Let’s talk about Brexit

Let’s talk about Brexit

A referendum on the UK’s membership of the European Union has been confirmed for 23 June 2016. Uncertainty has dominated the discussions to date, despite significant political posturing. Our own Veronica Truman and Ross Moffat discuss the issues around ‘Brexit’ relating to energy, highlighting key causes of the uncertainty.

A referendum on the UK’s membership of the European Union has been confirmed for 23 June 2016. Uncertainty has dominated the discussions to date, despite significant political posturing. Our own Veronica Truman and Ross Moffat discuss the issues around Brexit relating to energy, highlighting key causes of the uncertainty.

Veronica Truman: According to Energy Secretary Amber Rudd, leaving the EU would threaten energy security. This is on the basis that the UK would be unable to use the EU to minimise the risk of gas supply disruptions from Russia, as the UK grows increasingly dependent on imports.

Ross Moffat: Well maybe, but the majority of UK gas imports do come from Norway, a country outside of the EU. But I wonder, would the UK be able to better control and support it’s development of shale gas and oil and maximise what’s left in the North Sea outside of the EU?

Veronica Truman: Possibly, but the Government has already taken steps to promote development of both of these aspects while still within the EU. In the most recent Budget, the Government abolished the Petroleum Revenue Tax and cut the supplementary charge from 20% to 10%. And the Government is continuing to look at the promotion of shale with a consultation later this year on delivery of a Shale Wealth Fund. This could mean up to 10% of shale tax revenues will be invested into a fund over the next 25 years.

Ross Moffat: OK, so that considers the situation for gas. However, a lot of the talk in the energy markets at the moment is about power supplies and the tight margin for the winter. You could say leaving the EU would improve on this outlook.

Veronica Truman: How so?

Ross Moffat: European directives such as the Industrial Emissions Directive (IED) and Limited Life Derogation (LLD) have contributed to the loss of over 5GW of coal plant in 2016, around 25% of the available capacity. Leaving the EU would allow the UK the power to ignore such EU directives and give the country greater autonomy and flexibility over prolonging the current gas and coal plant. The UK would be able to prioritise energy security over decarbonisation, at least in the next few years when such an issue comes to the fore. This could allow coal plant to stay open for longer.

Veronica Truman: But it is not only EU directives that are currently causing coal closures. The UK has its own carbon targets out to 2050 which were set out in the UK Climate Change Act 2008. And don’t forget the UK has international targets to limit emissions and prevent temperature rises like the Kyoto Protocol which had target to 2012 and the more recent outcome of COP 21. It is more economic factors that are triggering the coal closures than any legislative pressures. The Fiddlers Ferry coal plant received a three-year subsidy as part of the Capacity Market, yet chose to shut down (facing a significant fine in the process), rather than continue to run at a loss. The unit has since received a one-year reprieve, with one unit winning a 12-month Black Start contract from National Grid to help address tight margins this winter. The weak economic conditions for coal plant during the current low-demand, high-supply coal market, have put the plant operational viability at significant risk. Coal has become unprofitable with the current low electricity costs, low demand and additional carbon costs when compared to gas. Keeping coal plant open may improve the country’s overall energy security, but it is unlikely to improve the wider economic health of the plant involved.

Ross Moffat: OK so is that why the UK Government is backing calls for a new fleet of gas and nuclear power plant, to replace the closing coal plant?

Veronica Truman: Well yes and no. It is also due to the move to decarbonise the UK electricity markets and help the country meet its carbon budgets.

Ross Moffat: Right, but as I understand it just one new gas plant, Carrington, has started construction since 2013 and the significant problems with the Hinkley nuclear plant development have been well documented. This is not a good sign for achieving those Government carbon targets. One issue, cited for the slow progress on new development, is that of State Aid. EU member countries face regulations over the level of support public authorities can provide to projects, without damaging or distorting competition within the wider European Union.

Veronica Truman: Does that mean a Brexit would give the UK greater control over its ability to support plant and project developments, avoiding the time consuming and expensive process of seeking approval from the EU? Would the UK be able to better support coal plant through the current challenging economic times? Brexit would also affect renewable developments which would benefit from the reduced red tape, quicker construction and lead times. I am thinking of biomass conversion in particular, as obtaining State Aid approval for Drax’s inclusion in the Electricity Market Reform (EMR) support schemes has slowed the progress in the project.

Ross Moffat: Indeed. Speaking of EU law and directives, does Brexit have the potential to impact the EU ETS or ESOS?

Veronica Truman: In short, no. The EU Emissions Trading System is a flagship EU policy designed to combat climate change through reducing carbon emissions. Being a member of the European Union is not a requirement to participate in the scheme. The UK had its own emissions trading scheme prior to signing up for the EU ETS.  And for ESOS, while that is an EU directive it has been transposed in UK national law. This would mean in the event of Brexit it would take an act of parliament to remove it from UK Law. Only in this eventuality would it mean UK companies wouldn’t have to comply with ESOS.

Ross Moffat: I guess that means that post-Brexit, the UK would have the option of reverting back to its own national scheme, linking it to the EU ETS or continuing within the system as normal. That would mean the ETS system is likely to be unaffected by the change and the UK will remain committed to tackling climate change and reducing its CO2 emissions as part of a global effort, irrespective of its role in or out of the EU.

Veronica Truman: Right, and remember the UK also has its own carbon price floor (CPF) scheme. This is expected to continue unabated post-Brexit. It sets a minimum price for emissions to help encourage uptake in renewables. The scheme was introduced as part of the UK’s Electricity Market Reform in 2013. As a result, it shall be largely unaffected by the EU. The CPF was frozen up to and including 2019/20 as part of the Government’s Spring budget, with a longer-term outlook for carbon price support due in autumn.

Ross Moffat: I thought the loss of over 5GW of coal-fired generation in 2016 had led to speculation of a change to the CPF? With the price frozen at £18/tCO2, there will be an estimated shortfall of around £200m in CPF receipts due to the loss of coal plant.

Veronica Truman: Perhaps, but that is a UK scheme so wouldn’t be affected by Brexit. Looking at the generation situation overall the role of renewables in the UK’s future energy mix may alter if the country is not required to adhere to EU-wide targets. While the UK has its own targets for reducing overall carbon emissions, EU targets operate on a percentage of electricity supplied by renewables. While the drive to curb carbon emissions is on a global level and the UK is likely to continue playing a major role in this effort, a Brexit could allow the UK greater control over the direction of its future policy.

Ross Moffat: I guess you should consider the recent move by the Government to cut subsidies for solar generation and on-shore wind, showing a clear preference to offshore wind installations, a strategy which has been heavily criticised by opposition and environmental groups. They have the ability to make those changes within the EU.

Veronica Truman: Very true. I think the general feeling is that Brexit would eliminate some red tape and bureaucracy surrounding new project developments. However, major questions remain over the impact on investment within the UK. Amber Rudd claimed the uncertainty over a Brexit would risk “several hundred million pounds” of investment in energy infrastructure. While the uncertainty immediately following a Brexit vote could deter short-term investment, the move is unlikely to impact on major projects such as the new Hinkley nuclear plant, as funding has been secured from outside sources like the Chinese Nuclear Power Corporation.

Ross Moffat: Also, the UK already has significant interconnection infrastructure already in place, with the UK transferring gas and power between the Continent via France, Belgium and the Netherlands. And new power interconnectors to France and Belgium are currently under construction.

Veronica Truman: Do you think a vote to leave would trigger a more insular focus for the UK supply network in the future?

Ross Moffat: Not really. The National Infrastructure Commission and others have recommended greater interconnection, whether with EU or non-EU countries (Iceland) to improve system security.

Veronica Truman: So interconnection remains a key element of the EU’s overall energy strategy. The UK’s strong dependence on imports, and the price premium which the UK market holds over Europe, may be a strong enough incentive to continue jointly funding interconnection. Particularly with the focus on EU security of supply.

Ross Moffat: Considering gas especially, I wonder if a Brexit would lead to even greater focus on domestic shale development rather that increased physical gas connections to Europe?

Veronica Truman: Maybe. What is clear is that uncertainty over the vote from both sides is impacting on market stability. Uncertainty in financial, currency, stock and commodity markets is creating volatility with traders unclear on the future direction post-Referendum.

Ross Moffat: High degrees of volatility are to be expected until an outcome is determined, and it’s negotiations post-Brexit would last at least two years, which could extend the period of uncertainty.

Veronica Truman: Volatility could ease in the aftermath of the vote once a solid outcome is known, allowing future energy strategy to be carried out from a more certain base, and putting to bed the question of the UK’s membership for at least a generation.

Ross Moffat: It is this uncertainty that is driving the discussion, with verifiable facts thin on the ground, despite what campaigners would have you believe.

Veronica Truman: I agree the debate is suffering from exaggerated claims on both sides, making it difficult for voters to develop a clear understanding of the issues.

To find out more about how Brexit could affect UK carbon legislation, take a look at our blog.

Amy Chambers

Posted by on Friday, the 20. May at 11.20