Five expert insights on Brexit and energy
On 13 November, we invited the EU’s former director general of DG Energy, Sir Philip Lowe, to speak to a small specialist audience about the likely impacts of Brexit on energy and climate policy. Sir Philip, who was in post from 2010 to 2014, is well qualified to comment: he has deep expertise across key EU institutions and is currently chair of the World Energy Council’s energy trilemma initiative. The meeting sparked interesting conversations, including around Sir Philip’s recent publication, Brexit and energy. This post reports the main insights from our discussion.
Ireland: the immediate challenge
There is little time remaining before the end of the Article 50 deadline to negotiate any substantial detail on energy and climate policy with the EU. There is still less time to resolve the island of Ireland’s integrated energy market: Northern Ireland imports 15 per cent of its power, and EirGrid is projecting potential generation inadequacy by 2021, even assuming Northern Ireland remains within the EU’s internal energy market.
Switzerland proves that managing divergence limits benefits
The UK and the EU start at the same place on energy regulation. In fact, the UK has been a consistent advocate for liberalising the energy markets and was the driving force behind the rules (network codes, market coupling etc) that now form the internal energy market. But just as this arduous process has begun to bear fruit, it is ironic that the UK is considering pulling out.
By contrast, Switzerland is in the centre of Europe but outside the EU’s internal energy market. The institutional and sovereignty issues that have prevented a seamless merger of Swiss-EU internal markets show the potential challenges that could arise for the UK. The Agency for the Cooperation of Energy Regulators (ACER) estimates that a lack of market coupling between Switzerland and its neighbours results in an estimated loss of €80 million in social welfare terms per year.
The internal energy market is a binary choice, ‘access’ is meaningless
UK companies actively trade gas and electricity across the EU and, despite the UK’s low level of physical interconnection, it imports seven per cent of its power from the EU. This is set to rise as £9 billion is planned to be spent on at least 12 interconnector projects between the EU and UK. Interconnection requires a common set of rules between the UK and the EU, alongside common institutions to enforce them. Without these, trading will be inefficient and the benefits of deep market coupling, capacity allocation and real time balancing would be lost. This would be a loss to the UK’s energy consumers.
The rules are set by institutions like the ACER, Electricity Network Transmission System Operators for electricity and gas (ENTSO-E, G) and the newly instituted Regional Operational Centres (ROC). After Brexit, the UK could seek observer status within these bodies but will certainly lose any ability to influence market rules. Unlike the government’s approach of seeking maximum access to the single market while adopting its own rules, there is no distinction between ‘having access’ to the EU energy market and being a part of it. The rules define the system, and the UK can either accept them to trade, or not trade. Similarly, the UK would lose out on the benefits of deep energy integration.
Divergence means going it alone on climate diplomacy
The UK currently participates in EU wide efforts to reduce carbon emissions, legislated through the effort sharing regulation. The UK has historically driven climate ambition in the EU, but Sir Philip commented that it would be a logical outcome for the UK to separate its climate commitments from the EU, if it withdraws from effort sharing and the EU Emission Trading Scheme (EU-ETS) and pursues a significantly different approach to meeting its carbon targets.
The UK should adopt a functional rather than a federalist point of view
The main strategic question for the UK is whether the advantages of further integration and interconnection with European energy networks outweigh the challenges of interdependence and the jurisdiction of supranational bodies.
Sir Philip argued that the energy sector is undergoing the 4D transition (decarbonisation, digitalisation, decentralisation and democratisation) and the future of UK and EU energy systems will depend on a variety of external global factors like digitisation, trends in oil, gas and coal markets and the geopolitics of climate change. A policy which keeps markets open in the face of this dynamic picture would be preferable, even it is politically more difficult to achieve.
Before its accession to the European Community, and within it as a member state, the UK has always promoted policies which made sense from a functional rather than federalist point of view. British ministers did not have to be Europhiles to see the advantages of co-operation with the UK’s European neighbours in meeting domestic energy challenges.
[Image: 1325 Pylons by Tomas from Flickr Creative Commons]