If the UK votes to leave the European Union, how will it affect the country’s energy supply and security and that of the wider European power sector? Diarmaid Williams and Kelvin Ross find out
There has been one topic dominating British politics this year – the referendum on whether the UK should leave the European Union. The issues topping the debate have been trade and immigration – but what effect would a ‘no’ vote have on the UK’s – and in turn Europe’s – energy system and the businesses that operate within it?
Some companies have been vocal in their opposition to the UK leaving. Speaking at a conference organized by the German British Forum in London, Juergen Maier, chief executive of Siemens UK, said: “For Siemens, the UK would not be interesting enough as a country on its own. We are interested in developing R&D and technology. The UK is an attractive market. But after we’ve developed we want to export the technology around the world, and by developing it just to British standards we would not be able to do that.”
Siemens has 13 factories in the UK and directly employs 14,000 people and Maier added: “This is not about protecting what we have today. For our 13 factories to be able to thrive in the future they need to be influencing what the future of their industry is going to look like. They need to be involved in R&D across borders and play a role in setting standards.”
And while Maier said that “it is not for us in business to tell people how to vote, we just want to inform the debate and enable people to make a better decision”, he added: “If we Brexit, we would end up in a more protectionist environment. Over time it would decrease competitiveness and harm the economic growth of the UK.”
Uk Energy Secretary Amber Rudd is a staunch advocate of the UK staying in the EU. In a speech delivered in March, she said: “Why do I believe that energy is an important issue in this debate? Sixty-five years ago, a treaty was signed in Paris that created the European Coal and Steel Community. This was the first concrete step towards the EU we know today. European co-operation began with an agreement on energy resources, to ensure we didn’t fight for them, but traded freely and fairly. And energy co-operation remains at the heart of the Union today, whether it’s about making us collectively more energy secure, making energy cheaper, or dealing with the global issue of climate change.”
She said that over the next five years the UK intends “to double our ability to import electricity with similar new connections to France, Belgium and Norway. And there are potential new projects with Denmark, Iceland and Ireland further down the track.
“These new connections as an extension lead to the vast European energy market, bringing cheap electricity from the continent. They are the perfect example of how being in Europe helps to deliver energy security at home.”
Rudd said that Britain’s geography means it is exposed: “We are an island. It is potentially much harder for us to import and export electricity and gas. In 2015 we imported almost half of the gas we need to heat our homes and power our businesses. And two thirds of this imported gas comes through pipelines from the continent. By 2030, even if we develop the potential of UK shale gas, we are expected to import about three quarters of our gas.
“In other words, we will have to continue to work with our closest neighbours to deliver energy security in the future.”
And she added that the UK’s membership in the European Union “helps keep our energy bills down. If we left the internal market, we’d get a massive electric shock because UK energy costs could rocket by at least half a billion pounds a year – the equivalent of people’s bills going up by around one and a half million pounds each and every day.”
The UK’s system operator National Grid asked economics consultancy Vivid Economics to undertake an analysis of the possible effects of an exit from the EU. In its subsequent report published in March, Vivid Economics states: “In the hotly contested Brexit debate, one thing is clear: Brexit will create economic uncertainty. This is because there are a wide range of possible outcomes from post-Brexit negotiations leading to a number of regulatory and market options for the UK’s relationship with the EU, with differing implications for investment and trade.”
The report concludes that, from an investor’s perspective, “higher returns are required to compensate them for the risk of less favourable post-Brexit arrangements. This puts upwards pressure on the cost of financing, raising the cost of investment in the UK energy sector.”
“The scale of planned infrastructure investment in the electricity sector over the next decade means that even small increases in the cost of financing could have large consequences for total investment costs.
“Further upwards pressure on costs would result from the likely devaluation of the Pound, given the role imported goods and services play in UK energy supply.”
It added that Brexit “would also result in some opportunities if it were the case that EU legislation constrained the UK to higher-cost technology pathways. However, this is unlikely as the UK’s domestic commitments to reducing emissions, coal closure and deploying renewables are similar or stronger than current and planned EU requirements.”
Phil Hewitt, director at UK consultancy EnAppSys, says that the impact of a Brexit on the UK energy system would be “very little directly because it would be impossible to disentangle from the EU energy market.”
He told Power Engineering International: “In the event of Brexit, the UK would be like Norway and Switzerland, with no ability to influence high level policy but with some influence on the detail of implementation.
“In other words, we will have to go with the policy of the EU without having a voice to prevent the overall thrust of what happens. It would make sense therefore to remain in the EU to have a voice in determining policy.” However, he adds that if the UK leaves the EU, there are different impacts on the countries that make up mainland Britain and also Northern Ireland and the Republic of Ireland.
“The GB electricity market of England, Wales and Scotland is one market overseen by National Grid for operational reasons. It is connected to the continent and the island of Ireland via interconnectors. The SEM market links the Republic of Ireland and the province of Northern Ireland into one market. The EU single energy market includes Norway and Switzerland, so it will be possible for both parts of the UK to continue to participate and there is no reason why not.
“The SEM arrangements are currently being rebuilt to make them compatible with the EU target model, so it would be difficult for Northern Ireland to leave this market without significant impacts on costs for Northern Irish consumers. The GB market would remain unchanged, but the interconnectors are a source of cheaper power from the continent so it would not make sense for British consumers to cut those ties.”
Hewitt adds: “The EU’s vision is a single energy market. This is being driven by the Third Energy Package which is a fully-integrated market.
“Day-ahead markets are already coupled and there are proposals for integration of balancing markets – the GB market, along with SEM, France, Spain, Portugal, Switzerland, Italy and Greece, is participating in a pilot project called TERRE, which goes live in 2017 – and there are other projects to deliver a cross-border, within-day market, and closer to real-time balancing too.
“It would be difficult for the UK to stop these processes without significant cost increases to consumers.”
And by way of an example of the position the UK could find itself in, he shares an anecdote: “EnAppSys are data experts so I sit on groups in Brussels that are implementing increased transparency. In the first meeting of one group, the guy from Switzerland explained that there were some legal issues in the implementation of the proposed transparency platform for the Swiss market.
“The response from ENTSO-E and the Commission was clear – this is a project mandated by the EU and you do not have the right to prevent its implementation: If you wish to access our market you play by the Commission’s rules. On a Brexit, the UK will be in the same position with reduced influence.”