EU Referendum Result: Energy - UK Analysis

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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


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