UK Will Be Vulnerable Outside of the EU’s Energy Market

Britain’s divorce from the EU is less than 18 months away yet the arguments become more fractious and uncertainties over trading relationships seem no nearer to resolution. Among the big unknowns is what fate lies in store for the UK’s energy market and its relationship with Europe.

Trade talks have yet to start as wrangles persist over the bill for a divorce settlement and what will happen to the Irish border. Yet there are so many other urgent questions, among them how, post-Brexit, the UK will sit within the EU’s internal energy market (IEM).

So where is the country at the moment? Seemingly in a limbo that nobody wants.

“We really don’t know,” says James Court, head of Policy at the UK Renewable Energy Association, wearily. “It’s difficult even to speculate.”

What is known is that most power companies want the current tariff-free harmonized trading arrangements on gas and electricity between the UK and the EU to continue post-Brexit.

How that will work is up in the air. The government’s current position is that the UK will leave the Single Market on leaving the EU and, therefore, quit the IEM.

“The UK will therefore need to develop its own regulations and network codes in line with future EU rules if harmonized trading arrangements are to be maintained,” Simon Virley, UK Head of Power and Utilities at management consultants KPMG, told Renewable Energy World.

He doesn’t think tariff-free trading would mean signing up to all future EU energy and climate rules; and different parts of energy sector would have different Brexit exposures. But it would mean the UK seeking to maintain membership of key regulatory and industry bodies such as the Agency for the Cooperation of Energy Regulators (ACER) and European Transmission System Operators (ENTSO).

So much for the UK having been a leading architect of IEM. If excluded, post-Brexit, lower wholesale prices and increased diversity/security of supply could be at risk. Almost everyone in the industry fears the alternative: cumbersome, protracted bilateral deals with each neighbouring country, governing each gas and electricity interconnector.

The UK’s membership of IEM matters particularly for Ireland; an EU member state, Ireland is heavily dependent on the free flow of gas and electricity through the GB market. Yet the Irish question — what sort of a border will there by between Ulster and the Republic — continues to be an impasse holding up any move towards trade talks.

Europe, meanwhile, is forging ahead towards an energy union that aspires to ‘ambitious, reliable, transparent, democratic’ and to ensure that the 2030 climate and energy targets are achieved.

Last year, the EU Parliament passed a resolution advocating various measures to make the market “fit for a growing share of renewables and active consumers.” It emphasizes regional cooperation and calls for integration of renewable energy sources into the market while phasing out support for mature renewables. Will the UK be left behind?

Another big question is whether the drive for greater interconnection between the GB and EU markets continues once Britain is out of the EU. The commercial incentives for greater interconnection remain, but will the political imperative remain?

It’s been estimated that exclusion from the IEM could mean an increased energy system investment cost of £500 million per year for the UK; that the costs of interconnector development will rise after access is lost to EU funding.

The UK has an estimated 4,000 MW of interconnection capacity. This is set to double by 2021. According to a report by Imperial College, London’s Grantham Institute, the projects to make that happen are unlikely to be hindered by Brexit. But beyond that, several gigawatts of connection is planned up to 2030, to reach a target 20,000 MW interconnector capacity. Investment in this could be affected by whatever future role the UK has in the IEM — if any.

“UK policymakers should provide a clear long-term energy strategy and commit to interconnector mechanisms currently in place,” Jonathan Bosch, author of the Imperial College report, said. “It should pursue barrier-free access to the IEM and preserve the benefits of harmonization with the European energy market, implementing EU energy packages, network codes and market design.”

One thing’s for sure: investors will be weighing up a long list of factors in making future decisions. The trouble is there’s precious little detail for them to go on. The sooner the UK can fashion an agreement, the better it will be for consumers and investors alike. 

Lead image credit: depositphotos.com

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