The UK's EU Referendum - DeHavilland

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The UK's EU Referendum

This is the third in a series of sector-focused briefings on the UK's referendum on EU membership, looking at the energy sector. It begins by looking at how UK Prime Minister David Cameron's renegotiation impacts the sector, before surveying the key issues at stake for the industry. Finally we look at the positions of the two campaigns and of the sector itself.

Cameron’s Renegotiation Effect on the UK’s energy industry The energy industry has not been the primary focus for Mr Cameron’s renegotiation; arguably, most of the discussion has been centred on ensuring the UK’s position as Europe’s financial powerhouse and addressing concerns regarding welfare and the free movement of people. However, when Mr Cameron pushed for an extension of the single market, with the intention of increasing “European competitiveness,” he certainly had the energy industry in mind.

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The renegotiation document, published on the 22nd February, mentions at some length the benefits that membership of the European Union and access to the single market already brings to the energy sector. The Government’s message seems to be, notwithstanding the renegotiation, the energy sector as a whole has a lot to lose by leaving the European Union. Mr Cameron has used the UK’s involvement in the energy sector at the EU level as an example of the country’s influence at its strongest, citing the Paris Climate Conference in 2015 as an instance of the UK’s ability to

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The UK's EU Referendum harness the collective power of EU Member States to its advantage.

European Competitiveness Following the publication of the final deal, the Prime Minister told the House of Commons that “Europe will complete the single market in areas that will really help Britain… In energy- allowing new suppliers into our energy market – meaning lower energy bills for families across the country.” Under the banner of “European competitiveness,” Mr Cameron does not detail specific arrangements that would benefit the energy industry directly, but instead informs that there will “be a new focus on further extending the Single Market to help bring down the remaining barriers to trade within the EU, particularly in key areas like services, energy and digital.”

Strengthening the Single Market When it comes to strengthening the single market for the energy sector, the Government has been keen to show the value of Britain having a voice inside the EU, and thus the necessity of retaining its membership. For example, the renegotiation document states, “The UK has successfully argued that instability in Eastern Europe and the Middle East means we need to strengthen Europe’s energy security and minimise price shocks. A fully-fledged ‘energy union’ in gas and electricity markets could save £50 billion a year across the EU by 2030 and should lead to cheaper energy prices for consumers.” The Government also claims that, “by 2017, we will have agreed a package of measures that will allow energy to flow freely between one national energy network and another.” It has also demonstrated that the UK has the ability to drive the EU’s agenda when it comes to signing international agreements that affect the energy sector. The renegotiation


document states that, “At the Paris climate conference in December 2015, the UK helped to ensure that the EU was at the heart of a coalition of countries that secured the firstever universal, legally-binding global climate deal, signed by 195 countries. The EU and its Member States are already taking steps to reduce emissions by at least 40% by 2030.”

Impacts of Brexit The consequences of a Brexit are still blurry and things could look very different depending on whether the UK is part of the European Economic Area (EEA). Below we take a look at some of the major issues at stake.

Internal Energy Market As regards the internal energy market, the consequences of a Brexit depend on whether the UK will or will not remain part of the EEA - based on the Norwegian model. If the country is included within the EEA, it would continue to benefit from being part of EU energy rules deriving from the Internal Energy Market (IEM) and keep the economic benefits of a larger combined market. Still, participation in the EEA would give the UK much less influence over decision making than it currently benefits from under EU membership.

Energy Infrastructure As regards energy infrastructure, the UK is facing massive upcoming investments in the energy sector, such as the phasing out of coal energy and the renewal of nuclear plants. A Brexit is likely to have consequences on costs as investors will ask for higher rates of return due to a perceived riskier investment climate. As part of the EU, the United Kingdom is currently a beneficiary of the Connecting Europe Facility programme, which enables the country to receive EU funding for projects which are essential to reaching the EU’s energy policy objectives of affordable, secure

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The UK's EU Referendum and sustainable energy and benefit from accelerated procedures for their implementation. Interconnection projects such as ElecLink and the France-Alderney-Britain (FAB) electricity interconnection project are therefore likely to be financially impacted by a Brexit. EU competition rules also have a serious impact on the existence of energy infrastructures, as shown by the decision of the Commission to approve the subsidy scheme for Hinkley Point C or the current inquiry on capacity market mechanisms. In case of Brexit, new UK competition rules may therefore trigger massive changes to the energy landscape of the country. It is worth noting though that state aid regimes exist under World Trade Organisation (WTO) rules as well, and thus the UK could not completely break free from this.

Climate Change The UK would be excluded from the EU’s international climate commitments and, in the most extreme scenario, from its climate tools such as the EU Emissions Trading System (ETS). It would therefore need to adopt its own Intended Nationally Determined Contribution (INDC) under the UN Framework Convention on Climate Change (UNFCCC) and elaborate national measures similar to the ETS, most likely also marketbased.


The UK is at the forefront of developing carbon capture and storage solutions as a temporary tool to mitigate climate change impacts. However, the technology is not ready yet and involves a great deal of funding, in particular through EU funds. The lack of such funds may imperil the development of the technology.

Politicians Upon delivering his speech on the EU renegotiation deal, Prime Minister David Cameron said: “Europe will now also complete the single market in energy. This will allow more suppliers into the UK energy market, lowering bills and increasing investment across the continent. That’s a real improvement too.” Energy Secretary Amber Rudd has come out strongly in favour of staying in the EU, and delivered a speech earlier this year emphasising the benefits this brings to UK energy security and lower consumer bills. Pointing to plans for new interconnectors with European partners she said, “These new connections alone could save British households nearly £12bn over the next two decades by driving down the price of electricity…By 2030, even if we develop the potential of UK shale gas, we are expected to import about three quarters of our gas. In other words, we will have to continue to work with our closest neighbours to deliver energy security in the future.” Further stressing the threat to energy security she said, "We have seen how countries such as Putin's Russia use their gas supplies as a tool of foreign policy, threatening to cut off supplies or drastically increase prices. We can't let our energy security be hijacked as a political pawn to bring Europe to its knees. By working together in the European Union we can stop this becoming a reality.”

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The UK's EU Referendum “The European internal energy market is about making sure it is cheaper and easier for us to buy and sell energy…It has been estimated that a fully integrated internal energy market could save up to £50bn per year by 2030.” Quoting a National Grid report, she warned that leaving the EU would result in a “massive electric shock because UK energy costs could rocket by at least half a billion pounds a year.” On investment, she argued “Being in the EU helps us attract billions and billions of pounds of investment in our energy system and supply chain. Taken together, this investment helps support 660,000 jobs in the UK’s energy sector.” Finally, she defended the UK’s record on global climate change policy which she admitted wouldn’t be possible without EU membership. “The global deal in Paris is in the UK’s interests, and frankly we wouldn’t have got it without being part of the EU. I firmly believe that from our position in the EU we can influence the great geopolitical challenges of the day – to make the world a safer place for Britain”, she said. Conversely, Ms Rudd’s colleague at DECC, Energy Minister Andrea Leadsom, is a staunch supporter of Brexit. In an interview with The Telegraph she said, “I really can’t see why bills would go up…Our energy security is not dependent on the EU at all. It is rock solid.” Her other comments in favour of Brexit centre on the benefits for small businesses, the impact of migration, and the economy. Meanwhile, Energy and Climate Change Minister Lord Bourne of Aberystwyth has spoken in favour of EU membership. He said, “Obviously, climate change is an issue that does not stop at national boundaries, so it is very natural that we want to be part of a unit like Europe in terms of climate change negotiations to push the agenda forward. […] I


think that it certainly helped being part of that very strong, united EU team.” When asked about leaving the UK, Shadow Energy Secretary Lisa Nandy said, “I think it would be bad for bills. I think it would be bad for our energy security. And I think it would be really disastrous for our ability to have a lasting global impact on tackling climate change.”

Stakeholders Former Energy Secretary Ed Davey said, “On climate change, it would frankly be environmental madness for the UK to leave the UK. It’s of course logically impossible for Britain to solve climate change alone – we only produce two per cent or less of global greenhouse emissions: we have to work with other countries to achieve our own domestic goals on climate. By exercising influence at the EU, we can force others to do their share; and with the EU, we exercise much more influence on the global stage of the United Nations.” Chair of the Committee on Climate Change Lord Deben said: “The battle against climate change depends hugely on the ability of Britain to remain within, and be a leader in, the EU. We’ve only got where we have got on climate change because of the EU, there would have been no Kyoto Agreement without the EU, and we do have to recognise that the idea that you can do anything environmentally on your own is just factually untrue.” National Grid commissioned a report by Vivid Economics to assess the impact of leaving the EU on the UK’s energy sector. The report found that “the increase in the cost of investment due to the uncertainty arising from Brexit negotiations could be a significant cost, given that the UK is undertaking a historic level of investment in energy infrastructure.” Centrica Chief Executive, Iain Conn said: “Prices are going to become really important for British consumers and we need to do

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The UK's EU Referendum everything we can to make sure that the market in Europe is as competitive as possible…It’s very hard to see what we can do to drive competition in Europe if we are outside. That’s why I think we’re better off in.” SSE said in its pre-close update that “the result of the EU referendum presents no immediate risk to how SSE serves its customers or to the investment that it continues to make in order to fulfil its core purpose. The level of risk may, however, increase if, following the referendum, there is a prolonged period of uncertainty about the legislative or regulatory framework that SSE operates within.” In a written submission to the Environmental Audit Committee, Energy UK states: “Energy UK is supportive of legislation for Environment and Climate Change at EU-level, provided that the instruments are clear, consistent and introduce sufficient flexibility to allow them to be implemented appropriately across a range of Member States that are at different stages of development of environmental awareness.” In a written submission to the Environmental Audit Committee, EDF said: “The EU has helped to address the most important environmental and climate change issues. Both are global and long term in nature, and need to be addressed at a supranational level, in order to deliver effective and efficient national-scale actions. It is therefore appropriate for action to be taken at the EU level as long as the frameworks adopted are capable of adapting to changing circumstances when necessary.” Chairman of the Advisory Board of Bloomberg New Energy Finance, Michael Liebreich said: “Should there be a vote for Brexit, a period of uncertainty will follow. Without doubt, it would cause some clean energy investors to hesitate before making final decisions on renewable energy projects in the U.K., but the impact is likely to be less than feared… The inevitable period of renegotiation of relations


with the EU is unlikely to see any significant changes in overall U.K. energy policy.” Chief Executive of E3G, Nick Mabey said: “Amber Rudd is absolutely correct that leaving the EU would push up UK energy bills. By accessing the huge EU energy market UK consumers save billions. Drawing on energy from other countries when demand is high we can avoid having to build expensive power stations that would stand idle for most of the year. Just as our gas and oil resources are plummeting, leaving Europe would damage our energy security and increase the risk of the lights going out.” PwC Advisory Board Member Volker Beckers, and Head of Utility Strategy and Regulation Stuart Cook made the following comments in a joint article: “In our view, Brexit poses risks in all three components of the trilemma…it cannot make it easier for us to negotiate the delivery of essential power and gas at times when Europe as a whole is suffering shortages… Outside the EU, it may prove difficult for Britain to attract investment at the levels required to renew our energy infrastructure. Another concern is that our ability to influence the low carbon endeavours of other countries would be diminished… We may face increased costs because we find it harder to benefit from the efficiencies which flow from cross-European coordination. Put simply, consumers’ bills may be higher.” Friends of the Earth Chief Executive Craig Bennett said: “The environment must be at the heart of the debate about our European future. The safety of the air we breathe, combating climate change and extreme weather wrecking homes and livelihoods will depend on us working with many countries to face these challenges. Now is not the time to be pulling apart.” WWF noted that “not everything that comes from Europe has been good for the natural world: agriculture and fisheries policies have been flawed and in some instances counter-

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The UK's EU Referendum productive. However, on balance, Britain’s membership of the EU has delivered benefits for our environment – such as reduced air and water pollution, reduced carbon emissions, increased recycling, clean beaches and protected areas for rare species and habitats that would be hard to replicate in the event of the UK leaving.” In a written submission to the Environmental Audit Committee, RSPB said: “The overall effect of the EU as an international negotiator


for the UK on environmental issues is undoubtedly positive. In the fight to tackle climate change, the UK benefits from having a significant voice to call for concerted international action as part of the EU negotiating bloc. Indeed, the EU has long been the most ambitious developed countries bloc in the international climate negotiations and, both historically and currently the UK plays a leading role for the EU (usually with Germany)."