How will Brexit shape our energy future?
On 23 June 2016, the UK voted in favour of leaving the European Union by 52% to 48%. This one result will trigger a series of key events.
David Cameron’s proposal to remain in a reformed European Union (EU) was rejected. He announced his resignation as the Prime Minister which will become effective from October. The Labour leader Jeremy Corbyn also faces a vote of no confidence. The majority voting to remain in the EU in Scotland has opened the possibility of a second referendum on Scottish independence.
The decision was a shock as on the day polls had indicated on Thursday that the campaign to remain was leading, with the value of the Pound rising as a consequence. However, this trend was soon reversed as the results starting to come in, with the value of the Pound falling by over 10% against the Dollar, and 7% against the Euro. This was the biggest fall against the Dollar since 1985. Conversely, the price of Dollar-denominated commodities – oil and coal – has fallen by 4%, offsetting some of this impact.
The turmoil has so far largely been focused on the financial markets, though UK energy prices have risen. Despite this, today’s volatility has so far been lower than the past few days, as announcements of further issues at the UK’s largest gas storage site and the recommendation of further cuts to Dutch gas production exacerbate concerns over the security of supply for the coming winter.
Are energy supplies affected?
The more immediate impact on the UK markets will be seen via gas flows over the interconnector between the UK and Belgium, as these are influenced by the exchange rate. The UK gas price is approaching levels where European buyers would increase imports from Russia instead, which may place a cap on UK prices. The interconnector is currently on maintenance, so the immediate impact on flows due to the fall in the value of the Pound may not be evident until next week. Power prices have followed gas higher, but with the price of carbon allowances falling this has dampened the impact.
To put today’s move in context, the last 3 months have seen gas and power prices rising over 30%. Today’s volatility in energy prices has not been exceptional.
One thing is certain: the vote to leave the EU will feed through the energy sector and energy policy. Proponents on both sides of the debate had indicated that there might be changes in energy and environmental policy as both the EU and UK decide how to manage the transition. Even before they faced each other as opponents in a televised debate, there were rumours that Amber Rudd and Andrea Leadsom were not on speaking terms. It appears highly unlikely that both, or either, will remain within the Department of Energy and Climate Change (DECC) for much longer. It remains to be seen exactly what changes will occur, and what their effect could be on UK energy policy. Once outside the EU, amongst other things Britain needs to decide if it will stick to existing plans for further energy integration and the model it will use to trade with the EU energy market. The much needed regulatory stability now seems further away than ever.
There are lots of questions circulating the energy industry at the moment. How will Brexit affect our energy and carbon policy? Is the EPBD impacted? Will our energy supplies be more or less secure?
Britain’s vote to leave the European Union will trigger many as yet unknown changes. The current heightened uncertainty and price volatility mean it is even more important for businesses to focus on aspects that they can control – reducing and managing energy consumption – in order to reduce exposure to aspects that they cannot.
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