The UK’s energy market is deeply integrated with that of its European neighbours, so the forthcoming referendum on its membership of the EU has major implications for energy and climate policy. In our new research paper, we examined five models of post-Brexit UK-EU relations, ranging from the ‘Norway’ and ‘Swiss’ models to free trade agreements such as Canada has negotiated, membership of the Energy Community and finally a ‘no deal’ option. Our conclusion is that while each option involves trade-offs for energy and climate policy, remaining inside the EU offers the best balance for Britain’s interests. We see three areas where this is particularly important: market integration, energy and climate diplomacy, and the costs and disruption caused by leaving.
The United Kingdom has long been a strong and effective advocate of liberalized energy markets within the EU. Given the perceived economic benefits and the multinational structure of energy markets and companies, it is unlikely that the UK’s current government would wish, or be able, to significantly reverse the trend of domestic energy market liberalization in the event of Brexit. But by leaving Britain would lose the ability to shape the EU’s integrated market from which increasing amounts of its electricity will originate. Under some models of leaving, the UK could even lose rather than gain influence over its energy policy.
A growing share of the UK’s electricity is exchanged with EU neighbours through interconnectors – giant cables under the sea which allow for the transmission of power. The UK’s grid is already linked to those of France, the Netherlands and the Republic of Ireland and a number of new interconnectors have been proposed or are in development, some supported by EU funding and financing. Because renewables produce a growing share of Britain’s electricity, there is a need to import electricity to meet fluctuations in supply and to export power in times of excess. Some estimates suggest that the new interconnectors could lead to a 7 per cent reduction in the wholesale cost of electricity by the end of 2021. If it votes to remain, the UK would continue to benefit from the common energy market, particularly in gas and electricity, while maintaining influence over its direction. An isolationist energy policy on the other hand would create risks to electricity prices that could negatively impact both UK businesses and households.
The EU also sets energy standards on most consumer products. If the UK leaves its citizens will continue to buy many products made to EU standards, as global manufacturers will in general not make goods to different UK specifications (unless they are stricter). It makes more sense to stay in the EU and help design sensible energy rules and regulations, rather than be subject to much of it from the outside.
Second, the EU negotiates collectively on international climate issues giving it greater political weight than any member state has alone. Although there is certainly more the UK government could do, it has been a strong advocate of international climate leadership within the EU. Similarly, the EU currently takes a coordinated approach in engaging with major fossil fuel producers such as Russia and countries in the Middle East. This has helped support price stability and security of supply, including through infrastructure investment to make existing pipeline systems more efficient and improve storage and capacity. Russia has long had a policy of trying to divide Europe and strike bilateral deals with individual member states where it feels it has more power. Remaining in the EU offers a platform for a strong, coordinated approach on both energy security and international climate change issues.
Outside the EU, the UK could no longer directly shape the climate and energy policies of its continental neighbours at a time when there are good prospects of a deeper, more effective European energy market. On the domestic front, a decision to leave would also make it easier for a future UK government to change policy by weakening or abandoning the current Climate Change Act, since only a change in domestic legislation would be required to change course on decarbonization.
The third reason for remaining is to avoid disruption. All the models of leaving that we reviewed would create regulatory uncertainty until a new framework of UK-EU relations is settled, which could be a sustained period. This could hamper much needed investment in the energy sector. The UK has pressing infrastructure needs, for example, to replace ageing power stations and to build a decarbonized energy system. Outside the EU it will be in competition with its EU neighbours to attract the necessary finance, with less ability to access European financial sources, such as the European Investment Bank or joint funding mechanisms like the Connecting Europe Facility.
Even if the UK votes to leave, a degree of continued adherence to EU market, environmental and governance rules would be inevitable. The debate on Brexit risks being simplified to a choice between the status quo or leaving the EU altogether. Missing from the debate is the sense that in the sphere of energy, EU integration is moving in a direction that could benefit the UK, and is being actively shaped by UK policy. In the case of energy and climate change policy, the best strategy is to work to create a better collective European approach through the EU. If it votes to remain the UK is well placed to shape an ambitious Energy Union to meet the continent’s multiple energy challenges.
Antony Froggatt, Senior Research Fellow, Energy, Environment and Resources; Thomas Raines, Research Fellow and Programme Manager, Europe Programme; Shane Tomlinson, Senior Associate, E3G; Former Senior Research Fellow (Chatham House).