As government pursues 'Green Brexit' vision, new research from Economist Intelligence Unit warns UK's task of cutting emissions could become more difficult and expensive after Brexit
There is now less than a year to go until the UK leaves the European Union. And for many in the energy industry, time is running out for the government to spell out a credible scenario that will not leader to higher energy prices and a trickier decarbonisation trajectory.
The latest research from the Economist Intelligence Unit (EIU) fuels these fears, warning that without ongoing membership of core EU institutions like the EU Emissions Trading Scheme (ETS) and the internal energy market the path toward a low-carbon energy system will prove a much bumpier road for the UK.
The predictions are contained in a new paper, released yesterday, that looks at the most likely Brexit scenarios, both in terms of UK-wide implications and the impact on six key economic sectors, including energy.
In the round, the EIU suggests the most likely Brexit outcome is the UK agreeing to a Canada-style free trade agreement, an outcome it thinks would see economic growth continue in the UK from 2018 to 2022. However, it does not rule out the possibility of a no-deal Brexit scenario, with negotiations breaking down during trade talks in 2019. If this happens, it forecasts that by 2022 the UK's nominal GDP would be 2.7 per cent lower than under the free-trade deal scenario.
A 'no-deal' Brexit would hit a number of core green industries, the EIU predicts. For example, in the auto sector car sales would be significantly impacted, running 4.4 per cent behind the baseline scenario. This could have serious implications for the electric vehicle (EV) sector, which ministers have been encouraging UK plc to invest in over recent years.
Meanwhile, in the energy world a no-deal Brexit scenario would result in an average 0.5 per cent fall in energy consumption between 2020 and 2022, EIU believes, delivering lower oil gas and coal consumption and falling electricity use. Such a scenario may lead to lower emissions, but it could also undermine investment in new clean infrastructure. EIU also warns that disruption to energy supply chains as a result of a 'cliff-edge' Brexit could push up costs and prices. "Overall, we expect energy consumption to be 2.9 per cent lower in 2022 under a no-deal Brexit than it would be under our core forecast," EIU warns.
But even if the UK does not crash out of the EU next year with no trade agreement and with only World Trade Organisation (WTO) rules to fall back on, there is still trouble ahead for the energy sector, EIU warns.
For example, the UK is set to become more dependent on Europe for its electricity supply in the coming years. There are currently 4GW of electricity interconnector capacity in operation, providing electricity links between the UK and France, Ireland, and the Netherlands. Over the next five years a further 13.6GW of contracted capacity is planned, from nations such as Denmark, Germany, and Norway.
Trading through interconnectors is managed via membership of the Internal Energy Market (IEM), which is designed to reduce barriers to international power trading. But for Britain to remain in the IEM most experts agree would require it to remain within the single market - which the government has explicitly ruled out.
Lobby group @EnergyUKcomms says UK *must* remain in EU's internal energy market, to keep costs down & meet climate goals.— Adam Vaughan (@adamvaughan_uk) February 2, 2018
But Lord Teverton told me this week "if UK comes out of the single market...there is no way I can see we will remain within the IEM."
Therefore it looks likely that the practice of trading electricity between the UK and other nations is likely to become more burdensome and more expensive, just at the point where high renewables capacity and smart grid infrastructure make such arrangements increasingly necessary.
Trade barriers could also deter investment in new generating capacity and other infrastructure in the UK, which could ultimately push up prices for the end consumer, EIU warns.
It's a point echoed by Scottish First Minister Nicola Sturgeon this week, during her address at the Scottish Renewables conference in Edinburgh. Sturgeon warned Brexit will make the building out of Scotland's clean energy industry more challenging, both in terms of energy trading and access to funding streams.
"If we are taken out of the single market, it will hinder our supply chain and reduce our skills base," she warned delegates. "If we are outside the internal energy market it could affect our influence on issues such as energy regulation and cross-border energy flows, something which is of increasing importance."
There are also more immediate concerns for Scottish clean energy developers. "Arguably more damaging to our ambitions, we could also lose access to EU funding," Sturgeon warned. "Scotland has benefited from one of the biggest investments ever made by the European Investment Bank - the £500m of funding they provided for the Beatrice offshore windfarm. Scotland has also done disproportionately well from EU support for research and innovation in the renewables sector. We want that to continue."
The other big Brexit uncertainty for UK energy and decarbonisation policy is the UK's future partnership with the EU ETS. A little clarity was forthcoming from Energy Minister Claire Perry last week, who confirmed the UK intends to stay in the ETS until the third transition period ends in 2020.
However, after that it is unclear whether the UK would join for the fourth trading phase, which would make it subject to the ongoing jurisdiction of the European Court of Justice (ECJ). But leaving the ETS after the third trading phase may make meeting with the UK's medium-term climate goals more difficult and expensive, EIU argues, explaining that quitting the scheme would likely require the UK to establish its own scheme and link it to the ETS, or rethink its approach to carbon pricing from the ground up.
Of course, the paper acknowledges that energy issues are unlikely to be at the top of the negotiating agenda, and the Brexit impacts on energy are likely to be more diffuse than other sectors. But concerns remain across the much of the industry, while environmental campaigners also fear Brexit could undermine both the UK and the EU's traditionally progressive role in international climate negotiations.
Ministers are quick to downplay many of these concerns. They maintain that the Climate Change Act means the UK's commitment to decarbonisation will be unwavering, while its willingness to work closely with the EU on climate matters remains undimmed. They insist a trade deal will likely enable continued trade in clean power and close co-operation with the EU on wider decarbonisation efforts. They also predict that freedom from the Common Agricultural Policy will allow for a raft of wider environmental gains.
But as the EIU report makes clear, there are still real, credible uncertainties for energy experts and environmentalists surrounding the UK's exit from the EU, despite protestations from Brexiteers and government ministers that the UK's climate ambitions have nothing to fear from Brexit.
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