July 6, 2016

Leave Vote Makes UK's Transition to Clean Energy Harder, Say Experts

Analysts say Brexit will create uncertainty for energy sector, which could hit £20bn investment a year needed to replace ageing, dirty power plants

The UK’s challenge to build a clean, secure and affordable energy system has become significantly harder amid the political and economic turmoil following the nation’s vote to leave the European Union.

Higher customer bills and delayed or cancelled projects are expected by experts, the most pessimistic of whom warn of the lights going out. The optimists argue that the global rush towards clean energy and strong domestic UK climate change targets can keep the transition to clean, green energy moving forward.

However, the leading Brexiters, such as climate change doubter and likely next prime minister Boris Johnson, will play a critical role. If the deal they negotiate with the EU means close ties - and crucially access, like Norway, to Europe’s internal energy market (IEM) - the long-term dent to the UK’s energy prospects may be reduced. But a more decisive break with the world’s biggest single market would leave the UK out in the cold.

With ageing, dirty power plants closing down, the UK needs to invest about £20bn a year between now and 2020, according to the National Infrastructure Commission, making up 60% of all infrastructure spending. Energy really matters, powering the economy both literally and financially. But the political risks have spiked after the Brexit vote, as have the financial risks and uncertainty about access to markets.

National Grid has issued a warning that energy bills would rise and energy security would fall if, like Switzerland, the UK was excluded from Europe’s IEM.

“It is vital the UK retains access to the IEM, which provides stability for energy companies and helps keep household bills down,” said a spokeswoman. “UK energy security depends on gas and electricity from the IEM and it is essential therefore that we take no risks with that. The issue of energy needs to be treated with the highest importance by the government as the negotiations on Britain’s exit begin.”

SSE, one of the UK’s big six energy companies, agreed. “The UK government should be mindful of the importance the harmonisation of the [UK] energy market with the countries in Europe can have on efforts to deliver clean, secure and affordable energy. Collaboration with other European countries on energy matters is important for UK consumers,” it said in a statement.

The costs of reduced collaboration could be high, according to research by Vivid Economics, published ahead of the vote: “The potential impacts resulting from exclusion from the IEM could be up to £500m per year by the early 2020s.” The analysts said further costs would come from investors demanding higher returns as the risks to projects rise.

“Given the scale of planned investment, even a moderate change of [0.5%] to the cost of financing, sustained for multiple years, would raise costs significantly, possibly in the order of hundreds of millions of pounds,” the research stated. “Further upwards pressure on costs would result from the likely devaluation of the pound, given the role imported goods and services play in UK energy supply.”

Before the referendum, energy and climate change secretary Amber Rudd warned of an “electric shock” from Brexit, citing the Vivid report. The boss of Centrica, which owns British Gas, agreed: “The probability is that our customers in the UK will see higher energy costs [with an exit].”

The political uncertainty now present is starkly illustrated by the diametrically opposed views of Rudd’s deputy minister, Andrea Leadsom. Brexit was a “superb result” for the UK, she said. Leadsom said freedom from EU laws on state aid would benefit UK bill payers, though how looser rules on subsidies would achieve that is unclear. Michael Gove, another leading Brexiter, said the 5% VAT charged on energy could be cut.

However, virtually all energy industry observers have a negative outlook for the UK’s post-EU energy system. Prof Paul Younger, at the University of Glasgow, said the vote to leave “blasts a hole” in the embryonic EU energy union, which would provide a huge market for the UK’s large offshore wind and tidal resources, as well as smooth out the intermittency of rising renewable energy.

“That will inevitably damage investor confidence [and] at very least result in delays and project cost inflation, and in many cases could lead to cancellation of mooted developments,” he said. “We’ve introduced a severe new source of turbulence and confusion just when … we were already fearing severe problems of grid control in coming winters. As a friend quipped: at least there will be no need to ask the last person to leave the UK to switch the lights out – that will already have happened.”

Nina Skorupska, at the Renewable Energy Association, said: “The result raises serious questions. Energy policy must be a priority for the government now, with industry needing reassurance and clarity on priorities. The first must be confirmation of the 5th carbon budget, which will hopefully give some confidence in the long-term direction of UK energy policy.” Under UK law, the government has until Thursday to accept or reject the latest carbon-cutting proposals from its own climate advisers.

The chancellor George Osborne warned on Monday that the impact of the Brexit vote was already being felt: “It is already evident that some firms are continuing to pause their decisions to invest.” A survey of its members by the business group the Institute of Directors found one in five were considering moving some UK operations abroad.

The flight risk is particularly high for the energy sector, in which many major players are foreign companies. The most high-profile is French company EDF, which wants to build a huge, heavily subsidised and highly controversial nuclear power plant at Hinkley Point in Somerset.

The plant is an important part of the UK government’s plan to keep the lights on and emissions down, but is at high risk from a change of leadership, said energy analyst Nick Butler: “Osborne has been a powerful supporter of new nuclear. He has tolerated both a sharp rise in costs, even at a time when the price of every other form of energy has been falling, and successive delays that leave the project years behind schedule and billions of pounds over budget. On the assumption that he joins David Cameron in retiring in three months time, his successor may take a tougher line and pursue different options.”

Jonathan Grant, director at consultants PwC, said: “Many supporters of Brexit [are] also opposed to climate policies such as carbon taxes and efficiency standards.”

EDF claims Brexit does not affect their plans, but other big clean energy players have expressed worries. “We still want to grow in the UK, particularly in wind power, but clearly a significant change like an exit from the EU introduces more risk to the sector for an unforeseen period of time,” said a spokesman for Vattenfall. SSE said political risk had risen.

“Business really hates uncertainty,” said Nick Molho, at the Aldersgate Group. But he said the global surge in clean energy and action on climate change provided very strong reasons for the UK follow suit, even from outside the EU.

“In 2015, the international market for low-carbon goods and services was already worth $5.5tn and this has continued to grow since the successful climate change summit in Paris in December,” he said. “It is in the UK’s interest to continue growing its low-carbon economy, a sector that was worth over £46bn in 2014 and was already employing over 238,000 people directly. The low-carbon economy may fare better [than others] if the government commits to its own targets - the UK is a pretty big market.”

Jonathan Gaventa, from thinktank E3G, said that legal EU targets for renewable energy for 2020 had been a major catalyst for investment, but that the bloc’s 2030 target is not nationally binding: “So current UK renewable energy investment is driven by the underlying need for clean energy in the UK. This need does not change.”

Prof Rob Gross, at Imperial College London, said one thing was certain: “What seems incontrovertible is that in the energy arena, as in so many parts of the economy which are exposed to external trade, victory for Leave creates uncertainty, risks instability, weakens the UK’s negotiating position and, at least in the short term, discourages investment.”

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