Would leaving the EU change the UK energy landscape?

28 July 2015 (Last Updated July 28th, 2015 18:30)

As a referendum on UK participation in the EU draws nearer, questions are being asked about what a potential exit could mean for the UK's energy market. Could an exit change the UK's role in the wider European electricity market, and what impact could it have on current decarbonisation targets?

Would leaving the EU change the UK energy landscape?

EU parliament

With the UK's in/out referendum on EU membership looming just over the horizon - Prime Minister David Cameron has promised to hold the poll by the end of 2017 but rumours suggest it could come as early as spring 2016 if his treaty negotiations go well - it has been a time of rampant speculation on what Britain leaving the EU might mean for the country, and Europe more widely.

Industry figures have been as quick as anyone to start second-guessing the results of a 'No' vote (according to the referendum bill, the question posed on the day of the poll will be: Should the United Kingdom remain a member of the European Union?). For many industry leaders, the prospect of forcing any kind of wedge between UK and European markets represents a blow to business and a step on the road to isolationism and irrelevance.

"The majority of CBI member companies of all sizes want to remain in a reformed EU," said John Cridland, director-general of the UK's main business lobby, the Confederation of British Industry (CBI), in a statement last year. "The fundamental choice here is whether Britain wants to be a global citizen or retreat behind national borders. The needs of the modern world increasingly don't recognise either the Berlin Walls or the Hadrian's Walls of the past."

European energy: in it together

The energy sector is an interesting case within the tide of speculation. After all, the EU itself has its roots in an energy treaty - it was the creation of the European Coal and Steel Community in 1952 that set the stage for the Treaty of Rome five years later - and in a community known for fractious disagreement on many issues, consensus on the benefits of energy co-operation and integration has always been relatively easy to achieve.

"It's one of the few policy areas where it is quite easy to sell the idea that an integrated European energy market brings benefits to many people," says Siobhan Hall, Brussels-based European policy senior editor for Platts. "That doesn't go away."

Both of the UK's two British-owned energy utilities, SSE and Centrica, have stressed the benefits of continued integration with the European energy market, as has National Grid chief executive Steve Holliday, who has described the European Commission's efforts to develop a single European energy market as "a good investment".



The UK government has angered environmentalists and green energy companies by removing the exemption to the Climate Change Levy.


As a result it seems vanishingly unlikely that energy will form a significant pillar of the EU referendum debate when it begins in earnest, likely with issues including migration, legislation and jobs taking centre stage. But in the event of a 'No' vote, would the UK face a drastically altered role in European energy affairs?

Energy co-operation, inside or outside Europe

Given the energy links that already exist between the UK and continental Europe, all signs point to the energy relationship remaining stable, even in the event of a British exit from the EU. The physical energy link, including power transmission cables to France and the Netherlands and gas pipelines to the Netherlands and Belgium, require operational partnerships that would remain unaffected.

"It's hard to see how the UK leaving the EU would necessarily make a big difference on the ground, on the technical side," says Hall. "The UK is connected to France by a power interconnector. The UK TSO [transmission system operator] and the French TSO have to talk to each other regardless of what happens politically between them."

One of the most common arguments for remaining in the EU is the importance of maintaining the UK's ability to exert influence on how it runs and take part in the wider conversation about its future. As true as this might be in other areas, in the development and regulation of energy technology the UK's place in the conversation seems to be assured.

"There's a European association of transmission system operators called ENTSO-E, and ENTSO-E has a very big role in developing technical EU rules that affect all power grid users," Hall says. "Switzerland and Norway, non-EU members, are members of ENTSO-E. National Grid is a member. According to ENTSO-E, if the UK left the EU, National Grid would still remain a member and it would still be playing a role in developing these technicals between TSOs all over Europe."

EFTA or EEA?

In terms of negotiating the UK's place in the broader European energy picture, much of the mechanics rests on how it would position itself after a 'No' vote. The government could opt to maintain its membership in the European Economic Area (EEA), as is the case with non-EU member Norway, or take a step further away from EU lawmakers by limiting its participation to membership of the European Free Trade Area (EFTA), as has been Switzerland's approach.

"It's hard to see how the UK leaving the EU would necessarily make a big difference on the ground, on the technical side."

Staying in the EEA would mean staying in the European single market, with all the benefits of free movement, but also requires adherence to common EU law in a number of areas. EEA membership would require the UK to continue with its EU-mandated renewables targets, which are currently set at satisfying 15% of energy demand from renewable sources by 2020. It would also leave the door very much open for remaining part of programmes like the Emissions Trading Scheme (ETS) and the development of the single energy market.

"If [the UK] takes a model like Norway then it is still going to be involved in the processes," says Hall. "There are parallel organisations that do similar things that the Commission does but for the countries that are in the Norwegian model."

But even if the UK went the Swiss route of simply staying in EFTA, the door to those schemes is hardly closed entirely. The ETS doesn't require EU membership to join, as discussions about ETS participation by Switzerland and Australia has demonstrated. And maintaining UK integration with the European grid would likely also be on the table, given the efforts made by the Commission to sign an energy treaty with Switzerland in recent years.

Targeting renewables

One area that some have speculated might see some significant change based on Britain's status in the EU is its renewables policy. The country is currently bound by an EU target to have 15% of its final energy demand met by renewable sources, and it is currently one of the few EU member states struggling to meet this requirement.



Rational thought is alive and well in the Dutch judiciary, even within the generally hyperbolic domain of the climate change debate.


As part of a broader paper awarded the 'Brexit prize' by free market think tank the Institute of Economic Affairs, British diplomat Iain Mansfield argued that in the case of a UK exit from the EU, the country should cast off this target, allowing policymakers more flexibility to satisfy energy requirements while also pursuing decarbonisation in the sector, perhaps through the development of more gas-fired or nuclear plants.

But even in this case, it appears the UK being inside or outside of the UK would have a limited impact. The 2020 target is binding, but beyond that, member states have agreed that the 2030 target to have 27% of the EU's combined final energy demand satisfied by renewables will not include national binding targets. "So the UK would have flexibility on renewables whether it is in or out of the EU after 2020," Hall notes.

And as Hall acknowledges, the forces of market economics will likely play a larger role than EU policy in countries' energy decisions. "How the energy mix develops in the UK is very dependent on economics," she says. "At the moment coal is cheap; gas-fired power plants can't compete. As the system moves to more renewables, marginal prices get lowered; that's partly what makes it difficult for gas plants. Renewables and nuclear is not technically a brilliant combination; if you've got very intermittent renewables needing flexible response and a lot of solid, baseload, not very flexible nuclear, that's a hard market to balance."

No doubt there will be many fraught discussions on the impact of 'Brexit' in the months leading up to the referendum debate. But energy remains an area where European consensus is fairly solid and the policy environment is stable and flexible enough to give the UK a range of choices, whether or not it remains a full member state. While an historic British break from the EU could provoke seismic changes in other areas of industry and policy, it's likely that the lights would be kept on in much the same way as before.