Brexit: Will the utility market be affected?

MAPP spends £24m on utilities each year. Utility consumption accounts for a significant proportion of our annual £120m service charge expenditure across the buildings we manage for clients in the UK.

We anticipate that the UK will continue to align with the EU on all the utility trading regulations. This is mainly due to the interconnections we have on electricity and gas and our dependence on them. For political reasons being associated with the European Union Emissions Trading Scheme (the largest emissions trading scheme in the world) is considered unlikely and we expect the UK to establish and run a stand-alone scheme.

The alternative would be for the UK to impose a flat Carbon Tax.

The lack of clarity is creating uncertainty in the markets and in assumptions on pricing.

This briefing note attempts to explain why.

Uncertainty over Physical Energy flows

Brexit: Will the utility market be affected?

It is in both the EU and UK’s interest to ensure that energy continues to flow, and Ofgem, the government regulator for gas and electricity has a number of fall back measures to protect security of supply.

The UK and EU energy markets are connected through interconnectors. These are expensive pieces of infrastructure and it is unthinkable that they will not be used in the future.

The EU has no tariff on power or gas imports from other World Trade Organisation members so the assumption is that if the UK left on WTO terms power and gas would not be taxed. That is however an assumption and the lack of clarity is affecting pricing.

Currency exposure

Brexit: Will the utility market be affected? 1

Sterling remains weak on historical trends and any recovery is being undermined by Brexit.

Weak levels of sterling are likely to result in lower levels of imported energy but an increase in exports to the EU notably to the Republic of Ireland.

Renewable Energy Guarantees of Origin (REGO) acceptance

Brexit: Will the utility market be affected? 2

Should a trade deal not be agreed the EU is unlikely to accept any UK based Renewable Energy Guarantees Origin (REGO), although the UK has stated that it will accept EU sourced REGO’s and will carry on with the Renewables Obligation (RO) system in the event of a no deal. This would lead
to the UK not being an attractive option for our exported energy as a renewable energy source. This would need to be addressed fairly quickly by Ofgem and the EU counterparts on the basis of a no deal.

In summary, like so many other things there is so much uncertainty. It is impossible for us to judge the outcome of the negotiations with the EU, but we look forward to the certainty of a deal or no deal. In the event of a no deal we are unlikely to see chronic shortages of gas and power but we are likely to see an increase in rates and a period of unpredictability.

MAPP will continue to monitor the situation on behalf of our clients.