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What No Deal Brexit Means for UK and EU Energy Markets

What No Deal Brexit Means for UK and EU Energy MarketsA no deal Brexit will encourage the U.K. to invest more in domestic power generation to balance additional costs from electricity imports from the EU as a third country and to upgrade its gas storage capacity, a policy analyst at the European Policy Centre (EPC) told Anadolu Agency on Thursday

A no deal Brexit will encourage the U.K. to invest more in domestic power generation to balance additional costs from electricity imports from the EU as a third country and to upgrade its gas storage capacity, a policy analyst at the European Policy Centre (EPC) said on Thursday.

Talks between EU leaders and British Prime Minister Theresa May on reaching a Brexit deal have been strained since the EU rejected her Chequers deal on Brexit last month in an informal EU leaders summit in Salzburg, Austria.

The U.K. is "not afraid” to leave the EU "with no deal if it has to,” May said on Wednesday at the Conservative Party autumn conference. She said leaving the bloc with no deal would be tough and difficult at first with tariffs imposed, however, the U.K. would eventually prosper.

Therefore, with only a brief amount of time left until the U.K. leaves the EU on March 29, 2019, the chances of a no deal Brexit seems more likely with little progress made in negotiations between the U.K. and the EU, and with Brexiteers rapidly losing support.

Energy experts deliberate over the several effects of a no deal post-Brexit U.K. on the energy sector and trade with the EU. Marco Giuli, a policy analyst at the EPC said a no deal post-Brexit means the U.K. will become a third country separate from the EU and excluded from gas and electricity flows optimization schemes, which are increasingly arranged through EU-level bodies and regulated by EU law.

"These refer to the protocols that regulate cross-border electricity flows on day ahead and real-time markets, which are less and less bilateral, increasingly regionalized and dependent on EU regulatory bodies. They allow more efficient grid management and therefore fewer costs for operators and consumers," he explained.

Giuli also noted the U.K. will lose voting rights in the Agency for the Cooperation of Energy Regulators (ACER) and the European Network of Transmission System Operators (ENTSO), which are set to expand their competencies as a result of the EU’s evolving energy legislation.

"The EU will need to adjust its emissions and renewable energy targets in light of the U.K.’s departure," he said, noting the emission allowances issued by U.K. authorities might lose their legal standing, implying distributional consequences on industrial actors holding them in Europe.

However, he said the future of the EU Emissions Trading System (EU ETS) will largely depend on whether the U.K. will leave the ETS with Brexit or will find an arrangement to remain part of the ETS until the end of the current phase in 2020, which would make the transition administratively easier.


- More interconnectors planned between the U.K. and EU

On the impact of a no deal Brexit on gas and electricity trade, Giuli noted that the trade volume is relatively low, but added that electricity trade is set to expand thanks to new interconnectors, the percentage share of which will grow to balance out shortages from intermittent renewable generation.

There are currently three interconnectors between the U.K. and EU member states with a cumulative capacity of 3.5 gigawatts (GW), one to France with 2 GW of capacity, one to the Netherlands with 1 GW capacity, and one to Northern Ireland with 500 megawatts (MW). In addition, a capacity of 500 MW is connected to the Republic of Ireland, according to the Office of Gas and Electricity Markets (Ofgem).

Furthermore, there are others in development, for example with Belgium, Norway and Denmark.

"Brexit might turn preferences towards national solutions for backups, which may become more convenient than trading if flow optimization will be compromised by the consequences of Brexit," Giuli noted.

With or without a Brexit deal between the U.K. and the EU, the trade will continue to be regulated by World Trade Organization (WTO) rules, implying that the U.K.'s access will be possible without tariffs and taxes to the EU energy market, he said.


- A post-Brexit trade deal possible

The impact of a no deal Brexit on the EU's security of electricity and gas supply is expected to be minor while as a third country, the U.K. will not be able to rely upon solidarity mechanisms in cases of supply disruption, Giuli said.

"This could be critical to the extent that despite sufficiently diversified supply, the gas storage capacity in the U.K. is low. The U.K. will probably have additional reasons to upgrade its gas storage capacity," he noted.

Additional costs from electricity imports, potentially arising from the fact that as a third country the U.K. will not necessarily be part of joint flows optimization schemes, will also embolden the U.K. to invest more in domestic power generation, he explained. However, it will be up to commercial operators to identify the best energy mix, factoring in the uncertainties stemming from Brexit, according to Giuli.

"Trade inefficiencies can, however, be corrected in the future i.e. through a trade deal post-Brexit. In the meantime, interconnection projects with the continent are going ahead," he said.


- Special attention should be paid to Irish energy system

Simone Tagliapietra, a research fellow at Bruegel also said that on aggregate, Brexit’s impact on energy systems for EU citizens and companies will be limited. "With or without the U.K., the EU will be able to complete its market, to achieve its climate and energy targets with feasible readjustments, and to maintain supply security," he noted, adding that the negative impact of Brexit on the EU energy system is manageable, even if special attention should be paid to the impact of Brexit on the Irish energy system.

"Pooling energy resources among member states is essential for the EU to build a common and truly integrated internal energy market that is able to withstand external shocks. Given the U.K.’s limited energy integration with the continent, the security of electricity and gas supplies on the continent will not be substantially affected by Brexit," Tagliapietra explained.

As a member of the WTO, the U.K. will likely be granted the right to import and export energy free of tariffs from and to other WTO members, he asserted, adding that the EU has shown flexibility with respect to the rules governing the usage of electricity and gas interconnectors with third parties.

"Given their mutual interest, the U.K. and the EU can likely find arrangements that will enable continued energy exchanges. Both the EU27 and the U.K. have an interest in an increasingly integrated energy market. But both face matters of principle that make it difficult to agree on this first-best solution," he concluded. 

The Brexit negotiating process between the U.K. and the EU plans to finalize by the end of March next year.

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