Brexit – UK and Europe energy outlook

An independent United Kingdom may affect the European Union’s chances of meeting reduced carbon goals but which way will the UK itself go?
Published: Fri 15 Jul 2016

The United Kingdom’s decision to ‘Brexit’ has come at a critical time. While issues such as immigration, economics and institutional reform are at the heart of the desire to reform, there is uncertainty around what separation could mean for both Europe’s and the UK’s clean energy futures. With decarbonization on the forefront of the world’s agenda, making the Brexit could deter the EU from meeting its emission goals while also demanding crucial decisions on the UK’s own clean energy direction, according to Haresh Patel, CEO of Mercatus.

“At a time where the world needs to take action against global warming, unity is critical,” says Patel. “For the first time ever, we saw real global alignment at COP21 in Paris last year, where all the world’s major leaders came together and pledged to reduce carbon emissions. But the agreement could be threatened by a Brexit.”

Unity for decarbonization

The UK is not alone in its strife. With global-scale issues such as unemployment, immigration and wage inequality at their peak, more politicians are blaming globalization for their own country’s problems, and adopting more isolationist philosophies. This protectionist attitude has been seen more commonly in candidates, presidents and prime ministers elected in the last year. While the urge to “build walls” and cancel trade agreements in order to protect their labour forces and economies is tempting, to pull out today is a major step backwards.

Patel cites Thomas Friedman’s ‘World is Flat’ theory, which holds that as a result from the interconnection of global economies through technology and the Internet, nations are reliant on each other for investment and resources. Thus, he says, unity is not only essential for the economic prosperity of nations, but for maintaining peace and achieving larger global initiatives, such as reducing carbon emissions and reversing global warming.

“With the UK deciding to separate from the EU, other nations may be motivated to follow suit, thus accelerating a domino effect of faltering global cooperation. If this happens, the chances of the EU meeting its carbon emissions goal could be seriously deterred.”

However, it takes two to tango, he adds. While Britain’s leadership on climate issues strengthens the EU, the British need their continental partners just as much in helping to slow its own backtracking into domestic low-carbon policies, which include support for renewables and zero carbon homes. Pre-Brexit, the UK has been on track to meet the EU’s decarbonization goal, with 20% of its energy coming from renewables, and steadily increasing with offshore wind and community solar.

“In short, if the EU loses such an important player, collaboration weakens, and our chances of beating global warming through technology are lessened.”

UK’s energy sector

Turning inwards, the question arises how will the power generation market fare for a newly single UK?

The crash of the pound is bad news for the flow of capital and investment funds. Rising overhead costs have squashed the profitability of new assets, turning investors way off. This comes at a bad time, as the UK badly needs to upgrade its ageing infrastructure to avoid power blackouts. Foreign investment has been crucial in raising capital for new power generation infrastructure, but this could now change. Without incentives offered by EU implemented energy directives (such as Renewable Energy, Energy Efficiency, etc.), which the UK are no longer bound to uphold, investors are likely to put their money elsewhere.

“This is good news for coal, but bad news for renewables,” says Patel. “While Britain has its own ambitious climate change bill in place, initiatives could easily change without pressures from the EU to keep up with carbon reduction goals.”

He continues that the pre-Brexit government was not exactly renewable-friendly either. While the UK’s Energy Secretary, Amber Rudd, (anti-leave) said the British government would “continue to invest in clean energy” post-Brexit, she also mentioned that it could not support renewable energy with heavy subsidies, saying that it “should be able to stand on its own two feet.”

The implementation of Electricity Market Reform (EMR) in the last two years has also shown the government is not interested in renewable power development, she adds. Only a fraction of funding from the Contract for Difference auctions has been put towards renewables. Instead, support is being allocated to nuclear projects such as EDF’s Hinkley Point power station.

New outlook on renewables

Internal strife within the UK is already stirring, as there is a possibility of Scotland having a second independence referendum, which could lead to a major loss in renewable generation capacity. Furthermore, post COP21 energy markets in the rest of Europe are working together to achieve an internal market by building electricity interconnectors, decentralising their systems and relying on each other to achieve higher penetration of renewable energies and a stable grid.

Patel says that a single UK would be going against this. But assumptions that the UK is entirely giving up its carbon reduction efforts are not entirely true. There could be a silver lining, as a new, independent government now has the flexibility to develop its own legislation.

“With a new prime minister in office, a reshuffled cabinet could introduce some fresh blood, hopefully with a more renewable outlook. Freed from inefficient red tape of EU bureaucracy, companies will be able to innovate faster as well, if they can still afford to.”

Concludes Patel: “While the independent UK maintains that it is still a great place to do business, let us hope that it will continue to uphold its support in the fight against global warming.”