In June, the UK electorate voted to leave the European Union (EU). Now, the question is: will the UK’s departure be a “Soft Brexit” or a “Hard Brexit” and what will be the impact for the renewables industry?
Soft Brexit would see the UK being granted access to the EU’s single market, likely by joining the European Economic Area (EEA). Members of the EEA accept certain laws of the EU, including in relation to renewables targets, in return for access to the single market.
If a Soft Brexit is not possible, the UK faces the possibility of a Hard Brexit (also called a “full divorce”) in which it no longer has automatic access to the single market.
Which option the UK takes has implications for renewables in the UK, Europe and globally.
Soft Brexit: Business as Usual?
A Soft Brexit will mean a continuation of current trends. EU/EEA renewables targets are legally binding in a way that pan-global climate change treaties like the Kyoto Protocol and the Paris Agreement are not. The most important EU law in this area is the EU Renewable Energy Directive, obliging the UK to source 15 percent of its energy requirements from renewables by 2020.
Any deal that retains these targets will require the UK to retain existing domestic renewables policies and subsidy regimes. However, prior to Brexit we had already seen substantial change in this area, including an abandonment of the renewable obligation certificate scheme, paring back of feed-in tariffs and a move to more market-oriented bilateral contracts for difference between generators and the Low Carbon Contracts Company (a UK government-owned company).
Or a Whole New Re-think?
A Hard Brexit could see further change. The 15 percent target will fall away, EU state aid rules (which impose restrictions on domestic subsidies) would cease to apply, and the UK may no longer be a party to the EU Emissions Trading Scheme. The UK would have full direction over its regulatory regime and support schemes, potentially offering an opportunity to re-design the current system.
However, any changes will take time. Until the UK ceases to be an EU member state, EU law continues to apply in the UK. Formal divorce is expected to be several years away. The exact date will depend in part on when the UK government exercises its “Article 50 trigger” under the relevant EU treaty, upon which a two-year time frame to conclude divorce negotiations commences.
Further, UK domestic policy in many respects mirrors the EU position and will continue to apply. The UK Climate Change Act 2008 requires the UK to cut its carbon emissions by 80 percent of 1990 levels by 2050 and to set five-yearly carbon budgets. So an underlying incentive for renewable projects will remain for as long as the UK government maintains this domestic policy.
Given the upheaval in domestic politics following the Brexit vote, and the substantial task involved in negotiating the best exit terms possible, domestic renewables reform may be low the to-do list. However, one of the first post-Brexit administrative changes made by incoming Prime Minister Theresa May has been to fold the Department of Energy and Climate Change into the Department of Industry, Business and Skills establishing the Department for Business, Energy and Industrial Strategy; a move potentially signalling a shift away from renewables support.
Will Funding Continue?
The UK is a substantial beneficiary of funds into renewable energy from the European Investment Bank (EIB). Although the EIB has a mandate outside the EU, and the UK will likely remain a member post-Brexit, the EIB will likely have less political will to lend significantly to UK projects.
The EU also provides funding to what are known as projects of common interest. A Hard Brexit will see this source of funding stop. Even before any Hard Brexit, existing projects might see themselves reclassified as no longer qualifying.
What Does Industry Think?
Concerns are being voiced by industry. Germany’s Siemens, one of the world’s largest wind turbine makers, announced that uncertainty triggered by Brexit may adversely affect long-term plans to export turbine blades from its new factory in Hull. With investment in the UK now seen as riskier and more expensive, there could be an increase in project cancellations, particularly given uncertainty around new import taxes and trade barriers.
On the other hand, some of the EU’s largest renewables players have sought to downplay concerns; Denmark’s Dong Energy, the single biggest investor in UK offshore wind, has been actively reassuring investors that the UK subsidies it receives are based on private law contracts with the UK government that won’t change. Amber Rudd, the UK’s Energy Secretary at the time of the Brexit vote, emphasised that the UK’s commitment to climate change would continue with annual support for renewables expected to double to more than £10 billion.
Effects in Europe and Beyond
The effects of a Hard Brexit on the renewables sector may not be solely confined to the UK. The following are possible repercussions from a Hard Brexit that could be felt in Europe and beyond:
- The UK’s integration with the wider European electricity grid relies on electricity interconnectors with continental Europe. These are regulated under EU-wide rules and many receive EU funding as projects of common interest. A Hard Brexit will put this funding (and potentially projects) at risk and will require the UK to renegotiate regulations governing interconnectors. If future interconnector projects are delayed or do not proceed, security of supply concerns may see a need for additional generation capacity, potentially providing opportunities for solar and wind projects on either side of the English Channel.
- The UK’s share of the EU-wide 2020 renewables target (20 percent of generation from renewable sources by 2020) means that a Hard Brexit would have the “burden sharing” targets of the remaining EU countries shifted upwards.
- The UK imports much of its renewables technologies from continental European companies. Hard Brexit could lead to mounting costs and reduced exports from Europe to the UK, and US, Chinese and other exporters may see a larger share of the UK market gifted their way.
It is too early to say with certainty what the consequences of Brexit will be for the renewables sector. More will become apparent during the negotiations between the UK and the remainder of the EU over the terms of the UK’s exit. But whether UK trade negotiators secure a Soft Brexit, rather than a Hard Brexit, will do much to alleviate concerns felt by industry.