The week after the referendum before
It hardly seems possible that it was only a week ago that the UK voted to leave the EU. The result sent shock waves around the world, impacting on financial and currencies markets as well as reshaping our political landscape. At the time of the results we covered the immediate impact in our blog “Brexit – what now?”. One week on, has the dust started to settle anywhere?
Few can have missed the spectacular twists and turns of the Conservative and Labour leadership contests. The dramatic moves in exchange rates and shares have also grabbed headlines. After showing significant falls in the immediate aftermath, the FTSE 100 has since risen to its highest levels since April. The FSTE 250 – which covers more UK-based firms – while having shown some signs of recovery is still 8% below levels seen last Thursday. The pound has fared less well, falling against both the dollar and the euro. Compared to last week the pound is 8% lower against the dollar and 7% lower against the euro.
Brexit and the energy markets
For energy, it has been broadly business as usual. The UK energy markets have shown a much more muted response to the news that the UK voted to leave the EU compared to the more immediate fundamental issues of supply and demand. The first real test of the gas market came after the Interconnector returned from maintenance. The link between the UK and the Continent had been offline since the vote and traders were wondering how the gas flows would respond to the change in £/€ exchange rate when the link returned. When flows resumed this morning it began to export strongly, with indications that levels would further increase. This left the market undersupplied this morning. A weaker pound against the dollar has also the ability to reduce the arrival of LNG deliveries. While it will not stop the UK receiving contracted cargoes, it may reduce the likelihood of spot cargoes being sent to the UK. After maintenance curtailed Qatari production through June, the outlook for July is more promising. So far two cargoes are booked for delivery but a further five could be on their way, reaching the UK in the next two weeks.
The impact on carbon
Meanwhile, EU carbon prices have shown much larger moves in direct response to Brexit, providing an influence on UK power prices. The UK is the second largest emitter in the scheme and a buyer of allowances. The prospect that the UK could exit the scheme has led to carbon contracts falling 17%. The market has been dogged by oversupply issues and steps are being put in place to tackle this. However, these reforms could also be derailed by Brexit after the vote led to Conservative MEP for Scotland, Ian Duncan, resigning. Duncan was a driving force behind the carbon market reforms, and his place could now be taken by a Polish MEP, which tends to be a pro-coal country, reticent to restrict the supply of carbon allowances.
The uncertain effect on investment
Uncertainty has forever been to the detriment of the energy market investment cycle, and while it will take years for formal negotiations to take place, this could lead to delays in projects being started. However, the European Federation of Energy Traders did try to bring some clarity, stating in a press release “it was confident that decision-makers will find the right means to secure the continued inclusion of the UK in the EU single energy market.” It added “We will continue promoting competition, transparency and open access in the UK energy sector as part of our regional spectrum irrespective of how the terms for the UK’s continuing engagement with EU markets are finally formulated.” In addition, Andrea Leadsom was keen to stress it was business as usual regarding investments in the markets when questioned by the Energy and Climate Change Committee on Wednesday.
Despite the assurances, there is still a high degree of uncertainty over what a post Brexit energy landscape will look like. With aging infrastructure and tight capacity margins there is a very real possibility of volatile pricing, particularly if Brexit leads to any delay in new investments.
While the energy markets are yet to really react to Brexit, as negotiations start there is bound to be an effect on prices. Therefore, never has it been more important to take control of your energy usage and spend. It is vital that the right tools, such as energy management and reduction controls and a procurement strategy, are in place to minimise and take advantage of any volatility that Brexit will bring.