Implications of Brexit

How Brexit might affect UK and European energy systems

A vote to leave the European Union (EU) in the upcoming referendum could release the UK from EU rules limiting support for the North Sea sector and allow more rigorous promotion for gas-fired generation as an essential balance to wind, according to Brexit supporters. But opponents dispute this, claiming that EU policy is already flexible to UK needs while Brexit could damage links with Europe’s common gas and power markets.

The two sides of the Brexit debate are also bitterly divided on whether the EU has been responsible for the high gas and power costs of recent years, which the exit campaign blames for undermining energy-intensive industries in the UK. While other factors – such as US shale gas output – have left European energy prices above those in North America, Europe’s focus on environmental and market aspects, rather than energy cost and self-sufficiency, has probably made the situation worse by adding costs and failing to boost domestic gas output.

A good European

Some advocates of Brexit see nothing positive in the track record of Europe’s involvement in UK energy. They claim that while Britain was deregulating its energy markets and leading the way towards integrated and competitive gas and power markets – like a good European – the rest of Europe was busy defending its vested interests and positioning national champions for expansion.

Continental energy companies were able to acquire UK assets from a position of strength within their own, still protected national markets, while UK companies were unable to buy assets in Europe as they struggled to protect market share at home and operated from a low profit base. As a result, four of the UK’s ‘Big Six’ generators are European-owned, while no similar assets in Europe are UK-owned.

EU policy has undoubtedly followed the direction of UK policy, first with liberalisation of the EU energy market in order to foster cross-border integration and competition, more recently through intervention in the energy market in order to foster low-carbon generation.

In a recent report3, the OIES said the Commission “did not really like what it calls “the latest more interventionist measures of current UK policy”, but has allowed them anyway, by approving nuclear subsidies and the UK’s capacity market to incentivise conventional back-up generation with capacity payments.”

But while the UK fully deregulated and has established an efficient market, Jayne Adye, campaign director at Get Britain Out (GBO), says the EU has failed to create its goal of single energy markets: “EU rules remain fragmented, varying from member state to member state. There are numerous reasons for this failure. While the UK had unbundled its electricity and gas markets in the 1980s, many European countries remain vertically integrated.”

She says EU State aid rules have also significantly hindered the ability of the UK to support its upstream energy sectors.

“Leaving the EU would allow greater state investment and support for different parts of the energy sector, using funds from EU membership costs. This would enable the Scottish government to provide greater support for the offshore sector which is a vital part of the Scottish economy,” she says.

Indeed, without support for the North Sea, current low oil prices could see rigs and pipelines close before marginal fields have been developed.

“Freed from the strictures of the EU state aid regime (though still subject to WTO rules) the UK government could choose to support key infrastructure in the UKCS (e.g. pipelines and terminals) necessary to extend the life of the basin,” said law firm Ashurst in a recent paper1.

Better together?

But even with Brexit this may not be possible, says David Buchan of the Oxford Institute for Energy Studies (OIES). He points out that it would be dependent on what Brexit alternative the UK chose to pursue – if it joined Norway in the European Economic Area arrangement, the UK would still have to obey EU competition and state aid policies.

Alternatively, any arrangement outside the EEA, possibly similar to that of Switzerland, would mean a free hand. “In these circumstances a Prime Minister Corbyn would, I think, be free to resume subsidising/nationalising UK coal mines,” says Buchan – or, Ms Sturgeon in the case of North Sea oil.

The UK’s offshore regulatory framework, and in particular environment, decommissioning and health and safety regulation, has been highly developed independent of EU law, and so would be unlikely to be affected by Brexit. Indeed, most of the recent action has been towards subsidiarity – ceding powers to more local control, rather than up to Brussels.

But if the momentum of Brexit encouraged Scotland to hold another independence vote, all powers could move to Scotland – potentially creating upheaval in the offshore sector.

Norway’s petroleum and energy minister, Tord Lien, has voiced his support for the UK remaining in the EU, where he said it had been a valuable ally to Norway in policy making. He said the UK had pushed for a simpler and more competitive European energy market, benefitting Norway, which often shares the UK’s view.

Gas and power

Brexit could give the UK more flexibility to support gas, although the recent abandonment of EU renewable targets after 2020, in favour of emissions targets, makes this less significant. The switch to emissions targets had been a key demand of the British government for some time, as it wanted the flexibility to use more gas to achieve emissions goals rather than relying only on renewables. “The EU does not and cannot set targets for the energy mix, because that is ruled out by the Lisbon Treaty,” says OIES senior research fellow Malcolm Keay.

The GBO campaign disputes this point, however. Before the treaty, EU renewable targets did play an important role in shaping UK energy policy away from relatively low-carbon gas and towards renewables – a 600 MW gas fired plant cuts as much CO2 as a 300 MW wind plant when operating flat out compared to coal, but gets no encouragement from Europe, and so no subsidy.

However, these were mutually agreed policies also imposed at a national level, so it is arguable that the policies are the EU’s responsibility.

Buchan does not believe gas will benefit: “I don’t see Brexit giving gas any more direct help than it already gets with the UK already tacking a carbon price floor [for fuels for power generation] on to the ETS price,” he says, referring to an additional UK penalty for carbon emissions on top of Europe’s Emission Trading System price – which will benefit gas relative to coal.

“However, Brexit might give indirect assistance to gas if the UK reduced its efforts on renewables, with Brussels no longer there to chivvy it along, and thereby opened up a gap in generation capacity that gas could fill. On the other hand, less renewables means less need for [gas] backup.”

GBO says Brexit will guarantee that the EU cannot set targets for the generating mix or biofuels. It claims that, under the rules the UK has already agreed to, renewable commitments mean increasing the share of renewables in generation from 11.3% in 2012 to over 30% in 2020. It says half of UK power stations earmarked for closure in 2020 have been forced to close already because of the demands of the EU’s Large Combustion Directive, which is expected to cost the UK 11 GW in capacity – raising serious concerns about the security of the UK’s energy supply.

But Brexit would not remove the legally binding UK climate targets under the Climate Change Act 2008, and the UK is committed at a national level to close all coal plants by 2025.

“Far-reaching emission-reduction goals are something that the UK has imposed on itself,” says Buchan.

As far as building on the shale gas revolution seen in North America, the EU has failed to act despite strong encouragement from the UK. It has at least decided not to restrict development – although most European states have imposed a ban, meaning the EU could also choose to follow suit.

As the UK government’s Balance of Competences Review2 noted: “It is possible that, in the future, when there is heightened activity on shale in the EU, the Commission may consider proposing more prescriptive legislation to ensure that all participants adhere to the same rules.”

Into the unknown

If Brexit were to take place, resultant changes to UK policy would take time to negotiate and implement. Campaigners to remain therefore claim that Brexit’s main initial impact would be to create uncertainty – this would be bad for energy sector investment generally, including gas.

However, exit advocates argue the contrary, suggesting that to remain in the EU presents greater uncertainty, with dependence on imports – especially oil-linked Russian supply – a lack of attention to domestic production and the possibility of regulations from Brussels towards more inefficient or centralised structures, all making the sector more vulnerable to external control and monopolistic behaviour. (This is their argument, not mine)

“The EU’s whole raison d’être is greater centralisation with the ultimate goal of political union… This means the EU will continue to follow its centralised statist approach towards energy. We desire a more competitive, free market driven energy sector,” says Adye.

Keay points out that gas already faces significant policy uncertainty in the UK (and Europe more generally), as it has a clear short-term role in decarbonisation but no clear long-term role.

“Amber Rudd’s ‘reset’ speech promised to clarify, but in fact compounded the uncertainty, suggesting both that gas policy could be left to market forces and that it is imperative to build more gas-fired power plants,” he says.

Trading 

If it were to leave the EU, the UK government would need to decide whether the UK would still participate in the single European gas and electricity market, which many see as an important aspect of energy security.

If the UK exits, it “may have a negative impact on arrangements for gas and electricity trading across existing and proposed interconnectors,” says Ashurst in its report. This could not come at a worse time for the power market, which has seen reserve margins shrink sharply over recent years, putting the UK more at risk of blackouts.

Indeed, House of Commons researchers recently noted: “An EU exit could increase focus on all aspects of UK-based generation. This could especially be the case if exit resulted in poorer security of supply through decreased interconnectivity to Europe, reduced harmonisation of EU energy markets, or less investment into the UK by multinational companies”.

GBO claim in their policy proposals4 that the UK would remain a member of all key international energy bodies and would be able to cooperate with the EU on key energy issues, remaining connected to other European energy networks. However, Adye says this is not necessarily a good thing.

“[It] makes the UK more dependent on a Continent short of energy – and itself reliant in part on Russian or North African gas, which contains considerable political risk… The Continent is energy short, reliant on expensive interruptible renewables and Russian gas. Freed of the EU obligations, the UK could develop more of its indigenous energy sources, rely more on gas and fuel-efficient coal stations,” she says.

Lower prices?

GBO not only claims the EU has made gas more expensive, it also says its’ renewables requirement has left the UK with expensive, intermittent, unreliable energy resources, which require going to the great cost of building flexible baseload power as a back-up. Together with higher gas prices and other costs, “EU policies currently account for up to 9% of the cost of energy for energy-intensive industries… and we expect this to rise to just under 16% by 2030 if we stay in the EU.

“Using British government figures, EU energy regulations have already cost the UK economy between GBP 86.6 and GBP 93.2 billion4.”

The Business for Britain prospectus for Brexit says it would be free to reduce energy prices immediately by cutting renewable subsidies and VAT, while increasing domestic gas and oil production through the removal of “damaging laws that hold back energy production”. It is unclear what this means, however, as such laws are generally imposed at a national level – so it is not a question of EU membership, but domestic policy.

Buchan dismisses the group’s arguments, suggesting they are way off the mark: “The Get Britain Out group should ‘get out’ more to talk to the UK energy industry,” he says. Indeed, most of the industry supports remaining within the EU, including the renewable energy sector, major gas and electricity utilities and big multinational oil companies.

However, the former has benefited from Europe’s focus on renewable energy, while utilities are dominated by European investors. And some are in favour of Brexit, including smaller oil and gas companies who fear that further EU regulation could erode their declining profit margins in the North Sea, and most intensive energy users.

The UK population will decide in June whether it believes the benefits of mutual cooperation outweigh the particular needs of the UK – or on another level, whether it trusts the UK or Europe to best govern its energy sector and wider economy. Whatever the outcome, disagreement over policy will undoubtedly continue at whatever level of government ends up holding the power.

 

  1. http://mypreferences.ashurst.com/reaction/PDF/6060-BRO_Brexit_doc_FINAL.pdf
  2. https://www.gov.uk/guidance/review-of-the-balance-of-competences
  3. OIES. The UK in the EU – Stay or Leave? The balance sheet on energy and climate policy, Feb 2016
  4. http://forbritain.org/cogpart3.pdf (pages 483-514)

First published in Gas Matters, March 2016.

 

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