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Brexit -- Commodities Implications



Factbox: UK House of Lords warns on Brexit risk to natural gas, power trade

By Stuart Elliott in London
Edited by Maurice Geller


February 2, 2018: The UK's upper parliament -- the House of Lords -- on January 29 warned that the UK's move to leave the EU in March 2019 puts at risk the UK's "frictionless" trade in power and gas with the EU.


  • Calls on government to clarify post-Brexit energy policy
  • Sees UK as 'more vulnerable' outside of EU internal energy market
  • Report points to several policy 'opportunities' post-Brexit


In a report on energy security post-Brexit, the House of Lords EU Energy and Environment Sub-Committee said future energy trade with EU member states would continue even if the UK left the internal energy market, but it would likely be "less efficient."


"This creates the potential for higher energy bills, and leaving the EU could risk supply shortages in the event of extreme weather or unplanned generation outages," the Committee -- led by Lord Teverson -- said.


The EU is a key energy trading partner for the UK, supplying 12% of the UK's gas and 5% of electricity, and the UK will have to continue to trade energy with the EU in order to meet demand, it said.


The report, entitled "Brexit: energy security," did not look at the implications of Brexit for the supply of oil to the UK because oil consumption in the energy sector, it said, is relatively low compared to gas and electricity.


Below are the key findings of the report:


INTERNAL MARKET, TRADE TARIFFS


The Committee found that there was "strong support" across the UK energy sector to continue to remain in the EU internal energy market, but it conceded this was unlikely if the government pursued its current policy of leaving the EU Single Market -- a policy repeatedly reaffirmed by Prime Minister Theresa May.


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Leaving the Single Market, and therefore the internal energy market, would make it difficult for the UK to continue its current beneficial relationship with the EU on gas and power trade.


"We call on the government to clarify its post-Brexit energy policy in the event the UK no longer participates in the internal energy market," the Committee said.


It said that while it was "unlikely" that tariffs would be applied to UK-EU trade in gas and electricity post-Brexit, even in the event of a 'no deal' scenario, the energy industry could be affected by tariffs on products used in the construction and maintenance of the energy system.


It also called for a transition period, during which the key elements of the current UK-EU energy relationship could be maintained, to allow time for the industry to adjust its working practices, contracts and IT systems to "ensure secure energy supplies continue to be available to consumers."


SUPPLY DISRUPTION


The Committee found that while gas and power trade with the EU would continue on a commercial basis post-Brexit, the UK could be "more vulnerable" to supply shortages under extreme conditions than is the case now.


"We urge the government to set out the means by which it will work with the EU to anticipate and manage cross-continent supply shortages that will affect the UK," it said.


On the subject of UK-EU gas and power interconnectors, the Committee said these benefited "all parties" and called on the government to clarify "as soon as possible" what regulatory regime will apply to UK-EU interconnectors post-Brexit.


It also asked the government to assess what impact leaving the internal energy market would have on the price paid by consumers for their energy and to take steps to mitigate this impact, "particularly for financially vulnerable consumers."


LABOR SHORTAGES


The Committee also warned on the impact of the loss of skilled labor from the EU in the UK energy sector, saying that at present the UK was "reliant" on workers from the EU, especially in engineering roles and the nuclear sector.


"Without access to specialist EU workers, there are serious concerns over whether the construction of new nuclear generation sites -- including the government's flagship Hinkley C project -- is feasible," it said.


The Committee said serious concerns had been raised over whether the Office for Nuclear Regulation would be able to recruit and train sufficient inspectors in time for Brexit.


A shortage of skills and heavy engineering capacity will also mean that UK upstream projects in the North Sea that have come to rely partly on the free movement of EU workers and EU fabrication yards in places such as Poland may face additional labor challenges.


"We call on the government to assess the workforce needs of the energy industry and ensure they are reflected in the post-Brexit immigration policy," the Committee said.


INFRASTRUCTURE INVESTMENT


The Committee said that EU investment has made an important contribution to constructing and maintaining a secure energy system in the UK, so replacement of this funding is "critical" to ensuring sufficient infrastructure is in place to enable future energy trading.


"It will be particularly important to replace the EU's funding of interconnectors, in order to ensure there is sufficient infrastructure to enable future energy trading," it said.


Lobby group Oil and Gas UK has also warned that uncertainty resulting from the Brexit vote could be damaging for investment and output levels, which are expected to resume their decline in the next few years.


How much of a hit Brexit could represent depends partly on the government's success in reassuring investors, and the resilience of London's financial and legal industries, which marshal upstream investment.


"In the absence of an overarching and enduring EU framework, the energy industry needs to have as much certainty as possible regarding the future of UK energy policy, in order to support long-term investments in the energy system," the Committee said.


For electricity, the Committee also called on the government to provide clarity regarding the future of the carbon price floor, the capacity market and contracts for difference.


EURATOM MEMBERSHIP


The Committee said that the UK's withdrawal from Euratom, which underpins the nuclear industry and trade in nuclear materials, could impact the UK's ability to maintain current levels of electricity generation.


The Euratom nuclear treaty was "fundamental" to the current functioning of nuclear power generation in the UK, and that any failure to replace its provisions by the point of withdrawal from the EU could result in the UK "being unable to import nuclear materials, bringing the UK's civil nuclear industry to a halt."


"Given the risk to the UK's energy security, if replacement provision is not in place in time, the Committee calls on the government to ensure contingency arrangements are in place and to review the possibility of a Euratom-specific transition period separate from the wider Brexit process," it said.


IRISH POWER MARKET


The Committee said it was "vital" that the single electricity market in Ireland is able to continue post-Brexit given that it has been a key dividend of the peace process, reducing energy prices in both Northern Ireland and the Republic of Ireland.


"Given that its functioning requires the implementation of EU energy laws in Northern Ireland, the mechanics of maintaining the single electricity market will require careful consideration and new arrangements," it said.


It also said that the construction of the North-South electricity interconnector in Ireland was "vital" for reducing consumer costs in both countries and for maintaining energy security in Northern Ireland.


"The government must satisfy itself that its construction is not at risk as a result of Brexit. If that cannot be established, the government must underwrite its cost to provide investor certainty," the Committee said.


ENERGY POLICY INFLUENCE


The UK's influence over future EU energy policy is likely to be severely constrained post-Brexit, the Committee said.


"The government should conduct a frank assessment of its potential degree of influence, taking particular note of the difficulties faced by other non-EU countries such as Switzerland and Norway," it said. "The experience of other countries suggests that the UK is likely to have little influence on EU energy policy post-Brexit."


The Committee added that while the government appeared "confident" that a post-Brexit energy relationship with the EU would favor the UK, it was concerned that this confidence is based on a "misplaced expectation of pragmatism" and that broader political considerations may affect the degree to which the UK can engage with the internal energy market post-Brexit.


POLICY 'OPPORTUNITIES'


While conceding that long-term policy changes outside of the EU legislative landscape were not part of the inquiry, the Committee said it would draw to the government's attention a number of policy "opportunities" post-Brexit.


These include: changing the process through which changes are made to the rules governing the technical workings of the energy system; setting domestically tailored renewable energy and energy efficiency targets, supported by retail and supply-chain measures; targeting support at specific generation technologies without state aid restrictions; reconsidering the charging structure applied to electricity traded over interconnectors; and setting VAT levels to reflect energy as an essential item of household expenditure.








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