EU Referendum Result: Energy - UK Analysis

BREXIT ANALYSIS – PRESENTED BY EDELMAN

EU REFERENDUM

23 JUNE 2016

MMO O N NT HTH S S

DAYS DAYS

ENERGY – UK ANALYSIS The UK’s referendum result may spell a period of uncertainty for the energy sector but it would require a particularly extreme shift in the make-up of the UK Government to change the course of UK energy policy in the short term.

The UK is likely to maintain a strong position in addressing climate change and deploying renewable technologies. However, the cost of upholding the trilemma, both for the Government and for households, is likely to increase. National Grid has suggested that leaving the EU could cost the UK up to £500 million per year in the 2020s, as a result of uncertainty over energy and climate investments.

Political environment Energy Secretary Amber Rudd and Energy Minister Andrea Leadsom will likely remain in place to oversee the energy agenda and the day-to-day operations of the Department of Energy & Climate Change (DECC) as the UK awaits the appointment of a new prime minister sometime in October. The Energy and Climate Change Committee will carry on its scrutiny function until a general election is called.

Once a new Government is formed, the new Prime Minister will likely need to make room for eurosceptic figureheads within the Conservative Party. Energy Secretary Amber Rudd, a key Remain figure, could expect to be moved on under a Boris Johnson administration after they clashed during the campaign. Her ‘Brexiteer’ colleague Energy Minister Andrea Leadsom would feel hard done by not to receive promotion.

Longer term, many in the Conservative Party have long opposed the legacy of the Coalition’s green agenda, particularly onshore wind. A eurosceptic appointment at DECC would (in the worst-case scenario) result in a disregard for the COP21 settlement and preferential regulation for low-cost fossil fuels at the expense of subsidy-based renewable schemes. This would have a ripple effect on the renewables sector and associated supply chain.

Immediate UK policy impact: • The Fifth Carbon Budget (reducing UK carbon

emissions to 61% below 1990 levels by 2032) is still expected to be ratified by 30 June.

• The coal plant phase out consultation which was first announced in November and has reportedly been delayed by internal disagreement, may still proceed.

• The long-awaited Carbon Reduction Plan outlining

heat and transport policies to address slow progress in these areas may be put on hold. Currently, the UK is not expected to meet its 2020 EU target of ensuring 15% of all energy is sourced from renewables.

• The Government’s whole system cost study may become buried by other policy priorities.

To end-2016: • The respective Capacity Market and CfD auctions

are expected to continue unless there is a significant change in economic circumstances. It is less clear if the proposed January 2017 auction will proceed.

• A new administration will have to give investors some indication of how the Levy Control Framework (LCF) and renewables subsidies will look beyond 2020.

• EDF has stated that the referendum decision will not

alter its plans for Hinkley Point C nuclear plant.

However the fate of Chancellor George Osborne remains uncertain, which could ultimately impact the feasibility of the project. This in turn may discourage other ‘new nuclear’ and offshore wind projects from taking final investment decisions.

Longer-term: Exit negotiations with Europe and the subsequent rewriting of British law will have significant ramifications for energy policy. While these are currently difficult to forecast, some potential guidelines:

• It would be surprising if the UK completely withdrew from the Internal Energy Market as the grid increasingly relies on interconnection with EU members for electricity imports.

• Provided the Climate Change Act remains in place

(more stringent than any EU directive), future UK Governments will not be in a position to renege on emissions limits or renewables targets, and the possible removal of state aid restrictions could see an increase in large scale energy projects.

• The process of adopting EU energy legislation such

as carbon pricing, which is an increasingly global initiative, should be relatively painless given that the UK’s Carbon Price Floor (CPF) is already significantly higher than carbon prices under the Emissions Trading Scheme (ETS).

Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 0203 047 2000 | @edelmanUK

ENERGY – BRUSSELS ANALYSIS Energy Union In order to participate in the Energy Union and Internal Energy Market, the post-Brexit UK will need to negotiate an appropriate settlement with the EU, and adopt the relevant European legislation.

It is unlikely that the UK will yield any influence on the formulation and interpretation of the rules it will have to comply with unless it can ensure membership of the relevant European energy agencies, including: ACER (Agency for the Cooperation of Energy Regulators), ENTSO-G (European Network of Transmission System Operators for Gas) and ENTSO-E (European Network of Transmission System Operators for Electricity).

Interconnection The UK has been at the forefront of efforts to liberalise and develop cross-border energy markets.

It has several electricity and gas interconnectors with France, the Netherlands and Ireland that fall within the current EU regulatory framework. The UK will need to negotiate with the EU as a whole an alternative regime on their future use.

Climate change While the UK’s climate change goals are established nationally under the Climate Change Act, at an international level, it would have to remove its emissions reduction commitment from the EU goal signed under the United Nations Framework Convention on Climate Change (UNFCCC) and December’s Paris Agreement. It would then have to submit its own Nationally Determined Contribution in respect of its intended climate actions under the UNFCCC processes. If the UK was to remain a member of the European Economic Area (EEA)

however, it would maintain the same targets as those of the EU at least as regards the UNFCCC process.

Oil & Gas Regarding the UK Continental Shelf, the UK will have to decide whether it will adhere to the various EU Directives relating to oil andMOgas or whether DAYS to N TH S develop its own policies.

One prospect that is unlikely to appeal to multinational oil and gas companies operating in the UK is a possible loss of free movement between the UK and EU. Without the free movement of labour, companies could see bureaucracy and cost increases at a time when the industry is trying to minimise expenditure.

Brexit could also have consequences for UK gas prices in the event the EU opts to impose export tariffs on EU gas sold to the UK. However, the UK could look to the US for cheap LNG gas imports following negotiations.

Renewables and Biomass The UK has been one of the most vocal supporters of sustainable biomass, however, outside of the EU, the UK would not be bound by EU sustainability criteria that are likely to be included in the upcoming EU Renewable Energy Package. Therefore, any UK biomass fuel would potentially have difficulty accessing the European market unless the EU was prepared to accept the UK’s own sustainability standards.

In addition to the above, the energy sector would also be impacted by the loss of EU funding for research and loans for new energy projects.

FURTHER INFORMATION

Andrew Mitchell Group Director, Energy Edelman UK andrew.mitchell1@edelman.com +44 20 3047 2489

Michael Jones Senior Account Executive Edelman UK michael.jones@edelman.com +44 20 3047 4025

Adam Almirall Account Executive Edelman Brussels Adam.almirall@edelman.com +32 2 250 00 18

Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 0203 047 2000 | @edelmanUK