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Energy sector eyes release of contingency plans for 'no-deal' Brexit

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Energy sector eyes release of contingency plans for 'no-deal' Brexit

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A protester waves EU flags in front of the Houses of Parliament in London.

Source: Associated Press

The European energy sector is eagerly awaiting the publication of the British government's contingency plans for a "no-deal" Brexit scenario, with stakeholders and industry analysts warning that a breakdown in negotiations with Brussels could pose challenges for cross-border power and gas trading and clean energy financing, and even pose an "existential risk" to Ireland's Single Electricity Market.

The United Kingdom government is planning to release further guidelines for businesses in September that will outline how to prepare for Brexit in the event that no deal with the EU can be reached by the official exit date in March 2019.

These so-called technical notices for a hard Brexit are scheduled to include issues such as gas and electricity trading, trans-European energy infrastructure and renewable electricity issues, according to a provisional list that was leaked to Buzzfeed News in August. Notices on the nuclear industry were already published in the first of three batches, on Aug. 23.

Most stakeholders are unsure what to expect from the remaining notices, but the energy industry as a whole is dealing with several potential issues, conversations with industry groups, think tanks and companies reveal. And at least some of those are set to impact British as well as European energy companies, especially if talks between London and Brussels break down.

"Especially with energy, there is a feeling that no deal is not an option," Marta Krajewska, head of European affairs at industry group Energy UK, which represents generators and suppliers including Electricité de France SA, SSE PLC, National Grid PLC and ENGIE SA, told S&P Global Market Intelligence. "Uncertainty obviously creates risk, and risk comes with a price."

The Department for Exiting the European Union, which was set up in July 2016 to oversee negotiations for the U.K.'s withdrawal from the EU and establish future relations with the bloc, declined to answer specific questions on what will be covered by the remaining technical notices, due to be published by the end of the month.

A department spokesman instead referred to the Brexit white paper published in July as representative of the government's current goals — although that document sets out targets for actual negotiations with the EU and, on top of that, was not warmly received in Brussels.

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Subsea cables such as this one, connect the U.K. with power grids in France, Ireland and the Netherlands.
Source: TenneT TSO GmbH

Electricity and gas trading depend on market access

The U.K.'s proposals in the white paper included maintaining the Single Electricity Market across Ireland "in any eventuality," adding that negotiators had already made progress on a legal provision to underpin this in the withdrawal agreement. It also mentions options for staying part of as well as leaving the EU's Internal Energy Market, or IEM, while preserving trade of gas and power through the interconnectors that link Britain to the rest of the EU — three existing ones to France, the Netherlands and Ireland, as well as others in development, for example with Belgium, Norway and Denmark.

A cliff-edge Brexit at the end of March 2019 could threaten both the integrated market between Ireland and Northern Ireland, and its links with the continent, since both depend on the wider IEM, according to SONI, the Northern Irish grid operator.

“If [Great Britain] is not part of the IEM, onward trading [from Northern Ireland] with Europe will be extremely difficult (if not impossible)," SONI said in written testimony to the EU Select Committee in the House of Lords in January.

In a letter sent to U.K. Prime Minister Theresa May and European Commission President Jean-Claude Juncker on Sept. 4, a group of energy trade groups, the British Irish Chamber of Commerce and companies including EDF warned that "the Irish Single Electricity Market, one of the many benefits that resulted from the Good Friday Agreement, would face a possibly existential risk if cross-border electricity tariffs were applied."

At its worst, a hard Brexit could stop power imports from south of the Irish border and consequently require thousands of generators on barges in the Irish Sea to provide power to Northern Ireland, according to a private government paper that the Financial Times uncovered in July.

Others have also emphasized that the market is integrated with an EU country that will continue to be subject to EU regulations, such as network codes, which govern how gas and power are allocated at interconnection points, and that the integration has other benefits besides security of supply. SSE, in its own Lords testimony, said that "larger, integrated electricity markets are beneficial for customers in Ireland and Northern Ireland, maintaining energy security and efforts to meet decarbonization targets."

"If you don't have the regulation, technically it should stop," said Thierry Bros, a senior research fellow for the gas program at the Oxford Institute for Energy Studies. Although a hard stop to cross-border flows is unlikely in practice, he said, the uncertainty around regulations for trading could hamper it to some degree.
"At the end of the day, you may not be able to do it because you don't know which system you’re going to have."

However, both the EU and U.K. have a vested interest in continuing to facilitate power interconnection even in the case of a hard Brexit, said Christian Egenhofer, head of the Energy and Climate program at Brussels-based think tank CEPS.

"There's a lot of rationale for keeping the cross-border trade because, with electricity, there is good economics behind it — power prices in the continent are lower than in the U.K.," Egenhofer told S&P Global Market Intelligence. "If the economics are there, the grid codes will either be kept or adapted, so that electricity trade can continue."

A spokeswoman for National Grid, which operates the power grid in England, Scotland and Wales, said that although it was preparing for all outcomes, "Even [in a] no-deal scenario, our interconnector business cannot foresee any credible circumstance where the trade in electricity with Europe will not continue."

Renewables industries would also like to see the U.K. remain part of the EU internal energy market since cross-border trading enables balancing intermittent generation across the continent as increasing capacity for solar and wind power join the individual grids.

Funding for infrastructure at risk

The U.K. also risks access to EU funding, specifically for energy infrastructure, according to several companies and institutions that gave evidence to the Lords committee. Taking together loans from the European Investment Bank, regional development grants and research and development support, the country receives around £2.5 billion in energy funds from the EU each year, think tank Chatham House said.

That money has helped lower the costs of new generation investment and increased energy efficiency, according to Centrica PLC, which estimates that the European Investment Bank alone has provided more than €37 billion in loans for U.K. energy projects since 2000.

"If we are outside the EU, access to those funds will undoubtedly be reduced, if not totally withdrawn, depending on any future relationship," Lawrence Slade, chief executive of Energy UK, told the committee.

The so-called Celtic interconnector, a planned 700-MW subsea cable between Ireland and France, for example, received €4 million through the EU's Connecting Europe Facility, another funding instrument of the bloc, in June 2017.

Developers Réseau de Transport d'Electricité and Eirgrid, the French and Irish grid operators, noted in a news release announcing the funding that the importance of a grid connection for Ireland has increased in the face of Brexit. "The project would reduce Ireland's reliance, in terms of energy, on the United Kingdom and provide Ireland's only energy connection to an EU Member State following the Brexit process," they said.

They added that the project would improve security of electricity supply in Ireland and France, increase competition in the all-island Single Electricity Market, and support the development of renewable energy, particularly in Ireland.

Clean energy investment could suffer

According to figures from Bloomberg New Energy Finance, cited by the U.K. Parliament's Environmental Audit Committee in July, clean energy investment in the U.K. fell by 56% in 2017. Climate change think tank E3G partly puts this down to the political, policy and trade uncertainty already created by Brexit, which has had "a decisive chilling effect on clean energy investment" in the country.

In a report published Aug. 31, E3G said the loss of access to EU funding mechanisms risks worsening this trend further and proposed a new multilateral infrastructure development bank with other interested countries to keep low-carbon infrastructure funding in place.

Chris Hewett, chief executive of the U.K.'s Solar Trade Association, said that the government needs to step up its support of renewable energy either way.

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Investment in low-carbon energy, such as solar, could suffer under Brexit.
Source: Associated Press

"Brexit — with deal or no deal — is causing significant uncertainty for investors, so it is more reason for the U.K. government to use domestic policy to increase policy certainty for investors – particularly for renewables which is a capital-intensive business," he told S&P Global Market Intelligence. "This could be in offering [Contract for Difference] access for solar, or setting ambitious zero carbon building regulations, or applying fair business rate treatment for rooftop solar on commercial property."

Investment in renewables could also take an indirect hit if the U.K. decided to leave — or was forced to leave — the European Union Emissions Trading Scheme, or EU ETS, the bloc's cap-and-trade system to rein in pollution. Prices have recently risen to above €20 per tonne of CO2 under the scheme following the announcement of a market stability reserve from next year that promises to reduce the number of allowances on the market.

"If there is a cliff edge by the end of March, putting in place a viable system to replace the EU ETS will be very challenging," said Krajewska, of Energy UK, adding that the need to sell power in advance is already putting pressure on some producers. "A lot of companies need to make commercial decisions," she said.

"The uncertainty about the future carbon price regime is already having a direct impact on the energy companies who trade days and months ahead. With the exposure to carbon costs being undefined for the period after March 2019, it’s extremely difficult to price any thermal generation."

Bros, of the Oxford Institute for Energy Studies, added that an exit from the EU ETS would put a heavy burden on the rest of the bloc as well.

"If the U.K. leaves and utilities here say we don’t have to hedge our production, then the CO2 price is going to nosedive in 2021," he said. "That I am worried about. We’ve managed to increase the CO2 price with the stability mechanism [but that] was designed pre-Brexit, so we’d have to look at it again."

Nuclear access still unclear

Following Brexit, operators in the U.K.'s civil nuclear sector would fall under a new domestic safeguards regime instead of the European Atomic Energy Community, or Euratom, which it would leave, the government said in its first release of technical notices.

That means Euratom approval will no longer be needed for supply contracts for nuclear material agreed by U.K.-established operators, although that excludes any contracts involving an operator established in any of the remaining 27 EU countries. Without a deal, importers may also need to obtain an import license for nuclear materials from the EU, the notice said.

According to DExEU, the government is working on signing bilateral agreements with key third countries outside the EU to ensure nuclear trade can continue, adding that several have already been signed and more are "on track to be completed before the U.K. leaves the EU."

Industry groups welcomed the clarification on some issues, but said the government still had work to do and would be best advised to stay close to Euratom.

"It is clear the most desirable and least disruptive course of action for both the U.K. and the EU is to conclude a sensible, rational and logical long-term association between the U.K. and Euratom, with a transition period to enable new arrangements to successfully bed in," Tom Greatrex, chief executive of the U.K. Nuclear Industry Association, said in response to the government release, calling the March 2019 deadline "challenging" to achieve this.

"There’s no room for complacency and much remains in the control of the U.K. government to deliver. ... There remains a lack of detail on how this would work in a no deal scenario, and it’s critical this is fully detailed before March 2019," he added.