UK energy policy in limbo as Brexit looms - ICIS analysis

Author: Christopher Somers

2019/07/30

LONDON (ICIS)--Energy policy decision making by the new UK government is likely to be delayed until the country’s exit from the EU has been resolved, according to ICIS analysis on Monday.

Preparations for the Brexit deadline on 31 October are set to be the immediate focus of Boris Johnson’s new government, which was formed last week after the Conservative MP won his party’s leadership contest.

Brexit will likely delay the release of the government’s energy policy white paper, which was previously due over the summer, to at least the autumn.

Johnson has repeatedly said that he intends to ensure that the UK exits the union on or before the Halloween deadline regardless of whether a new withdrawal agreement has been reached.

The need to assess the implications of the UK’s new 2050 net zero emissions target, introduced by former prime minister Theresa May in one of her final actions in the top job, is likely to further delay policy announcements.

Overall, the new government’s energy strategy is unlikely to differ substantially from that of the previous government. Incoming energy secretary Andrea Leadsom has publicly endorsed the 2050 target, while Johnson has stated that the climate change agenda will remain at the “absolute core” of energy policymaking.

CARBON PRICING

A no-deal exit on 31 October would potentially disrupt the European energy market and would mean that the UK immediately withdrew from the EU emissions trading scheme (ETS), potentially flooding the carbon market with up to 100m allowances.

This means that the government would need to decide how to price carbon in the absence of the single European carbon price.

A note released on Tuesday showed that a carbon tax, set at £16/tCO2e, would be introduced on the UK’s first day outside the EU. This tax would be in place at the same rate until the end of 2019, with new rates due to be set at “future fiscal events”.

The government’s preferred option for post-Brexit carbon pricing would be the introduction of an EU-linked domestic ETS.

NUCLEAR

The government recently unveiled plans for its proposed regulated asset base (RAB) model for financing new nuclear power projects.

This model would attempt to unlock up to 14GW of new nuclear capacity in the UK by using government money to support projects through the development.

A new scheme for funding nuclear power was deemed necessary because of significant criticism faced by the government for its £92.50/MWh contracts for difference (CfD) strike price guarantee for EDF’s Hinkley Point C project.

The government has consistently said that nuclear expansion should be a key part of future energy strategy, with the most recent projections from energy department BEIS stating that nuclear will account for 29% of total generation by 2035.

ONSHORE WIND AND SOLAR

Onshore wind and solar projects look set to remain locked out of future rounds of government subsidy allocation.

With the renewable obligation scheme closed to new entrants since April 2017 and the two technologies unable to compete in CfD auctions since 2015, projects have been without a subsidised route to market.

There have been hopes from the solar and onshore wind industries that the government would use its energy white paper to welcome both technologies back to the auctions.

But ICIS analysis showed that it is likely that the government will rely on corporate PPAs to support new onshore wind and solar projects in the future.

Christopher Somers

A full analysis including market impact, is available on the ICIS Power Perspective interactive web platform. If you have not yet subscribed to our analytics products, please get in contact with Justin Banrey (justin.banrey@icis.com).