Yahoo Finance UK businesses face post-Brexit surge in energy prices
Factors such as increased transportation costs and the UK leaving the EU internal energy market means businesses will likely see an increase in energy costs as a result of Brexit, a new report by services switching company Bionic has revealed.
The report cited a House of Lords committee warning that the UK faces energy shortages and increased gas and electricity bills after Brexit if the transition is not managed well, with one of the main stumbling blocks being that almost half of the UK’s gas supply is imported from the continent.
It explained that if the UK begins trading outside of the EU’s Internal Energy Market, the frictionless trade it currently enjoys with its European partners will be put at risk, meaning consumers could be forced to pay more.
About 40% of the gas used in the UK comes from Norwegian and other European pipelines, while about 6% of electricity is generated in France, Holland and Ireland.
The UK will still be subject to the EU’s internal energy market, but will no longer be in a position to contribute to the decision-making process, which could lead to a loss of investment, and could also see consumers and firms paying a higher premium on energy due to increased transportation costs.
There are currently four subsea pipelines connecting the UK to Europe, with a further 11 currently planned or under construction, at least eight of which are expected to be completed by 2022.
This means the UK is about to become even more dependent upon imported energy, which “is a big problem where costs are concerned as the free flow of energy across these interconnectors is vital to maintain a level playing field in the energy market and keep prices down.”
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The report said leaving the EU without an adequate energy deal also means energy supplies may be at risk during extreme weather or when power infrastructure suffers technical problems, as the subsea cables help balance energy supplies and guarantee supply when wind and solar power is unavailable.
Another issue is that the UK is currently part of the EU Emission Trading System (EU ETS), an EU-wide cap and trade system which puts a price on carbon through trading of emission permits. If the UK leaves the EU ETS, it’s unclear what carbon pricing mechanism will replace it and the exposure to carbon costs for that period is undefined.
This will make it difficult to price any thermal generation.
To protect against market volatility and wholesale price rises, suppliers buy their energy up to years in advance, and October will see the UK’s four biggest electricity producers — EDF (EDF.PA), RWE (RWE.DE), Scottish Power and SSE (SSE.L) — set the price for their winter 2020/2021 contracts to supply smaller UK providers.
Ofgem is reviewing this month’s deadline, but Lawrence Slade, chief of trade association Energy UK, fears the worst.
He has said that “the lack of certainty around the future carbon-pricing mechanism as well as the rules underpinning the cross-border trade of electricity and gas create risk, and risk has a price. This situation is likely to create cost pressure that will feed through to customer bills.”
The UK's reliance on imported gas supplies could not only help to push prices up, it might also lead to shortages, particularly during any Europe-wide cold spells.
Meanwhile, a report in December pointed out that the UK’s access to the EU’s power grid is guaranteed only until 30 June 2026, after which there will be annual negotiations, while the tricky and much-debated fisheries part of the deal grants EU boats access to British waters up to the same deadline of 30 June 2026.
It is possible that if the UK and EU decide to renegotiate these fishing terms, the UK’s electricity could be under jeopardy, the report said.
Paul Galligan, CEO at Bionic, said the report “goes to strengthen the case for switching soon for longer fixed term tariffs, securing rates for your business before they become too volatile.”
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