Balance of power: How Brexit would affect the UK energy sector  

In under a week, UK voters will decide the fate of the country in a referendum over Britain’s continuing membership of the European Union (EU). Grantham Research Associate Dr Sheridan Few explores some potential implications of exiting the EU for the UK energy sector.

Issues such as the economy and immigration are key battle grounds for EU referendum campaigners, but UK voters’ final decision will have far reaching implications for many aspects of our lives – including our energy supply.

Currently, the UK energy system relies heavily on neighbouring countries. With the decline of North Sea oil and gas, the UK imports a growing percentage of its energy (as outlined in this succinct report on Brexit and Energy by the UCL European Institute). Half of our gas comes from abroad, (albeit mostly from Norway, outside of the EU); two thirds of which is transported through pipelines connecting to EU/European Economic Area countries. Electricity imports current supply about 6.5% of UK consumption, although several new physical connections with mainland Europe are underway.

I mulled these facts over on my way to an event on how a vote to leave the EU would affect the UK energy, hosted by international law firm Eversheds. Whilst not an expert on the EU context, my feeling was that the major challenges we face today, from immigration to climate change, are global in nature. As such, it makes sense to me that we should approach these problems in a joined up manner. Adding to this, our normally packed office would be a pretty lonely place if only those with a British passport were to remain (as indeed would my flat, grocery store, and yoga class), and I believe in the benefits, vibrancy and potential for great research that a multicultural society enables.

Keeping the UK powered up

Kicking off the discussion, Lord Deben, chairman of the UK’s Committee on Climate Change (CCC), and former Secretary of State for the Environment, gave an impassioned speech about why Brexit would be damaging both for the UK energy sector, and for the UK as a whole.

His argument centered on the fact that, regardless of EU membership, the UK will remain reliant on the EU both for the import of energy, and trade in other goods. Leaving the union, he says, will only mean that it loses powers of negotiation at the EU level. A ‘leave’ vote could require rapid re-negotiations that see the UK forced to agree to paying a very high price to access the EU’s internal energy market. The UK National Grid estimates that being excluded from this internal market could cost UK consumers around £500m a year during the 2020s.

The need for more interconnections between the UK and the rest of Europe in order for the UK to “keep the lights on” was a recurring theme.  These physical links allow the transfer of electricity across borders. Panelists at the event agreed that new interconnections already planned between the UK and the rest of Europe would go ahead. A Brexit, however, would put the UK on a weaker footing in price negotiations, and in shaping future plans.

Future and existing interconnections could play an important role in providing the flexibility to allow an affordable energy system with a higher penetration of renewables (see, for example this CCC report and this paper by Imperial researchers).

Lord Deben also made the point that since the UK is an island just 22 miles off mainland Europe, the idea that we share interests with our continental neighbours is a “fact of life”, and cited improving air quality and achieving cleaner beaches as examples of challenges that EU nations could better address together.

Renewables at risk

Shifting energy production from the combustion of fossil fuels to low-carbon mix of renewables, nuclear and bioenergy  will require a range of supportive and stable national policies. Subsidies for renewable energy could however be vulnerable in a post-Brexit budget reshuffle, further denting the confidence of investors and harming the success of the renewables industry.

Furthermore, the EU has played an instrumental role in demonstrating that there is a stable market for renewables, attracting a range of investors from utility companies to more risk averse investors, such as large pension funds.

Stepping up to global challenges

A ‘leave’ vote could also compromise the UK’s influence on the global stage. From the panel, Kirsty Hamilton (of the low carbon finance group at Chatham House) emphasised that we are currently at a critical point in managing the energy transition, following the signing of the Paris Agreement, and ought to be fully participating in the important discussions surrounding this. Lord Deben drew on his diplomatic experience to echo these concerns, stating that the substance of most important world decisions are typically made by key players such as the EU and the United States, whilst smaller countries tend to make relatively modest contributions at a later stage.

It seems to me that with the rise of economies such as China and India, and the increasing influence of groups of small island states in negotiations like those at UN climate change talks in Paris last December, having a voice within a large group will only become more important in future global negotiations.

Whilst the UK would technically still be bound by its own Climate Change Act following Brexit, parliament could repeal this act, and the wind would be in the sails of those who, Lord Deben suggests, would seek to do so. Certainly an atmosphere of uncertainty surrounding climate and energy policy would make it challenging to meet the tough demands set out in the Paris agreement.

But also, he claimed, it is no coincidence that almost all of the lead figures in the Brexit campaign are nonbelievers in climate change. He implied that Brexit campaign leaders belong to a brand of conservatism which does not like to engage with large scale long term planning, and prefers to believe that large changes, such as those required in order to meet the challenge of climate change as set out in the Paris agreement, should not and will not happen.

Looking for positives

Even by the end of a long evening of discussion, the panelists struggled to identify positive outcomes of Brexit for the UK energy sector. The closest they got were a few specific issues that might not be adversely affected by a split. New interconnections would probably still go ahead (albeit probably at higher cost to the UK), the Climate Change Act might survive, and perhaps OfGem and Ireland could inspire sufficient confidence for continued investment in the UK energy sector.

Whilst I wasn’t surprised that the panel tended to conclude that Brexit would be likely to have negative implications for the UK energy sector, there was amazing unanimity among both panellists and attendees.

It is clearly difficult to fully assess the impact of Brexit without a clearer vision of what the relationship between the UK and the EU would look like post-Brexit. However, none of the models set out by Eversheds for how a post-Brexit relationship with the EU might be structured appear likely to reduce the environmental impact, increase affordability or even enhance the UK’s power to determine the structure of our energy system.

So as you’re making your mind up which way to vote on 23 June, bear in mind the importance of acting together to tackle grand global challenges, the important role the UK within the EU has played in this so far, and what more we could achieve by continuing to work together.

Find out more

For more information on the implications of EU membership for the UK energy sector, see this Energy Futures Lab blog post by Dr. Robert Gross, Director of the Centre for Energy Policy and Technology.