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?
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.