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Energy bills could rise even further after Brexit - Warwick Business School

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Rising energy prices hit the headlines on a regular basis and are the cause of much political debate, this could hot up even more if the UK does not secure access to the EU’s internal energy market after Brexit.

A lot has been said about the UK staying in or out of the single market and customs union, but very little has been mentioned about the internal energy market. That needs to change.

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Since the discovery of North Sea oil and gas, the UK has become hooked on natural gas. The problem is, that since UK production peaked in 2000 it has fallen by 63% and last year only covered just half the country’s needs. It is predicted that by the end of the 2020s the UK could be importing over 70% of its gas.

Fortunately, the gas industry anticipated the need to import and the UK is well served by a significant infrastructure that includes pipelines from the Norwegian sector of the North Sea, interconnectors to Belgium and the Netherlands, and three LNG import terminals.

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At the same time, the National Transmission System, owned and operated by National Grid, has adjusted as new directions of flow have emerged. Unfortunately, some of the infrastructure is ageing and the closure of the Rough storage facility will leave the UK short of storage capacity.

At the moment, Norway provides 65% of our import needs, a further 12% comes from North West Europe via the two interconnectors, back-filled by imports to the continent from Norway and Russia.

The remaining 23% arrives as LNG nearly all from Qatar. Furthermore, the signs are that in the short to medium-term the UK will have access to plentiful supplies of gas, including new LNG supplies from the US, at affordable prices.

On the face of it then, Brexit should pose few challenges to the UK’s gas security. But, although Norway is not in the EU, through the European Free Trade Association and the European Economic Area it is a member of the EU’s internal energy market and is subject to EU energy regulations.

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The interconnectors land in EU member states and are governed by EU regulations. They also face a fundamental challenge to their business model as their long-term contracts come to an end.

The pre-eminence of the UK’s gas hub, the National Balancing Point, has been surpassed by the Dutch Title Transfer Facility, which will likely become the European benchmark.

It is looking increasingly likely that under the Conservatives the UK will not be part of the EU’s customs union in the future, but will it remain in the internal energy market?

If not, then it will be on the wrong side of the EU’s new energy solidarity mechanism and will lose influence over the future direction of gas market reform. Furthermore, the loss of Rough will make the UK more reliant on imports via the interconnectors and means it will have to pay a premium to attract the gas the country needs. Already, the fall in the value of sterling means that the UK is paying more for its gas imports.

Customers in the UK currently benefit from frictionless access to a well-functioning North West European gas market. If the UK finds itself facing barriers to market entry this would make gas trade with the EU costlier, which might impact on Norway’s willingness to use the UK to access the continent.

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Equally, LNG importers that currently use the UK as a bridgehead to Europe, might send their cargoes straight to European terminals. All of this could threaten the UK’s gas security just when its import dependence is increasing.

The closer that the UK’s Brexit negotiators can get to an outcome that is ‘business as usual’ when it comes to gas trade, the better.

The chances should be good because the UK plays an important part in guaranteeing the resilience of Europe’s internal gas market.

The danger is that those ‘red lines’ that the UK government will not cross may leave the UK out in the cold and see energy prices rise even more.

Michael Bradshaw is Professor of Global Energy at Warwick Business School and is researching Global Gas Security funded by the UK Energy Research Centre (UKERC).