Much has been written over the course of the past few weeks about the impact of a potential Brexit on various areas of the UK’s economy. In terms of the energy industry, the debate has primarily focused on the ongoing role of the UK in the Energy Union and the effects that a departure could have on its physical and economic ties to its European neighbours in conventional energy - key topics being gas and electricity interconnections, the future of the Hinkley Point nuclear power plant and energy trading.
However, in the run up to the vote there was limited discussion in both camps around how Brexit might influence the UK’s decarbonisation policy, and post-vote, it is not yet clear how the fallout will affect the UK’s low carbon economy going forward.
In the wake of adjustments to renewables support mechanisms, last year then Secretary of State for Energy and Climate Change, Amber Rudd, emphasised that government’s re-set of energy policy was aimed at addressing the energy trilemma – i.e. ensuring security, affordability and decarbonisation.
With the prospect of Brexit looming in the not so distant future, and potential separation from EU-driven governance and markets, will decarbonisation remain a priority for the new UK administration or is the UK’s trilemma set to become more of a dilemma instead?
Clear direction for policy and regulation
In reality, as the Brexit process has not yet taken shape, the long-term effects are still too difficult to call. However, it’s clear that the sooner the government can develop and promote a roadmap for the UK’s realignment with EU and global energy markets and infrastructure, the better.
Early signs have been promising for the decarbonisation agenda. Following the vote, Rudd was quick to assure investors that the UK is still committed to transitioning to a low carbon economy whilst not compromising energy security or value for money for consumers – reiterating that the trilemma retains government’s focus.
Happily, the UK’s commitment to reduce emissions is also already enshrined in the UK’s Climate Change Act (CCA), which many have noted will continue to apply notwithstanding changes in the UK’s relationship (legal or otherwise) with the EU.
The UK’s Carbon Plan references a wide range of measures aimed at achieving these reductions, including the introduction of energy efficiency measures in the built environment and the development of cleaner fuel in transport and more effective agricultural techniques – with the transition to renewable energy being the cornerstone of the government’s strategy for meeting applicable targets. That plan has had success to date, with a quarter of the UK’s electricity being generated by renewables inclusive of nuclear.
Quietly, in the midst of the Brexistential crisis engulfing the UK a few weeks ago, Parliament also managed to adopt its Fifth Carbon Budget.
On the flipside, some have voiced concerns that without EU oversight, the UK’s commitment to decarbonisation levels might wane. It is true that the CCA and related regulations and directives still provide significant flexibility to alter direction on low carbon policy – as evidenced by the transition to the CfD regime – and if the UK will no longer be subject to State Aid regulations post-Brexit, that flexibility is set to potentially increase.
Decisions will need to be taken as to whether the UK will align itself with EU policy going forward, by continuing to contribute to EU targets under the Paris Agreement framework or continuing to remain part of the EU ETS for example, or make a break and develop an independent policy direction.
However, the UK’s legislative framework for decarbonisation has traditionally been quite robust and at times, even more ambitious than that of the EU. For example, the Third Carbon Budget set a target of reducing UK greenhouse gas emissions to the level of 35% below 1990 levels by 2020, compared with the more conservative 20% target set by the EU. The UK has set a target of a 50% reduction by 2025 which also surpasses the 40% target set by the EU for 2030.
that the UK’s approach to setting these important targets will change as a result of Brexit.
Bolstering funder and investor confidence
Clear policy will certainly bolster funder and investor confidence in the UK’s low carbon economy. The uncertainty created by the reality of Brexit and the resulting changes in UK leadership could still cause a slowdown in investment in related infrastructure, particularly with respect to inbound capital and funding.
There were already fewer greenfield renewables projects being developed in the aftermath of changes to the support frameworks for technologies like onshore wind and solar, curtailment of support offered to heat and biomass projects by RHI and limited visibility on criteria and timing for the next CfD auction. These changes had already negatively impacted the “attractiveness” of the UK for renewables investment, and Brexit has the potential to compound the issue.
The prospect of leaving the EU has also left the UK with a weaker pound, which may also increase capital costs for developers and investors and potentially make funding more expensive. For projects reliant on technology, services or feedstock which originate elsewhere, these currency fluctuations have disrupted their modelling and potential returns. Where projects are competing with others for supply chain, for example, certain biomass feedstock which are in high demand and short supply, these additional costs could result in some deals looking challenging.
Finally, concerns have also been raised about the ongoing role of the European Investment Bank (EIB) in funding energy and infrastructure projects in the UK going forward. With €3.5bn pumped into UK energy projects in 2014, the importance of EIB’s contribution to the sector is not to be underestimated. One such project was the Beatrice wind farm located off the North-East coast of Scotland, which alone received a capital injection of £525m from the bank.
EIB have confirmed that a pending Brexit will not affect any existing commitments to UK pipeline projects, however, they have also acknowledged that they would need to be cautious about green-lighting UK projects requiring long-term investment or debt. Low carbon energy assets, including energy efficiency measures, are often developed under concessions or arrangements with project financing or other long-term funding. The withdrawal of such a powerful economic resource could be particularly problematic for capital intensive projects such as offshore wind developments.
Volatility and turbulence have left funders and investors uncertain as to which way the market will go, with some deals being postponed until the outlook becomes clearer. Some private sector developers have already shelved or delayed future renewable power investment into the UK, awaiting the outcome of the Brexit negotiations to see where the domestic industry will stand. Whilst these decisions often do not affect ongoing development work, further work going forward may be on hold. However, in contrast others have announced a cautious forward-thinking approach in response to the uncertainty and highlighted that they don’t view EU energy policy as being dependent on EU membership.
Keeping supply and demand in balance
Investors and funders in the sector can take comfort from the fact that now, more than ever, the UK will be focused on ensuring energy security and that renewables and other low carbon energy measures could play a significant role in building up the UK’s energy networks and generating stock.
Pre-Brexit, government and industry were already grappling with how to “keep the lights on” in the early 2020s when industry experts have consistently warned that the UK’s growing demand for electricity is going to outstrip its arrangements for generation and supply. Over the course of the past decade, different administrations have promoted different strategies for addressing this shortfall – usually involving some combination of interconnection, storage, nuclear new build, cleaner gas and renewables.
Recent adjustments to subsidy frameworks indicate that the emphasis will be on re-allocating public funds to those renewables technologies capable of delivering electricity at utility-scale (i.e. offshore wind) or to those still at an earlier stage of development. Decentralised energy, including heat networks and micro-generation, demand side response and energy savings measures also take centre stage in plans to boost the resilience and efficiency of the system, and could become even more important if the UK enters a prolonged recession.
There has been renewed emphasis on improving the cost-effectiveness of subsidies and affordability for consumers but the UK thus far remains committed to its budget allocation for further CfD auctions. In particular, former chancellor George Osborne’s eighth budget delivered in March confirmed the allocation of £730m worth of investment for the next round of auctions, which would focus on offshore wind and other less-established technologies.
National Grid has also recently announced that, should the Government fail to change its trajectory in order to ensure 22GW of nuclear energy generation, 100GW of renewables and 20GW of fossil fuel generation with carbon capture and storage technology in 2050, then the CCA targets will not be met.
Evolving energy landscape
With this increased pressure to keep supply and demand in sync, and mounting consumer scrutiny of their utility bills, query how decarbonisation will be weighed in the balance with security and affordability in the UK’s new energy landscape.
Adding more gas-fired plants would be a means of increasing capacity at a relatively cheap cost, and cleaner gas generation has always been a feature of the UK’s energy plans. However, local air pollution levels have also traditionally been a political priority; since before the 2015 general election there was consensus across all major British parties on the phasing-out of unabated (lacking carbon capture storage technology) gas-fired power. Note also that such developments would be contingent on gas imports and storage, which could also be impacted by the Brexit process.
New nuclear capacity could also play a critical role, although the obstacles faced by the Hinkley Point facility highlight the difficulties of deploying nuclear generation at scale, Brexit or no. Gas and electricity interconnectors will also no doubt feature prominently but may need to be the subject of new trade deals and arrangements if Brexit is actioned.
Against this backdrop there still looks to be significant opportunity for offshore wind, solar and other low carbon technologies and measures to play their part. Existing policy commitments will certainly keep decarbonisation on the agenda for the shorter term – with its presence and weighting in the trilemma going forward yet to be determined.
This article was co-authored by Trainee Solicitor Firas Albani.