Brexit will cost British energy sector £500m a year from 2020

An independent think-tank report has estimated that the economic costs to the electricity supply industry in the UK of British Independence from the EU will be as high as £500 million a year from 2020.

With the Brit-Govt’s intention to leave the single market following Brexit, the report states the UK’s chance of remaining in the EU’s internal energy market looks “unlikely to be possible” – despite significant support from within the energy industry to do so.

See also:

Energy UK wants Britain to remain in EU Emission Trading Scheme despite Brexit

Leaving the EU’s internal energy market is expected to have a serious impact on Britain’s security of supply, as energy trading with Europe – conducted via interconnectors – will be less efficient and costlier to consumers when done outside of the IEM. 

Owing to our current dependence on European imports to meet our power demand, this would leave British consumers not only at risk of higher prices, but also vulnerable to supply shortages in the event of extreme weather or unplanned generation outages.

Even if Britain does remain in the EU internal energy market, the report warns on the other hand that the UK would be required to adopt European energy policy, leaving Britain with little say on its energy laws. 

The report by London-based consultancy Vivid Economics states: “In the hotly contested Brexit debate, one thing is clear: Brexit will create economic uncertainty

“In the energy sector, possible post-Brexit arrangements range from continued membership of the Internal Energy Market (IEM), a scenario that is similar to the status quo (and similar to Norway’s current arrangements) to a new set of bilateral arrangements if the UK is excluded from the IEM (similar to arrangements in Switzerland).

“From an investor’s perspective, higher returns are required to compensate them for the risk of less favourable post-Brexit arrangements. This puts upwards pressure on the cost of financing, raising the cost of investment in the UK energy sector.

“The scale of planned infrastructure investment in the electricity sector over the next decade means that even small increases in the cost of financing could have large consequences for total investment costs.

“Our assessment is that higher costs of investment in energy infrastructure is the most significant Brexit risk to the energy sector.

“If Brexit results in exclusion from the IEM, Britain could also forgo the benefits from market integration initiatives, such as market coupling and cross-border balancing and capacity market integration.

“As this would only occur after both Brexit and leaving the IEM, these risks are inherently more uncertain than the risk to costs of energy infrastructure. Over the longer term (beyond 2020), these losses in value could have a knock-on impact of undermining the business case for further investment in interconnection between the UK and its neighbours.

“In total, the potential impacts resulting from exclusion from the IEM, but excluding Brexit impacts on the cost of investment, could be up to £500 million per year by the early 2020s.”

The report also highlights the potential impacts on the UK’s drive to decarbonise.

Besides renewable generation – an intermittent source of energy – Britain also needs nuclear generation to meet its fourth and fifth carbon budgets.

However, leaving the EU could undermine the Britain’s capability of building future nuclear sites, due to curtailed access to specialist EU workers.

Investment needs in the UK’s electricity sector will be higher over the next decade than over the last two decades, due to both capital stock upgrades and the UK’s decarbonisation plans.

Coal generation built during the 1960s is reaching the end of its life, with closure accelerated by EU air quality directives, and most of the UK’s fleet of nuclear plant are due to close by 2030.

The low carbon transition is also pushing up investment requirements, as both nuclear and renewable energy are more capital intensive than the fossil fuel plant they replace.

The National Infrastructure Commission identifies around £14-£19 billion investment per year in the electricity sector in the period to 2020. This is three-quarters of total energy sector investment in this period, and 60% of total UK infrastructure spending to 2020.

16 Feb 2018

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