Is the energy industry ready for Brexit?

03 July 2017

The Brexit negotiations have begun.  Although the discussions have got off to a “promising start”, both sides recognise the complexity of the work ahead.

To date, the focus of attention has been on the most knotty issues  that go to the heart of our emerging relationship with the EU- the rights of citizens, the Irish border and the ‘divorce settlement.’ But many other aspects of life in the UK will be impacted by Brexit.

Consider the energy industry - vital to the economy, an essential service which provides the foundation for our day-to-day lives. Yet, energy is not “front of mind” in Brexit discussions. The industry is not facing the scale of change anticipated for financial services, the car industry or agri-food. However, it would be wrong to assume that energy will be sheltered from the impact of Brexit.

Just before the election, the House of Commons Business, Energy and Industrial Strategy Committee reported on negotiation priorities and identified a number of areas requiring urgent attention, including:

  • We need new arrangements for regulating nuclear trade if we cease to be a party to the EurAtom agreement - EurAtom provides the legal framework which supports the inspection of nuclear facilities and which facilitates international trade in nuclear materials.
  • We need to redefine our relationship with the Internal Energy Market which supports the movement of electricity and gas between European nations. This is particularly important on the island of Ireland where close cooperation over a number of years has established electricity market arrangements which span the border.
  • And we need to plan what we will do if we are no longer part of the EU Emissions trading arrangements.

It will be essential to resolve these issues in a way that provides certainty to investors. The energy sector is competing with other industries and other countries for new money. And it needs a lot of money to finance the infrastructure which will support our transformation to a low carbon economy.

Preparing for Brexit will be a significant programme of activity for Government. But, it will also impact directly on the energy companies. Consequently, energy companies will need to:

  • assess the impact of new trading arrangements on their supply chains, particularly if the UK is no longer part of the Customs Union;
  • plan how they will recruit and retain staff in a world where labour may not be able to move as freely as before;
  • consider how they manage activities that span borders (a number of companies have headquarters outside of the UK and operation across Europe); and
  • re-evaluate their strategies.

The energy industry needs a strategic routemap for implementing the changes that lie ahead.

A routemap that bolsters investor confidence.

Other regulators have been turning their attention to the adequacy of Brexit preparations. The Bank of England, in its capacity as Prudential Regulator, wrote to all cross-border banks in April 2017 and: 

  • observed that although government is aiming for a comprehensive new trade relationship with the EU, a range of outcomes are possible;
  • set expectations that all banks "should undertake appropriate contingency planning”; and
  • described the scenarios that contingency planning should address.

The energy industry now needs to bring its Brexit preparations into sharper focus. Perhaps Ofgem should follow the example set by the Prudential Regulator and ask energy companies for an update on their plans.

Stuart Cook

Stuart Cook | Director – head of utility strategy and regulation
Profile | Email | +44 (0)20 7804 7167

 

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