How Brexit would affect the UK’s energy sector
While debates over the impact of Brexit on high-profile issues such as trade, immigration or security are rarely out of the media, the impact on one of the country’s most important sectors — energy — receives less attention.
Surprisingly, despite the UK being part of the EU single market, there is currently no level playing field for UK generators to compete with their EU counterparts. Thermal generators in Europe have an advantage over their UK peers due to lower CO2 taxes, transmission, and balancing charges.
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If the UK left the EU and was not successful in negotiating a free trade agreement, the government could, in theory, level the playing field by imposing a tariff on electricity imports, making it more expensive for foreign generators to export electricity to the UK. The rationale behind this could be that, if tariffs are inevitable, it is better to impose them in a way that mitigates existing distortions to trade.
The estimated result of such a levy is that energy imports to the UK could fall by roughly one-third. The reduction in imports would need to be substituted by domestic generation, allowing room for new capacity investment or delayed retirement of old capacity. By using the levy to reduce reliance on imported energy, the UK government would be ensuring greater security of supply through additional flexibility to increase imports if a supply crunch occurred.
Any measure to increase security of supply would be helpful at a time when security margins in generation have been falling rapidly. However, increasing security of supply by these means would be achieved at a cost—both measurable and intangible. In the first instance, import tariffs would increase the cost of electricity to British consumers by an estimated £140m per year.
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A potentially more significant concern is that any introduction of import tariffs would be likely to cause problems in other areas of negotiation with the EU. Once implemented, this could set a precedent for similar levies across other sectors of the economy. Overall, if the EU judged the UK’s policy stance to be deliberately antagonistic, it could make any future trade agreement with the EU much more difficult to achieve.
If the UK chooses to leave the EU, the government may have to decide between enhancing energy security and creating a level playing field in generation on the one hand, and negotiating effective trade agreements that are needed to maintain trade with the EU on the other. The ultimate decision could have substantial implications for the UK’s energy sector and energy users.