Utility Week

UTILITY Week 28th April 2017

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UTILITY WEEK | 28TH APRIL - 4TH MAY 2017 | 13 Policy & Regulation Analysis I n an alternative universe, UK civil serv- ants are busy spearheading fresh moves to deepen the European single energy market. With the UK holding the rotating presidency of the EU Council of Ministers, British officials are in the driving seat on the preparation of the EU's so-called fourth energy package. It is a task they are well equipped for, given how instrumental the UK has been in shaping the internal energy mar- ket (IEM). Back in the real world, the UK is heading out of the EU and in all likelihood the IEM too, following the snap general election. To help the industry navigate its post- Brexit future, the Energy and Climate Intel- ligence Unit (ECIU) assembled some of the sector's leading experts for a briefing at University Col- lege London (UCL). Energy suppliers' dependence on fixed con- nections means withdrawal from the EU's common trading arrangements will have a bigger impact on the sector than many other parts of the economy, warned Michael Grubb, professor of international energy and climate change policy at UCL. He said: "With electricity you need a wire, and gas still largely needs pipelines, unlike a lot of sectors where the economic debate can trade-off access to European markets with access to other parts of the worlds. With elec- tricity, you ain't going to be building a wire to any other parts of the world, nor a gas pipeline." And the UK's reliance on interconnectors is set to wax rather than wane, said Anthony Froggatt, a senior research fellow in energy and environmental issues at the security think-tank Chatham House. "Even now the UK government is expect- ing interconnectors to play a significant role in the energy mix," he said, pointing to recent projections from the Department for Business, Energy, and Industrial Strategy (BEIS). These show that by 2024, the UK is expected to be importing 8TWh of energy through interconnectors, making them the third largest contributor to the power mix behind gas and renewables. However, trading down those intercon- nectors is bound to be more complicated if the UK quits the single energy market. And the gathered experts were pretty gloomy that any other outcome is likely in light of the EU's hostility to cutting deals on a sector-by-sector basis, a position it reaf- firmed last week in a European Parliament resolution on the trading bloc's Brexit nego- tiating guidelines. Grubb suggested that mutual self-interest might dissuade the EU from this hardline stance. "That position might have to crack for reason of mutual interest. Precisely because we can't trade electricity with the US or China, there is a very strong interest in the UK remaining part of the IEM and some inter- est for the EU." But given the UK's government's determination to escape from the jurisdiction of the European Court of Justice, Munir Hassan, partner and head of clean energy at CMS Cameron McK- enna, expressed doubt that the UK would expend political capital on fighting for single energy market membership. "The reality is that we are unlikely to be able to remain in the IEM. I don't think that's going to be a priority. We should not kid our- selves: energy is unlikely to be anywhere near the top of the negotiating agenda," he said. Forging the basis for a new agreement should be helped, though, by the fact that the UK has played such a strong role in shap- ing the existing framework for electricity, he added. The UK doesn't have to be less energy secure outside of the IEM, but it will have to invest in more domestic capacity to make sure it is, warned Grubb. And there will be an impact on custom- ers' bills, added Hassan, because much of that home-grown capacity will be installed Brexit and the IEM The UK is likely to leave the single energy market as a consequence of Brexit, even though it's in no-one's interests – especially ours. David Blackman reports from a recent briefing at UCL. to back up renewables. In addition, UK cus- tomers may lose out on the savings their EU customers will make through the greater effi- ciencies that the fourth electricity package is set to deliver, such as intra-day trading. The post-referendum depreciation in the value of the pound had already driven up domestic energy prices, said Grubb, albeit "not by a massive amount". An added twist, Hassan said, is that the cost of importing energy infrastructure equipment has been inflated by the drop in the value of the pound. Brexit could also have a knock-on impact on investment in interconnectors, warned Grubb. Those involved in developing the 10GW-worth of capacity currently in the planning pipeline have been given "pause for thought" by Brexit, although he predicted that the bulk of projects "will probably go ahead". A drop-off of EU investment in energy projects has already happened since the ref- erendum, observed Hassan: "When speaking to investors across the EU, the issue of Brexit comes up a lot more." Another headache identified by Grubb is the UK's likely loss of access to funds from the European Investment Bank (EIB). Brit- ish interconnectors could be competing for funds with overseas projects that will be able to command lower borrowing costs thanks to EIB access, he explained. The good news, though, is that investors from outside of the EU appear untroubled by Brexit, Hassan said, and he said the inter- connectors he was involved in had not been blown off course by last summer's vote. Nevertheless, the irony, suggested Grubb, is that the UK is preparing to leave the IEM just when increasing reliance on renewable generation is reinforcing the case for cross- border co-operation on energy. To make his point, he said the expansion of North Sea offshore wind capacity could be delivered more efficiently through greater collaboration between the surrounding countries. "It would be in every body's inter- est for Britain to be part of that." The prob- lem will be persuading the politicians. "We should not kid ourselves: energy is unlikely to be anywhere near the top of the negotiating agenda." MUNIR HASSAN, CMS CAMERON MCKENNA

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