Brexit: The impact on UK’s energy sector (part 2 of 2)

Blog 1 explored Brexit’s impact on tariffs, nuclear, and the environment. This blog covers affects on capital project funding and demand management.
Published: Tue 19 Mar 2019
A blog entry by David Butcher

Contributed by:

David Butcher
Transformation Programme Manager
capgemini

David Butcher's Blog

In the first part of this blog, we explored Brexit’s impact on tariffs, nuclear, and environment and climate change. In this blog we will delve into how Brexit will affect capital project funding and demand management, and look at the overall impact it will have on UK’s energy sector.

Capital project funding

Currently, EU initiatives represent a multi-billion euro investment in UK energy infrastructure projects. The European Investment Bank (EIB) has put nearly 15 billion euro into UK projects in the last decade. Projects that the EIB approved or approves prior to Brexit are likely to continue with their backing, but post-Brexit UK projects will automatically be ineligible for funding. The UK government will therefore have to find an alternative way to invest in infrastructure – and given the recent closure of the PFI/PPI approach to funding projects, this will require major policy development to avoid the lights going out.

Any lack of clarity on post-Brexit energy policy will have impact on the willingness of the private sector to invest. Deploying more renewables for energy generation and more storage solutions needs investment in technological development. In addition, research and development behind the development of “Smart” energy systems in the UK is currently dependent upon EU partnerships – which are likely to end. Policy will therefore have to encourage the private sector to develop technology innovation and see it through to mass rollout.

In the short term at least, lack of access to European funds and general market uncertainty will reduce investments in EU interconnections and UK generation plants, endangering the UK security of supply and increasing retail prices.

Demand management

Often lost in the noise of the headline-grabbing “vanity project” approach to solving the energy problem, UK policy needs to do more to promote energy efficiency in buildings. EU energy efficiency directives have driven reductions in energy use, and it remains critical that the UK continue down this path individually post-Brexit.

Impact

To stabilize the long-term position on many of the above points, the UK will require a transition period to agree and consolidate a new energy relationship with the EU. UK industry needs to adapt to any modified regulation, contractual relationships at the same time as managing a rapidly changing technological landscape.

For the UK government, Brexit will require work on regulations, as energy laws will need to be re-written locally, and market participants must be ready to comply with the new rules. In addition, the general political instability already being observed is likely to take years and a lot of public sector effort to normalize, which will detract from time available for sector transformation and improvement.

For the firms that operate in the industry, there is much to be done. For the transmission and distribution organizations, there is the potential threat that “keeping the lights on” becomes that much harder should the access to EU power become constrained, or the timelines to stand up nuclear generation extend. Managing this issue will require extensive scenario modelling and potential investment in network infrastructure and controls. Further stress could be put on the network from increased uptake of distributed energy resources, such as solar. If domestic energy prices rise, the business case for the individual to generate their own power improves, which could expedite the growing issues of multi-directional, and less predictable power flow.

For the retailer, increasing prices are likely to drive increased ‘switching’ behaviour from consumers making the market even more competitive than it is now. In addition, greater churn is likely to put pressure on operating costs. Uncertainty around long-term prices and mechanisms on the wholesale market will require suppliers to price increasing amounts of risks into their energy trades, exacerbating the customer-driven market churn problem. These issues will require looking at operating models and business efficiency to ensure survival in tougher conditions.

For all organizations, understanding, planning for, and working with their supply chains on the impact of Brexit will be critical to all parties’ ability to thrive in the new world. This will require complex reviews of such issues as taxation, contracts, tariffs, customs laws and practices, and impact on lead times. All of the above will have impact on how the end-to-end process most efficiently operates and will likely require substantial redesign.

The future

Disruption is going to be a fact of life through the Brexit process. Big data, AI, automation, internet of things, cloud-hosted digital solutions, aggregation platforms, and more are gaining ground at the same time in the energy sector. This disruption also presents a host of new opportunities, allowing organizations to invent new business models, services and products to survive and drive growth. Disruption in the energy sector isn’t new, but the pace of change is. Organizations need to be living entities, always asking “What’s next?,” ready to adapt, at speed, continuously. Companies must embrace an inventive mindset to deliver tangible results.

To speak to me about how I can help you with the challenges and opportunities that Brexit brings, contact me via email (david.butcher@capgemini.com) or on twitter (https://twitter.com/DrDavidButcher).