No-deal Brexit could add £bns to UK energy costs

(UCL European Institute, 23 Oct 2019) Greater production costs and leaving EU markets are likely to make energy more expensive.

Recent research found that leaving the European Union without a deal could increase UK energy costs by billions of pounds per year. With the UK a substantial net energy importer, a no-deal Brexit is expected to have negative effects on the UK energy sector.

Cutting ties with the EU could increase the cost of energy inputs and reduce previous benefits from integration with EU energy markets. Building on a project commissioned by British energy watchdog, Ofgem, recent evidence from UCL found that depreciation of the pound to parity with the euro (which may happen with no-deal) could add £1.5bn per year to British domestic energy bills. Other research, this time commissioned by British Transmission System Operator, National Grid, found that severing ties with EU energy markets and abandoning certain risky infrastructure investments could add a further £2.2bn/yr. Future benefits from further integration with EU energy markets would likely also be lost.

Parity between pound and euro is an outcome widely seen as increasingly likely from a ‘no deal’ Brexit, as estimated in reports from Morgan Stanley and others. A 2018 report from UCL traced the impact of the 2016 exchange rate depreciation on British energy prices, and from this evidence estimated that pound-to-euro parity could increase average domestic energy bills by £61 per year due to the higher cost of gas and electricity. Based on this study, Ofgem reported that the pound-to-euro and pound-to-US dollar exchange rates fell by 15% the year after the vote and that the lower exchange rate was the dominant influence that increased wholesale electricity and gas prices.

A report funded by National Grid found that severing ties with EU energy markets could add in excess of £2bn per year in domestic energy costs. This comes from numerous implications of exiting EU energy markets, including from: (a) an increased cost of energy sector investment programme; (b) abandoning EU energy market integration regulations, or ‘decoupling’; (c) decreased investment in future interconnectors; (d) decreased supply security for gas; (e) decreased trading in cross-border markets (for capacity and balancing); (g) decreased liquidity; (h) decreased access to energy storage; and (i) decreased access to lower cost gas, among other detrimental effects.

Another UCL report, from 2019, shows that the EU policy of ‘coupling’ markets has created efficient electricity trading between GB and its European neighbours. Inefficient trading means electricity flowing in the ‘wrong’ direction, i.e. from countries with high to low electricity prices. The latter creates welfare losses in the two connected countries. Instead, the EU policy of market coupling, the authors show, has substantially decreased trading inefficiency with GB’s largest connected neighbours, France and the Netherlands. The research also found that electricity trading with the Single Electricity Market of the island of Ireland became much more efficient after the EU regulation was introduced in 2018. Before then, inefficient trading occurred almost half of the time.

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UCL European Institute, 23 Oct 2019: No-deal Brexit could add £bns to UK energy costs