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Watch: How much is the Brexit-related weaker pound impacting energy costs?

Since the June 2016 vote by the UK to leave the EU, the pound has dropped sharply against the dollar and the euro. In February, the UK's rate of inflation jumped to 2.3%, its highest level since September 2013, driven by higher fuel costs. Platts senior editors Stuart Elliott, Nick Coleman and Henry Edwardes-Evans examine the impact of the weaker pound on the UK's energy costs and look at what other factors have been at play.

Read our related analysis: UK's energy costs fuel post-Brexit inflation

View Full Transcript

Video Transcript

How much is the Brexit-related weaker pound impacting energy costs?

With Stuart Elliott, Nick Coleman and Henry Edwardes-Evans

SE: Hello, and welcome to the latest S&P Global Platts commodity pulse video, I'm Stuart Elliott, and I'm joined by senior editor Nick Coleman and editorial director Henry Edwardes-Evans.

With the UK government set to formally notify Brussels of its intention to the leave the EU, the impact of Brexit on the value of the pound and consequently on the country's energy costs is being ever more keenly felt.

According to the UK's Office for National Statistics, the country's inflation rate jumped sharply in February to 2.3% from 1.8% in January, the highest level since September 2013, with the main contributor to the increase being the rising cost of fuel.

As a significant importer of energy, the UK has been exposed to the sharp fall in the value of the pound since the vote in June last year to leave the EU.

The pound dropped in value against the dollar from $1.49 on June 23 to just $1.25 now, while against the euro it dropped from Eur1.31 to Eur1.16.

The relative low wholesale commodity prices since Brexit have dampened somewhat the impact on retail prices despite the currency devaluation, with electricity and gas retaining steady weighting in the UK Consumer Prices Index (CPI).

But, the UK remains import-dependent given the large volumes of dollar- or euro-denominated commodities it buys.

Nick, turning to you first - it looks like the UK's rising inflation has been mostly triggered by oil. How much is to do with the UK's exposure to dollar-denominated imports and how much to other factors?

NC: Well, year on year the pound has weakened by about 11% against the dollar so that's a pretty steep price rise right there, but the greater weight is actually a result of global oil prices rising; they’ve almost doubled since February last year.

You have to bear in mind that a year ago oil prices were at their lowest in more than ten years. Actually, fuel prices in the U.K. now are still cheaper than they were five years ago but nonetheless, you know, they are now significantly higher than a year ago.

The price rise has been felt almost entirely at the petrol station forecourts, not in aviation costs so we might have still some inflation still coming from airline tickets and prices. They tend to have hedging mechanisms to sort of cushion the blow of price fluctuations.

But, on the positive side low oil prices last year did cushion the U.K. economy. And that was demonstrated in the fact that U.K. oil consumption actually rose by 2.5% last year.

SE: Ok. There’s a similar picture in actual gas actually where wholesale prices have been relatively low which has meant that the impact of the currency weakness hasn't really come through which is fortunate for the consumer and in fact the U.K. gas price more dependent on other factors, I think than the currency weakness at the moment.

We had some issues with storage, the Rough Storage facility, over the last six months to a year. In the summer last year the Rough wasn't available for injection which kept prices low and in the winter it was not available for as much withdrawal as people wanted, so the prices rose.

And, Henry, in power that must have felt filtered through in some way as well did it?

HE-E: To an extent, yes Stuart, I mean obviously gas price does drive the U.K. electricity price. The gas unit is usually the price setting unit and we saw volatility over the winter but that was more to do with tightness in the French nuclear market than anything to do with thermal plant back in the U.K.

Gas is dominant, increasingly dominant, with the carbon price floor pushing coal out of the market pulling CCGT run times up, but I think the main impact was actually for Euro reporting utilities in the U.K., the likes of RWE, e-on and Scottish Power owned by a Iberdrola.

And if we look back to the day before the referendum vote UK electricity prices were at £42/MWh, that converted to Euro55/MWh that day. Last week, U.K. electricity prices were back at forty £42/MWh, that are converted to Euro48/MWh, so those German utilities, the Spanish utilities, they're hurting from their U.K. earnings being down and that might be actually placing inflationary pressure on retail prices; and we've seen a spate of hikes in that area in recent weeks

SE: Right, and I guess you know we can't ignore the fact that the Brexit talks are about to begin in earnest from Wednesday once the article 50 has been triggered. What can we expect over the course of this this period of uncertainty? Do you think, Nick, that the oil market will be in any way influenced by what's coming out of Brussels and London and if we're getting any leaks on possible directions, any steer of what might be happening?

NC: As I say, there could still be a bit more inflation in the system but generally oil prices are going to be determined by factors elsewhere in the world. Look at OPEC, look at US shale; Perhaps over the six months – it’s hard to see – you know, very dramatic rises in the price of crude oil, but you know I think we have to look at bigger factors outside of the U.K. really.

SE: And Henry, in power, what can we expect of this uncertainty: volatility?

HE-E: Yes, I think six months is too short a period to say anything other than uncertainty on the political front and therefore impacts on exchange rates. I think longer term, though, you know, you may have some impact on the fact that a weak pound would be reflected in increasing infrastructure costs, delayed interconnection agreements, delayed interconnection projects, and that could then in the next regulatory period have an impact on the networks-regulated asset base.

SE: Thanks Henry, thanks to you as well for joining us and please do join us again for the next Commodity Pulse.