Energy sector hoping for a soft Brexit

The softer Brexit the House of Commons is inching towards almost three years after the referendum could be welcome in energy circles.

Angus MacNeil knew the game was up for Theresa May’s withdrawal agreement when he entered the House of Commons division lobby last Friday afternoon.

The Western Isles MP and former chair of the Energy and Climate Change Committee rapidly realised the number of rebel Conservative and Democratic Unionist Party MPs queuing up to vote against the prime minister’s deal meant it was doomed.

Within a few minutes, the rest of the world knew too as the result of the vote came through. By 344 to 286 votes, the Commons voted to reject the PM’s deal – the third successive defeat it has suffered.

Last Friday’s vote, which took place only hours before the UK had originally been due to leave the EU, has pushed the entire Brexit process even closer to the brink.

While May wants to bring her withdrawal agreement back for yet another vote in the Commons, MPs are trying to hijack the entire process, although they have yet to find a majority for any single course of action. Unless the parliamentary deadlock can be broken, the default postion is that the UK will depart the EU without a deal on 12 April.

Angela Hepworth, policy and regulation director at EDF Energy, told an Energy UK Brexit briefing event on 28 March that the politicking surrounding EU withdrawal is “froth” from a business perspective.

But the French-owned company has been putting in place plans for the “worst-case scenario” of a no deal withdrawal from the EU, she said. These include increasing “strategic stocks” of key materials to boost the company’s resilience if its supply chain is disrupted by traffic hold-ups at UK ports.

Access to interconnectors

A number of proposed interconnector projects, which are playing an increasingly important role in the UK’s energy mix – according to the Energy Trends statistics published last week by the Department for Business, Energy and Industrial Strategy (BEIS) – are up in the air due to regulatory uncertainty post-Brexit.

However, Hepworth expressed confidence that exchanges of electricity and gas would continue across the existing interconnectors, albeit perhaps “less efficiently” than is currently the case. Ofgem approved modified access rules for the interconnectors in mid-March, which will enable trade to carry on.

She also warned that “constant vigilance” will be needed to spot the “unforeseen issues” likely to thrown up by Brexit.

And the EDF director described as “astonishing” the uncertainty over the future of the UK’s emissions trading arrangements, stressing the importance of “clarity” on the future direction of the strategic carbon price.

Longer-term worries stemming from Brexit include access to labour – particularly in relation to EDF’s new nuclear power plant construction project at Hinkley Point C.

The good news though, Hepworth said, is that energy is “one of the best set up” sectors for dealing with Brexit, singling out how ministers had resolved the risks to the movement of nuclear fuel and materials as a result of the UK’s departure from the Euratom treaty.

And she said the language in the proposed political declaration, which outlines the UK’s future relationship with the EU, is “quite helpful” in terms of reducing friction in the future EU-UK energy relationship.

Good starting point

Matt Hinde, director of energy at public affairs agency Fleishman Hillard, agreed the political declaration is a “good starting point for a good relationship”.

“On energy we are in a pretty good place – not least thanks to the work of BEIS,” he said. But he warned this good progress on the UK’s energy relationship with the EU could be worthless if the wider Brexit negotiations fail to get off the launch pad.

“It’s not all bad news but we have to somehow get to that negotiation and this isn’t a great starting place,” said the Brussels-based Hinde, pointing to mounting exasperation in EU circles with how the UK is handling its exit.

“There is complete consternation about how a government of a developed country can reduce its influence in the world quite so dramatically.”

And the EU will not back down on the backstop, the controversial provision in the withdrawal agreement that threatens to tie Northern Ireland into the EU’s single market and customs union long term, he predicted.

“The issue of the backstop is viewed as essential, it will not disappear. If we are to have an organised withdrawal, it will be on the basis of a backstop.

“The backstop is going to be implemented or we will have to find a way to extend.”

This souring of relationships could have ramifications long after the withdrawal process is done and dusted, said the former UK government energy envoy to the EU.

Several thorny issues

While the UK is consumed by Brexit, it is only one of several thorny issues that the EU has to grapple with, Hinde pointed out. “Things are fluid. A year ago, the majority of opinion in the EU probably would have liked us to stay and find a way to a second referendum and a revocation. I’m not sure that’s the case now. It’s not good for us in terms of our long-term relationship.

“They want this over and done with.”

And he reminded the Energy UK event that the conclusion of the withdrawal agreement is only the first step in the Brexit process. Officially, an agreement on the future EU-UK agreement is due to be drawn up by December 2020 to tie in with the end of the transition period, which could be extended for another two years.

But even this extended timescale is not “realistic”, Hinde said, pointing out that Canada has been negotiating its free trade deal since 2002, which has only recently been concluded.

“It may be quicker because we are in an arrangement, but it’s highly unlikely we will be able to do this in one-and-a-half or three years.

“This is a five-year negotiation and at every stage there is going to be another difficult conversation.”

Added to this, Hinde said the idea that the UK will be ready to start negotiating the terms of its future relationship immediately after it leaves the EU is “optimistic”.

A softer Brexit?

But while the chaos surrounding the UK’s withdrawal from the EU is destabilising the economy, the softer Brexit the House of Commons is inching towards could be welcome in energy circles.

In last week’s indicative vote process, out of the menu of options presented to MPs, the one that came closest to succeeding was former chancellor of the exchequer Ken Clarke’s motion that the UK should remain in a permanent customs union with the EU.

While the implications of a customs union hasn’t been “really thought through” yet, said Hinde, this option could facilitate the kind of close relationship between the EU and the UK energy sectors that the industry is keen to retain.

A customs union, coupled with the kind of high alignment on energy matters mooted in the political declaration, could end up with full participation in the internal energy market, he said.

“In terms of energy it would help in terms of access to the market and getting stuff across borders.

“If we end up with high alignment there is scope for something that looks like membership of the internal energy market.”

Add to these factors the UK’s good performance over recent years on cutting carbon emissions, and scope emerges for a “grand bargain” with the EU on an area that is central to its mission, Hinde said: “The Paris agreement is one of those things that is viewed as the reasons for the EU to exist and the UK is pretty important in that.”

A strong commitment

Alison Conboy, deputy director for EU exit climate and energy at BEIS, told the meeting that the UK is in a “pretty strong place” on cutting emissions. “The path is clear and the commitment from the centre is very strong.”

And she insisted the UK government is continuing to make progress on energy issues, pointing to next month’s upcoming round of contracts for difference auctions, and the recently concluded sector deal for offshore wind. “Having worked through a number of different governments, the focus still feels right up there.”

EDF’s Hepworth agreed the industry has the “right mechanism in place from a policy perspective” that would provide the sector with the stability it craves.

However, if the UK leaves without a deal, the ramifications will be “extremely difficult”, said Hinde.

Even though EU has concluded its own no deal arrangements, he expressed doubt that the EU would thwart an extension because “the consequences of no deal will be awful”.

But the ball is in the UK’s court, said Mo Hussein, head of public affairs and campaigns at Westminster lobbying firm PLMR: “The focus is on us in the UK to say what we want: we need to have a plan going forward.”

Hinde agreed. “If we ask [for an extension] we will get it, but we have to give people a reason.”

• Utility Week’s Energy Summit ‘Delivering a robust future for UK energy in a post-Brexit landscape’ takes place in London on 13 June. Download details at  https://event.utilityweek.co.uk/summit/