With only nine months until March 2019, the Brexit process seems to be timed from one European Council to another. Little new information has emerged from this June Council, however, on what the future holds or when the withdrawal negotiations might conclude and provide us with the clarity we desperately need on the future framework. We hope the upcoming White Paper will answer some questions.
This opacity around what the future framework looks like and when it would begin has already started to impact the energy sector. In the energy world, operators have to plan in advance, because the delivery of energy into people’s homes and businesses is not a straight forward matter.
The Emissions Trading System is the most efficient way to decarbonise
The uncertainty around whether the UK will remain in the European Emission Trading System (EU ETS) is already having a direct impact on the day-to-day business of energy companies. Suppliers buy their energy days, months and years in advance to find the best deals and limit customers’ exposure to the market’s volatility.
Under the Secure and Promote obligation, the largest market participants need to pledge to make a market in a certain amount of electricity capacity in order to help improve liquidity and market access for smaller and new entrant electricity suppliers. This obligation will be extended to the winter period 2020/21 from 1st October. At present, as we do not know what carbon pricing mechanism the UK will be in, the exposure to carbon costs for that period is undefined which makes it extremely difficult to price any thermal generation and causes deep uncertainty across the market. Uncertainty creates risk and risk has a price. This situation is likely to create cost pressure that will feed through to customer bills.
From the very early stages of the Brexit negotiations we have been clear that the EU ETS is the most cost-efficient way to price carbon and incentivise emission reduction investments. While the energy sector has to buy 100% of its allowances for every tonne of carbon it emits, other sectors still get free allowances, even though this diminishes every year. So the scheme covers the whole economy.
Deciding to leave the EU ETS would create a big policy gap that other options, such as a carbon tax, would not fill as cost-efficiently and broadly as the trading scheme. A carbon tax would likely be strongly lobbied against by carbon intensive sectors, putting all the burden on the energy sector, pushing consumer prices up and making carbon reduction less efficient and cost-effective than it is today. It would also undermine the UK government’s carbon budgets and its ambitions under the Paris Agreement, as well as a potential earlier move towards zero net emissions.
The energy sector has clearly demonstrated its commitment over the years to decarbonisation and has been leading the way. We are renewing this commitment by advocating that the UK should stay in the EU ETS.
Participating fully in the Internal Energy Market is the best way forwards
This goes hand in hand with our belief that the best way forward for the UK is to remain closely aligned with the rules of the Internal Energy Market (IEM), to guarantee that our trading of energy remains as efficient and low cost as it is today. There are several important aspects to the trading and delivery of energy, such as market coupling and balancing services, which optimise the allocation of capacity across borders and help keep the whole system at an equilibrium between supply and demand. As energy markets become more integrated, the whole grid is optimised, allowing for cost-efficiencies across systems. The deployment of large amounts of variable generation renewable energy – wind and solar, means that larger, liquid, connected markets across Europe are the best way forwards, so that the UK can use our neighbours carbon free electricity when it is available, and vice versa.
We believe that this is the best way to deliver both lowest cost energy to UK consumers but also to ensure we deliver on our carbon commitments. Both in the EU and in the UK, climate and energy policies have become interlinked over the years. This is also now extending to transport and other sectors. Energy is an integral part of the climate framework. The EU ETS is a perfect example of this synergy.
With the Clean Energy Package we have a stable policy framework to operate in
With the 2020 framework now firmly in place, work over the last few years has been focussing on the 2030 landscape. Here again- with discussions around the Clean Energy Package well underway, a clear view is emerging as to what this 2030 framework will look like for the EU. This is welcome and reassuring. The negotiations cover a whole range of issues, including a number of targets aiming at achieving a more competitive, secure and sustainable energy system and to meet long term 2050 greenhouse gas reduction objectives.
While the UK is still part of those discussions, it is not clear though how exactly we will contribute to this framework in the future. Does this mean that the recently agreed targets on renewables and energy efficiency should be disregarded? Certainly not.
Over the years, the cost of renewables has been driven down and we find ourselves in a very different world to the one we were in when working on the 2020 framework. We should not forget that the UK is a leader in the deployment of renewables and world leader in technologies such as offshore wind. The EU targets are a clear indication of the direction of travel to 2030. Alongside the UK GHG targets which – due to our own legally binding obligations - will match or most likely exceed those of the EU, this will provide the right long term vision and framework that are needed to support the UK energy industry’s ongoing investment in renewable and low carbon energy and the UK’s wider actions to decarbonise across the economy.
There is no obvious benefit to consumers or industry from divergence
From the energy sector’s point of view, the European energy market as it is now and where it is heading is fully compatible with our vision and the trajectory we are on. The best way to get where we want to be is to stay in a framework that has delivered and that we have helped shape and continue to influence. While some aspects of this market can be more challenging than others, Energy UK believes that the benefits of remaining part of the IEM strongly outweigh the disadvantages which risks jeopardising all the work that has been done and that lies ahead.
The next couple of weeks must provide more clarity as to what the future looks like and for that reason I look forward to the publication of the Brexit White paper. Energy and Climate are intrinsic to the success of our industrial base and our society and as such should feature highly. We believe the best way to preserve what we have created is to remain closely aligned with the EU framework, which supports our national efforts and the broader global ambitions.