A plan would have been nice4 August 2016
First the referendum, now the consequences. The following discussions briefly analyse the likely effects on Britain’s energy future of leaving the European Union. By David Flin
Trying to analyse the consequences on energy policy of the UK’s referendum vote to leave the European Union is complicated by the fact that the leaders of the leave faction had no idea what they would do if they won the vote.
This makes it difficult to predict what policies might be adopted, and what the consequences of these policies might be. We do not know over what timescale the UK’s leaving the EU will take place, whether Scotland and Northern Ireland will remain in the UK, what terms will be agreed for exiting the EU, and what the driving forces behind policy decisions will be. Although we know that the new UK prime minister will be Teresa May, we do not know who will be the leader of the main opposition party,
A post-Brexit UK will still have energy ties to the EU, through gas and electricity links, and an emissions trading market that it is unlikely to leave. However, the UK will have much less influence, and the EU will lose a strong pro-free market voice which has helped shape much of its energy policy.
In 2008, the UK became the first country to set a long-term binding law to cut CO2 emissions by 80% by 2050, and create a voluntary carbon emissions market before the EU launched its own Emissions Trading System.
The balance of experts generally expected the UK, once a new prime minister was chosen by the ruling Conservative Party, to scrap EU emission and renewable targets, but retain the 2008 Climate Change Act. However, the renewable industry in the UK is investing and creating jobs, and so the government may look to create confidence by emphasising that the removal of EU State Aid approval means that they are able to give any level of support to any technology. An example of this is the new nuclear build programme, with the government being able to confer whatever level of support it likes on Hinkley Point C.
Leaving the EU will result in the UK’s having to renegotiate its own climate change agreement under COP21. The agreement is more ambitious than that set out in the UK’s 2008 Climate Change Act. The leaders of the Leave campaign were generally those with the most regressive ideas on climate and renewable energy, while environmental groups and supporters of renewables were generally the most in favour of staying in the EU. The most likely outcome will be a weakening of the UK’s position on investment in the renewable energy industry, and less activity in taking steps to cut carbon emissions.
It is likely that the UK will lose access to the EU’s eighth Framework Programme for funding innovation and research, Horizon 2020, which has a total budget of €70 billion. A significant portion of this budget is dedicated to energy innovation, and the UK is one of the largest recipients. Academic institutions and companies that benefit from this programme will see their funding evaporate, which will have a negative impact on research and development of new clean energy technologies.
Much will depend on the terms the UK negotiates with the EU for access to Europe’s internal energy market (IEM). It has been estimated by the UK’s National Infrastructure Commission that the country needs to invest £20 billion a year until 2020 to replace power plants that are being closed. The National Grid has said that energy security would be at risk if the UK was not part of the IEM.
According to research published by Vivid Economics: “The potential impacts resulting from exclusion from the IEM could be up to £500 million a year by the early 2020s.” It said that there would be further costs as investors demand higher returns as the risk to projects rise.
The European Investment Bank (EIB) has invested €7.2 billion into renewable energy since 2007. The UK has been the biggest beneficiary, receiving 24% of these funds, significantly more than any other country. It is highly probable that investment into renewable energy in the UK from the EIB will drop sharply. While non-EU countries do receive funding from the EIB (around 12%) EU countries receive higher priority than non-members in access to funding.
EU Emissions Trading Scheme
There are three options for the UK with regard to the EU ETS: it can remain in the ETS; it can leave the ETS but retain emissions trading; or it could abandon emissions trading entirely.
Membership of the EU is not a prerequisite to participating in the EU ETS. Lichtenstein, Iceland, and Norway are all participants. However, the UK would lose its involvement with reforming the ETS, but would be subject to the ETS Directive’s provisions. The UK has 768 active installations in the EU ETS, which collectively emitted 198 million tons of CO2 (equivalent) in 2014. It is unlikely these will be happy to be subject to Directives over which they have no degree of control.
The UK could set up its own trading scheme, linked to the EU’s. Switzerland is currently negotiating to link its scheme with the EU. However, UK businesses are likely to object to the notion of additional layers of bureaucracy and different compliance mechanisms across their EU-wide portfolios.
The third alternative is to abandon emissions trading entirely, and use taxation as a mechanism to reduce carbon emissions. However, while the UK’s existing carbon floor price could be simply and quickly reformed, it is hard to imagine the UK government imposing a carbon tax.
Ambiguity about the new UK-EU relationship will raise uncertainty about changes in energy and climate policies, and investor uncertainty brings with it a risk premium.
Leaving the single market could also open the UK to new import taxes, adding cost to equipment such as foundations for offshore wind farms, or components for the French-led Hinkley Point C nuclear power plant project. However, it would also eliminate the EU’s trade duties on Chinese solar equipment imports. According to Bloomberg New Energy Finance, this will expose domestic solar manufacturers to much stronger competition, potentially making UK manufacturers unviable.
Dario Traum, a policy advisor at Bloomberg New Energy Finance, said: “The UK will probably work rapidly on free trade agreements with the EU, but that will not be a quick process. Over that period of uncertainty, you will probably see big investors holding back until they know what environment they will be operating in.”
Siemens has put new wind power investment plans in the UK on hold following the Brexit vote. A manufacturing hub in Hull will not be affected by the decision, and should still begin producing blades and assembling turbines next year. However, Siemens said it will not make new investments until the future of the UK’s relationship with the EU becomes clearer.
It has also been widely reported that the Hinkley Point C nuclear plant project could be under threat. Jean- Bernard Lévy, CEO of EDF, said that the UK’s decision to leave the EU will have no impact on the project. However, Angus Brendan MacNeill, chairman of the Commons Energy and Climate Select Committee, said the project is “bedevilled by uncertainty”, and he doubted if EDF, itself in financial difficulties, would invest billions in the project while there is such uncertainty about the situation. It is also clear that even before the referendum, EDF was not convinced that it would be financially prudent to continue, and the company’s finance director Thomas Piquemal resigned over the issue.
Because the UK will no longer be restricted by EU limits on state aid, the government can support the project without limits. How much support it will provide, however, is less certain, especially given the difficult fiscal situation it is likely to be in.
The UK energy sector is a major recipient of foreign direct investment (FDI), with EU countries accounting for over half over this. A survey carried out by Ernst & Young on company confidence for power and utilities indicated that there was an overwhelming view that leaving the EU will make capital more difficult to access, and will dramatically reduce investment.