Related Articles
Free access
Forward article link
Share PDF with colleagues

Brexit leaves certainty of uncertainty

No one in the UK’s Leave camp had a real energy plan. So what now?

IN THE energy sector, political decisions can affect companies and nations for de­cades. So they usually involve meticulous evaluation and due diligence. Yet the UK's vote to leave the EU on 23 June has taken the energy sector off-guard. Not that ener­gy was ignored during the campaigning - the UK Independence Party (Ukip) took a courageous stand to defend British toasters and kettles, while the Secretary of State for Energy, Amber Rudd (in the Remain camp) and her pro-Leave junior minister, Andrea Leadsom, exchanged blows in the media. But in a campaign characterised by the Leave campaign's dismissal of "experts", it quickly became clear that complex-but-im­portant energy matters were not much in mind. Neither policymakers nor industry leaders seriously contemplated what would happen in case of Brexit.

Had they peered into crystal balls or fish guts - more reliable, probably, than the populist sloganeering of Ukip leader Nigel Farage - they might have seen the hazards in store. Separating the world's fifth-largest economy from the world's largest economic bloc will require a herculean effort, involving the renegotiation of dozens of internation­al treaties and the purging of national laws from European ones. This opens a period of political, regulatory and commercial un­certainty. And as is already plain, it will have an immediate impact on the economy and energy in particular. Who wants to invest in a country where most trade agreements are soon to be obsolete and hundreds of laws and regulations need to be rewritten - es­pecially its energy sector, where the capital figures are usually counted in the hundreds of millions of dollars?

Calculating risk

Among the first out­comes of Brexit will be the freezing of many infrastructure projects and an increase in the capital costs for the rest as investors ask for higher returns to compensate higher risks. This is especially bad news for the UK's utility sector: all British coal plants and all nuclear plants but one are scheduled to be shut down during the next 10 years. The in­terconnectors linking the UK with France and the Netherlands - allowing the UK to import electricity and stabilise its grid - al­ready operate close to maximum. To keep the lights on, the UK needs to invest be­tween £14bn-19bn ($19bn-25bn) annually over the next five years: daunting before the vote, nigh-on impossible after it.

The fallout won't be limited to the UK electricity market. Four European utilities - Eon, RWE, EDF and Iberdrola - are among the six biggest electricity producers in the UK. They've already suffered heavy losses thanks to the post-vote plunge in sterling's value. Even for European utilities with limit­ed exposure to the UK, Brexit will have stra­tegic repercussions. Among many other im­pacts, Brexit has probably killed off the plan to build a nuclear reactor at Hinkley Point C, jeopardising both the UK's energy strat­egy and the French government's efforts to salvage its nuclear industry.

Beyond electricity, the oil and gas sector is somewhat sheltered because the UK's in­frastructure is mature and in place. But the shift in gas trading from London to Amster­dam will probably accelerate. A new inde­pendence referendum in Scotland - where the majority voted to remain, and the gov­ernment has pledged to keep the nation in the EU - brings huge new uncertainties to an offshore sector already battered by the weak oil price.

And, of course, Brexit will also hinder European cooperation. Will the UK remain part of the internal energy market? No one knows - the question doesn't seem to have occurred to the Leave camp. In any case, the UK may now lose access to EU bod­ies and mechanisms such as the European Networks of Transmission System Opera­tors for Electricity and Gas, the Agency for the Cooperation of Energy Regulators, and the Emissions Trading System. On that last point, the EU's carbon market is already a casualty of Brexit: carbon credits crashed by around 20% after the vote.

EU energy policymaking will now be frozen as resources are absorbed in months of complex negotiations. Should Europe persist with the Energy Union - central to its climate strategy - the balance of power within the EU will now shift. Positions long advocated by the UK, which helped shape EU policy, like deeper liberalisation and stiffer climate protection, will lose traction. Nuclear energy and unconventional hydro­carbons will lose a key proponent. Pro-coal central Europe will see its relative weight grow. For EU energy policy as for the UK's, Brexit is a leap in the dark.

The irony of this grim future is that a well-planned and swift exit from the EU could have had little impact on the energy sector. The bloc has strong energy relations with many non-EU members. Unlike ag­riculture or clothing, energy is unlikely to face climbing tariffs: the EU does not tax electricity, oil, gas and coal imports. While many related goods, from wind turbines to liquefied propane, are subject to tariffs, duties are usually low and could be avoided if the UK signed up to the European Eco­nomic Area (like Norway) or Swiss-style bilateral agreements.

So a major problem is not Brexit per se, it is the unknown and probably messy path that will lead to it. Before stable relations are reestablished with the continent, the UK faces years of political unrest, regulatory instability, cut-throat negotiations and con­stitutional dissolution. The days following the referendum suggest the divorce will be long and acrimonious, but it may not be too late to organise a swift separation followed by a reconciliation. For the energy sector, this would be the only way to mitigate the looming crisis.

Also in this section
US oil sanctions on Venezuela would escalate crisis
21 July 2017
As Donald Trump threatens to introduce measures against the South American nation's exports, the outcome could be ruinous for all concerned
Nigeria looking up
17 July 2017
Long-awaited legislative progress, peace in the Delta and some astute political management are creating optimism in the country's energy sector
Iraq starts to get grip on security
12 July 2017
Career diplomat Sir Jeremy Greenstock, now chairman of London-based Gatehouse Advisory Partners and of Lambert Energy Advisory, is optimistic about Iraq's future