With Brexit (possibly) on the horizon, it would be a fool’s game to think an exit from the EU won’t affect our energy sector. Dr. Craig Lowery, senior consultant at Cornwall Insight, highlights some of the potential outcomes should the UK’s initial decision to leave the European Union go ahead.
Let’s start with the positives; how might Brexit benefit the energy sector?
As many of the UK’s energy and environmental policies are enshrined in UK law – for example, the 2050 net zero ambition – much of the direction for the country in energy terms are set.
Where the UK may benefit is in the ability to potentially employ a lighter-touch approach to energy policies, which could include means by which to support investment, emissions pricing or measures such as the rate of VAT applied to energy. However, as with many Brexit-related issues, this depends upon the manner of the UK’s departure from the EU and the nature of any enduring relationship after that.
With regards to the challenges posed by Brexit, what are the main areas we should be concerned about?
Investment in the energy sector may be adversely affected by the economic uncertainty surrounding Brexit, which could lead to higher costs in the long-term. For example, both the UK’s onshore and offshore wind sectors have benefitted from support from the European Investment Bank (EIB), with this lost support needing to be replaced by commercial alternatives and/or state-backed solutions.
Due to the UK’s reliance on imported energy, the need to implement enduring cross-border trading arrangements is important from a supply perspective. In cost terms, while clarity on any potential energy tariffs is pending, any post-Brexit weakening of sterling on foreign exchange markets would imply higher input costs.
How might these challenges affect your average energy customer?
In terms of costs, it will depend upon how different elements such as costs of imported energy, cross-border trading, tariffs and foreign exchange impacts are combined. From a domestic perspective, there remains a large proportion of the customer base that is on capped tariffs – due to Ofgem introducing a price cap on default energy tariffs – and therefore any potential for higher prices will be mitigated by this policy.
This would also be the case for those customers on any long-term tariff deals. However, customers on uncapped or shorter-term tariffs would be expected to see any changes feed through more quickly, with the same also being the case for non-domestic customers.
How might Brexit affect the future of the energy sector?
If there is prolonged political and macroeconomic uncertainty, as well as movements in the foreign exchange market, it may lead to potential investors in the UK seeking a higher rate of return to compensate for such risks. This underlying investment risk – coupled with the loss of the European Investment Bank’s support – may have an adverse impact on new projects across the energy sector. This would raise the cost of borrowing, and hence development costs for new projects, leading to higher energy prices. However, higher energy prices would provide an upside for project developers, increasing forecast revenues and improving investor appetite.