The unexpected Brexit result has opened up a period of great uncertainty as politicians grapple with the election of a new party leader and the associated decision of when to trigger Article 50 of the Lisbon Treaty, which officially commences the two-year period of negotiations to an exit from the EU.
While these decisions impact the economy as a whole, what specific energy and climate change policy changes can be expected? Electricity Market Reform is the UK’s central piece of policy to address the trilemma of: security of supply, minimising the cost of electricity, and decarbonisation. It has two main support mechanisms: the capacity market supports fossil fuel generation and Contracts for Difference supports renewables. However, added to this, the UK relies heavily on overseas investment, the most obvious example being the planned nuclear generation plant at Hinkley Point, which is based on investment from both France and China. While negotiations are being conducted with the EU and a period of uncertainty persists, a delay of crucial investment decisions can be expected.The UK independently chose to phase out coal-fired power stations by 2025 so is unlikely to backtrack in order to allow longer lifetimes to ageing coal-fired plants when it exits the EU. There is also speculation that the adherence to planned closures of coal-fired plants could in any case be a condition set by the EU as part of a negotiated exit agreement.
A number of energy-related policy areas were due for reassessment ahead of the EU referendum and decisions on these will now need to be made under different political conditions. One of these areas is low-carbon heat, which provides huge opportunity for emissions reductions. Clearer direction was also being demanded for renewable power, investors in which have been discouraged since cuts were made to subsidies by the UK government last year. It is not yet clear how much independence the UK would have over the implementation of new subsidies, which would still be subject to State Aid rules if the UK remains part of the European Economic Area.
Prior to the EU referendum, energy secretary Amber Rudd estimated that leaving the EU would see energy costs rise by around £500 million a year and warned of the possible breakup of the internal energy market. However, in reality, the EU’s internal energy market is expected to continue due to the high level of interconnectivity between the UK and the Continent, as well as the fact that the UK is a large market for energy and is due to double its imports from the Continent over the next five years. We don’t yet know what the terms of energy imports will be and whether import tariffs would be applied, which would push prices up in the UK. While a weaker pound continues, this will also contribute to higher import costs.
In terms of gas imports, the UK has a number of long-term gas deals in place and deliveries of LNG, which originate from countries such as Qatar, are expected to increase in the future. In addition, although shale gas is being banned in many parts of Europe, the UK has put legislation in place to ease the progress of developing sites for fracking in the UK.
The Brexit vote has created uncertainty for the EU Emissions Trading System (EU ETS) as the associated carbon allowances are heavily traded in London and the UK contributes greatly to the design of the mechanism. Disengagement from the carbon market will need to be handled carefully to prevent an oversupply of allowances to the market. Once there is clarity in this area, an exit from the EU ETS can be expected to reduce the carbon cost of power generation, although it is not yet known where the government will set the UK’s carbon price floor, which is due to review in the autumn.
It is being speculated that the issue of climate change, which does not recognise national boundaries, will take second place to energy security and energy cost over the immediate phase of negotiation. However, the UK’s climate change target of a 50% reduction by 2025 is set in UK legislation under the Climate Change Act 2008, independently of EU legislation. If the government adopts the proposed fifth carbon budget, it would demonstrate its commitment to emissions reduction.
Any changes to compliance requirements under the UK’s environmental policy will not come about quickly and there are likely to be months of uncertainty as the government establishes its relationship with the EU and unravels its environment policies from EU policies. A full consultation was due to be issued this summer on a replacement scheme to the CRC Energy Efficiency Scheme and it was planned that The Energy Savings and Opportunities Scheme (ESOS), the UK’s implementation of the EU Energy Efficiency Directive, was to be central to this. As ESOS has been transposed into UK law, it is reasonable to expect this could continue.
Concerns are that the Paris Accord, signed by France in recent weeks, could be in jeopardy unless the UK signs quickly as it could require a recalibration and, therefore, a delay. The EU’s emission reduction commitment, made ahead of the Paris Agreement, is made up of a basket of commitments from each member state of which the UK makes up a strong element.
Before there can be any certainties about the direction for energy and climate change policies, political uncertainties will need to be addressed and a timetable for a negotiated EU exit established. Indications are that article 50 is unlikely to be invoked until towards the end of this year and, as such, it will be some time until we learn of the direction energy and environmental policy will take.