The UK is only a few weeks away from a June 23 referendum that will decide whether or not it exits the European Union. British leaders are stepping up their campaign, urging voters to reject a “Brexit,” warning that doing so would lead to huge economic losses. The Chancellor of the Exchequer, George Osborne, said a Brexit would leave Britain “permanently poorer,” resulting in an economy that is 6 percent smaller in 2030.
But the economic effects that will stem from breaking up with Europe are not as clear cut as the government of Prime Minister David Cameron tends to argue. Take the electricity sector, for example, where there are some upsides from a Brexit for electricity generators.
If the UK withdrew from Europe, the British government would be allowed to put up new tariffs on electricity imported from France and the Netherlands, two countries that have strong linkages with Britain. That would correct for some market imbalances, according to Dr. Vladimir Parail, a senior consultant at the London-based consultancy Oxera, who spoke with Oilprice.com in an interview. Related: Petrobras Offloads $1.4B In Assets Amidst Political Turmoil
“Despite the UK being part of the EU single market, there is currently no truly leveled playing field where UK generators can compete with their EU counterparts. Notably, the UK has a higher CO2 tax than the rest of Europe, as well as higher transmission and balancing charges levied on generators, giving thermal generators in continental Europe a competitive advantage over their UK peers,” Dr. Parail said.
British electricity generators pay about 8 to 8.5£/MWh more than their competitors in France and the Netherlands, according to Oxera’s research, equivalent to about 25 percent of traded UK electricity prices.
Oxera’s analysis finds that if the UK imposed new border charges on imported electricity, there would be several effects. First, electricity imports would fall by one-third as domestic coal and gas-fired generation becomes more competitive. Second, there could be higher investment in power plants within the UK, as the tariffs provide a “level playing field.” Related: Can Saudi Arabia Really Break Its Dependence On Oil?
Dr. Parail argues that the effect would be to increase the security of Britain’s electricity supply. A Brexit followed by new tariffs would not only provide a jolt to domestic generation, but the drop in electricity imports would mean that imports could then be ramped up in a time of need. “Overall, raising tariffs on electricity imports could act as an insurance mechanism—consumers would pay more in exchange for greater security of supply, since they would not be as dependent on electricity imports and would have greater flexibility to increase imports in case of a supply crunch,” he said.
The insurance policy would not come without costs. While British electricity generators would see gains under a Brexit plus new trade barriers, UK consumers would see higher electricity bills. Oxera’s research finds that consumers would spend an additional £140 million per year under the new system. Still, that only equates to about £2 per person each year.
Moreover, a Brexit could lead to higher levels of investment in British natural gas production, according to Penelope Warne from CMS, an international law firm. “To try to enhance the overall security of supply picture, there may be a case for investment in new indigenous sources of gas (such as shale gas) and new UK gas storage and LNG facilities in a Brexit scenario,” Warne wrote on CMS’ blog. More trade barriers would mean a greater need for domestic energy. Related: How Suncor Has Become The King Of Canadian Oil Sands
A Brexit would also free the UK to subsidize generation types that it chooses. “For example, the UK could choose not to close existing coal plant, and could promote specific new nuclear plant with substantial concessions free of EU procurement/state aid/competition rules,” Warne wrote.
The UK would probably choose to stay aligned with many EU energy and decarbonization initiatives even if it did leave the Union, but the Brexit would open “Pandora’s box,” Warne argues. Another uncertain element would be what happens to the Republic of Ireland, which as a member of the EU would lose direct geographical access to the Union through the UK.
With all of this said, energy is not exactly dominating the debate surrounding the Brexit. The most hotly debated issues come down to things like immigration, the effects on the broader economy, and British sovereignty independent of Brussels. Voters will ultimately decide the country’s future on June 23. According to The Economist, polls right now have the “Leave” and “Remain” campaigns neck and neck.
By Nick Cunningham of Oilprice.com
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