Implications of a "No-Deal" Brexit

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At the time of writing, MPs are due to vote on a series of amendments to Theresa May’s Brexit plan, which was overwhelming defeated in the House of Commons on the 15th January 2019.  All in all, the likelihood of the UK leaving the European Union without a deal come March 29th is higher than ever, which could have severe repercussions for the UK’s energy industry.

How will a no-deal Brexit impact wholesale energy market prices?

Leaving the EU without a deal will undoubtedly be bullish for gas and electricity prices. The main impact of Brexit negotiations on energy market prices thus far has come from drastic fluctuations in the value of the Pound against the Euro. At the time of writing, the Pound has reached 9-month highs, with the financial markets looking at the increasingly likelihood of the Brexit process being extended as the key driver. Despite this, forecasts by the Bank of England suggest the Pound could plummet by as much as 15% against the dollar, which would ultimately push gas and electricity prices up.

All in all, a cheaper Pound makes imports from abroad more expensive and also encourages continental buyers to take up positions in UK energy contracts, influencing market prices in the process.

How much energy does the UK currently import from the EU?

EU imports makes up roughly 7% of the UK’s generation mix, with the majority of power generation coming from domestic means including gas-fired turbines, wind and nuclear. However, a number of additional interconnectors are due to go live in the coming years, which will likely see cross-border flows increase.

On the gas side, the UK is more reliant on foreign pipeline imports coming from Norway, Belgium and the Netherlands. LNG deliveries come from all over the world and currently make up a small portion of total annual imports, although this is expected to increase in the future.

 

Is there a security of supply risk in the event of a no-deal Brexit?

Overall, security of gas and power supply is not a key concern. There are strong commercial incentives for the UK and EU member states to continue trading, which will ultimately drive the desire to find a workable solution regardless of the Brexit outcome. Europe and the UK are heavily connected through their energy infrastructure, which is not expected to physically change in the future, although future plans may be delayed until the full details of the Brexit process are in place.

What would the impact be on the UK’s electricity market?

Increased energy interconnectivity with Europe has been highly beneficial for the UK, helping to deliver lower energy prices and improve our security of supply. The UK has been at the forefront of efforts to liberalise and develop cross-border energy markets pre-Brexit, and this approach of open communication is widely expected to continue under any scenario in which a deal is agreed with the EU prior to 29th March 2019.

However under a no-deal Brexit, cross-border flows will no longer be governed by European energy law and the UK’s electricity markets would be decoupled from the Internal Energy Market. This increases the possibility that interconnector transmission charges could be increased and will force a return to explicit auctions of cross border capacity. Furthermore, the UK would be excluded from EU platforms for forward power capacity allocation and balancing services, further adding to transactional costs.

National Grid has published an assessment in which it believes that the impact will be negative with a total-cost impact of £420m if the UK is excluded from the Internal Energy Market: 

  • Additional costs of £160m from loss of price efficiencies from market coupling.
  • £80m from loss of access from cross-border balancing services which reduces procurement costs.
  • £20m from higher capacity costs.
  • £160m from fewer interconnectors being developed, so less pressure on reducing prices.

A no-deal Brexit would also have severe implications for Northern Ireland, who share a single electricity market with the Republic under the Single Energy Market (iSEM). Maintaining the Single Energy Market is in the strong interest of all parties, with UK ministers working to ensure that the split of the market is avoided under any scenario.

What would the impact be on the UK’s gas market?

Unlike electricity, the mechanism of the cross-border trading of gas is not expected to differ from the current arrangement. This is particularly the case in the short to medium term, as interconnector capacity is booked well in advance (past the date the UK leaves the EU), so flow rates and costs likely to be unaffected.

Current cross-border trading conditions are governed by the EU’s Regulation on Wholesale Energy Market Integrity and Transparency (REMIT), which aims to increase the transparency and stability of European energy markets. In the event of a no-deal, the UK will no longer be bound by these conditions, although the UK could still adhere to these principles to reduce friction of trade as Russia currently does.

The UK currently imports gas from a variety of sources across the globe, helping to mitigate against security of supply risks. It is expected that a no-deal Brexit will place a greater reliance on LNG arrivals into the UK. LNG trade flows themselves are likely to be unaffected, with most UK LNG arrivals come from countries outside the EU, such as Qatar, Russia and the US. According to the World Trade Organisation (WTO), the EU does not impose any tariffs of restrictions on LNG from non-member countries.

What is the likely impact on the UK’s Total Carbon Cost?

The UK’s current carbon cost comprises of 2 components, a domestic carbon tax known as the Carbon Price Support, combined with carbon allowances purchased from the EU Emissions Trading Schemes (ETS). The Carbon Price Support is fixed at £18/tCO2 until at least 2021, while ETS allowances currently trade around €24/tCO2. The costs are paid by all polluting sources of power generation, with the scheme aiming to switch power generation towards greener means by taxing higher polluting alternatives.

A no-deal Brexit will see the UK drop out of the EU-ETS system, effectively flooding the market with pre-purchased allowances once we leave. October 2018’s budget announcement outlined a plan to introduce a new carbon tax of £16/tCO2 on top of the Carbon Price Support in order to keep the current carbon cost around the £30-£40/tCO2 level in the event of a no-deal scenario. All in all, the total cost of carbon isn’t expected to change dramatically in the short term, but could have an impact on the UK’s generation mix in the longer term.

 

This document has covered the likely outcomes of a no-deal Brexit on the UK’s energy sector. Despite this, there are still many unknowns with Brexit, even with the March 29th deadline fast approaching. As a result, the information outlined in this document is subject to change.

LASER is actively working together with our Suppliers to help mitigate against the potential impacts of a disruptive Brexit. We acknowledge that there is still a great deal of uncertainty surrounding the process, and will continue to work with our Suppliers to interpret information and distribute it to customers as it is released.

If you have any specific questions regarding the information above, contact Harry Perkins by emailing harry.perkins@laserenergy.org.uk.