Brexit Energy: What to Expect for Your Business Energy
The countdown to Brexit has begun – how will the UK’s departure from the EU affect your business energy costs?
Businesses and individuals across the UK depend on having a reliable and affordable supply of energy, but how will the provision of this essential resource be impacted by Brexit?
A House of Lords committee has warned that the UK could face a post-Brexit energy shortage as well as hikes to household gas and electricity bills as well as business energy costs.
According to the committee, Brexit will cause energy trading to become less efficient, diminish Britain’s influence on energy rules, and cast uncertainty over future European investment in UK energy infrastructure. The result is a significant impact on energy prices for both households and businesses.
Over the last few years, the UK has become increasingly reliant on energy imports. Currently, around 40% of the UK’s gas supply comes from Norwegian and other European pipelines, and about 5-6% of the country’s electricity comes from France, Holland and Ireland. In the past, this reliance hasn’t posed a problem due to the frictionless, harmonised trade in energy with European partners. Post-Brexit, however, trading outside of the EU will likely be less efficient than trading inside it, causing consumers to pay more for a less reliable energy supply.
Post-Brexit Rise in UK Energy Bills
Recent insights provided by Green Alliance have underscored the importance of fostering channels of co-operation between the EU and UK on energy and climate policy in the post-Brexit landscape. With a focus on achieving the best possible outcomes, Green Alliance has uncovered some potential risk areas associated with failed collaboration going forward which could result in escalating UK energy costs.
UK foreign gas dependency stands to rise to 42% and its long-term gas security stands to be seen in the face of extra-EU operations. Electricity interconnection with Europe brings down energy costs. This currently provides 7% of the UK’s energy. Continued influence of bodies such as the Agency for the Co-Operation of Energy Regulators and the Energy Transmission System Operators for gas and electricity – together with additional collaborative efforts surrounding sharing regulation, efficiency, and renewable energy targets – could bring more than £1 billion in energy savings to UK consumers beyond 2021.
Offshore wind (and renewable energy in general) – until now, a UK success story – is another sector facing potential threats to growth. Off the back of uncertainty over favourable finance terms from the European Investment Bank on leaving the EU, further growth in this industry is uncertain as loans are less likely to be given as freely. As such, it is fundamental that the UK negotiate its position with the EIB and other European investment bodies for sustained growth.
In addition to this, there is further uncertainty surrounding energy efforts geared towards 2030. Firstly, more than half the UK’s emissions targets to 2030 have been expected to be achieved through EU-derived legislation. This raises some very serious questions on applicable regulatory structures and governance going forward. The UK’s 2030 nuclear plans also stand to be unhinged in the wake of their exit from Eurotom.
In achieving positive outcomes, it has been proposed that the UK negotiates with the EU to achieve the objectives of the Paris Agreement and the EU energy union which will, in turn, lay the foundations for ongoing collaboration on energy and climate policy. Moreover, it is recommended that the UK continues to participate in the EU’s internal energy and gas markets.
Solidarity principle no more
Pre-Brexit, the UK has worked in partnership with the EU and the other Member States to make cross-border trade in energy easier and cheaper. However, it remains unclear how this can be achieved when the UK leaves the single market along with the Internal Energy Market (IEM) the other bodies charged with developing and implementing the EU’s energy policy.
After March 2019, the UK will leave the EU’s single market solidarity principle for gas, an agreement which implies that if one country were to experience a problem with energy supply, member states would be obliged to help each other maintain supplies.
Being outside the EU means that the UK may be more vulnerable to supply shortages in the event of extreme weather or unplanned generation outages in the subsea pipelines or electrical interconnectors linking the UK to other EU countries.
Whatever the final detail of the EU exit terms, the UK is likely to be more peripheral to EU energy markets, which will mean higher prices and more unreliable supply for consumers.
Hard Brexit UK Means a Hard-Hitting Impact for UK Energy Market
The uncertainty around the UK remaining in the European Emission Trading System is affecting the provision of the nation’s energy.
Energy UK is a trade body that represents over 100 energy-related businesses. Last week, the organisation appealed for the government to deliver ‘close alignment’ with the EU framework. They recommend that the country continues to participate in the European Union’s Internal Energy Market (IEM).
Uncertainty around Brexit UK is already affecting the day-to-day business of energy companies.
Energy UK say that there is a risk that a Hard Brexit will disrupt the industry and could cause higher costs per energy consumers. At the moment, thanks to market coupling and balancing services across borders, energy is traded openly across Europe. This integrated system helps to an equilibrium between supply and demand.
The CEO of Energy UK, Lawrence Slade, recently published a blog post warning that industry players are becoming increasingly frustrated about the lack of progress in Brexit UK negotiations.
Slade wrote: “Little new information has emerged from this June Council, however, on what the future holds or when the withdrawal negotiations might conclude and provide us with the clarity we desperately need on the future framework.”
The government is due to publish a white paper which will contain details of the proposals to be used for negotiations with the rest of Europe.
“We hope the upcoming White Paper will answer some questions. This opacity around what the future framework looks like and when it would begin has already started to impact the energy sector. In the energy world, operators have to plan in advance, because the delivery of energy into people’s homes and businesses is not a straightforward matter,” Slade said.
In his post, Slade mentioned three Brexit-related impacts for energy firms. These are:
- Uncertainty about the future of UK involvement in the EU emissions trading system (EU ETS).
- Uncertainty about UK participation in the European Internal Energy Market (IEM).
- Uncertainty about UK compliance with the EU Clean Energy Package.
Why the cause for concern?
- Lack of clarity on the ETS, IEM, clean energy regulations, and nuclear regulation could have a major impact on investor confidence.
- Energy suppliers buy their energy far in advance to limit their customers’ exposure to market volatility. This means that uncertainty over supply means uncertainty over pricing.
- The EU ETS has proven to be the most cost-efficient way to incentivise emission reduction investments. Deciding to leave the EU ETS would create a big policy gap.
- Quitting the IEM would make it more difficult to optimise load share and trade of power across Europe, likely leading to higher energy costs.
What does Energy UK recommend?
Slade concluded: “From the energy sector’s point of view, the European energy market as it is now and where it is heading is fully compatible with our vision and the trajectory we are on. The best way to get where we want to be is to stay in a framework that has delivered and that we have helped shape and continue to influence. While some aspects of this market can be more challenging than others, Energy UK believes that the benefits of remaining part of the IEM strongly outweigh the disadvantages which risks jeopardising all the work that has been done and that lies ahead.”
Thus far, officials and ministers have signalled that are in agreement with close EU alignment on climate and energy issues.
UPDATE – Energy UK respond to the white paper
Commenting on the publication of the Government’s Brexit White Paper, Slade said:
“It’s encouraging that the White Paper again makes it clear that the Government is looking to maintain broad cooperation over energy with the EU. Right across the energy industry there’s clear agreement that a close relationship with the EU has been mutually beneficial and that its continuation will deliver the best outcomes for customers and businesses.
“Access to a EU-wide market has helped keep bills down by enabling the most efficient use of energy resources – something that will become even more important in a world of variable generation. The EU Emission Trading System (ETS) has been crucial in the drive to decarbonise across the whole economy, something in which the UK energy sector has led the way.
“As an essential product for consumers, businesses and the UK economy, energy must be a priority in the ongoing negotiations with the EU. So, whilst we welcome the broad commitments, there is a lot of detailed work and discussions required in a short space of time to achieve these goals and provide the clarity urgently needed on issues such as participation in the internal energy market and the EU ETS – and the continuation of the Single Energy Market between Northern Ireland and Ireland. The opacity around policy has already been having a direct impact on the energy sector.
“As an industry, we are committed to working with Government and the EU to ensure the future relationship continues to deliver benefits to the UK’s customers and businesses.”
Brexit energy update – November 2018
According to an article in The Independent, Brexit has already added billions of pounds to the UK’s energy bills. Research by University College London suggests that leaving without a deal could cost the average UK household an extra £61 a year.
Gas and electricity prices have already increased since the 2016 referendum due to:
- the collapse in the pound’s value
- additional volatility in wholesale prices
In the year after the vote:
- households paid on average an extra £75 on gas and electricity
- there was an 18% rise in wholesale electricity prices
- There’s been a 6% hike in gas prices
Leaving without a deal could knock another 12% of the sterling’s value relative to the euro.
Brexit energy bill could be an extra £1.5bn by March 2020.
Get the best post-Brexit business energy deals
More than ever, with increasing prices of gas and electricity looming, businesses need to shop the market and compare business energy quotes to get the best deals. At Smarter Business, we know that time is a valuable resource for SMEs. We also know that the process of acquiring and comparing quotes can be confusing and time-consuming.
As an independent consultancy, we are here to help. We’ll do the hard work for you and help you do your business smarter, Brexit or none. Get in touch for a free quote: https://smarterbusiness.co.uk/