As Britain looks set to leave the EU’s Single Market, business consultants have attempted to map out the numerous challenges facing the energy sector after Brexit, making the case for a transition phase to smooth the exit path.
The UK’s withdrawal from the EU’s energy market now seems all but certain, according to a report by the Boston Consulting Group, Global Counsel, and Herbert Smith Freehills, published on Wednesday (28 June).
“Continued full membership of the Internal Energy Market (IEM) by the UK is not compatible with the stated political goals of the UK government to end the supremacy of the EU over UK law,” states the introduction of the report, titled “Strong currents: Navigating the post-Brexit energy market”.
The list of questions raised by Britain’s decision to leave the EU is daunting in the energy sector. It includes trade law and tariffs, but also nuclear safety and the UK’s continued membership of the EU emissions trading system for greenhouse gases.
The only good news in the report is also the most obvious: Physical energy connections won’t vanish overnight after Brexit. “The economic and commercial incentives to sustain, and potentially increase, energy market integration through physical electricity and gas interconnection are strong for both the UK and EU,” the report notes.
That was for the reassuring part. The rest looks much gloomier as Brexit raises significant questions for the UK, beyond the physical interconnection of markets.
“How will the UK source, and trade in, nuclear materials outside of the Euratom treaty? How will the UK approach security of gas supply as an EU ‘third country’? And how will the UK price carbon emissions once, as seems likely, it leaves the EU-ETS?”
One particularly difficult issue relates to the situation now facing the Irish cross-border Single Electricity Market, which the report describes as “exceptional in its complexity”.
And there is of course a “cliff-edge” scenario under which the UK abruptly leaves the EU without any transitional arrangement, an outcome described as “unlikely” but not impossible.
“In reality, both the UK and EU would see such an outcome as an historic failure and will make great efforts to avoid it,” says Matthew Duhan from Global Counsel, one of the authors of the report.
“But, the negotiations are going to be tough and with a divided minority UK government it is not inconceivable we might see an accidental ‘no deal’ scenario on Brexit ‘day one’,” he warns.
What the report clearly stresses is the need for a transitional arrangement to smooth the path to Brexit.
The most likely outcome, Duhan says, is continued physical linkage to the internal energy market, through a bilateral agreement on energy, either forming part of, or ‘flanking’, a wider free trade deal. But he warns “there is a long way to go to secure such agreement.”
Other options after Brexit include Britain joining the Energy Community, an institution that promotes the extension of the internal energy market to the EU’s neighbours, mainly in the Western Balkans.
“But, while it may offer inspiration for a deal it’s not an ‘off the peg’ solution,” says Silke Goldberg, Partner at Herbert Smith Freehills.
“Sitting in what is essentially a waiting room on the path to EU accession for a group of much smaller countries such as Albania, Moldova and Ukraine is no-one’s idea of a UK Brexit destination,” Goldberg says.