Cut the power
Phil Hewitt discusses the implications of Brexit for Britain’s power generation industry
Since that fateful day on June 23, 2016, when the British public voted to leave the European Union, there has been much speculation about the potential impact of Brexit on the GB and EU electricity markets.
Some commentators have argued that Brexit will give Britain more control over its power generation market. Most, however, have expressed concern that blocks on trade and restrictions on the freedom of movement will damage key industries, undermine security of energy supplies, increase prices for consumers and make trading more volatile.
Currently Britain is part of a highly-interconnected market that allows the flow of electricity between different EU countries. If leaving the EU means the end of Britain’s participation in the Internal Energy Market (IEM), a series of bilateral agreements will need to be negotiated and agreed. It’s not impossible – Switzerland made similar arrangements with the bloc despite not being a member of the EU – but there will be a period of uncertainty, possibly several years, while those agreements are being thrashed out.
Removing access to the IEM means that Britain will have to withdraw from market coupling on the interconnectors. Market coupling is a complex system that determines allocation of cross-border transmission capacity according to demand in the energy markets of each country. Traders participate in day-ahead auctions and bid for energy on their Exchange, then the system works out the best use of available capacity to satisfy demand while minimising the price difference between two or more countries. This is what the EU Commission calls ‘Net Social Welfare’.
Brexit will remove Britain from this process. Instead of interconnectors participating in market coupling and being allowed to access a ‘cap and floor regime’ that is easier to sell to banks for finance, traders will have to negotiate prices for capacity on the open market and then trade on both sides of the interconnector. This will inevitably lead to greater price volatility and, ultimately, higher prices for consumers. Based on current estimates, annual electricity bills in Britain to end consumers will go up by up to five per cent or £50. Also, no market coupling into Britain from the continent means no market coupling into Ireland so residents there will also be hit with higher energy bills.
Being excluded from this process will also dent the economic case for Britain’s participation in current and future electricity infrastructure projects. Britain has already made pre-Brexit commitments to get involved in several interconnector schemes that will now be more expensive than first anticipated. In the future, investors will be less inclined to commit large sums of cash to these types of projects if it is more difficult to understand the risk of making a profit from them.
Investment costs will rise on two counts. If Britain is forced to renegotiate new terms in the post-Brexit era, investors will demand a higher rate of return to offset the increased risk because interconnectors will need to operate as merchant interconnectors as opposed to transmission assets dispatched by market coupling. The uncertainty could also weaken the pound and push up import costs, making it more expensive for Britain to import goods and services required for infrastructure projects.
All of this is likely to have the overall impact of reducing infrastructure capacity. If there is less capacity available, this will make it more difficult for Britain to export and import electricity to and from mainland Europe, which will push up prices.
Even some of the opportunities cited by commentators appear overblown. Brexit could free Britain from the constraints of the Industrial Emissions Directive (IED), giving generators the chance to produce power using lower-cost, higher-polluting technologies – but the current situation in the market means that this is unlikely to happen. Britain is already pursuing several carbon reduction programmes – such as the closure of coal-fired stations and other renewable energy schemes – in a bid to meet emissions targets that are, in many cases, more stringent than those imposed by Brussels. In many cases, the choice of technology is therefore limited to higher-cost, lower-polluting options.
There are no immediate reasons to panic, however. In the short term at least, Brexit is unlikely to compromise security of energy supplies in Britain. Domestic gas markets are generally well connected to mainland Europe and further afield to countries such as Qatar. If Britain leaves the European Atomic Energy Community (Euratom), we will need a new regime for regulation but this will have little impact on nuclear power station prices. The worst it will do is add greater risk to new build projects, which are already overpriced.
However, it’s hard to escape the conclusion that, overall, Brexit will have a negative rather than a positive impact on the domestic power market for end consumers although not being part of an EU-wide interconnected market will increase price volatility, which could create opportunities (and downside risk) for traders.
Phil Hewitt is director of energy data monitoring specialist EnAppSys. EnAppSys is an independent energy market monitoring company that provides electricity and energy market data, systems and consultancy services to parties with an interest in the UK energy market. The company’s experienced analysts use data aggregated from different electricity data sources to provide subscribers with informed and user-configurable energy information and analysis, energy management systems and energy-related applications.
For further information please visit: www.enappsys.com