Energy Supply and Decarbonisation Beyond Brexit: Politics and Policy

THERE will be no long-term sustainable future for capitalism in the twenty-first century unless climate change can be limited. For a country like Britain, this means completely decarbonising the economy by the second half of the century, if not before. Britain's path towards a low-carbon economy has been significantly shaped by membership of the EU, especially through legislation and regulations affecting the energy sector, so Brexit raises important questions about whether and how that path will continue in the future. At the same time, Brexit poses some immediate and direct challenges for the security and costs of energy supply. This is because over the last twenty-five years the UK energy system itself has become intertwined with that of EU member states, through the development of the Internal Energy Market and the associated infrastructure. The UK is increasingly dependent on energy imports, many of which come from or pass through the EU. The EU has sought to increase its energy security, both through solidarity mechanisms between member states, and by forging better relationships with suppliers and transit countries. Leaving the EU therefore raises serious questions about the security and costs of Britain's future energy supplies. Moreover, Brexit is happening at a time of significant flux in energy systems around the world. After thirty years of free markets (at least in theory), state intervention and even re-nationalisation are increasingly back on the agenda. Even more fundamentally, new technology in electricity, coupled with developments in ICT and data handling, is leading to a rapid decentralisation of energy systems, disrupting established industry players and giving new roles to consumers. In what follows, we outline the key issues for energy and climate policy in a post-Brexit Britain. The next section looks at the potential impacts of different Brexit scenarios on energy supply, with a focus on costs and security. In the third section we consider how domestic political support for decarbonising energy may be affected by Brexit, and some of the low-carbon policy issues raised by separating from the EU. The fourth section looks at post-Brexit Britain in the light of long term technological and ownership trends in the energy sector. Our energy future could end up looking a lot more isolationist than it does now, or we could remain fairly integrated with the EU. Both futures are feasible, but differ significantly in the challenges they pose and opportunities they offer. The UK's energy policy and system have become increasingly integrated with the EU in recent decades, through regulatory harmonisation, common policy frameworks and infrastructure. But there has been little discussion of energy supply or its environmental impact within Brexit debates, except in the broadest terms. The July 2018 White Paper did not clarify the UK government's ambitions for the future relationship in this area. Effects of Brexit on energy supply will come via two routes: direct and indirect. Indirect effects work through routes outside energy policy and regulation. One of these is the impact of currency shocks or depreciation, leading to increases in the costs of fuels and imported inputs to supply chains. Another is potential disruption to supply chains as the UK leaves the Customs Union or the Single Market or both. There is also the possible effect of loss of access to skilled labour; for example, Oil and Gas UK estimate that around 5 per cent of the workforce in the North Sea is from EU countries.1 More generally, uncertainty linked to Brexit has cast a pall over investment decisions in the whole sector.2 The direct effects will come as a result of whether or not the UK stays in the Internal Energy Market (IEM). The IEM has developed over a number of decades through increasing European oversight and in areas such as market rules and environmental protection, legislative control of policy and regulation in the energy sectors of Member States. Thus, the IEM is not about tariffs but rather about a set of shared policies and rules and, more recently, participation in a linked automated network of trading platforms. The issues involved in leaving the IEM differ across gas, electricity and oil. Oil is globally traded, so the effects of Brexit can be expected to be fairly minor. By contrast, trade in gas and electricity, being largely or entirely networked through pipes and wires, is much more regional in nature. In the short term, the implications for gas security of supply are more important, but in the medium term it will be electricity that matters more, as we are likely to switch over to using electricity for cars and at least partially for heat as well, in order to decarbonise the economy. Gas trade with European countries from outside the IEM is entirely possible (as the example of Russia shows). The UK is well connected physically to the Continent, and with both North Sea fields and the largest liquefied natural gas (LNG) infrastructure in Europe, it is a useful trading partner. The main concerns are therefore less about trade per se and more about security of supply and price stability at times of peak demand, when we become more dependent on imported gas. When the UK joined the then European Economic Community in 1973, it was poised to enter the North Sea oil and gas boom period (Figure 1). By contrast, it leaves as its energy import dependency has re-emerged, with domestic production of gas and oil expected to continue to decline. The UK is highly dependent on Norway for winter imports, which might become a problem if there were a situation in which the UK had to compete for Norwegian gas with the remaining EU Member States, since Norway, being a member of the European Economic Area, is more closely aligned with the latter. This situation, and resulting price volatility, may make a post-Brexit Britain seek other options, including more LNG and strategic gas storage which could cost in the order of a £100 million a year.3 For electricity, the present trade (which tends to run from the Continent to Britain) could, in principle, continue. But experience from Switzerland suggests that the EU increasingly sees electricity in terms of participation in a system with common rules and interlinked trading platforms. The latter have developed in the last two years into a ‘market coupling’ system that has reduced transaction costs and led to more efficient allocation of interconnector capacity. Exiting this system as part of the IEM would mean a loss of economic benefits, as prices are likely to rise. Estimates of what is potentially at stake are of the order of €100 million a year. However, the market coupling system is expected to evolve to allow shared electricity system balancing services (that is, matching supply and demand in real-time), access to which would be worth a lot more, potentially of the order of several billion pounds a year.4 The balancing service offered by interconnectors will be of increased value as the share of wind and solar and other variable renewables increases. Any resulting rise in final energy prices is likely to sharpen the politics of energy affordability and the costs of decarbonisation. There are, therefore, good security and economic reasons for remaining within the IEM. However, doing so whilst leaving the EU would also come with some ‘sovereignty costs’. These would include having to accept future EU energy legislation and regulation without having a formal say in their development, and the jurisdiction of, if not the European Court of Justice, some other arbitration mechanism acceptable to the EU-27. This loss of influence would be considerable, as the UK has historically been a strong voice in the development of an integrated European energy system. Before leaving energy supply issues, it is worth briefly considering two other special problems. One is the Single Electricity Market (SEM), a common integrated electricity market and system across Northern Ireland and the Republic of Ireland which has been in place since 2007. The SEM involves shared regulation and major investments going into increased interconnection between the two. There are a number of possible post-Brexit arrangements, somewhat mirroring those arising from the wider Irish border problem. Maintaining the SEM has been recognised as a priority by all negotiating parties, and the UK government has reaffirmed its commitment to maintaining the SEM in the July 2018 White Paper, but finding a solution will be politically delicate. The other special problem is ‘Brexatom’ (British withdrawal from the Euratom Treaty). For more than sixty years, the Treaty has shaped the UK's domestic nuclear legislation, including standards and rules on nuclear safety and non-proliferation, health and safety and nuclear waste management. Of greatest concern is the non-proliferation of nuclear material. Currently, this is overseen by Euratom safeguards inspectors on behalf of the international community. Outside of Euratom, inspections will need to be carried out by the UK's Office for Nuclear Regulation (ONR), directly reporting to the International Atomic Energy Agency. The ONR accepts that it will not be possible to have capacity in place by March 2019 to inspect the same number of facilities as under Euratom, although it says that it will meet international standards. In addition, the UK will need to negotiate and ratify new bilateral agreements for supply of nuclear material and equipment, in particular with Australia, Canada, Japan, and the United States before the UK leaves the EU, or if there is one, at the end of the transition period. All of this is possible, but will take additional resources for the ONR and time is pressing. Post-Brexit, concerns about energy security, affordability and competitiveness are likely to rise up the agenda, which raises the question of whether the low carbon agenda survives. A common view is that it will, because the two key frameworks setting the UK's ambition on climate policy—the 2008 Climate Change Act (CCA) and the 2016 United Nations Framework Convention on Climate Change (UNFCCC) Paris Agreement—are not dependent on the EU. Brexit is likely to require the UK to adopt its own Nationally Defined Contribution under the Paris Agreement, but this is a relatively minor technical change. More important is the argument that the UK will lose influence because it will no longer be part of the EU bloc, but rather just one country with around 1 per cent of global carbon emissions.5 Moreover, with the loss of UK advocacy internally, there is a risk that the EU will be a weaker ally in the international arena. However, at present both the UK and the EU have signalled a desire to continue working closely together at the international level. At the same time, the 2008 CCA commits the UK to emissions reductions targets that are more ambitious than those of the EU. However, a significant part of expected UK emissions reduction to 2030—the Committee on Climate Change (CCC) puts it at 50 per cent—is through areas covered by EU legislation and regulation, such as energy efficiency and vehicle emissions standards. These frameworks should be incorporated into UK law through the Great Repeal Act, but they have been flagged as delivery risks by the CCC6 and there are concerns that without the EU to enforce them there will be a governance gap. In practice, both the UK's efforts in international climate leadership and the future efficacy of the CCA depend in large part on the domestic politics of climate change policy. There is broad support for action on climate change in the UK, but the issue is of low salience to most voters, so that support is not deep. The CCA does benefit from strong support from business, both in the energy sector and more generally; for example, in April 2018, twenty-one major energy firms and other businesses called on the UK government and the EU to continue to work closely towards meeting the goals of the Paris Agreement.7 Nevertheless, two fears remain. One is that if there is a deep economic shock on leaving the EU, public support for climate policy will be overwhelmed by concerns about costs. It is already the case that policy costs associated with carbon reduction, especially on electricity bills, are set to grow to 2020.8 A second fear is of hostile attacks on climate change policy and science from a resurgent right-wing populism. Surveys show that Leave voters tend to be more sceptical of climate science than the general population, and while UKIP as an organised force has dissipated, its supporters and voters are still around. One would expect their presence to be felt especially within the Conservative party. Yet it is far from clear that the current party leadership is tacking to the right on climate change. While there has been significant dismantling of policy, for example on support for solar photovoltaic (PV) and onshore wind, and scrapping the zero-carbon homes standard, there have also been some proactive steps, such as a suggested phase-out of conventional diesel and petrol cars by 2040 and an instruction to the Committee on Climate Change to look at the implications of increasing ambition on the UK's 2050 target. It is hard to think this approach is not at least in part a political strategy from a Conservative government aimed at appealing to younger voters, who are both more concerned about climate change and more likely to vote Labour. While the Conservatives need to appeal more to such voters, the party is in a brittle and unstable state, and a stronger shift towards right-wing populism is a significant possibility, as is some successor to, or resurgence of, UKIP. Such developments would be a major threat to the decarbonisation agenda, and could see the weakening, if not the repeal of the 2008 CCA. If commitment on climate change action remains strong, what are the post-Brexit policy issues? One is how to price carbon emissions. The EU's Emissions Trading System (ETS) has been a centrepiece of Europe-wide climate policy since 2005. The UK government wants to stay in the scheme until 2020, but it is not clear what the desired relationship will be beyond this. The ETS has been largely ineffective because of lobbying, and a domestic emissions trading scheme might be an opportunity for a better design, but it would have a smaller trading pool, and the practicalities of setting up a new scheme could take several years. The simplest option would be to build on the current UK carbon floor price policy by bringing in a carbon tax. However, the effectiveness of a tax will depend on the level at which it is set, and this in turn will be determined by the political considerations discussed above. A second issue is support given to low carbon technologies, at present mainly in electricity generation. Renewables are most vulnerable, as historically, UK governments have been lukewarm towards such technologies, and policy has really been driven from the EU via the Renewables Directives. The exception here is offshore wind, which has now reached a critical mass where it is producing such employment, investment and potential export benefits that it has won government backing. Looking beyond 2020, a post-Brexit Britain would have to be extremely isolationist to resist the global trend towards cheaper renewables. Investment will depend on market design, which needs reform, and planning rules. Recent UK governments have been keen on new nuclear power, but here there are potential headwinds post-Brexit. Nuclear remains less popular with the public than renewable energy and it currently looks expensive, as noted in the 2018 National Infrastructure Assessment.9 A third issue is the loss of low-carbon investment support. The UK has received around £2.5 billion a year in energy loans and grants from the EU, including infrastructure finance, regional development funding and grants for research and development. The most significant loss would be reduced or even loss of funding from the European Investment Bank (EIB), as nearly 30 per cent of loans to the UK have supported energy infrastructure, amounting to over £8 billion in the past five years, levering in investment from others. Ninety per cent of EIB investment goes to Member States, so outside of the EU it will be more difficult for the UK to access loans and a replacement will be needed. In addition to decarbonisation, the UK energy system is evolving in a number of other ways. One relates to ownership and markets. When the UK joined the EEC in 1973, energy industries were state-owned monopolies. This situation was transformed by the liberalisation revolution of the 1980s and 1990s. However, this Thatcherite project was barely complete when a slow drift back towards state intervention began from the early 2000s onwards. The retreat from free markets was initially linked to decarbonisation goals, but as energy prices rose sharply in the latter part of the decade, scepticism about the true extent of competition in retail markets also came to the fore, leading to price controls. Labour under Jeremy Corbyn has gone further, calling for a return to public ownership in the energy sector in the 2017 election manifesto. Public ownership is allowed within the current rules of the IEM as long as networks, generation and supply are not owned within the same part of the state. Indeed, ironically, many of the companies active in British markets have parents in other EU Member States that are state owned; not just four of the ‘Big Six’ energy utilities, but also major players in offshore wind and new nuclear developments. In a post-Brexit Britain, that foreign ownership might come under scrutiny. However, it is worth noting that the parts of the energy sector specifically targeted by Labour for renationalisation are gas and electricity networks owned mainly by companies and banks in Asia, Australia and North America.10 Public ownership in energy is a post-Brexit approach to ‘taking back control’ that offers an alternative to sovereignty and ethno-nationalist narratives. But a return to the statism of the 1970s is not feasible; the challenge will be how to make public ownership work for a twenty-first century energy system that is undergoing major technological and institutional change. A second trend is in the devolution of policy making. Historically, British energy policy has been set centrally, and markets and networks have operated within GB-wide regulatory frameworks. This unitary approach changed with devolution in the late 1990s. Energy policy is somewhat of a grey area in devolution: Whitehall has retained control of the key legal frameworks and financial but there are important between the and Energy policy, regulation and markets in Northern Ireland are now largely run from the of the UK, except for nuclear At the other end of the has a in areas such as energy efficiency and is in an having a of control over policy which it has to out a somewhat have that Brexit, through the of directly from to might an opportunity for a to the for example on climate However, it is not clear that Brexit is for this to For example, the government is currently on a Climate Change that would have a emissions reduction than the 2008 CCA. It has for oil and gas, out new nuclear in and is all policies that set it from the UK's also has some control over renewables policy, and political support for wind has led more as well as wind a from what would change with a hard Brexit would be the of the common EU for energy and climate policy, and the that between and would likely with more renewable and going for more nuclear with given the technical between these two we could see the development of two largely energy systems, wider The third important trend is about the decentralisation of the electricity system on and networks is giving to one with a large number of technologies, including wind and solar increasingly through and control The between and of electricity are with a number of in electricity markets and trading already in parts of Britain. the to the electricity system has historically been by and it will increasingly come from the demand in homes and businesses and through the costs of which are of cars and the of technologies, the of storage will These present a number of One is that major investments in the of infrastructure across the country will be needed. Another is since energy decentralisation is an global there are potential export markets with for those companies to take a However, the of the UK to access the EU part of that market will be by the post-Brexit including trade in There are also potential regional development opportunities in the strategic of research and development which could some of the impacts of For example, under its the government has million in vehicle research in the However, far more will need to be not least because the UK may lose access to a large share of EU low carbon funding and will be no longer for EU and There is also a that Brexit might the of change. This is because under in which the UK is no longer in the there will be less electricity and as a domestic low-carbon of will be at a It may also be that leaving the IEM Britain more to policy and regulatory that might the of energy especially in of that is currently difficult under EU The energy revolution is for large energy and network It out the that and could become far more in the production and of more of the implications for climate change and to back control’ from large utilities, which low public The of or are if However, there are other for a system in which control to to out new roles for in the in with such as or who will to the of resources around the need to in active to is up with questions of control and in gas and electricity are networked a Brexit leaving the IEM will mean a more and energy future for Britain Northern Ireland if the Irish SEM is could potentially lose access to the efficient trading mechanisms of market coupling and for electricity interconnection with are likely to slow or even price for would be relatively but the opportunity costs of access to shared balancing services will be Britain may have to build more LNG and gas storage facilities to price volatility, to costs. of access to of pounds worth of EIB funding would also make investment costs unless an domestic public investment is Economic shocks and are a hard Brexit with the of an resurgence of right-wing would a serious challenge to the current political on decarbonisation. a to the might see a return to public ownership in may from different parts of the UK, especially as and their energy systems in ways. However, there are also major long-term going on in energy that are global in and so that even a more post-Brexit Britain is likely to be affected by trends include the costs of renewable electricity and electricity storage technologies, and the of energy a of domestic climate policy, in the longer term Britain's energy system is likely to continue to and A on electricity and more from wind and solar means that balancing the system will become more difficult but also more interconnection with Britain's would an important but in an post-Brexit we would need to back more on domestic of This could potentially be into an but if access to global markets can be retained and what Britain's energy future will look like in terms of ownership and on which of out in post-Brexit At the different return to maintaining the current or a and to some be across the major political But the about them remains the of The funding from the UK Energy supported by the UK under the and for the research on which much of this is