The U.K. will leave the European Union on March 29 and so far there’s no agreement to replace the rules and regulations that govern vital trade between Britain and the rest of the world. If a no-deal happens, here’s what it could mean for the country’s energy industry.
Will the Lights Go Out?
Almost certainly not. The amount of power the U.K. imports from continental Europe fluctuates but was 6.6 percent of total supply in the third quarter of 2018, according to government data. After Brexit, British electricity systems will be decoupled from the European Internal Energy Market.
That doesn’t mean gas and power will stop flowing, according to Joseph Dutton, a policy adviser at climate change think tank E3G, but trading could become less efficient and longer-term supply less certain, increasing costs for consumers. This would be especially true in times of unplanned supply interruptions or extreme weather.
There are four high voltage direct current (HVDC) interconnectors linking the U.K. electricity system to mainland Europe. The EU doesn’t currently charge import duties on electricity and has a small tariff of around 0.7 percent on natural gas, which it doesn’t apply in practice. If the U.K. exits the EU without a deal it would default to World Trade Organization rules for energy imports and exports. According to the majority of experts Bloomberg spoke with, tariffs aren’t expected to be placed on energy imports.
Brexit will happen after the end of peak winter demand, which will help mitigate any short-term risk of imported power flows being interrupted, and any potential issues would be resolved quickly, according to consultant Wood Mackenzie Ltd. A fall in sterling could increase the cost of energy imports, it said.
“We’re assuming the cost of electricity will rise, but we don’t know by how much or when,” Confederation of British Industry senior energy policy adviser Tanisha Beebee said in an interview.
The situation on the island of Ireland is more complicated because Northern Ireland and the Republic of Ireland are part of a Single Electricity Market. A no-deal Brexit would potentially leave this “without any legal basis,” and “with a high risk that it would not be able to continue,” according to E3G.
The sudden separation of Northern Ireland’s electricity market from the south would be an incident without precedent. The SEM is so complex that it’s hard to see how anyone could impose customs rules over it, said Munir Hassan, partner at law firm CMS.
Still, Hassan was confident that the political will exists to ensure power continues to flow even if there’s no deal. “I’m a big believer that sense will prevail,” he said.
To ensure that any interruption to the flow of goods through U.K. ports doesn’t prevent vital maintenance work, some companies have already begun stockpiling equipment, Beebee told reporters at a briefing in London. That includes wind turbine blades and spare parts for power plants, she said.
Will North Sea Oil Suffer?
Some North Sea oil and gas operators have also begun looking into stockpiling vital equipment, according to Alan McCrae, head of U.K. tax for energy, utilities and mining for PricewaterhouseCoopers LLC.
“Power generators, pumps, all sorts, blowout preventers,” said McCrae. “It would be key pieces of kit on a platform, that if something fails you can’t produce.”
Oil & Gas U.K., the offshore energy industry trade association, cites the example of importing equipment from Bulgaria before it joined the EU. It took four days to transport goods from the country into Aberdeen, where they could be delayed at the border for up to a week. Reverting to WTO rules could increase costs in the sector by 500 million pounds ($651 million) a year, the trade association said.
If essential equipment is delayed, temporarily halting oil and gas production, the effect on energy prices can be significant. In 2017, a small crack in the Forties oil pipeline system, a critical conduit in the North Sea, pushed crude prices to their highest level in more than two years as the operator needed weeks to fix the problem.
Operators are also concerned that in the event of a no-deal Brexit, any immigration restrictions could severely affect projects in the long-term if highly skilled workers they need aren’t able to live and work in the U.K. About 5 percent of the U.K.’s oil and gas workforce comes from the EU, according to Oil & Gas U.K.
In the long-term, the political uncertainty around Brexit could hurt investment, according to Wood Mackenzie. An aging oil province like the North Sea needs constant work to maintain output and “fiscal stability and cost certainty are critical” when competing globally for investment, it said.
Is the Fuel-Trade at Risk?
The impact on imports of crude oil and refined fuels looks relatively benign. The nation’s refiners wouldn’t experience any “day-one issues” in a no-deal scenario and would be able to avoid any supply chain “pinch points,” the U.K. Petroleum Industry Association said.
Under WTO rules there are no duties on crude oil imports, although VAT is charged at 20 percent, so the U.K. being out of the EU isn’t going to impact the oil industry “very much at all,” Lesley Batchelor, director general, Institute of Export & International Trade, said in an interview.
While imports look secure, there’s some uncertainty about crude exports to Asia. South Korea is currently a major buyer of U.K. oil because it has a free-trade agreement with the EU. There are few signs that the British government can arrange a deal to replace that by March 29. China also buys North Sea oil, but flows tend to depend on trading economics, so any lost demand from South Korea could be hard to replace.
What About Natural Gas?
The U.K. imports most of its natural gas from countries in the European Economic Area, which includes Norway. Norwegian pipelines remain the main source of U.K. gas imports, and accounted for 87 percent of incoming flows in the third quarter of 2018, according to government data. Liquefied natural gas and pipeline supplies from Belgium and the Netherlands make up the rest.
Access to natural gas supply isn’t expected to be affected if it exits the EU without a deal but trading could also become less efficient and less liquid.
Not everyone shares this view. John Wood, chief executive officer of energy infrastructure development firm InfraStrata, sees heightened gas-price volatility as likely. This will increase liquidity on the U.K.’s National Balancing Point gas hub as a result, he said.
“There shouldn’t be any material impact on the availability of gas to meet U.K.’s demand and supply requirement,” Wood said by email. “At the moment both the U.K. and Europe are witnessing a deluge of LNG cargoes primarily because, relative to the Far East, we are offering the highest prices.”
For gas exporters to Europe it could, however, have an impact. In the event of a no-deal Brexit, all U.K.-based natural gas shippers will lose the right to supply the French market, creating potential shortages and higher prices for French consumers if alternative arrangements aren’t in place, the Oxford Institute for Energy Studies said in a report.
French energy giant Total SA plans to move its natural gas trading operations from London to Geneva and Paris, although the company said this was not related to Brexit.
Jonathan Westby, co-managing director of Centrica Plc’s energy marketing and trading, said in an interview that the company already has a European trading base and so isn’t considering moving staff out of the U.K.
“Our preparations are just about how we make our existing business work,” Westby said. “We, like every U.K. company, are preparing for Brexit, putting in place measures to deal with whichever outcome. But the outcome is still uncertain.”
Going Nuclear
For nuclear power, Britain is setting a new safety regime that will maintain the industry’s ability to trade. It’s signing nuclear cooperation agreements with Australia, Canada and the U.S, allowing the U.K. to continue civil nuclear cooperation when the current European Atomic Energy Community, or Euratom, arrangements cease to apply in the U.K. The U.K. said Feb. 14 that it has all the replacement international agreements in place to ensure continuity in the civil nuclear trade.
Electricite de France SA, the operator of 15 nuclear reactors in the U.K., has negotiated with the British government to ensure that EDF employees, including those working on the Hinkley Point project, can seamlessly travel in and out of the country.
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