With the recent overwhelming rejected Brexit deal lingering in the air, what will be next as it continues to be a hot topic of conversation. Leaving volatility rife with only a couple of months left to muster up a plan B; What impact will Brexit mean for the energy market?
One thing is clear is that we would all be better off if the UK remained within the Internal Energy Market (IEM). An interconnected, tariff-free wholesale market which enables efficient energy trading would be the most beneficial to everyone. Continued access is a Government priority in the Brexit negotiations. IEM participation means adopting various European legislations, however this might not be aligned with UK judicial plans, unless the UK remains part of the institutions which handle EU energy regulation.
The escalating cost to energy consumers continues in the absence of an agreed deal. Since the referendum, it’s been reported that Brexit added £2bn to UK energy bills the following year. Leaving without a deal could substantial play havoc on the British bill payers further. The main key driver of this according to energy watchdog Ofgem is the impact on currency. Leaving without a deal could further deflate the value of the sterling by circa 12 per cent of its relative value to the euro, amounting to an extra £1.5bn in energy bills by March 2020. Further uncertainty means that energy consumers will be faced with increasing bills over the coming months.
In the wake of Brexit, the energy market has seen many casualties with nine energy suppliers ceasing business operations. In the impending arrival of triggering Article 50 and the aftermath, what lies ahead for businesses in the energy sector? The EU is a major source for energy investment, equating to €2.5 billion in energy loans. Lawrence Slade, Chief Executive of Energy UK, highlighted that: “If we are outside the EU, access to those funds will undoubtedly be reduced, if not totally withdrawn, depending on any future relationship.” Brexit will have an impact on the funds for energy projects, to what extent remains to be seen.
Furthermore, Analysts have warned short-term carbon prices will be volatile due to Britain’s uncertainty to leave the EU. Without a Brexit deal in place, Britain automatically leave the Emissions Trading System (ETS) and would replace its costs with a carbon tax which is set at 16 pounds a tonne as stated in Reuters. The ETS charge power plants and factories for each tonne of carbon dioxide they emit. A no deal Brexit will impact on carbon costs. It has been highlighted that Britain will set up its own equivalent system to the ETS if this is the case, following the release of UK government documents at the latter part of last year. The impact, even though Britain abides by its international obligations to cut carbon emissions, “could hit the price of EU carbon permits as Britain is currently such a big buyer.” Britain are the second-largest emitter of greenhouses gases within European, plus are a major buyer of ETS permits. Analysts have highlighted that the price of permits would be hit. “Such outcome would be overall bearish for European Union Allowance (EUA) prices in the short term as UK installations could be expected to offload their surplus allowances and unwind hedges,” Refinitiv analysts state.
“As 2019 is the first year of the operation of the market stability reserve (MSR), this will be still the most important factor impacting the carbon market,” said Sandrine Ferrand, analyst at Engie Global Markets. Berenberg Analysts have bullish forecasts in place and said the MSR will lead to a deficit of 400 million tonnes of carbon permits in 2019. This is likely to be an ongoing occurrence. “The EU ETS system has just begun a decade of deficits,” said Berenberg analyst Lawson Steele.
Omar Rahim discussed his views on Brexit in a recent interview with The Financial Times: “We need a second referendum. Enough time has passed to clearly see what the implications of Brexit are, and that information wasn’t at hand at the time of the vote.”
It’s clear that it’s not clear what will become of the energy market when unpredictability is prevalent. It’s futile to think that when Brexit was instigated, the effects on the energy market to date would be positive. Walking away with a no deal Brexit will have a snowball effect, worsening the already negative impacts which have been a direct cause to the energy market. Plus, additional consequences of Brexit will be felt.