Brexit and energy: A choice between economics and sovereignty

If Brexit means the UK leaving the EU’s single energy market, it will have to invest more in new electricity generating capacity, pay higher prices – arguably with less security of supply – and accept a bigger role for the state in the energy sector, writes Philip Lowe.

Withdrawal from the European Union raises key questions for the UK’s energy sector. Leaving the bloc’s single energy market will mean the UK will no longer need to co-ordinate or co-operate with its European neighbours in the sector or accept governance by its supranational bodies. But that independence is likely to mean the UK will have to invest more in new electricity generating capacity, and face higher prices, less security of supply, and possibly a bigger role for the state in the energy sector.

The level of physical interconnection between the British mainland and other European countries remains low at 6% of installed electricity generation capacity compared with an EU average of over 20%. Nevertheless, the UK has been at the forefront of efforts to create a single European energy market and has also been among those pushing to reduce carbon dioxide emissions to combat climate change.

The logic behind fostering greater EU cross-border activity is that solving energy issues is easier if a country’s network is bigger and covers areas with more varied sources of supply, different weather conditions and demand patterns.

An EU-wide interconnected, integrated network of national energy systems has the potential for countries to save on investment in generating capacity, reduce costs and strengthen energy security. There is an obvious link between the UK’s higher wholesale energy prices (30-40% above those on the Continent) and the relatively low level of energy interconnection between the UK and its European neighbours.

But for the UK to enjoy the benefits of the European single market in energy it must also abide by its rules, including on interconnection, the balancing of supply and demand and congestion management – the rules that ensure energy can flow to where it is most needed. It must also accept governance by supranational bodies that police the common trading area, and jurisdiction of a common referee in the event of disagreements or disputes.

Prime Minister Theresa May’s proposal for a free trade agreement with the EU which would “cover sectors crucial to our linked economies” suggests the energy sector will be included. The immediate challenge for the UK government is to identify which parts of EU energy and climate change legislation it should adopt, which should be amended, and possibly, which should form part of any new EU-UK trade agreement.

Yet the language as well as the economic and commercial reality of integrated, interconnected networks does not fit well with the Brexit that the majority of British voters backed. In energy as in other areas, the UK government has indicated it wants to release the UK from the control of EU institutions, agencies and courts, after at most a transitional or ‘implementation’ period.

That could put the UK in the same boat as Switzerland. Swiss ambitions to be part of the EU’s single energy market have foundered because they refuse to open their energy market to competition or accept the jurisdiction of EU institutions and bodies. However, unlike Switzerland, the UK has long championed market liberalisation initiatives and many foreign energy companies have set up shop in Britain.

The lack of clarity on the UK’s future relationship with the EU on energy matters spells uncertainty for businesses and investment in the sector. Without some form of EU-UK agreement, it will also raise questions about one of the success stories of energy market integration in Europe: the Single Irish Energy Market.

It is possible to imagine a bespoke arrangement for Ireland in parallel with an agreement on a soft border between Northern Ireland and the Republic of Ireland. But if the logic for an all-Ireland energy market is strong, it is difficult to see why there should be opposition to market integration between the UK and other EU countries.

In the short to medium term, countries such as the UK can maintain their trajectory towards a low-carbon economy by switching from coal to gas. But in the longer term they need low-carbon electricity, which means more renewables, more nuclear, and more use of carbon capture and storage (CCS). In the UK, no net additional nuclear capacity is likely to come on stream before 2025, and CCS is unlikely to become commercially viable before then at the earliest.

If the UK elects to “take back control” of UK energy policy it would be able to bypass EU limits on state aid. That would open up the potential for the UK government to embark on a more interventionist approach to the sector and speed up decisions on public funding for energy investment. New entrants or strategies by the existing utilities may help boost competition in the UK market, but the wholesale price of electricity will be largely predetermined by government policy: the connections between the UK and the Continent and the energy mix the government opts for. Imported liquefied natural gas could provide an area for competition, but the need to meet the country’s decarbonisation goals suggests the UK will have to fall back on expensive investments in nuclear to cover future national energy needs.

The biggest energy policy challenge facing the UK and every other EU member-state is to guarantee that supplies of low-carbon electricity are affordable for households and competitive for businesses.

The government must decide whether the desire for sovereignty expressed in the Brexit referendum outweighs the economic arguments in favour of integration in the European energy market. If Brexit means the UK leaving the EU’s single energy market, it will have to invest more in new electricity generating capacity, pay higher prices – arguably with less security of supply – and accept a bigger role for the state in the energy sector.

Sir Philip Lowe is Executive Chair of the World Energy Council’s Energy Trilemma initiative, and former Director General of DG Energy at the European Commission. 
He recently authored a policy brief for the Centre for European Reform (CER), a think-tank based in London with an office in Brussels.