Brexit Shakes Up EU Energy and Climate Landscape - Dispatch Weekly

Brexit brings with it many questions to answer in the international landscape and one among them is climate change and EU’s climate policy.

As the UK has voted to leave the EU, there is a great deal of market and political uncertainty that will shape UK and EU energy for years to come. The referendum does not, however, change the fundamentals as the global climate crisis demands that the UK and the EU accelerate the decarbonisation of their economies. Further, the UK and EU must continue to work together and with international partners – as they have done in recent years – to strengthen global efforts on climate change.

The UK’s domestic Climate Change Act remains in place and the UK will ratify the Paris Agreement. EU climate targets and the EU commitment to implement the Paris Agreement still stand.

Both the UK and other EU countries already benefit greatly from an integrated energy market, and these benefits will continue to grow through the energy transition. The underlying economics point to a mutual interest in continued UK participation in the integrated European energy market.

The UK and EU will have strong drivers to maintain investment and jobs despite the economic uncertainty created by the referendum. Core economic drivers for creating a modern clean energy and transport system have strengthened rather than weakened.

Formally, the result will trigger a protracted exit negotiation process, which will formally begin in the Autumn once ‘Article 50’ is triggered. In the interim, existing rules and arrangements will continue to apply, most likely for at least the next two years.

A swift resolution of the preferred model of the UK-EU relationship is needed. The UK referendum did not give a clear mandate for what this should look like, other than for the UK to leave the EU. Following Cameron’s resignation, the new government needs to consult and engage widely to determine the core elements that will need to be included in the exit negotiation.

Overall UK investment climate

Financial and currency markets are showing considerable volatility this morning (Friday 24th). If this continues it will create a more challenging environment for all forms of investment in infrastructure, including in energy.

Investors in the UK’s energy sector now face three sources of uncertainty:

• Market risk, including uncertainty on the future terms of access to the internal energy market
• Financial risk, including potentially higher borrowing costs and currency fluctuations
• Political risk, including changes in the UK’s political leadership and policy direction.

This uncertainty could risk energy sector investment and further challenge UK security of supply. To limit this uncertainty and keep investment flowing, early steps should be taken:

• The Prime Minister (and potential Conservative leadership candidates) should reiterate a commitment for the UK’s clean energy and climate policies and targets to be at least as strong as – or stronger than – the rest of the EU.
• Leaders in the UK, other member states, and European institutions should spell out a firm statement of intent for the UK to continue to fully participate in the internal energy market.
• Ofgem should be tasked with initiating a process to ensure UK domestic energy regulation remains compatible with the internal energy market (including network codes).
• If the financial volatility leads to a sustained economic downturn, governments should introduce new financial stimulus focused on clean energy and transport, to maintain investment and jobs through the economic uncertainty.

Renewable energy

In contrast to recent years, EU renewable energy targets are no longer the primary driver of renewable energy investment in the UK. While the EU’s 2020 target was a major catalyst for investment, the 2030 target is not nationally binding – so current UK renewable energy investment is driven by the underlying need for clean energy in the UK. This need does not change.

Renewable energy investors will, however, be affected by the volatile economic environment. Governments and institutions such as the Green Investment Bank and European Investment Bank may need to redouble their efforts on renewable energy financing.

EU Energy Policy

The direction of EU energy policy has been driven by global forces, including the rise of smart clean energy technologies and geopolitical pressures. The fundamental logic for modernising and decarbonising EU energy systems remains strong.

The EU Energy Union project initiated last year can be expected to continue, and legislation currently under development will still be tabled. Some alterations may be needed to timelines and to some proposals to take account of the UK vote. While EU heads of governments and senior leaders will understandably be preoccupied with the implications of the referendum vote for the EU, it is important that the UK referendum does not distract the EU from the reforms that the EU energy market needs.

UK Climate Change Policy

The UK has been a strong advocate for climate ambition within the EU. However, the heart of the UK’s own climate ambition is delivered by the UK’s own policy and legislation:

• The UK Climate Change Act sets out the framework that limits emissions, including 5-yearly carbon budgets, the 5th of which is due to be agreed very shortly;
• Electricity Market Reform has set out the mechanisms for supporting low carbon energy, and the last Government announced auctions of Contracts for Difference of up to £730m up to 2020, which will support up to 4GW of offshore wind and other renewables;
• The Government has committed to phasing out coal in the energy mix by 2025;
• UK Energy Minister Andrea Leadsom has said she believes it is necessary “to take the step of enshrining the Paris commitment to net zero emissions in UK law”.

International Climate Policy

People around the world will also now be asking what the result means for the Paris Agreement:

• The UK will still be a Party to the UN Framework Convention on Climate Change, and will still be a signatory to the Paris Agreement, regardless of its relationship with the EU;
• The UK will continue with its ratification of the Paris Agreement, as it would have before this result;
• The only difference is that whereas previously the UK submitted a joint Intended Nationally Determined Contribution (INDC) together with other EU Member States, once it officially leaves, the UK will need to submit its own, and the EU will need to re-submit its INDC, in light of this change.