Energy policy: From trilemma to Brilemma

How will the UK’s vote for Brexit affect its ability to ensure a secure supply of affordable energy while meeting carbon reduction targets? Liz Parminter, Olaf Remmler and Ted Hopcroft speculate.

On 23 June, the United Kingdom voted to leave the European Union. There is uncertainty in the energy sector, where there is potential for profound changes that will affect the nature of, and the way we address, the energy trilemma – how to achieve security of supply at an affordable price while achieving carbon targets.

Three key questions will drive this:

1. What role will the UK have in the European Energy Market (IEM)?

EU directives are designed to build an integrated, competitive and sustainable common energy market. They have been developed in the context of EU renewable targets and seek to ensure the most cost-effective and affordable supplies to EU citizens. The aim is to develop market rules and cross-border infrastructure such that energy can be produced in one EU country and delivered to consumers in another – at the same time keeping prices affordable by creating competition and giving consumers choice. A key aspect has been the development of new interconnectors and the optimisation of interconnection through market coupling.

The IEM is important to address the trilemma. Great Britain’s current installed interconnection capacity (about 4GW) represents four per cent of the total installed capacity. Provisional grants for six new interconnector projects in the last Budget would increase interconnection capacity by about 12GW.

This could, however, be under threat. Access to the IEM is limited to EU member states and those in the European Economic Area (EEA). This in turn depends on agreement to the “four freedoms” of the EU – free movement of goods, capital, services, and people. The last is of course a point of contention for the UK. Switzerland’s integration into the IEM by June 2015 was put on hold after the Swiss immigration referendum of February 2014, in which the Swiss narrowly voted to impose a quota system on all immigration.

What will happen to the UK’s role in the IEM if a negotiated agreement on the four freedoms cannot be reached, and will this require new alternative generation build?

2. Will the UK be able to attract the necessary investment for energy infrastructure, especially electricity generation assets?

The UK already needs a considerable amount of money to upgrade its infrastructure, any changes in our role in the IEM could increase this even further. What will the attitude of international investors, in particular the large European companies, be? There is clearly a specific issue on the development of Hinkley Point C. Despite positive pronouncements, Brexit could feasibly prove the last straw for Hinkley.

A Hinkley failure and issues with the IEM would create the need for more generation. This raises the question of what that generation may be and where that investment might be found. Gas is an obvious answer, but to what extent can gas replace nuclear and retain our carbon commitment?

3. Will the UK change its energy policy to respond to these challenges?

Much of UK energy policy for the past 20 years has been driven by alignment with European policy. Does Brexit potentially provide greater freedom to manoeuvre for the UK government? A response to any security of supply challenge and greater freedom from adherence to the Industrial Emissions Directive (IED), could result in the retention of our coal plant for its full life and a revision of our approach to renewable generation.

These are of course complex areas and much is already enshrined in UK law, which would have to be repealed to enact the above options. Emissions are also covered by COP21 and the Paris discussions, but there are no binding initiatives at country level as yet. Would the government have the appetite for this? Certainly in their policy change on solar and onshore wind, the Conservatives have indicated they are prepared to take rapid and firm decisions on renewables projects.

Decc could therefore have a substantive task in re-considering energy policy across a very broad spectrum in tandem with the findings of the Competitions and Markets Authority (CMA) report.

PA has considered potential outcomes arising from the above and developed two scenarios using our energy modelling suite. The first can be characterised as a pre-Brexit scenario, assuming interconnector and generation build continues largely as planned and there is no change in government policy. The second is a post-Brexit scenario, assuming changes across each of the areas above. These scenarios are summarised in the table below.

If the post-Brexit scenario is a plausible outcome, the government may have to re-examine its existing policy commitments such as carbon-reduction targets, adherence to the IED and with it potential access to low-carbon, low-cost EU generation. In this world our modelling shows that there will be an increase in prices to consumers of 18 per cent by 2030 and we are unlikely to meet currently stated carbon-reduction targets from the energy sector. Britain will also need to secure investment in four or five new CCGTs to maintain security of supply.

Our initial modelling has focused on GB, but it is also important to recognise the position of Ireland and Northern Ireland. Ireland in particular depends on interconnection and closer coupling with the GB market to maintain its policy objectives and it could have a complex challenge understanding how it acts as part of the IEM when its connection to that market may be through a non-IEM country.

Brexit alone is sufficient to change the policy landscape, but overlay the impact of recent CMA findings on the introduction of zonal transmission losses and the generation investment climate is once again subject to extensive re-evaluation.

The post-Brexit scenario is only one of many potential outcomes, and businesses, investors and policy makers alike would do well to consider a range of plausible options before defining future direction.