Brexit and energy

As the Brexit negotiations begin, we shouldn’t forget the impact they could have on existing and future energy policy in Scotland. An issue that got precious little attention during the referendum campaign.

The UK currently operates within an EU wide regulatory framework, including the single electricity and gas market. Other directives cover energy services, security and the Euratom treaty on nuclear power. The main aim is to create non-discriminatory access to networks and the creation of wide area wholesale markets. It is claimed that the current integration results in savings of around 5% of costs, with full market coupling and shared balancing resulting in further gains of 2.3% of wholesale electricity costs.

Leaving the EU does not change the UK’s key energy policy objectives that include low prices, energy security and environmental targets. The use of interconnectors to mainland Europe is an important link to energy markets and for energy security. At least eight cables are being laid to trade power between the UK, Ireland, France, Belgium, Denmark and Norway, tripling the existing number of UK interconnectors. Huge investment has been committed to the projects under way, and ones even further afield have been suggested, such as a cable to bring Iceland’s volcanic power to Scotland.

Another question mark will be over the single electricity market in Ireland and integration into the GB system. There are related concerns over freedom of movement for energy workers, withdrawal from the EU carbon pricing system (ETS) and collaboration on energy research. MP’s have been particularly critical over the consequences of withdrawing from nuclear cooperation through the Euratom Treaty.

This slide gives National Grid’s fairly pessimistic take on the consequences.

brexit energy

The ‘no deal’ approach would mean a reversion to WTO rules at best, but the WTO would provide very little help in terms of energy market access. It might be possible to include energy in trade deals with Canada and the USA, over energy sources like LNG, but energy is realistically an issue with close neighbours.

Equally, if we remain within the system then the tricky issue of judicial oversight rears its head. It is hard to envisage a deal that does not bind the UK to ECJ decisions.

Brexit also has implications for the Scottish Government’s independence plans. Scotland is a net energy exporter, but it also increasingly relies on imports from England, particularly when the wind isn’t blowing. The counter to unionist claims that Scotland would be cut off from the GB system, is EU market access requirements. However, if the UK isn’t bound by those directives, then neither would a future rUK government. Of course in the short term there is probably a joint incentive to reach a deal. The longer term might be more problematic.

As with other areas there are also opportunities with Brexit. Outwith the EU the UK could develop different subsidy regimes, state intervention and redesign the wholesale market. All is not well with our energy market and it could be argued that we could be more flexible outwith it.

In summary, those who support the current market based approach argue that the UK negotiators should focus on barrier-free trade that would maintain the ‘benefits’ of the internal market and high-level cooperation on energy matters. Sceptics point to the extra cost and inflexibility of the current system and argue that a lighter touch engagement with the EU would free up the UK to adopt a different approach.

 

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