There are a number of outcomes possible for how the EU and the UK can structure the UK’s access
to the broader EU energy market and it is yet early to predict what direction negotiations will take. Nonetheless, once the UK has left the EU, trade between the UK and the EU is likely to be impacted, including energy trade. In order to understand it, we fist need to consider the new direction in energy policies that the U.K. Took in the last years.
In September 2016, after many years of setbacks, the decision was finally taken by UK Prime Minister Theresa May to give the green light for the construction of Hinkley Point C (HPC) nuclear power station in Somerset. This £24.5 billion initiative, largely financed by French and Chinese state-owned firms, constitutes one of the largest single infrastructure investments in British history. The announcement came less than a year after enactment of a “new direction” in UK energy policy, withdrawing support from several renewable and energy efficiency schemes and entrenching commitments to nuclear power. The relative scale and intensity of this British nuclear enthusiasm is a point of growing curiosity among international observers.
Official UK rationales for these persistent nuclear commitments are indeed puzzling. As government analyses have repeatedly shown, nuclear power is far from being the most favourable low carbon UK energy option. Britain is blessed with what the Department for Energy and Climate Change called “the best wind, wave and tidal resources in Europe”. Official figures repeatedly show HPC to be more expensive than comparable tranches of energy from wind and solar power. Arguments over the value of “base load” generation are repudiated by the National Grid. With nuclear construction times also massively longer and relative costs dropping radically for renewables, the mismatch looks set to exacerbate by the time HPC comes online.
Originally set for completion by Christmas 2017, HPC is now unlikely even to have started construction by then. Associated plans for a massive 16 GWe programme of new nuclear power by 2025 look even less likely. With UK renewable energy capacities in the meantime burgeoning despite a relative dearth of official support, energy security arguments would logically also favour a switch towards these “Cinderella options” to fill the gap left by nuclear delays. Yet, as prospects for resolving underperforming nuclear plans get ever more distant, increasingly favourable renewable projects remain paradoxically ever more threatened by cut-backs, leading to serious problems in that sector. Taken at face value, these patterns are difficult to explain.
Brexit, in whatever form, is unlikely to change the UK’s energy strategy; UK climate goals are established at a national level under the Climate Change Act 2008. But, there will nevertheless be important issues to settle. For example, at an international level the UK’s emissions reduction commitment would need to be disentangled from the EU target under the United Nations Framework Convention on Climate Change (UNFCCC) and the recent Paris agreement. The UK would also need to submit its own Nationally Determined Contribution in respect of its intended climate actions under the UNFCCC processes.
Industry will wish to understand whether the UK will still be able to participate in the EU Emissions Trading Scheme (EU ETS). If Brexit used the EEA + EFTA model, then, like Norway, Lichtenstein and Iceland, UK industry would be able to participate in the EU cap and trade scheme. If the UK did not participate in the EU ETS, transitional and linking arrangements would be required, which would be particularly important for companies holding a surplus of allowances.
The biggest impact of Brexit for Europe may be for the EU project as such. With the UK’s departure
the EU would lose an important liberal voice in the debate, also in relation to energy policy and EU market integration. The UK has been an important proponent of liberalised EU energy markets and the EU’s Third Energy Package, a legislative package aiming to liberalise European gas and electricity markets. Given that the UK government has been at the forefront of efforts to liberalise and develop cross-border energy markets, it is likely that the UK would continue to implement and be supportive of many aspects of the Third Energy Package. For example, the unbundling requirements, which require the separate ownership and operation of electricity/gas transmission systems from generation, production and supply interests;
the level playing field and the standards of transparency. It might therefore be that the UK continues on a policy trajectory set out by the EU also post-Brexit, and that differences in regulation remain minimal, at least in the short-term.
On the other hand, EU energy policy may get a stronger regulatory focus without the UK. In the longer term regulation may therefore diverge between the EU and the UK and companies operating across Europe may encounter more Brussels initiated red-tape in an EU where the UK’s voice is absent.
For the UK to be able to participate in the European internal energy market following Brexit, it would need to negotiate an appropriate partnership with the EU, and adopt and comply with the relevant European legislation. One way in which this could be envisaged would be similar the agreement between the EU and the countries in South East Europe and the Black Sea region that are part of the so called Energy Community, which aims to extend EU internal Energy market rules and principles outside the EU’s borders. Yet, the UK would not have a say in the political process to formulate EU policies and regulations. Only if the UK would manage to negotiate to remain part of the institutions which interpret and co-ordinate EU energy regulations, such as ACER, ENTSO-E and ENTSO-G, would the UK have some say in shaping the direction of EU energy markets in the future.
It is unlikely that the energy sector would be hit by high tariffs post-Brexit, but tariffs and transfer pricing, are already complicated issues and Brexit may complicate things further for pan-European groups. Moreover, for the UK, the oil and gas industry remains the largest industrial investor in capital expenditure and it would be concerned if import tariffs rose even marginally. There is also some concern about the ability to influence EU policy on critical areas such as steel tariffs which make up a very large part of costs for capital expenditure in the oil and gas sector, for example. Adding to this is non-tariff barriers such as increased regulation and limitations on the mobility of staff which would become a puzzle for UK-EU cross-border activity in the energy sector.