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Does Brexit pull the plug on the UK energy sector?

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Trade deals, immigration and Northern Ireland have dominated the Brexit talks. Yet as exit day approaches and the threat of leaving the EU without a deal looms, will the UK be able to keep the lights on and electricity flowing?

The United Kingdom’s power grid is fully integrated with mainland Europe’s, so given the evidently Herculean task of severing ties with the European Union, it is unsurprising that concerns have been raised about post-Brexit energy policy.

After all, the EU rulebook on all things power is a massive tome, rivalling legislation like the Common Agricultural Policy for impact and the bloc’s trade policy for complexity. It is certainly not a simple matter of flipping a light switch on and off.

Indeed, the EU has spent the last five years updating its rules on energy efficiency, renewables and carbon markets so that they are fit for purpose. The UK was one of the main engineers of the new laws, which recently entered into force.

Yet unlike single market access woes and protecting the Good Friday Agreement, energy policy is where the UK could get off lightly, regardless of what happens at the end of March.

This is largely because Britain is quite literally an energy island, only relying on other countries to provide about 6 per cent of its average annual electricity demand. In absolute terms, power exports are also not that significant.

What little energy is imported and exported from and to the EU via the UK’s four existing undersea electricity cables would continue largely unabated after Brexit according to most experts, as the EU does not impose tariffs on electricity.

It’s the same story for natural gas, too.

Even in the event of no-deal Brexit, contingency plans mean power will continue to flow across the four interconnectors, despite the UK government confirming last year that EU energy rules would cease to apply if there is no withdrawal agreement.

However, decoupling from the EU market could lead to inefficiencies in the nitty-gritty process of power trading, having a knock-on effect on the volume of electricity that can be imported and exported. There is potential for an increase in power costs for the consumer.

In the short term then, the lights stay on, with the admitted risk of imported power becoming costlier. Yet matters become far less certain in the medium-to-long term and when investment decisions come into play.

Interconnectors are big business and come with hefty price-tags. Many projects completed so far in Europe have been built with EU rules in mind, which state that each country must be able to export a certain amount of its power.

For 2020, that target is 10 per cent and is set to increase to 15 per cent by 2030. If the UK is no longer a part of that mix, then the incentive to connect grids will no longer be as potent.

The Brexit vote has already had that effect, as France’s energy regulator put the brakes on a proposed second cable across the Channel shortly after the June 2016 referendum result, citing “uncertainties”.

Although the IFA 2 interconnector is now proceeding as planned, any delays to projects that take years to complete can be costly. The UK has nine projects with six EU countries ready to go, as well as two more with Iceland and Norway. Brexit’s true effect on all of those is simply not predictable now.

The UK government has slowly rolled out its Brexit and no-deal Brexit planning, including how to deal with the trade in nuclear material, which is currently governed by the EU’s venerable Euratom Treaty.

In mid-February, Business Secretary Greg Clark announced that the UK has brokered deals with Australia, Canada, the United States and the International Atomic Energy Agency (IAEA) that safeguard “continuity for civil nuclear trade following exit day”.

Existing arrangements with Japan will also remain in force, but more talks will have to be held.

It is unclear whether leaving the EU will affect the UK’s nuclear power operations. Industry insiders insist that Brexit uncertainty was a factor in Hitachi’s recent decision to suspend work on the Wylfa nuclear plant in North Wales, though the company itself cited economic concerns.

One definite knock-on effect of leaving the EU would be loss of access to funding, particularly under the bloc’s Connecting Europe Facility (CEF), a programme set to enjoy a war-chest of over €40bn in the next decade. EU nations have used CEF money to build everything from energy interconnectors and undersea broadband cables to new motorways and port facilities. Yet that dries up in the event of no-deal.

In September 2018, the UK government confirmed it will underwrite any projects that already had funding approved but, like so many other current recipients of EU money, Westminster support will merely be a stopgap.

CEF is not the only tap that could be turned off. The European Commission announced an ‘Innovation Fund’ in February that will offer up to €1bn to help develop low-carbon technologies. That could include perfecting hydrogen vehicles, scaling up carbon-capture-storage, tidal energy projects and so on. The fund will be fuelled by revenues from the EU’s Emissions Trading System (ETS), which the UK will also cease to be a member of.

If the UK-EU withdrawal agreement does somehow get enough support, possibly after an extension to Article 50, then the UK will transition out of the ETS and will eventually set up its own mechanism, a move that climate experts have welcomed.

A UK-specific market could then be linked to ETS, much as Switzerland has done. However, if there is no deal the UK will have to fall back on a carbon tax instead.

Sourcing investment for new technologies is a problematic game that Brexit will only exacerbate. Big energy companies often turn their noses up at tech that has not proved itself at scale. Yet getting it to that point in the first place is where its backers struggle.

Scientific consensus now says that carbon-capture-storage, for example, works and does exactly what it is designed to do. Yet doubts about its industrial feasibility still need to be quashed and Brussels is, according to its climate chief Miguel Arias Canete, “putting its money where its mouth is” to make it a powerful tool in the quest to cut emissions.

This is an area where the UK has done well over the last decade. 2018 was the sixth year in a row of falling emissions, according to data released at the beginning of March 2019, even though the economy continued to grow.

Brexit deal or not, the UK will still be bound by its commitments to 2015’s Paris Agreement, though it may need to submit a separate pledge as its current obligations fall under the EU’s joint commitment to cut emissions by 40 per cent by 2030 compared to 1990 levels.

March’s data showed the UK has cut its own emissions by 39 per cent compared to 1990 and environmental groups are now hopeful that Westminster will update its 2050 climate target of 80 per cent cuts to reflect the strong progress.

Brussels has already started to think about 2050 and in November proposed a net-zero emissions target for mid-century. EU leaders are set to use 2019 to decide whether to endorse that plan or not. If Brexit goes off the rails, the UK could end up being a part of that discussion.

On the flip-side, the EU may well feel the pinch of Brexit most when it comes to climate action, as the UK has been an influential deal-maker and mediator between its fellow member states.

Commission officials are already concerned that the departure of the Brits will embolden Europe’s central and eastern nations, many of whom would rather the EU scale back its emission-cutting ambitions.

British diplomats have been a dab hand at real-economy negotiations and have been instrumental in convincing countries like Poland and the Czech Republic that cutting out carbon and methane will be a fair team effort. No climate debate in Brussels can be held without hearing the term ‘just transition’ now.

Of course, championing a clean and green economy has been the UK’s modus operandi as it suits British interests, which include renewable energy generation, nuclear power and low-carbon tech know-how.

The current uncertainty has not put paid to that way of thinking either. During a recent discussion between EU ministers on the 2050 climate planning, UK participants countered the suggestion of other delegates that tackling climate change is “not about reinventing the wheel” and insisted that innovation must be the watchword.

However, Brexit kicks away the UK’s seat at the table and reduces its role to one of a rule-taker, in much the same way that Norway accepts EU energy legislation in return for market access. The UK could quite plausibly end up following an agenda that does not suit its interests.

That is the bottom line: the power behind British sockets will continue to flow, but how green and cheap it is over the next decade will be directly affected by what happens at the end of March.

Brexit has already caused the relocation of two EU agencies and pushed multi­national companies to take their business elsewhere. Yet in the power sector, little damage has been done at this stage.

If the plug is indeed pulled on EU membership, the UK will have a huge challenge on its hands to maintain its high standards.

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