A no-deal Brexit could cause energy prices to skyrocket

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Exiting the European Union will have many positive and negative effects on the UK economy, some big, some small. Energy is one of those areas due to be affected by the political landscape from March 2019.

One major concern for the UK population, aside from currency fluctuations and job security, is rising energy prices. Millions of residents have already faced two rounds of price hikes this year due to rising wholesale prices for gas and electricity. Any additional costs would certainly have a negative impact on household finances. This uncertainty around the energy market is leading more people to question what energy tariff they should be selecting when they compare energy prices.

Right now, part of your energy bill helps to invest in renewable energy sources and facilitate the research of energy improvements, to meet green energy and pollution targets that are set by the European Union. These targets could potentially differ when the UK is set to leave. It is extremely unlikely that they would be scrapped, there is a possibility that initiatives to increase green energy and reduce pollution could potentially be scaled upwards, which may lead to an additional outlay on customers’ bills. Here’s how Brexit could also increase the cost of household and business energy bills:

  • Reduction in EU investment
  • Leaving the EU Emission Trading System
  • No replacement or solution for Euratom
  • Rising transportation costs

The Big Six are likely to be less affected by this change, in comparison to many smaller energy firms in the UK. This is by way of their financial power to absorb fluctuating wholesale prices and currency exchange rates should they wish to do so. Only British Gas and SSE are UK-owned. EDF is French, Scottish Power is owned by Spanish firm Iberdrola, and Npower and Eon are German.

A ‘no deal’ scenario currently remains unlikely when the UK is due to leave the European Union. A fair outcome needs to be negotiated as soon as possible. As negotiations progress, the government will still be required to have a contingency plan for any final eventuality, this includes a ‘no deal’ scenario. According to the Department for Business, Energy & Industrial Strategy, the UK government has been working to ensure there is a plan in place for ‘day 1 in all scenarios…’.

It’s imperative for the UK government to inform residents and businesses what they will be required to do if there was a ‘no deal’ scenario, to help them prepare for the road ahead.

The UK’s gas and electricity trade with the EU27 has an annual value of around £6billion. Natural gas equates to 80% of this. The UK currently imports gas from EU27, but is far more reliant on gas imports from Norway. Right now, electricity is imported from Ireland, France, and Netherlands. These imports account for around 7.5% of the UK’s total consumption. If new interconnector capacity is delivered under new plans, this will likely increase.

UK wholesale prices for electricity are generally higher than those in the EU27. Leading this energy charge is the capital city, London. It is estimated that around 25% of all oil trading across the world takes place in this city. Clearing services, energy derivatives, and physical trading for gas and electricity markets in the EU also takes place in the United Kingdom.

InterContinental Exchange (ICE), based in London, is a leading global energy exchange and trading hub for European energy. London participates in a vital role to determine the energy market reference price.

All European Union rules for energy market regulation will no longer be applicable to the UK, under a ‘no deal’ or a failure to implement trade agreements scenario. All UK based energy operators will no longer be able to participate in the rules that enable physical interconnection of our energy markets.

We’re not suggesting that power to homes will be cut, but the impact could see wholesale electricity prices increase amongst other changes to the energy market. It is worth noting that some government officials have warned that a ‘no deal’ Brexit could lead to electricity blackouts across Northern Ireland. A shortage of supply and the risk of increasing electricity prices will be a major concern.

The EU does not have a tariff for gas and electricity imports from other WTO members, this means that gas and electricity between the UK and the EU27 would remain tariff-free. Unfortunately, this does not immediately apply to energy plant and materials supply across these borders, these may be subject to a tariff barrier

A solution will need to be found if London wishes to continue to lead the charge for European gas, electricity, oil, and emissions trading under the financial services sector. However, under a ‘no deal’ scenario, UK authorised energy firms may not be able to trade freely within the EU’s Single Market.

At this stage, there is a lot of speculation about what will and will not happen. This will hopefully become clearer as announcements are made while the negotiation process is underway.

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