EU Referendum and the Energy Industry
15 July 2016, News release from SMS Plc
UK power prices have been driven upwards over the last several weeks, in large part, due to the possibility of the UK exiting the EU. Along with increased volatility in oil prices, Sterling losing value against the Euro due to market uncertainty has been the key driver in this upward trend.
Factors outside of the UK and Europe are more prominent drivers in wholesale energy costs, as global economics have far reaching impacts into local power prices, so if the UK were to leave, this may have less of an impact on prices than would initially be expected.
Instances such as the US shale gas market opening up, the nuclear explosion at Fukushima, along with the Russian and Ukrainian conflicts, are all examples of the measurable global impacts on UK energy prices.
Fundamentally, whether the UK remains or leaves the EU, the market conditions remain the same, and over the longer term, global economics and short term supply and demand fundamentals will continue to drive prices.
Should the UK vote to leave the EU, expectations are for energy prices to rise in the near term across closer dated delivery contracts, mainly due to Sterling losing value against the US dollar and the Euro. There could also potentially be a slowdown in investments in new generation, although much uncertainty remains in this area.
However, if the UK remains in the EU, then we anticipate a slight softening of prices across the board, due to removal of uncertainty risk pricing and an expectation of Sterling recovery.
The EU Referendum and Compliance in the Energy Sector
If the UK votes to stay in the European Union on 23rd June, it's business as usual.
However, if the UK votes to leave the European Union on 23rd June, unpicking and then disentangling the regulatory framework on compliance in the energy sector is going to be problematic i.e. What primary UK legislation originates solely from Directives from the EU, what is home-grown and what would still be on the statute books even if UK wasn't, or had never been, part of the EU?
The work of the United Nations Framework Convention on Climate Change and the international agreements to which the UK has become signatory would have found their way on to the UK's statute books in any case, but moulded primarily by our Parliament instead of through the auspices of the European Commission.
The question then is, do we go through the pain and inconvenience, disruption and argument of repealing Acts of Parliament in order merely to extinguish all EU-related compliance measures? Would we be throwing out regulatory elements of considerable benefit with the EU 'bathwater'?
"May you live in interesting times..." A curse or a blessing? A massive headache or a brilliant opportunity?
What influence could the EU Referendum have on the Energy Efficiency Agenda?
In recent years a number of UK regulations influencing energy efficiency have been rooted in EU directives. While we do not know how the UK government would have approached the energy efficiency gap without this influence from Europe, it is useful to consider what an out' vote could potentially influence.
The EU Eco-design Directive has required electrical compliance manufacturers to take action to improve the energy efficiency of their products. Whilst at times this has resulted in tabloid claims that 'EU bans powerful vacuum cleaners', the reality has tended to be a gradual improvement in efficiency which has had a positive influence on consumer bills. While an out vote would give UK government the option to repeal regulations in this area, it is unlikely that product manufacturers would try to undo the harmonisation on products standards as doing so would reduce their ability to sell into the EU market.
As the Energy Performance of Buildings Directive imposes regulations on buildings within the UK, there may be greater scope for the government to change the landscape following a Brexit. In particular, energy performance standards for new buildings could be watered down, although this would embed further inefficiencies in the building stock and risk the UK falling short of commitments to reducing carbon emissions. The recent scrapping of the zero carbon homes target would appear to indicate that the current government does not see high efficiency buildings as a priority and there has been little reassurance from prominent brexiteers, that environmental legislation would be retained.
The EU Energy Efficiency Directive has had a significant influence on energy management policy and withdrawing from the EU would open up options for a change of approach. Currently member states are not only required to have energy efficiency improvement targets (on aggregate 20% by 2020), but also to demonstrate a plan capable of delivering this reduction. Various other aspects of the directive have been targeted at improving the understanding and ownership of energy consumption and efficiency options in consuming organisations. Any decision to remove these schemes and commitments would leave a significant hole in the policy landscape.
Whether leave or remain, the ambition for UK government should be to provide a stable and progressive policy environment to promote energy efficiency as it enhances the competitiveness of UK Plc.