Brace for Brexit

Brace for Brexit

Lorenzo Colantoni
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Although the threat of the U.K.'s exit from the European Union is already expected to have a significant impact on the U.K. energy sector, the chaos of the last three months has provided further clarify on the potential and devastating impact of Brexit

Since Theresa May's resignation and Boris Johnson’s rise to power, the situation has become even more complicated. The new Prime Minister's attempt to suspend Parliament to force an exit without a deal ended in a resounding failure, while the proposal for a new agreement with the European Union submitted on October 2 is unlikely to be accepted by Brussels – in fact, it is not even supported by Johnson who submitted the proposal. Many European analysts and officials consider it more a provocation that a real proposition. Faced with the growing risk of a further postponement of the exit date, scheduled for October 31, or a no-deal Brexit, the future of the U.K. is less stable than it has been for the last 50 years. Its energy sector, given its key role and inherent fragility, is one of the areas most at risk from this uncertainty. The Brexit effect is already evident in the short, medium and long term, and could get worse in the event of no deal and further postponements. Three sectors have been affected the most: the oil industry, environmental protection and the energy market.

 

Storms in the North Sea

On August 2, 2019, the Sunday Times published a confidential document from the British government codenamed “Operation Yellowhammer”. It contained the hypothetical – and devastating – consequences of a no-deal Brexit, with limited references to the energy sector. One point, number 15, was deleted, and so it remained even after the official publication of the document by the British Government in September “on the grounds of commercial sensitivity.” As revealed in mid-September by Sunday Times reporter Rosamund Urwin, point 15 was devoted to the fate of British refineries after a no-deal Brexit, the sector that, according to the paper, will actually be one of the hardest hit. The picture presented by the text is indeed worrying: Facing E.U. tariffs makes petrol exports to the E.U. uncompetitive. [...] This leads to significant financial losses and announcement of two refinery closures (and transition to import terminals) and direct job losses (about 2000). Resulting strike action at refineries would lead to disruptions to fuel availability for 1-2 weeks in the regions directly supplied by the refineries.

Brexit comes at a time of particular crisis in the North Sea oil sector, which has been hit by low oil prices and rising operating costs due to ageing facilities and the need to dispose of many platforms. The refineries where North Sea oil arrives on land, for example in Middlesbrough, England and Grangemouth, Scotland, have for years been at the center of major competition battles over the renegotiation of contracts that considered by the management at companies such as Ineos as too favorable under new market conditions. This is a crucial issue for the whole country, however, because refineries directly employ thousands of people (in the Grangemouth area over 3000), in some of the U.K. regions still most severely affected by the effects of Thatcher-era deindustrialization. A no-deal Brexit could exacerbate this crisis by increasing the cost of hydrocarbon imports, which are necessary given the dwindling extraction in the North Sea, and by reducing exports to Europe, effectively undermining production for the domestic market.

 

An Unclear Future for the British Environment

For some refinery owners, however, Brexit seems like a blessing. This is the case with Jim Ratcliffe, the third richest man in the U.K. and owner of the petrochemical company Ineos. He began his career as a Brexiter by spending heavily in the run-up to the U.K. exit with the aim of abandoning what he called the E.U.’s “stupid green taxes.” He has worked on several fronts over the past four years to get the country to abandon European standards and rules to prevent air and water pollution, which have also threatened to close some of his plants – the same people responsible between 2014 and 2017 for 176 violations according to the European Environment Agency. Brexit, particularly if no deal is reached, could open the way for his proposals and those of other businessmen, thus posing a threat to environmental protection in the country. Not only would it take the U.K. out of the European Union, the leading promoter of ambitious environmental laws, but it would foment an economic slowdown in the country (already underway), which would result in London giving more concessions to companies to promote investment or, simply, to convince them not to leave the country. However, this situation is not only reflected in pollution, but also in the fight against climate change, an area where the United Kingdom has always had great ambitions, but few achievements. The country will miss its 2020 renewables target and is dramatically behind those on emissions and energy efficiency to 2030 (about which the U.K. has not yet confirmed its commitment, because of Brexit). It is unclear how the country can continue on the path of decarbonization in this crossfire, between a non-ideal starting situation, threats to its energy security and increasing costs to consumers and industry.

 

The Cost of Brexit

The other reference to energy in “Operation Yellowhammer” is with regard to energy prices. While denying the possibility of supply disruptions, point 5 shows the real possibility of significant increases in gas and electricity costs for industry and consumers, with the possible exit of operators from the market, fueling further political and economic problems. Brexit exacerbates the problems already in place in the structure of the UK energy market, dominated by the oligopoly of six companies, which have been accused on numerous occasions of operating a cartel for a synchronized price increase. The recent opening of the UK market to other operators has also been guaranteed mainly by the application of European rules, in particular the Third Energy Package. The U.K.’s exit from the E.U. threatens the expansion of this first, fainthearted opening, exacerbating the problems inherent in it. This is not just about higher energy prices, but the long-insufficient generation capacity for the U.K., the result of a shortage of investment, for which the oligopoly is largely responsible. The country has been in constant danger of blackouts for more than a decade – a real threat, given the power outage that affected the entire country on August 9, 2019. The long-term energy planning White Paper, expected for years, has been postponed due to Brexit, while uncertainty over the U.K.’s future creates mistrust of renewable investments (and not only) that should ensure the expansion of British capacity. In 2018, the U.K. lost its place in the Renewable Attractiveness Index published by Ernst&Young precisely because of concerns over Brexit. Not only does the UK risk missing the boat of the energy transition and the renewables boom, but also risks discounting all of this directly in its production capacity.

All this has consequences not only for the country as a whole, but also at the level of its constituent nations. Scotland risks not making the most of its receptiveness to renewable investment as a result of Brexit, at a key time for the expansion of its wind capacity, which is growing at one of the fastest rates in Europe. This adds to Edinburgh’s already fervent dislike of both Brexit and the attitude of Westminster, shown during both the May and Johnson administrations to hold the positions of the regional United Kingdom governments in little regard. While the energy aspect of Brexit further gives a further boost to Scotland’s desire for independence, tensions with the Republic of Ireland are also growing. The country is only connected to the rest of the E.U. by the East-West Interconnector, which passes through the U.K. The balance of Ireland’s energy system (30 percent of which is powered by renewables) is also very closely linked to that of the U.K. The paralysis in British energy planning also threatens the expansion of Ireland’s renewable capacity and the stability of its energy system, igniting the existing tensions over the key issue of the border between the Republic and Northern Ireland in the post-Brexit period.

The impact on energy of the U.K.’s exit from the E.U. risks even greater social division and instability in the country. These issues are not only affected by a no deal, but also by the uncertainty of the constant postponements of the exit date that paralyze political debate in the country on any matters other than Brexit. The United Kingdom will therefore have to make a prompt decision, regardless of the E.U. position. This would be a sudden change of course from the uncertainty of the last four years, which the Johnson government seems far from able to take, and which perhaps can only be guaranteed by new elections.

 

Lorenzo Colantoni, Researcher of the Energy Program at IAI