interconnections going forward may be an in early indication that Brexit negotiations are not going so well. The other negotiation litmus test is Hinkley Point C (HPC). If EDF pushes this decision further down the road we might have to draw the conclusion that member states are prepared to make planned infrastructure project investments another political football in exit negotiations.

Brexit bad for renewables?
Will Brexit lead to changes in the UK’s climate change commitments? While the Climate Change Act binds the UK to reaching its carbon reduction targets, there is some concern already from the Renewable Energy Association that that this particular can may be kicked down the road.
However, last week’s approval of the fifth carbon budget should set the renewable lobby’s collective mind at rest as they plan future investments. This deal sees the Government agreeing to reduce emissions to an average of 57 per cent of 1990 levels between 2028 and 2032. Although all was not quite green in the garden as National Grid announced that the UK was on track to miss the official DECC target of producing 15 per cent of all UK-generated energy from renewables by 2020.

Could water deregulation be derailed?
The water sector in England & Wales is undergoing a period of substantial regulatory change. Now that the 2014 Price Review (PR14) is complete, the market is preparing for the introduction of retail competition for non-household customers in April 2017. New structural models are set to emerge and new investment partnerships will be required as a result. Current vertically integrated regional monopolies could well be replaced with a more disaggregated value chain with companies specialising in specific services to build walls around new competitive advantages being established.

There is no suggestion as yet that water deregulation activity will be slowed down by Brexit: just last week Business Stream announced its acquisition of Southern Water which will see Southern Water exiting the non-domestic retail market and handing about 100,000 of its business water and sewerage customers across to Business Stream. The net effect will see Business Stream holding 10% of the UK’s overall business market for water and sewerage.

More litmus tests for Brexit success
Of course it is far too early to accurately tell whether existing inward investment flows, and energy security and decarbonisation targets will be blown off course but right now it is clear that is lots of momentum behind projects like Hinkley Point C, offshore wind farm developments. We even had some positive news linked to potential inward investment to create the planned Swansea Bay Tidal Lagoon project. The latest numbers run by analyst Mike Edge indicates that the lifetime cost to consumers of the project would be the same as HPC plant. The other piece of good news is this project is likely to be led by investors from outside the EU – principally from India and China. Perhaps this renewables project could show the way for future UK energy infrastructure investments. This too then looks like another interesting litmus test for the future.

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