Richard Power: Uncertain times for the energy sector after Leave

Outcome will depend heavily on how single market negotiations pan out, writes Richard Power

A post-Brexit recession could reduce demand for all forms of energy  electricity, oil and gas. Picture: TSPL
A post-Brexit recession could reduce demand for all forms of energy  electricity, oil and gas. Picture: TSPL

Predicting Brexit ­consequences for the UK energy industry is problematic. Much will depend on whether the UK strikes a new deal to provide access to the Internal Energy ­Market and the effect of Article 50 negotiations on the UK and European economies.

Uncertainty over UK access to the single market while Article 50 negotiations are underway could well cause an EU and UK-wide recession, which would be likely to reduce demand for all forms of energy – electricity, oil and gas.

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That would have knock-on effects on price and profitability, which could decrease investment and increase disputes and insolvencies. If the UK does not negotiate continued access, then tariffs and import taxes might be introduced by both the UK and EU, worsening economic problems. EU-based electricity and oil and gas companies might be dissuaded from investing or even from continuing UK operations.

Ironically, the UK oil and gas industry, relatively isolated from EU regulation, might feel the effects most keenly. As the Wood Review and a PwC survey found, even before the EU referendum, various factors including the global drop in the oil price were exerting economic pressure on the UK Continental Shelf (UKCS) oil and gas sector.

The potential general economic downturn could be exacerbated by the loss of EU funding for UK energy infrastructure projects such as offshore wind farms, which as ‘projects of common interest’ would have been ­eligible to access EU financial ­support.

However, unless the UK adopts an EEA/EFTA-type arrangement, EU state aid rules would no longer apply and the UK would have greater independence to allocate state funding for energy projects.

The recent PwC survey found that some industry players favoured a state-sponsored ‘super joint-venture’ structure to spread the costs of ownership, operation and decommissioning of infrastructure, or even renationalisation. That might be a more realistic possibility post-Brexit.

Then there is the Scottish question. A new independence referendum would resurrect 2014’s arguments about which country would be entitled to UKCS revenues and who would foot the decommissioning bill.

However, the impact on the UK’s energy market would be bigger. Scotland produces 26.4 per cent of the UK’s renewable power generation and independence would impact on the remainder of the UK’s ability to achieve CO2 targets.

Two of the UK’s Big Six energy companies – Scottish Power and SSE – are headquartered in Scotland, and Scotland is a net exporter of electricity. There would be repercussions for the UK energy market if a second vote was for Yes.

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There have also been calls for the EU to accommodate Scotland’s continued membership. Could the UK (Scottish?) North Sea oil and gas industry be saved as Aberdeen becomes a trading hub for EU-based companies, funded by EU subsidies? Could an independent, EU-member Scotland use EU funding to further develop its renewables industry and export clean power to the UK and Ireland – and maybe even the continent?

It is impossible to forecast the impact of Brexit on the UK energy sector. It seems safe to assume that economically, it is in for a bumpy ride over the next two years.

• Richard Power is a partner and energy specialist with Clyde & Co