The Low Carbon Kid: UK energy and environment sectors face post-Brexit uncertainty

Monday, July 11, 2016

UK energy and environment sectors face post-Brexit uncertainty

[note: Originally published in The Fifth Estate, on 28.6.16.]

The UK energy market and the prospects for environmental safeguards face an uncertain future following the country’s referendum vote to leave the European Union.

One-fifth of British business leaders said they were considering moving operations abroad after the vote, according to a survey by the Institute of Directors. One in four also planned to freeze recruitment and over a third said it would cause them to cut investment.

Immediately following the announcement of the result, Greenpeace UK executive director John Sauven commented: “Many of the laws that make our drinking and bathing water safe, our air cleaner, our fishing industry more sustainable and our climate safer now hang by a thread… The climate change-denying wing of the Conservative Party will be strengthened by this vote.”

Jacob Hayler, the executive director of the Environmental Services Association, which represents the UK’s resource and waste management industry, also voiced the opinion that the result would “extend and intensify the uncertainty around both our industry and the UK more generally”.

“The danger now is that the waste and recycling sector is placed at the bottom of the government’s in-tray.”

He promised to “make the case for the circular economy within the UK”.

The effects on investment prospects are likely to be negative for these sectors. Last year the National Grid commissioned research from Vivid Economics on the impact of Brexit on the British energy sector, which concluded that investment costs would increase due to the “uncertainty arising from Brexit negotiations” at a time when the country is “undertaking a historic level of investment in energy infrastructure”.

This view was echoed following the announcement by Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, who said that energy companies could be most exposed to the effects of a Brexit. Plans for capital intensive projects such as offshore wind and new nuclear power stations are particularly vulnerable.

Although EDF chief executive Jean-Bernard Lévy said the UK’s decision would have no impact on EDF Energy’s strategy to build Hinkley Point C – the first new nuclear power station built in the UK in almost 20 years – this was contradicted by Fiona Reilly, PwC’s global head of nuclear capital projects and infrastructure. She said the decision to leave the EU “could have a significant impact on our nuclear program”, citing “access to capital and investor confidence”, but also the need to “renegotiate our involvement in the Euratom Treaty and our 123 Agreement with the US”.

Jonathan Grant, director of PwC sustainability and climate change, called the result “a major setback for the type of collaboration needed to tackle global environmental issues like climate change”, and said “there is a risk that it could kick EU ratification of the Paris Agreement into the long grass”.

Professor Steve Cowley, chief executive of the UK Atomic Energy Authority, the country’s nuclear research agency, told the BBC that over 1000 clean energy exploration jobs may be lost. Scientific research benefits greatly from EU partnerships and funding. Researchers are afraid, he said, that £55 million (AU$99m) in annual European Commission funding would be withdrawn.

While the decision to leave will not affect the UK’s climate change goals, as they are enshrined in law at a national level under the Climate Change Act 1998, there will still be implications. The UK’s own emissions will have to be deducted from the EU’s, which count together under the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement.

The deduction could impair the EU’s perceived performance since, as the UK is a relatively high performer, it helps to counteract the lesser performance of other member states. The UK will also have to submit its own Nationally Determined Contribution to the UNFCCC process, since at present all member states are covered by a single document.

Christiana Figueres, before the vote, had already said that a pro-Brexit result would mean the Paris Agreement “would require recalibration”. Following the vote, Ian Duncan, the only Conservative MEP for Scotland and the British lead MEP on the bill to revise the Emissions Trading System, resigned. In his letter he said: “It is with quite some regret that I take this step. I believe passionately in the need to address climate change.”

Whether the UK will continue to participate in the EU Emissions Trading Scheme is uncertain. European carbon prices fell over 15 per cent following the Brexit vote. If negotiations result in Britain adopting the EEA + EFTA model, then, like Norway, Lichtenstein and Iceland, it will do so. Otherwise, arrangements will have to be made to compensate those companies which hold a surplus of emission allowances under the cap and trade scheme.

Also, the country will be free of the targets set by the EU Renewable Energy Directive and the restrictions under EU state aid, which could free the government to curtail renewable energy support regimes, as long as it still kept within the Climate Change Act’s restrictions. Many right-wing politicians would like to see this Act withdrawn, however.

But any subsidies must still comply with the World Trade Organisation’s subsidy regime – which arises from the same principles as EU State aid rules.

It’s unlikely that Brexit will reprieve the death sentence hanging over the UK coal-fired power stations and many older gas plants. The law stipulating that their greenhouse gas emissions are too high to permit them to continue was the EU Industrial Emissions Directive 2010, which passed into national law. The UK Government is anyway proposing (subject to consultation) to close all unabated coal-fired power stations by 2025.

A particular area of concern is the future of Europe’s ambitious plan to liberalise and harmonise its energy market and grids, known as Energy Union. The UK Government has always pushed the European market to be more liberal. Regardless of Brexit, cooperation with the EU internal energy market will still be necessary because of the electricity interconnectors and gas flows between the British Isles and the continent.

So whatever rules the EU opts for in the Energy Union market will have to be complied with by the UK without it having been able to participate in their formulation – unless the UK succeeds in negotiating to remain a member of the bodies that write the rules, such as ACER, ENTSO-E and ENTSO-G.

Karel Beckman, editor-in-chief of Energy Post, commented that policymakers in Brussels should reconsider the Energy Union and opt “for more realistic forms of market integration”.

Energy and the environment hardly figured in the public debates during the referendum campaign. But the vote’s legacy could have a much greater impact on both.

David Thorpe is the author of: