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CARBON COMMITMENTS 14 | 8TH - 14TH JULY 2016 | UTILITY WEEK Policy & Regulation Market view O n 23 June, the United Kingdom voted to leave the European Union. There is uncertainty in the energy sec- tor, where there is potential for profound changes that will affect the nature of, and the way we address, the energy trilemma – how to achieve security of supply at an affordable price while achieving carbon targets. Three key questions will drive this: 1. What role will the UK have in the Euro- pean Energy Market (IEM)? EU directives are designed to build an inte- grated, competitive and sustainable common energy market. They have been developed in the context of EU renewable targets and seek to ensure the most cost-effective and afford- able supplies to EU citizens. The aim is to develop market rules and cross-border infra- structure such that energy can be produced in one EU country and delivered to consum- ers in another – at the same time keeping prices affordable by creating competition and giving consumers choice. A key aspect has been the development of new intercon- nectors and the optimisation of interconnec- tion through market coupling. The IEM is important to address the tri- lemma. Great Britain's current installed inter- connection capacity (about 4GW) represents four per cent of the total installed capacity. Provisional grants for six new interconnec- tor projects in the last Budget would increase interconnection capacity by about 12GW. This could, however, be under threat. Access to the IEM is limited to EU member states and those in the European Economic Area (EEA). This in turn depends on agree- ment to the "four freedoms" of the EU – free movement of goods, capital, services, and people. The last is of course a point of conten- tion for the UK. Switzerland's integration into the IEM by June 2015 was put on hold aer the Swiss immigration referendum of Febru- ary 2014, in which the Swiss narrowly voted to impose a quota system on all immigration. What will happen to the UK's role in the IEM if a negotiated agreement on the four freedoms cannot be reached, and will this require new alternative generation build? 2. Will the UK be able to attract the neces- sary investment for energy infrastructure, especially electricity generation assets? The UK already needs a considerable amount of money to upgrade its infrastructure, any changes in our role in the IEM could increase this even further. What will the attitude of international investors, in particular the large European companies, be? There is clearly a specific issue on the development of Hinkley Point C. Despite positive pronouncements, Brexit could feasibly prove the last straw for Hinkley. A Hinkley failure and issues with the IEM would create the need for more generation. This raises the question of what that gen- eration may be and where that investment might be found. Gas is an obvious answer, but to what extent can gas replace nuclear and retain our carbon commitment? 3. Will the UK change its energy policy to respond to these challenges? Much of UK energy policy for the past 20 years has been driven by alignment with From trilemma to Brilemma How will the UK's vote for Brexit affect its ability to ensure a secure supply of affordable energy while meeting carbon reduction targets? Liz Parminter, Olaf Remmler and Ted Hopcroft speculate. Post-Brexit, the rate at which the GB electricity market is decarbonised is affected by the lack of new nuclear capacity and lower carbon-neutral electricity imports. We assume demand will be met by extending the lives of coal plants and building more gas generation. For comparison, we have maintain the same renewable deployment in both scenarios. In the pre-Brexit scenario, emissions are cut by about 57 per cent by 2030, whereas in the post-Brexit scenario, they are reduced by only about 40 per cent. This shortfall is clearly going to severely affect the energy sector's contribution to our carbon commitment. THE SCENARIOS Area Pre-Brexit Post-Brexit IEM l UK remains part of the IEM. l NEMO, IFA2, NSN, Viking Link, FAB link, ElecLink and NorthConnect link built. l 14GW capacity by 2030. l UK does not remain part of the IEM, but is allowed to retain current interconnec- tor access (4.5GW). l Further access is restricted and there is no new interconnector build. Investment l Hinkley C operational 2027 fully commissioned 2028. l Planned gas CCGT built. l Planned renewables built. l Hinkley cancelled – no new nuclear build. l Gas CCGT built to close the gap. l Planned renewables built. Change l No policy change. l All coal capacity to be decommissioned by 2030, in line with IED directive. l IED repealed/amended under GB legislation. l A five-year delay to each coal power plant closure date compared with the Pre-Brexit Scenario, relaxing IED binding objectives but also taking consideration of the age of GB coal-fired generation fleet. l Carbon commitments repealed/amended to accommodate increased gas build 0 -10 -20 -30 -40 -50 -60 % change in CO2 Reduction in CO2 emissions (relative to 2016) 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 Pre-Brexit case Post-Brexit case