Brexit Energy: The Problems, Prices & Possibilities
While Brexit energy drinks and Boris Johnson’s hair may seem humorous, Brexit could have very serious effects on the UK energy market: skyrocketing energy bills, power shortages, even a potential nuclear disaster! The list of possible consequences is long and, at times, extreme. Even while uncertainty grips Westminster (not to mention the rest of the country), when it comes to energy we’re here to tell you what to expect in the months to come.
The EU and the National Grid Today
To try and forecast what may happen, it’s important to understand the UK energy market as it is today. The UK generates and produces its own electricity and natural gas, but not enough to satisfy the domestic market. Because of that, the British national grid also imports energy from the EU.
The UK is connected to continental Europe via four undersea high voltage direct current (HVDC) interconnectors that allow energy to flow freely between the UK, mainland Europe and Ireland. In 2019, the UK imports about 6% of its electricity and a full 47% of natural gas from the EU.
Under EU law, which would no longer apply to the UK in a no-deal Brexit, energy is traded freely across borders within the EU so that any excess electricity will be transferred to markets that need it.
To make this explanation more clear, let’s use a simplified example. Imagine that on a particularly nippy day in London it’s also extremely sunny in southern Spain. Solar panels would be generating more electricity than is needed in Spain, so instead of losing that energy, it’s transferred to London.
The EU/UK Trade Policy
The European Union is a single market, which means that there are no barriers to trade between members. That means that right now, even if the EU wanted to tax the UK for importing natural gas, it couldn’t do so. Obviously, when or if the UK leaves the Union, that will no longer be the case.
The EU would still have to trade energy with the UK (no EU country has suggested cutting trade in any case) because the UK and EU will both still be part of the World Trade Organization (WTO), an international organization dedicated to promoting fair trade internationally.
What Happens If There’s No Brexit Deal?
Although no one knows exactly what will happen in the event of a no-deal, or hard, Brexit, we feel confident in a few predictions.
Your lights will (probably) not go out
Gas and electricity will continue to trade between the EU, and neither side has made any indication that they are looking to cut the flow of energy between the UK and the Continent.
That being said, a no-deal Brexit with no alternative energy agreement will certainly make international energy flow less efficient. An extreme weather event, like 2018’s “Beast from the East” cold snap and snowstorm, could put so much strain on the national grid that without gas from abroad, the UK could be left shivering.
Luckily the most uncertain period looks like it will occur in April and the following months, meaning the UK has some time before it needs to worry about severe winter weather testing the heating infrastructure.
Will energy prices rise after Brexit?
Right now the UK imports about 6% of its electricity and 47% of its gas from mainland Europe via underwater interconnectors and pipelines. If the UK leaves the EU without a deal, the UK government will have to renegotiate prices with the EU under the rules of the World Trade Organization.
If the European Union chooses to do so, they could place high prices on energy and fuels flowing to the EU. The UK could retaliate, but since 2004 the UK has imported far more energy than it exports. That means that Europe would have a huge advantage in a price negotiation.
Even if the EU chooses not to place punishing prices on energy sources, you should still expect your bills to go up. Market uncertainty will cause suppliers to raise their prices to combat falling share prices. In fact, studies show that uncertainty has already caused energy bills to increase since the referendum.
Additionally, at least in the short term, the value of the pound sterling will almost certainly fall, and prices across all industries will increase to compensate.
The UK and Non-EU Energy Trading
Apart from trade with the EU, the UK will also have to negotiate new rates with other crude oil and natural gas providers. All EU countries pay the same rates for fuel, but post-Brexit the UK will need to re-negotiate prices.
This past summer during his whirlwind tour of the UK, US President Donald Trump touted American LPG exports as a potential way of keeping the UK gassed up through the impasse. He neglected to mention whether or not the United Kingdom would receive a discount.
The UK has already secured a no-deal agreement (a trade agreement that will be enacted if there is a no-deal Brexit) with Norway, one of the EU’s largest external sources of oil, but has yet to set an agreement with Russia, which supplies more than 30% of the EU’s crude oil. A high trading rate could put further strain on the UK energy market.
What If There Is a Deal?
This is a difficult question to answer, because “a deal” could range from a full customs union with freedom of movement to a bare minimum of trade agreements between the United Kingdom and the EU. Still, looking at the situation we feel confident that energy trade would be a high priority for both sides.
If the EU and the UK Government manage to agree on a deal, most likely the energy trade would remain the same or similar to policies in place currently. The UK, as a net importer of electricity and natural gas, has already made it clear that they would prefer to maintain the status quo.
Meanwhile, the EU has several conflicting interests in terms of whether or not to raise the UK’s gas and electricity import prices. However, we predict that the EU will be accommodating, principally for the sake of Ireland.
Brexit and Irish Energy
As part of the European Union, Ireland also trades energy freely with the rest of the EU, which currently includes the UK. Looking at a map, it’s not difficult to guess that any energy Ireland imports from the EU must pass through the UK. That means that high energy import prices for the UK would also affect Ireland.
Imagine the EU decides that the UK will pay double its current price. That means that the UK would be forced to trade with Ireland at the same rate or lose money every time electricity or fossil fuels passed through the country to get to Ireland. Because of that, we predict that regarding energy Europe will be keen to maintain similar trade conditions if possible.
Higher import prices would have a huge effect on Irish energy bills, both in the Republic and in Northern Ireland. The island currently imports about 39% of its natural gas, and 8% of its electricity through its connections with the UK.
There are planned interconnectors and pipelines that would connect Ireland directly to France, but as of now all energy connections to the EU have to pass through the UK.
Northern Ireland, the Republic and Brexit
An even more thorny issue is the sharing of electricity between Northern Ireland and the Republic. Since 2007, the entire island has used one energy grid, the Integrated Single Energy Market, or ISEM (previously known as SEM). Like many of the policies agreed upon since the Good Friday Agreement, SEM relies heavily on Ireland and the UK being part of “one single union” as EU members.
With the UK, and thus Northern Ireland, leaving the EU, it’s unclear how the Integrated Single Energy Market could continue to exist. That makes Northern Ireland’s electricity supply uncertain and will almost definitely lead to a rise in household bills going forward.
Brexit, Energy and the Environment
All EU countries are required to meet certain targets towards generating renewable energy to combat climate change and promote sustainable energy generation. The EU Renewable Energy Directive (RED) dictates the Europe-wide goals and timetables to member countries' governments.
When the UK leaves the EU, it will no longer need to follow the regulations. So does that mean Brexit will result in a less-green world? The simple answer is: probably not. Many of the projects designed to meet RED’s target goals are already in motion, so the majority will probably continue as money has already been spent.
Customers concerned with the environment should be aware that independent suppliers like Octopus and Tonik Energy supply 100% renewable electricity tariffs that have a fixed rate, which helps protect you from rising energy costs.
Additionally, the UK has set its own goals independently of the EU. The UK’s Climate Change Act is actually more aggressive in scope than the EU-wide environmental scheme. This could help the UK become more energy independent going forward, but as of now it still relies on natural gas and electricity imports.
Brexit and Nuclear Power
One of the more alarming complications of Brexit involves nuclear power plants. The UK has 15 nuclear power plants that supply a full 20% of electricity in the UK.
Those power plants are currently regulated by Euratom, an organization dedicated to managing the European market for nuclear energy, safeguarding hazardous nuclear materials and protecting against radiation generated by a nuclear power plant.
The UK is a member of the World Association of Nuclear Operators, and it is already in law that control will pass from Euratom to the UK Office of Nuclear Regulation, but many experts are worried about the transition period. Obviously, when dealing with nuclear energy generation, there’s virtually no room for a learning curve.
Apart from safety, there have also been concerns raised about the nuclear industry from a business standpoint. As of now, if the UK leaves Euratom, it will become much more difficult to sell energy to other European countries.
Brexit and the Big Six
Apart from all of the issues listed above, Brexit will surely complicate things for many of the largest UK energy suppliers which are owned by foreign European corporations. Among the Big Six companies, which hold around 75% of the UK energy market, only two are owned by UK businesses.
Although it’s unlikely that they’ll leave the market completely, foreign-owned energy companies like Scottish Power, SSE and E.ON will almost certainly face increased operating complications and costs. While the Big Six have been forced to hold their prices at Ofgem’s national price cap, they’ll either have to somehow increase their revenues somehow lose money.
So… What’s Happening?
It’s extremely difficult to predict how the political situation will play out. Within the UK Government and the EU there are numerous conflicting interests; some advocate for “no deal”, others a “soft deal”, and some want to stay within the European Union.
While it is still unclear exactly what will happen, you can be sure of a few things: expect steeper bills in the future and don’t be surprised if more and more suppliers close up shop due to increased costs and market uncertainty.