Since the UK’s decision to leave the European Union (EU) there have been fluctuations in financial and currency markets as traders address a wide range of uncertainties in a post-Brexit United Kingdom. While in the short-term, energy markets are facing higher import costs and strong export demand brought about by currency movements, the longer-term focus can move to assessing the potential impact on investment.
Uncertainty is inherent in negatively impacting on future investment plans. Financial backers seek assurances, guaranteed returns, and clear strategic direction before fronting up their cash.
This is something very few can offer in the current political and financial landscape.
Formal negotiations to leave the EU are expected to last two years. The UK must first serve official notice to the European Commission by enacting Article 50 of the Lisbon Treaty. It is unclear when Article 50 will be triggered, with the UK making clear they will only do so when ready. In the interim, trading relationships continue with the EU as normal and the UK Government has attempted to stress business as usual in regards energy policy.
The quicker than expected ascension of Theresa May to Prime Minister has served to calm some fears over prolonged political uncertainty. Future energy policy under her leadership is unclear at present with a cabinet reshuffle resulting in the closure of DECC, and the creation of a new Business, Energy and Industrial Strategy department, headed by Greg Clark. Green campaigners are concerned that decarbonisation could take a back seat with climate change being diluted at a cabinet level.
Government stresses stability
The UK government moved quickly to assure markets and investors, playing down any potential impact on energy policy, technology development and decarbonisation. “Absolutely none of this is threatened by the UK voting to leave the EU on June 23rd”, stressed Andrea Leadsom, who at the time was Energy Minister.
Former Energy Secretary Amber Rudd confirmed the UK was “fully committed” to tackling climate change. The UK will not “step back from international leadership” she said while highlighting the important role of the Climate Change Act. The recent Paris Agreement signed in December will help in delivering a worldwide effort to address global warming and its effects.
The European Federation of Energy Traders was confident of the “continued inclusion of the UK in the EU single energy market.” It also pledged to “continue promoting competition, transparency and open access in the UK energy sector.”
Investors can take confidence from the understanding that, for the time being at least, the status quo is maintained. Financial support already awarded to energy projects will remain in place, with the government likely to grandfather support ahead of any possible regulatory reforms following Brexit.
Impact on investments
The lead up to the vote saw the beginnings of a hiatus on investment. Energy projects slowed or were held back as developers awaited the outcome of the referendum vote. Now that the decision has been made, there will be a prolonged period of uncertainty over the UK’s future relationship with the EU as negotiations take place.
However, the need to attract investment in order to develop new energy infrastructure will not change after Brexit. Economic opportunities will remain for investors keen to take advantage of the need for decarbonisation, meeting energy emission targets and modernising the UK energy supply.
Current political and financial uncertainty will likely deter fresh investment in the short-term. Despite this, such challenges are manageable in the long term, although they do require careful planning, financial scrutiny, and clear direction.
The European Investment Bank (EIB) will continue to provide funding for projects until a decision is made by member states over the UK’s shareholding in the Bank. The UK has received 24% of the Bank’s funds since 2007 to drive renewable technology growth. The EIB does lend to non-EU members but the current level of support is unlikely to be retained.
The rising cost of imports as a result of the devalued sterling has already been cited by developers as a major factor in dialling back future energy plans. However, investors from outside Europe may see currency movements as an opportunity.
Increasing costs are likely to require stronger incentives from government to attract the required investment. This will drive up the costs of government support schemes such as Contracts for Difference. The Levy Control Framework (LCF) is already forecast to surpass its latest spending cap. The previous Chancellor, George Osborne, had already announced plans for a 15% reduction in Corporation tax to attract investors.
Many of the UK’s major energy infrastructure investors have moved to quickly outline their position post-Brexit.
EDF Energy has stressed Brexit is no barrier to progress at the new Hinkley Point C nuclear power plant and the company remained fully committed to the project. However, uncertainty continues over EDF’s financial health in the wake of escalating development costs. There are also concerns over the safety of the new reactor technology. A further drop in power price projections has led to a sharp increase in subsidy costs for the site after the government agreed to a strike price of £92.50/MWh. EDF confirmed the project had reached the stage for the board’s Final Investment Decision (FID), with the latest deadline now September. Doubts remain over the viability of the project without the assurances of an FID. This was the case before Brexit and is likely to remain so now, though newly appointed Chancellor Philip Hammond gave his backing to the project stating the UK “has to make sure the project goes ahead”.
Siemens announced it was progressing with investment plans for the UK after initially reporting it would pause activities until more clarity was available. However, the group’s CEO confirmed it was “here for the long term”, stressing the UK was “a good place to do business”. Siemens will go ahead with investment in a £310m wind turbine manufacturing centre in Hull, although currency movements may impact on long-term export plans. The move was a welcome boost for campaigners eager to showcase an optimistic and positive outlook for the UK outside of the European Union. The UK’s largest offshore wind investor, Dong Energy, also preached calm following the Brexit vote stating it “did not believe UK energy policy was dependent on EU membership.” The UK’s exit will also not halt plans to invest £6bn in wind farms by the end of the decade.
Drax, the owner of the largest renewable energy plant in the UK, imports wood pellets from the US. It confirmed it was unlikely to be affected by currency movements due to a long-term hedging strategy. The company has banked on current government policies backing subsidies to biomass generation and phasing out coal-fired power plant.
In April, UK Ministers backed plans for a further 9GW of interconnector capacity, up from the current 4GW provided by links with Ireland, France, and Netherlands. Five new interconnector projects were announced by Ofgem back in 2014, representing an investment of up to £6bn. The projects are in various stages of development and include 1GW links with France and Belgium, as well as subsea cables stretching to Denmark and Norway. This will grant the UK access to the hydro-power generation developed in Scandinavia. Brexit is unlikely to halt progress in developing mutually beneficial interconnection, seen as a key element to the EU’s overall energy strategy whether with EU or non-EU countries. The UK’s nature as a net importer and the price premium it holds over Europe is likely to be a strong enough incentive to continue development. However, given current uncertainty, the targeted connection dates of 2019-20 appear to be optimistic.
A manageable challenge
The UK energy sector has previously showcased its resilience in dealing with changing environments. Though the move to leave the EU has prompted fresh disruption and uncertainty in the financial and political landscape, given appropriate care, management and strategic development, the opportunities available to the UK both within Europe and the wider world can be secured. The required investment in energy infrastructure for the UK can be supported to address long-term challenges going forward.
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We’ll keep our blog updated with industry developments as they unfold and how they could affect you. If you have any energy or carbon queries relating to the impact of the referendum result, you can call us on 01527 511 757 or email us.