A no deal Brexit and its possible effects on the UK energy market

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After long internal debate on its EU membership, the UK voted in favor of Brexit on 23 June 2016. About nine months later, on 29 March 2017, UK prime minister Theresa May triggered article 50 of the Lisbon Treaty which signaled the start of the two-year period given to the UK to negotiate an exit deal (Colson, 2018). The initial deadline for a deal was October 2018, but a few considerable issues have prevented the EU and the UK to come to an agreement. With only about five months left, time is running out for the UK while the possibility of a ‘no deal’ is coming ever so close. Whereas article 50 not only appoints two years of negotiating time, it also stipulates that the UK will have to leave the EU whether both parties will be able to come to an agreement or not. With the exception of some hard line Brexiteers, both the UK and the EU don’t favor such a scenario. But even so, especially the EU has intensified its preparation for the possibility. A no deal Brexit would have a profound impact on UK industry as a whole, this article will give some insight on how such a Brexit would affect the UK energy market in particular.

In order to get an understanding of how a no deal Brexit would impact the UK energy market we first have to take a closer look at this industry. The UK energy mix consists of petroleum, coal, natural gas and primary electricity to suffice its heating and transport. While coal in particular used to be a major component in the UK energy mix concerning electricity generation, its usage has majorly decreased in favor of natural gas generation (EIA, 2018).

Source:https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/643414/DUKES_2017.pdf

Source:https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/643414/DUKES_2017.pdf

From the visual we see that the UK was a net energy exporter from 1980 to 2003, this can be ascribed to North Sea oil and gas extraction that has since then greatly decreased. Consequentially, since 2003 the UK has been dependent on import. And while it should be noted that the UK energy import dependence lies below the EU average, that does not negate the fact that it is moving closer to it, which is a trend that is most likely to continue in the future. The UK mainly imports oil from Norway, the OPEC countries and Russia; natural gas comes from Norway, Qatar and the Netherlands; petroleum imports come mainly from Russia, Sweden and the Netherlands; Coal arrives from Russia, Colombia and the US while a small part of the UK’s electricity comes from France and the Netherlands (UK Office for National Statistics, 2016). If we look at this overview we can see that, while the UK is dependent on energy imports, it does not rely heavily on the EU27 for them. In contrast, the UK does enjoy deep trading relations with Norway which are currently regulated by EU legislation as Norway is an EEA member.
                While UK dependence on EU energy imports might be relatively low, their markets are deeply interconnected. Firstly, the UK functions as an important player in energy rights trading in Europe. The capital serves as a trading hub and a liquid gas and electricity market, the InterContinental Exchange (ICE) online marketplace is a leading global energy trading platform, and the UK also plays a large part in determining energy market reference prices such as Brent oil and NBP gas. When the UK leaves the EU, its regulation will no longer be applicable in the UK and directly affect these organizations by removing their ability to trade freely in the EU single market, this would highly disrupt market flows (Harrison, 2018).
                Secondly, the UK and the EU are interconnected through pipeline networks, legislation and cooperation through treaties and organizations such as Euratom and the Internal Energy Market (IEM) (House of Commons Library, 12 October 2018). The latter is designed to increase efficiency through harmonization of the EU energy markets, which includes EEA countries such as Norway.
    

Source: https://publications.parliament.uk/pa/ld201719/ldselect/ldeucom/63/6308.htm

The IEM ensures tariff-free energy trading within the EU and provides a solidarity net in case of sudden domestic supply disruption. What is important to note, is that in the case of no deal, there would be no transition period for implementation of new legislation, and there would be no existing structure for future relations between the two parties (House of Commons Library, 12 October 2018, pp. 7-8). No deal means not only no UK membership in the single market, the customs union and organizations such as the IEM, but no structured relations at all. This would have several negative effects on the UK energy market. Limited or no harmonization between the UK and the EU would firstly make for less efficient trading, which would increase trade coordination costs, this in turn could defer new investments regarding interconnecting infrastructure and capacity growth. Trade would contract and costs would increase for both parties (Pollitt, 2017).
                For example, the UK would most likely be affected by increased and more unstable wholesale electricity prices as the infrastructure that connects UK and EU electricity markets would stop working in a frictionless manner. The most problematic region in this case would be Northern Ireland. It shares an electricity grid with the Republic of Ireland and will most likely be cut off if it comes to a no deal. In a worst case scenario Northern Ireland could face blackouts and exceptionally high electricity prices (Vaughan & Hopkins, 2018).
                While electricity and gas traffic between the UK and EU would be tariff free, construction and maintenance materials will be subject to tariff barriers, which would mean possible delays of essential goods and services and increased costs and risks (Harrison, 2018). These expected delays due to the restriction of free movement is directly connected with the legion of internationals that are employed in the energy sector. UK’s oil and gas industry is reliant on international expertise and capacity both on a technical and practical level. These professionals would be unable to move freely and do their jobs, impeding UK industry efficiency (Ocean News, 2018).
                 Secondly, less harmonized energy trade relations would make the UK system more prone to shortages and unexpected supply disruptions. Within the EU framework there exists a solidarity principle for supply crises, but after its exit the UK would be excluded from this system. Therefore, in order to counteract this insecurity, the UK would have to invest in improving its energy storage or back-up capacities which in turn will lead to increased system costs and reduced efficiency. There is no way for the UK to go about this differently, such as by establishing individual trading agreements with its EU trading partners as the UK will no longer be part of EU legislation and treaties, while the EU27 members are still bound by their common legislation framework and will thus not be entering into separate agreements (Pollitt, 2017, pp. 136-140).
                The UK will therefore have to negotiate with the EU in its entirety, as it is currently trying. This process is clearly proving to be a challenge because the UK’s priorities and wishes do not align with those of the EU. Particularly the UK’s resolve to leave the single market and its wish of being exempt from EU court of justice legislation in combination with its desire to maintain the privileges that organizations such as the IEM bring to the table, is a problematic factor in the current negotiations (UK parliament, 2018). This is specifically expressed by the Internal Policies Directorate General of the European Parliament: “As the internal energy market is based on a complex and dynamic set of enforceable rules a stable set of institutions is needed to make it work. Hence, it is not conceivable that a country can participate in the internal energy market when it does not accept the powers of super-national institutions (e.g. ACER, ENTSO, ROCs, European Commission) over its own energy system” (European Parliament DG for internal policies, 2017, p. 30).
                European negotiators have made it clear that they will not allow the UK to ‘pick and choose’ the aspects of their new relationship that is only five months away, both parties are bound to have to make some concessions in order to come to an agreement on the most complicated issues that are currently breaking up talks. It has become clear that, regardless whether there will be a Brexit deal or not, the UK energy market will suffer from decreased efficiencies and increased costs. The difference lies in the fact that if there is no deal, and thus no framework and prospect for cooperation, these negative effects will go much deeper and last much longer. They will majorly hinder the UK in continuing its role as an energy trading center, thereby impacting both the UK’s economic standing and the lives of many international professionals. A Brexit deal would be in everyone’s best interests, the next few months will show whether the UK and the EU will be able to agree on a new relationship, or whether this divorce will end ugly.


Bibliography

  • Colson, T. (2018, March 29). Brexit, one year to go: Time is running out for Theresa May to get a deal. Retrieved from Business Insider: https://www.businessinsider.com/brexit-timeline-when-will-britain-leave-the-eu-2018-3
  • EIA. (2018, April 24). Coal power generation declines in United Kingdom as natural gas, renewables grow. Retrieved from US Energy Information Administration: https://www.eia.gov/todayinenergy/detail.php?id=35912
  • European Parliament DG for internal policies. (2017). The impact of Brexit on the EU energy system. study, Policy Department A: Economic and Scientific Policy. Retrieved from https://publications.europa.eu/en/publication-detail/-/publication/28fd0793-e14a-11e7-9749-01aa75ed71a1/language-en
  • Harrison, A. (2018, July 26). What a no-deal Brexit would mean for Britain’s energy markets. Retrieved from The London School of Economics and Political Science: http://blogs.lse.ac.uk/brexit/2018/07/26/what-a-no-deal-brexit-would-mean-for-britains-energy-markets/
  • House of Commons Library. (12 October 2018). What if there's no Brexit deal? briefing paper. Retrieved from file:///C:/Users/User/Downloads/CBP-8397.pdf
  • Ocean News. (2018, August 15). What Would a ‘No-Deal’ Brexit Mean for the UK Oil and Gas Industry? Retrieved from Ocean News and Technology: https://www.oceannews.com/news/energy/what-would-a-no-deal-brexit-mean-for-the-uk-oil-and-gas-industry
  • Pollitt, M. G. (2017). The economic consequences of Brexit: Energy. Oxford Review of Economic Policy, 33(1), 134-143.
  • Şengül, E. (2018, October 5). What no deal Brexit means for UK and EU energy markets. Retrieved from Anadolu Agency: https://www.aa.com.tr/en/energy/energy-diplomacy/what-no-deal-brexit-means-for-uk-and-eu-energy-markets/21855
  • UK Office for National Statistics. (2016, August 15). UK energy: how much, what type and where from? Retrieved from Office for National Statistics: https://www.ons.gov.uk/economy/environmentalaccounts/articles/ukenergyhowmuchwhattypeandwherefrom/2016-08-15
  • UK parliament. (2018, January 29). Brexit: Energy Security, Chapter 5: Energy trade. Retrieved from www.parliament.uk: https://publications.parliament.uk/pa/ld201719/ldselect/ldeucom/63/6308.htm
  • Vaughan, A., & Hopkins, N. (2018, September 27). No-deal Brexit could result in Northern Ireland blackouts, leaks reveal. Retrieved from The Guardian: https://www.theguardian.com/politics/2018/sep/27/no-deal-brexit-could-result-in-northern-ireland-blackouts-leaks-reveal

 

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