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No-deal Brexit and the energy market – what will it mean for the UK?

The outcome of the UK’s exit from the European Union remains as unclear as ever and, with Boris Johnson confirmed as the new Prime Minister, leaving without a deal remains a distinct possibility. While this would have impacts across almost all aspects of business, it is important to understand the effect it will have on the energy market and what companies can do to mitigate that risk.

As we highlighted in our previous blog, the UK currently imports more than half our gas. A portion of this is shipped to the UK in the form of liquefied natural gas (LNG), while the majority is carried through pipelines and interconnectors with Norway, the Netherlands and Belgium. Although Norway remains outside the EU, it still uses EU rules and regulations to manage its pipelines. In the event of a ‘no-deal’ scenario, the mechanisms of cross-border trade are not expected to fundamentally change.

Net electricity imports currently account for around 7.5% of our total electricity demands, coming from France and the Netherlands. We also have both electrical and gas interconnections with Ireland, though these are used mainly used to export energy.

Gas Trading

Fortunately, even without a deal, the flow through these interconnectors is unlikely to be significantly disrupted. National Grid, as well as the operators of each pipeline, use the privately-owned PRISMA system that delivers a range of services to both EU and non-EU nations to manage the trading of gas. Even without a deal, the day-to-day mechanics of gas trading is unlikely to change. However, a no-deal Brexit would not be without implications for how we trade gas with the remaining EU members.

EU members do not place tariffs on either gas or electricity from other World Trade Organisation members, so flows of electricity and gas would not encounter additional tariffs. However, much of the imported equipment required for constructing and maintaining the energy networks could see further costs added.

LNG is playing an increasingly important role in our total gas supply and the number of shipments arriving at UK LNG terminals at Milford Haven and on the Isle of Grain have increased significantly during 2019. This additional supply has helped to suppress wholesale gas prices and reduces our reliance on European supplies. The large number of shipments arriving in the UK is driven in part by subdued demand in Asia, resulting in shipments being re-routed, and also by increased exports from new terminals in countries, such as the USA and Russia, but the ability of LNG to be shipped globally means that prices and supply can be less predictable.

Optimisation

Many gas and electricity flow optimisation schemes are arranged and regulated at EU level, leaving us with little input into how they work in the future, while we would also lose our voting right across the expanding EU energy legislation.

While it is unlikely we will see substantial disruption initially, the UK would require investment to shore up systems if we could no longer guarantee the co-operation of the EU. For example, the UK currently has very low levels of storage capacity for gas, which would need to undergo a major upgrade.

Leaving the EU also means the UK faces the need to devise our own energy market regulations as EU-wide legislation ceases to apply. UK Guarantees of Renewable Origin will not be valid in the EU and our departure from Euratom requires us to switch our oversight and safeguarding of nuclear technology to the International Atomic Energy Authority (IAEA).

Another area that impacts energy costs is the Emissions Trading Scheme (ETS). The UK currently operates under the European EU-ETS scheme, but this will stop immediately if a no-deal Brexit occurs. An abrupt exit from the EU could see UK emitters rapidly offloading permits, flooding the market at a time when a ‘no deal’ may weigh on demand across Europe.

Many companies should by now have transferred their UK permits to European registries to ensure they continue to be valid post-Brexit. This has helped to support carbon prices to close to €30/tonne recently, however, the market is particularly volatile given the uncertainty surrounding Brexit. The impact of leaving could be significant given that carbon remains one of the key drivers of UK gas and power prices. In the event of the UK exiting the ETS, Britain has already stated that this scheme will be replaced with a UK version that sets a fixed price for carbon.

Infrastructure

Overall, the initial impact of a no-deal Brexit on the UK energy market is likely to be fairly limited, certainly in comparison with the potential disruption that other sectors may face. However, going it alone could leave us more vulnerable to supply disruption or wholesale price increases. On the other hand, it could provide the impetus needed to overhaul and improve our existing infrastructure.

Primarily, the risk of a no-deal Brexit heaps more uncertainty on UK businesses during a period where it is already extremely difficult to accurately predict what is on the horizon for the energy market. Ensuring you are on a tariff that takes these risks into account, as well as reducing the total amount of energy your business consumes are both valuable steps to insulate yourself against these potential risks. To find out more about your options, get in touch today on 08451 46 36 26 or email enquiries@inenco.com.