The legal implications of Brexit in the energy sector are closely linked with the commercial factors. The primary sources of risk for corporates operating in Britain are the threat of increasing electricity supply costs and higher costs of financing for energy and infrastructure projects. Any Brexit-related devaluation in the Pound will compound these risks.
The impact of Brexit on electricity prices and supply will pivot on whether the UK will seek or be able to remain in the EU Internal Energy Market (IEM) as an exit from the IEM presents the possibility of introduction of customs duties or tariffs on the import of electricity.
The Government has indicated its intention to retain access to the IEM as free as possible. If the UK is able to remain in the IEM, wholesale energy price trends in the UK are expected to largely remain linked to those in the EU as is currently the case.
However, in the medium-to-long term there is a risk of regulatory divergence. To the extent that the IEM and the UK decide to implement different standards, this may create regulatory barriers ultimately resulting in higher prices for end users.
An exit from the EU presents risk for financiers looking to invest in the electricity assets in Britain. This includes lending for infrastructure and construction projects financed on the basis of projected future energy costs. In the short term, higher returns are likely to be sought by financiers to offset the risk posed by Brexit. In the medium-to-long term, it may be that less favourable conditions also put upwards pressure on the overall costs of raising investment for such projects.
At particular risk is power generation, where EU policy has had a direct influence on UK policy support for investment in renewables. Brexit may realign these priorities and provide a more volatile policy environment for investors to assess when making investment and lending decisions. This finance risk may also extend to industries reliant on access to power and electricity infrastructure, such as manufacturing and logistics. Contractors operating in these areas, particularly those based in the EU, may face higher barriers to market entry.
Although UK is heavily integrated with the EU gas market, it has a number of sources of supply independent of the IEM. The UK also has fairly significant domestic production of gas. In the short term it is unlikely that Brexit will have a significant impact on the gas supply chain. Longer term there are questions as to the extent to which EU regulations regarding interconnectors between the UK and EU will continue to apply.
Environmental and Climate
Pollution controls and emissions limits have been largely directed by EU-related obligations – these will fall away as a result of Brexit. Companies are unlikely to see a significant reduction in the regulatory burden imposed by environmental and climate change legislation.
The success of any negotiations regarding ongoing participation in the EU Emissions Trading Scheme will also be of significance to certain companies.
- Due diligence on existing energy supply contracts or any medium-long term service agreements likely to be impacted by higher costs of electricity (or gas) supply.
- Assessment of exposure to possibility of higher costs of imported equipment and services
- Longer term energy supply contracts and the development of on-site generation may provide opportunities to hedge specific exposure to Brexit-related energy risk.