Brexit, Hinkley Point C And Oil: UK Energy Solution Providers Need to Plan for Volatile Policy and Prices

Business cases for investments in energy solutions – whether solar PV, district heating, LED lighting or energy monitoring systems – are significantly impacted by energy policy and prices. Prior to the Brexit vote in June, UK electricity prices were flat or trending down and energy policy was set around long-term climate change and capacity goals. But now market participants face a much more volatile mid-term outlook. What factors are shaping the mid-term outlook?

The Department for Energy and Climate Change (DECC) has been abolished. This raises questions about energy and climate change policy. Also on the policy side, the UK government may no longer feel bound to EU climate change targets. Investment in the Hinkley Point C nuclear power station is up for reappraisal. The view is that the price for power agreed three years ago must be renegotiated at the very least considering energy prices have dropped in the last three years.

A major impact of Brexit on the UK is funding for UK energy projects. Last year the European Investment Bank (EIB) lent over €7 billion to the UK. Energy projects accounted for 28%, the highest of any sector. Capital intensive projects such as offshore wind are likely to be impacted if the EIB stops funding, especially as subsidies for renewable energy generation in the UK are already getting reviewed and cut on a frequent basis.

So there is plenty of uncertainty on the policy agenda which will stymie investment, whether it is in nuclear, offshore wind or energy efficiency.

Imported fuel prices will rise due to a weaker currency and possibly new trade barriers. For Brexit to have an effect on UK energy prices, it would depend on decisions over the operation of the interconnectors and transmission charges and if the EU imposes export tariffs or premium fees on gas and electricity flowing to the UK. While those decisions bring uncertainties for the mid and long-term outlook, we must prepare for an increase in energy prices in the near-term simply because of the continued low pound against the euro and US dollar. As one third of the UK’s energy supply is imported and traded in US dollars and euros, the continued drop in sterling will naturally feed through to bills and energy services costs.

Despite the impact of a weaker currency, fuel prices may stay low. Energy prices may not be impacted that much in absolute terms as Saudi Arabia’s oil production rose again in July to another record high. The oversupply of oil will continue to lower the price of oil (and natural gas), but uncertainties remain on for how long and how low Saudi Arabia is willing to let the oil prices go down.

The inevitable conclusion is that UK energy solution providers need to shape their business plans for the next three years in a highly uncertain environment. Value propositions need to meet short-term customer requirements which are not dependent on how the market evolves.

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