As we move towards the final Brexit scenario, many of our members are asking what the impact will be on the UK energy markets in general and for their institutions. Below we cover the potential impact on wholesale energy prices (the commodity), carbon and non-energy costs (policy) in more detail.
Here the impact is already being seen, particularly with the significant increases in oil, coal and carbon prices during 2018. Forward wholesale prices have risen and become much more volatile. However, thanks mainly to the TEC risk management strategy, this impact will only be felt on TEC member prices further out from 2021 due to the high cover levels secured when prices were much lower.
There are, of course, always a range of approaches when buying energy. A fixed term, fixed price contract would set the wholesale energy costs based on the market level on the day of signature, whilst other more flexible strategies offer opportunities to make forward price fixes for periods between 1 month and 20 years (the latter available by buying directly from generators under a power purchase agreement). In all scenarios there would be some exposure to the price levels which are presently being impacted by global geopolitical events, including Brexit.
We need to consider the medium to long term where we still have to secure prices, and there will continue to be volatility due to base fuel (coal and oil) and carbon price movements. However, the forward market is currently “backwardated”, meaning prices for energy further out are lower than they are for the coming year. So there will still be opportunities to secure good prices, and our trigger management strategy will even protect against sustained price increases on these more extended dated markets.
It is true that the UK does import some gas and power from the EU, but these commodities are and will continue to be tariff free in a post-Brexit world. Of the 7.5% of gas consumption which the UK imports, 75% comes via interconnectors with Norway, already a non-EU country. For electricity, there is sufficient confidence in even post-Brexit arrangements that several interconnectors with EU countries are still being built to add to the existing facilities with France. The UK daily market price is usually higher than those on the continent so even on a price basis, electricity will continue to flow into the UK.
The impact of a connected energy market is probably more significant on the remaining 27 EU countries as they rely heavily on, in particular, imported gas but are already looking to secure supplies through, among other things, Nordstream 2. This is a pipeline bringing gas to Western Europe via the Baltic Sea route rather than the less stable Ukraine route. The UK and Europe will continue to compete for liquefied natural gas (LNG) supplies from producers outside Europe, including Qatar and West Africa, so no change here.
As carbon price is a component cost of UK electricity prices, clearly our ability to continue to access the EUETS will be a factor. However, the UK has had its own carbon floor price for some time now and could happily operate even with a carbon border tax adjustment, although this is an example of where a previous red-line may be ignored due to the significant investments held in carbon credits by UK participants in the EUETS.
Here the UK has been forging ahead with a re-nationalised plan to de-carbonise UK electricity generation in particular. The Contracts for Difference arrangements designed to encourage investment in new UK renewable generation are an example of this, although they can hardly be considered a success. Capacity market arrangements, designed to keep standby generation on the network for periods when renewable generation is low, are being established on a national basis across Europe and again deliver to meet national demand for electricity. Here there is an expectation that the new interconnectors with Europe will be part of this arrangement, rather than excluded from it.
Although the prospect of a “deal or no deal” seems to change on an almost daily basis as politicians across Europe indulge in brinkmanship, one possible impact may be to force an early General Election. A change in colour of the policymakers could result in a wide range of outcomes, especially if recent platitudes from Party Conference season are to be believed, including re-nationalisation of all utilities. TEC believe such extreme outcomes will result in higher prices, but perhaps comment should be reserved for if and when this becomes a reality.
There has already been some criticism of UK policy and the ability to satisfy the so-called energy trilemma of plentiful, affordable and sustainable energy supply in the short to medium term so these concerns would remain whether we are in or out of the EU. One potential benefit of being outside the EU is that new generation could be built outside the rules governing state aid, such as the new Hinkley C nuclear plant, although even here progress has been made within the present rules.
Perhaps the only certainty for the coming months is that there will be more uncertainty around the specific impacts on both energy markets and policy under outcomes ranging from good deal to bad deal to no deal. One thing TEC know for certain, is that we will continue to collaborate with our suppliers and policy makers (of any political leaning) to secure the best outcomes available for our Members.
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