Transcript Impact of Brexit on the UK energy sector

Impact of Brexit on the UK
energy sector
Report prepared for National Grid
November 2015
National Grid’s statement on its Brexit work
•
We are not advocating to leave or remain in the EU. We are providing evidence for
government on different scenarios to better inform the debate.
•
The EU energy policy significantly influences the UK energy system and the
environment in which we operate as a company. We therefore consider it crucial to
carefully assess the impact of a possible Brexit on the UK energy market.
•
We therefore made the choice to start assessing the impact of a possible Brexit at
an early stage, and to bring the expertise of an independent consultancy (Vivid
Economics) to support this work
•
We are keen to share our findings
Contents
1. Key findings
2. Value of EU membership for the UK energy system
3. Brexit scenarios
4. Assessment of impacts
― Gas markets
― Electricity markets
5. Broader impacts
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Key findings
Question: What is the cost of Brexit to the UK energy sector (from a net welfare perspective)
1. Though uncertain, the impact of Brexit on the UK energy system is very likely to be
negative.
2. In the energy sector, possible post-Brexit arrangements range from continued
membership of the Internal Energy Market (IEM) to a new set of bilateral
arrangements if the UK is excluded from the IEM.
3. The impact of the UK being excluded from the IEM could be up to £0.5 bn per
annum in the 2020s. Most of these impacts could be effectively mitigated if the UK
is allowed to remain in the IEM, although there would be a loss of influence over
policy design which has not been quantified in this analysis.
4. Further impacts on the investment climate for energy assets could exacerbate the
impact by up to several hundred millions of pounds and occur even if the UK stays
within the IEM. Additional economy-wide impacts such as a fall in the exchange rate
could raise costs to the energy sector further, but were beyond the scope of this
work.
Notes: (i) Impacts would need to be considered in the context of overall energy sector costs. (ii) This
study relies on secondary sources. Where possible, we have adjusted for consistency and
triangulated, however, without access to the underlying data, there are limits to the extent to which
this is possible.
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Value of EU membership for the UK energy sector
Benefits are a result of general membership and IEM participation
EU membership
IEM participation
Electricity
Gas
•
•
•
•
Access to lower
cost gas
•
Access to storage
could reduce
summer/winter
spread
Liquid markets and
trading hubs
(National Balancing
Point)
Security of supply
due to solidarity
mechanism
•
Optimised use of
UK energy assets
due to network
codes and EU
energy legislation.
Increased (market
coupling; crossborder balancing;
capacity market
trading)
Improved
investment case
for new
interconnectors
Broader
•
•
•
Good investment
climate and
reduced cost of
financing for the
energy sector (due
to market certainty,
access to supply
chain and skills,
etc.)
Influence on EU
rules & policies to
ensure they are
advantageous to
UK
Constrained
technology choices
due to EU targets
Economy wide
• GDP and
energy demand
impacts
• Certainty and
economy wide
cost of financing
• Exchange rate
and terms of
trade
• Access to skills
and labour
Outside the scope
of this analysis.
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Approach: Brexit scenarios
The level of impact depends upon whether the IEM is retained
Energy sector
IEM retained
(‘Norway’ scenario)
Increased cost of energy sector investment
programme
Electricity
Decreased
market coupling
Decreased
trading in cross border markets (capacity)
Brexit
Brexit
Decreased
trading in cross border markets (balancing)
Decreased investment in new interconnectors
UK leaves the IEM
(‘Swiss’ scenario)
Gas
Higher cost of gas
Decreased liquidity
Decreased storage
Decreased supply
security
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The risks for gas as a result of Brexit are minimal in the nearer
term
Impact
Assessment
Description
Higher cost of
gas
Minimal
Markets are already integrated: small price differentials
Decreased
storage
Minimal
UK has excess storage capacity: it would be necessary to lose
60% to 70% of gas sources for there to be an interruption to
domestic consumers (equivalent to losing all LNG supply, IUK and
BBL imports, and 50% of domestic supply) (source: Ofgem, 2012).
Decreased
liquidity
Minimal
Until recently, NBP was the most liquid market in Europe
(Booz&Co, 2013). Infrastructure is in place and will likely be used.
However, there is potential that other gas hubs could become
relatively more attractive in case of Brexit.
Decreased
supply
security
Minimal
UK have diversified sources of supply: many import facilities (e.g.
LNG and Norway pipeline) and storage overcapacity.
Note: present gas security arrangements (Security of Gas Supply
Regulation) are relatively weak as EU member states can withhold
gas from each other when the gas is needed to serve their
domestic ‘protected customers’ .
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Electricity: Exclusion from market coupling
Exclusion from coupling leads to sub-optimal interconnector trading
Market coupling reduces flow against
price differential; extension to
intraday coupling improves liquidity.
If Brexit, then UK could be excluded
due to political barriers.
Loss of ~£90m pa at current levels of
interconnection; up to £160m pa with
more interconnectors by early 2020s.
Source: Scaled assessment of
benefits of coupling from
ACER/CEER (2014).
Alternative estimate: up to £200m
(Vivid calculations based on
Booz&Co., 2013).
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Electricity: Loss of higher uptake of cross-border balancing
Exclusion from balancing leads to more expensive balancing options
EU codes promote higher uptake of crossborder balancing services which reduce
procurement costs for TSOs.
If Brexit, then UK could be excluded due to
political barriers.
Loss of value up to £80m pa by early 2020s
assuming complete inability of UK to secure
additional bilateral arrangement.
Source: Based on National Grid internal
estimate of balancing services
Alternative estimate: up to £120m (Vivid
calculations, based on Mott Macdonald, 2013)
Impact of Brexit on the UK energy sector
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Electricity: Interconnectors not included in capacity market
Exclusion from capacity market leads to more expensive options for security of supply
Capacity markets yield short- and
long-run efficiencies in sourcing of
energy and capacity.
If Brexit, then UK could reverse
decision to include interconnectors
in capacity market owing to
removal of EU requirement.
Participation of existing
interconnectors and those in
advanced planning reduces costs
by up to ~£20m pa by early 2020s.
Source: Scaled estimates from
DECC (2014).
Impact of Brexit on the UK energy sector
Electricity: Fewer interconnectors
Undermined business case for FAB link, IFA2 and Viking Link does not proceed (3.4 GW)
Interconnectors can reduce wholesale prices,
with benefits for UK energy consumers.
Brexit could reduce investment due to reduced
EU support and increased investor uncertainty.
Loss of £160m pa in the 2020s if Viking Link,
IFA2 and FAB Link are cancelled. NEMO and
NSN not assumed at risk.
Source: Estimate from Poyry (for Ofgem, 2014)
Alternative estimate: up to £170m, Redpoint
(2013)
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Broader impacts: System flexibility and risks
Other impacts of EU membership exist regardless of IEM, although these are less certain
Assessment
Impact
Description
Cost and
timing of
investments
Increased financing costs due to market
uncertainty created by Brexit
Cost: £100s of million cost in the
near term. Vivid Estimate based on
multiple years of uncertainty and 50
basis points increase (source:
interviews)
IEM rules and
policies
Less influence on EU rules & policies to
ensure they are advantageous to UK
Cost unclear and not quantified as
many rules already set, and extent of
further UK influence uncertain
(interviews with experts)
Technology
choices
UK constraints are similar or more binding
than current EU requirements beyond 2020
March 2016 Update: Recent
announcements by Government
constrain technology choices in the
UK beyond 2020 (e.g. coal phase
out, 4 GW offshore wind, net zero
emissions legislation)
(upper annual estimate in 2020s)
Impact of Brexit on the UK energy sector
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UK government could minimise risks of Brexit
Some are cheap to mitigate, while others are more difficult or costly
IEM
impacts
Working to preserve membership in the Internal Energy Market would
minimise a large share of the risk of Brexit.
Unilateral action to minimise domestic policy risk, for example:
Other
energy
system
impacts
•
improve domestic policies and regulation related to interconnection could
mitigate impacts (e.g. committing to continued cap-and-floor regime)
•
greater visibility of investment profile for all energy assets (e.g. extending
allocations for capacity and CfD auctions)
Preparing to strike bilateral deals across EU could mitigate impacts, for
example:
Economy
-wide
impacts
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skill-sharing agreements that allow staff to easily transfer to the UK
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supply chain agreements to ensure avoidance of tariffs
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Company Profile
Vivid Economics is a leading strategic economics consultancy with global
reach. We strive to create lasting value for our clients, both in government and
the private sector, and for society at large.
We are a premier consultant in the policy-commerce interface and resource
and environment-intensive sectors, where we advise on the most critical and
complex policy and commercial questions facing clients around the world.
The success we bring to our clients reflects a strong partnership culture, solid
foundation of skills and analytical assets, and close cooperation with a large
network of contacts across key organisations.
Practice areas
Energy & industry
Natural resources
Growth & development
Competitiveness & innovation
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Appendix: Impacts beyond the IEM
Potential for increased financing costs due to market uncertainty created by Brexit
Given that the energy sector is particularly capital intensive and going through a period
of investment in new infrastructure in the electricity sector, an increase in financing
costs could have a significant impact on overall costs.
A high level estimate suggests up to £100s of million cost assuming:
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£15-20 bn investment cost in the electricity sector per annum (Infrastructure UK
and HM Treasury, 2015).
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Borrowing cost differentials of 50bps, based on discussions during the project.
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Multiple years of uncertainty, based on a limited period over which uncertainties
resolve following the referendum.
Rather than increase costs, uncertainty could lead to the deferral of investment until
uncertainties resolve. However, timing is important for a proportion of the new
investment at it is required to achieve security of supply objectives, limiting the ability to
defer this investment.