Brexit and the IEM

In an alternative universe, UK civil servants are busy spearheading fresh moves to deepen the European single energy market.

With the UK holding the rotating presidency of the EU’s Council of Ministers, British officials are in the driving seat on the preparation of the EU’s so called fourth energy package. It is a task they are well equipped for, given how instrumental the UK has been in shaping the internal energy market (IEM).

Back in the real world, the UK is heading out of the EU and in all likelihood the IEM too.

To help the industry navigate its post-Brexit future, the Energy and Climate Intelligence Unit (ECIU) assembled some of the sector’s leading experts for a briefing last week at University College London (UCL).

Energy suppliers’ dependence on fixed connections means that withdrawal from the EU’s common trading arrangements will have a bigger impact on the sector than many other parts of the economy, warned Michael Grubb, professor of international energy and climate change policy at UCL.

“The reality is that we are unlikely to be able to remain in the IEM. I don’t think that’s going to be a priority.”

Munir Hassan, partner and head of clean energy at CMS Cameron McKenna

He said: “With electricity, you need a wire and gas still largely needs pipelines, unlike a lot of sectors where the economic debate can trade off access to European markets with access to other parts of the worlds. With electricity, you ain’t going to be building a wire to any other parts of the world, nor a gas pipeline.”

And the UK’s reliance on interconnectors is set to wax rather than wane, said Anthony Froggatt, a senior research fellow in energy and environmental issues at the security thinktank Chatham House.

“Even now the UK government is expecting interconnectors to play a significant role in the energy mix,” he said, pointing to recent energy projections from the Department for Business, Energy, and Industrial Strategy (BEIS). These show that by 2024, the UK will be expecting to import 8TWh of energy through interconnectors, making them the third largest contributor to the power mix behind gas and renewables.

However, trading down those interconnectors is bound to be more complicated if the UK quits the single energy market.

And the gathered experts were pretty gloomy that any other outcome was likely in the light of the EU’s hostility to cutting deals on a sector by sector basis, reaffirmed last week in a European Parliament resolution on the trading bloc’s Brexit negotiating guidelines.

Grubb suggested that mutual self-interest might dissuade the EU from this hard-line stance.

“That position might have to crack for reason of mutual interest, precisely because we can’t trade electricity with the US or China there is a very strong interest in the UK remaining part of the IEM and some interest for the EU.”

But given the UK’s government’s determination to escape from the jurisdiction of the European Court of Justice, Munir Hassan, partner and head of clean energy at CMS Cameron McKenna expressed doubt that the UK would expend political capital on fighting for single energy market membership.

“The reality is that we are unlikely to be able to remain in the IEM. I don’t think that’s going to be a priority. We should not kid ourselves: energy is unlikely to be anywhere near the top of the negotiating agenda,” he said.

Forging the basis for a new agreement should be helped though by the fact that the UK has played such a strong role in shaping the existing framework for electricity, he added

The UK doesn’t have to be less energy secure outside of the IEM, but it will have to invest in more domestic capacity to make sure it is, warned Grubb.

And there will be an impact on customers’ bills, added Hassan, as much of that home-grown capacity will be installed to back-up the inevitable fluctuations in renewable generation. In addition, UK customers may lose out on the savings that their EU customers will make through the greater efficiencies that the 4th electricity package is set to deliver, such as intra-day trading.

The post-referendum depreciation in the value of the pound had already driven up domestic energy prices, said Grubb, albeit “not by a massive amount”.

An added twist, Hassan said, is that the cost of importing energy infrastructure equipment had been inflated by the drop in the value of the pound.

Brexit could also have a knock-on impact on investment in interconnectors, warned Grubb.

Those involved in developing the 10GW worth of capacity currently in the planning pipeline had been given “pause for thought” by Brexit, although he predicted that the bulk of projects “will probably go ahead.”

A drop-off of EU investment in energy projects had already happened since the referendum, observed Hassan: “When speaking to investors across the EU, the issue of Brexit comes up a lot more.”

Another headache identified by Grubb was the UK’s likely loss of access to funds from the European Investment Bank (EIB).

British interconnectors could be competing for funds with overseas projects that would be able to command lower borrowing costs thanks to EIB access, he explained.

The good news though is that investors from outside of the EU appear untroubled by Brexit, Hassan said, who noted that the interconnector projects he was involved in had not been blown off course by last summer’s vote.

Nevertheless, the irony, suggested Grubb, was that the UK is preparing to leave the IEM just when increasing reliance on renewable generation is reinforcing the case for cross-border co-operation on energy.

To make his case, he pointed to how the expansion of North Sea offshore wind capacity could be delivered more efficiently through greater collaboration between the surrounding countries. “It would be in everybody’s interest for Britain to be part of that.” The problem will be persuading the politicians.