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UTILITY Week 6th May 2016

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UTILITY WEEK | 6TH - 12TH MAY 2016 | 15 Policy & Regulation Analysis O ver the next few weeks, the political agenda will be dominated by ongo- ing – and increasingly ill-tempered – debates about the referendum on member- ship of the European Union, which will be held on 23 June. Whether the result of this "advisory" referendum will be ratified by Parliament, especially if Brexit prevails, is far from certain. The two central topics are the economy and immigration, with the latter closely aligned to the sovereignty issue. While Brexit success is not expected, there could be a shock if older voters (who are generally believed to favour Brexit) vote in large numbers while more Europhile younger voters stay at home. The recent barnstorming visit to the UK by outgoing US president Barack Obama was focused on persuading young people, in par- ticular, to vote for the status quo. For UK utilities, a vote for Brexit would raise many issues, especially in the energy sector. Four members of the big six are based in mainland Europe (EDF, Eon, Iberdrola and RWE). In particular, it might well sound the death knell for the controversial Hinkley Point C nuclear project, which already faces a ra of complex financial and technical issues. In the final analysis, the French govern- ment, as the ultimate holder of over 80 per cent of EDF's shares, is charged with mak- ing the final investment decision. However, at the highest echelons of the French gov- ernment, views are polarised. Emmanuel Macron, the ambitious economy minister, is a strong supporter while Segolene Royal, the environment and energy minister who was narrowly beaten in the 2007 presidential election, harbours real doubts. Importantly, the four big six energy sup- pliers that are based overseas may well respond if Brexit were confirmed. EDF will be very much driven by the Hinkley Point C decision, while both Ger- man-owned companies, RWE and Eon, face massive challenges. RWE is seeking to re-invent itself. Its two core businesses – coal-fired generation and nuclear generation – are being effectively discontinued in its prime market, Germany. With a few exceptions, coal-fired plant is being phased out, while all nuclear German nuclear stations will close by 2022. Eon, too, faces similar challenges, although it does have a far more interna- tional portfolio than RWE, including its writ- ten-down Russian power plants. Both companies could decide that Brexit is the straw that breaks their camel's back – and put their UK businesses up for sale. The Iberdrola-owned Scottish Power seems to be in a more settled position, despite low generation prices and ongoing concerns about cuts in renewable generation subsidies. In terms of cross-Channel energy links between the UK and northern France, Bel- gium and Holland, there seems to be little reason why these cannot continue as previ- ously. And most of the UK's gas imports will continue to come from its North Sea sector, where output peaked some years ago, and Norway, which is outside the EU. Dutch gas imports are now quite low. Inevitably, the EU referendum campaign has thrown up various assertions about energy prices, few of which can be proven. However, Centrica chief executive Iain Conn recently highlighted the EU's role in setting energy prices. He said: "It's very hard to see what we can do to drive competition in Europe if we are outside." On a company-specific basis, National Grid is well-placed because its most signifi- cant overseas earnings, by far, are from the US. Aside from interconnectors, its EU expo- sure is minimal. SSE, too, has virtually no mainland EU exposure, except minor operations in the Republic of Ireland. Indeed, for years it has eschewed opportunities to invest elsewhere in Europe. Instead, it has focused on grow- ing its UK energy business, albeit across a wide range of sector activities, ranging from power generation in Yorkshire to supplying electricity to inhabitants of remote islands off the west of Scotland. While Centrica is currently undergo- ing a shi in strategy – with far less focus on oil production – it is seeking to emulate National Grid by becoming a more important player in the US energy market. These days, it has minimal trade in mainland Europe. On the water front, the impact of Brexit would be less wide-ranging, especially since the highly acquisitive UK strategy of the French water companies in the late 1980s has been superseded. However, the impact and high cost of implementing EU water directives would be less pronounced. For the UK water companies, Ofwat's periodic reviews are pivotal, along with any other government-inspired intervention – an assault against very low corporation tax pay- ments is one such example. In the lead-up to 23 June, share price movements, especially of the most exposed sectors, may well be volatile if opinion polls are still pointing to a close result. Some US investors may well reduce their holdings in exposed stocks, on a similar basis to the 2014 Scottish referendum. SSE's share price was volatile during that period. Nevertheless, compared with travel com- panies such as EasyJet, the impact of a Brexit vote on the utilities sector will be minor – aside from possibly putting the final nail into the Hinkley Point C coffin. Even so, there will be some very anxious people, not least in the European Commis- sion, eagerly awaiting the result of the "advi- sory" referendum on 23 June. Nigel Hawkins, director, Nigel Hawkins Associates We're in with the in crowd Business organisations are lining up against Brexit, and a vote to leave the EU would also have serious consequences for utilities – especially energy companies. Nigel Hawkins explains why. BREXIT POLLING INTENTIONS In: 51% Source: ORB International Out: 46% Don't know: 3%

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