Utility Week

UTILITY Week 2nd December 2016

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28 | 2ND - 8TH DECEMBER 2016 | UTILITY WEEK Markets & Trading Market view T he media and public might be more focused on new runways and high- speed rail links, but it is Britain's energy sector that needs more infrastructure spending than any other. Much of the capital required to fund that investment will come from abroad. Before committing those funds, investors will want more detail about Brexit. Crucially, is Britain still going to be a part of the EU's internal energy market (IEM)? The IEM enables harmonised, tariff-free trading of gas and electricity across Europe. The UK has been a leading force in designing the IEM over many years, consistently argu- ing for the opening up of markets to reduce costs for consumers. By maintaining access to the IEM, and lit- tle changes, UK consumers would continue to benefit from access to lower wholesale prices in many neighbouring countries, as well as increased diversity (and therefore security) of supply. This will become ever more important as Britain's own North Sea energy supplies decline. Step outside the IEM and these benefits would be put at risk. Some have argued for bespoke arrange- ments to be set up, with bilateral deals with each neighbouring country governing each gas and electricity interconnector. However, these deals would be complex and techni- cally detailed. Based on the experience of other countries, like Switzerland and Can- ada, that have negotiated bilateral deals with the EU, these deals would take many years to put in place and create considerable uncer- tainty and blight for projects currently under development. Any introduction of tariffs or customs duties, or dislocation of trading arrange- ments – such as different settlement periods, or quality standards – could inhibit the trad- ing of gas and electricity across borders. The result would be higher consumer bills and risks to security of supply. Agreeing to continue with harmonised, tariff-free trading arrangements on gas and electricity should not mean signing up to all future EU energy and climate legislation, such as future targets on renewable energy. However, it will mean the UK seeking to maintain membership of the key regulatory and industry bodies, which help shape the rules and network codes that govern energy trading arrangements in Europe. Some of these bodies already have representatives from non-EU countries, but if full UK mem- bership to some of them is not possible once the UK leaves the EU, then the UK should still look to participate in the working groups that support them and secure observer rights to the key decision-making forums. The second thing to note is that the UK's membership of the IEM is not just a big deal for the UK. Ireland is heavily dependent on the free flow of gas and electricity through the GB market. Indeed, the creation of the single electricity market in Ireland – linking the Republic of Ireland and Northern Ireland – and close co-operation on energy between the UK and Ireland – stems back to the undertakings in the 1998 Good Friday Agree- ment. So the stakes are very high indeed. Access to the IEM is therefore a key issue. But as investors consider the wider impacts of Brexit on the energy market, it is important to recognise that some parts of the energy sector will be more affected than others. So, depending on how the negotiations pan out, the impacts could be more signifi- cant for the renewables sector, or for inter- connection, than for upstream oil and gas, or for regulated networks. But much depends on the shape of Britain's new relationship with Europe. The final thing investors will need to assess is the likelihood of changes in the new government's policy on energy and cli- mate change. Will the government do away with the 2020 renewables target, once the Great Repeal Bill is passed into law? This might present an opportunity to focus efforts on the least-cost pathways to the 2030 and 2050 decarbonisation goals, rather than the technology-specific targets required by the EU's 2020 target. Will we maintain member- ship of the EU Emissions Trading System? Answers to these and other policy questions will be crucial in shaping how the British energy market develops. There is precious little detail for investors to go on right now and it could be some time before the fog lis. The prime minister said she will trigger Article 50 before the end of March 2017. But elections in the Netherlands, France and Germany could thwart any sub- stantive negotiations until the end of 2017. Even when the key players do get to the negotiating table, energy will not be a front- line issue. It was not one of the six priority sectors listed by the prime minister during her conference speech in October. In a way, this could be helpful. Ideally, Britain's con- tinued access to the IEM should be kept out of the political debate as far as possible and a technocratic agreement reached that cur- rent trading arrangements on gas and elec- tricity continue for the benefit of all sides. Investors will be weighing up a long list of factors in making investment decisions. The sooner the UK can reach an agreement about continued access to the IEM, the better it will be for consumers and investors alike. If the prime minister has one point on energy in her brief for the forthcoming Brexit nego- tiations, then that should be it. Simon Virley, partner and head of power and utilities, KPMG. He was previously director general for energy markets and infrastructure at Decc (2009-15). Let's not exit EU energy Continued access to the internal energy market will help keep bills down and maintain security of supply. Simon Virley says the government should make this one of its aims in its EU negotiations. What is the IEM? In order to harmonise and liberalise the EU's internal energy market, three consecu- tive legislative packages of measures were adopted between 1996 and 2009, addressing market access, transparency and regulation, consumer protection, supporting intercon- nection, and adequate levels of supply. As a result of these measures, new gas and electricity suppliers can enter member dtates' markets, while both industrial and domestic consumers are now free to choose their own suppliers. Other EU policies related to the internal energy market address the security of the supply of electricity, gas and oil, as well as the development of trans-European networks for transporting electricity and gas.

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