What will the future of UK energy sector be in case of Brexit?

If, at the 23 June 2016 referendum, the UK does vote to leave the EU, energy and climate policy will be part of the overall package of issues to be negotiated, as it is unlikely that each sector will be treated separately.

Access to reliable, clean and affordable energy is a fundamental need of any modern society. Energy therefore lies at the heart of a country’s economic welfare and political and environmental security. It has also always been at the heart of European integration. The European Coal and Steel Community, formed by a treaty signed in Paris in April 1951 (effective since July 1952) was indeed Europe’s first supranational organisation – where Member States pool sovereign powers in order to ensure effective cooperation and a level playing field.

The European Atomic Energy Community (Euratom) was established by treaty in 1957 alongside the European Economic Community, the forerunner of the European Union (EU).

Energy should be natural territory for cooperation among European countries, given the geographic and economic interdependence that characterises its supply and distribution. Despite efforts in this direction, energy remains a politically sensitive issue, with domestic differences in policy priorities and industry approaches visible across the EU.

Meanwhile, the EU has been successful in building a collective approach to tackling climate change, including setting targets for reducing greenhouse gas emissions, promoting renewable energy and energy efficiency, and helping to drive forward international agreements. The United Kingdom’s energy and climate change policies have evolved together (and sometimes dialectically) with the EU’s, particularly over the past decade, shaping each other. Indeed, the UK has been critical in driving forward integration of the European energy market, and has been a strong advocate of liberalised energy markets and some climate change mitigation policies.

If, at the 23 June 2016 referendum, the UK does vote to leave the EU, energy and climate policy will be part of the overall package of issues to be negotiated, as it is unlikely that each sector will be treated separately. The model of relations for energy and climate may well be determined by political and public sentiment on higher-profile issues such as freedom of movement, rather than by what is best for the UK in these policy areas.

Change to the current interconnection arrangements may  have a negative impact on UK energy security

The UK is increasingly reliant on imports, including from and through continental Europe, and its energy market is deeply integrated with that of its European neighbours. As a growing share of the UK’s electricity is exchanged with EU partners, it would be neither possible nor desirable to ‘unplug’ the UK from Europe’s energy networks. A degree of continued adherence to EU market, environmental and governance rules would be inevitable.

The precise impact on the energy sector, should the UK leave Europe, is unclear at this stage. However, what is sure is that in the immediate future we would be very unlikely to see any major changes to the current systems and regulation. Any exit would take a significant amount of time to negotiate and plan and the EU and the UK would have to decide how access to each other’s energy markets would continue, if at all.

UK has a number of electricity and gas interconnectors, such as IFA (Interconnector France – Angleterre, i.e., the interconnector between France and England) and BritNed (the interconnector with the Netherlands) and is in the process of developing more. It is likely that the effects of a Brexit would be most keenly felt by existing and in particular future interconnectors as the relevant regulatory framework for interconnectors in the EU would fall away for UK interconnectors, and a reliable alternative regime would need to be negotiated which will likely have an impact on both costs as well as security of supply for the UK.

EU Member States cannot negotiate their own trade agreements, so it would be a matter for the UK and the EU as a whole to decide on their future use, such as whether these interconnectors would be able to enter the capacity market auctions. Change to the current interconnection arrangements may therefore have a negative impact on UK energy security as the UK is a net importer of electricity. In addition, the UK would have to decide whether to continue to adopt EU-wide electricity regulation or to develop its own set of policies.

Will UK continue to apply EU Directives and standards?

As regards the UKCS (UK Continental Shelf), the UK would have to decide whether to continue to apply the various EU Directives relating to oil and gas or whether to develop its own domestic policies. EU companies that have investments in UK waters could find themselves subject to two different regulatory regimes if the UK decides to develop its own regulatory framework.

The UK may well remain committed to the single European Energy Market which would require it to remain subject to the relevant European Energy Directives and Regulations, and to remain part of the institutions like ACER, ENTSO-E and ENTSO-G which regulate it. If there were a more radical approach (which meant leaving the single energy market), then there would be more significant issues to be dealt with such as access to EU markets, especially through interconnectors, and access to UK markets for EU energy.

On climate change, even if the UK were to leave behind the EU Climate Change Package, it would still have the very stringent UK targets as well as any commitments arising from international agreements such as the Paris Agreement.

UK regulation on many energy topics, including carbon capture and storage for example, implement the relevant Directives and therefore conscious decisions would need to be taken to move away from them through new regulation. How far they would go is very difficult to estimate. Relaxations in other areas, such as procurement, may also have an impact on the energy system.

Energy and climate issues are not among the principal concerns of voters during the referendum campaign, although both areas could acquire greater importance for citizens in the event of either rising energy prices or an increased desire to see the UK respond to the domestic impacts of climate change.

The UK has a proven record of success in shaping the EU agenda to suit its own priorities, especially with regard to market liberalisation and competition. It is clear from this assessment that a decision in June to remain in the EU would enable the UK to maintain and potentially build on this influence. A vote to remain would also send the strongest signals in terms of investor confidence and market access. A vote to leave the EU could cause the UK to lose rather than gain influence over its future energy options, and the resulting uncertainty would also have an impact on urgently needed energy investment decisions. All available future models demand trade-offs, but in the field of energy and climate change remaining in the EU offers the best balance of policy options for British national interests.

Federico Girolamo Lioy

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