How will Brexit Affect UK Energy Prices

The infrastructure required to provide an entire nation with Gas and Electricity is formidable. Add a series of four electricity cables to interconnect the UK’s infrastructure with that of main land Europe, along with added rules and regulations governing them and you have created an incredibly complex system which allows for the direct import and export of power with our closest neighbours. Now throw into the mix a relatively unknown variant which is Brexit, under whatever guise it eventually manifests itself, and you have the potential to have created a completely unpredictable beast that has market experts contradicting each other when trying to provide clarity on what happens next.

If the last three years of indecision has proved anything to us, it is that the future with regards to Brexit is uncertain. Forecasts by any business leader, politician, civil servant or media outlet are generally tainted by agenda and bias one way or the other. However, what is clear is that for most of these people, with vast personal fortunes, is that they really have the least to lose. As much as the potential is there for vast fortunes to be significantly reduced, it is likely that for most in positions of power even major wealth reduction will not lead to a lowering of living standards. With that in mind and shifting the focus onto us, as consumers; below is a quick look at the effects of the strength of the pound and on our reliance on imported energy may have on household bills.

One of the most significant factors will be the strength of the Pound. If we are trading with the European market then we are likely to be buying units of energy against the Euro or US dollar. Therefore, a relatively strong pound will see wholesale costs fall whereas if the pound falls, the costs will rise accordingly. Understanding accurately what the pound will do post Brexit at this point is almost impossible. Especially when the currency has been dramatically rising and falling on mere rumours of the likeliness of no deal, versus good deal, versus bad deal. Put very simply, the currency market is centred around confidence. Rises and falls will happen in tandem with the levels of confidence in a currency at any given time. The Bank of England has measures it can take to mitigate drops in value and business leaders, along with our politicians have been working behind the scenes to reassure investors that the UK is open for business, no matter the outcome. it would be therefore reasonable to expect that after three years, there are significant plans in place to minimise the risk of a complete crash, which should ensure relative stability for the pound. This will make any price rises or falls minimal, especially in the immediate aftermath of a withdrawal as the market adjusts to new conditions. In the longer term the effects of the pound will be more noticeable if we continue to grow our reliance on imported power. The alternative to this is to reverse that strategy and invest more in our own infrastructure. This would, in the longer term, reduce the impact on bills from the rise and fall of the currency market, but would create its own problems in footing the bill for investing in any new infrastructure.

The UK’s current position of being a net importer of electricity weakens its position. Although imports only account for around 7% of the entire demand, the government intends to increase this to 20% by 2025. The benefits of an increase would be to reduce the UK’s reliance on gas and coal power stations and help meet green targets while a renewable infrastructure is still being put into place. However, complications in how this is delivered will be compounded when we leave the Bloc. To begin with, the UK will not have any direct say in creating or amending rules or agreements within the pan-European trading system. This could potentially lead to the UK being subject to unfavourable terms, but this is unlikely. As an outsider of the trading system the UK will indeed have no input input into any eventual decisions, but as a customer that is buying more units of energy year on year, the UK would have a huge influence, as private companies which supply the power, will not want to lose an important customer. Of course not everyone is optimistic with a Ukrainian born billionaire businessman, Alexander Temerko stating that he believes that a no-deal Brexit would lead to a 30% rise in the price of electricity. His stance however, is fairly predictable given that he is hoping to build a new electrical cable between the UK and mainland Europe. In contrast, a spokesman for the National Grid has said that they are not anticipating any additional charges for inter connectors in the event of a no-deal Brexit. Again, this is a predictable stance given that the overseers of the National Grid will not want to instil panic amongst the public.    

When all the shouting, the arguments and wild claims have all died down, a simple stabilising fact will remain. The energy market is regulated by OFGEM who monitor the market closely to ensure that consumers are protected from unfair price hikes and scrutinise any infrastructure investments. As it stands today, the energy price cap acts as an unflinching barrier to any company that would try to exploit a volatile market by unduly raising rates. Add to this the growing competition in the energy market and it becomes clear that that the UK consumer is protected by a robust, if not perfect, energy market and infrastructure. Therefore, at least in the short term, it is unlikely that most consumers will notice any difference. This is because it is easier than ever to switch between suppliers if yours starts pushing prices up. The longer term is much less clear but it is unlikely that the UK will be hit with an outrageously high import tariff, especially if our import demands continue to grow and we become an ever increasingly important customer.

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