UK vote to leave EU increases market uncertainty

Investors seeking to develop new power infrastructure in the UK face increasing uncertainty after the country voted to leave the EU in a referendum held yesterday. The prospect of an uncertain investment environment comes at a time when the government is trying to replace the country's ageing nuclear and coal-fired power plants.

The heightened uncertainty and risk for developers over the coming years as the UK negotiates its exit from the EU is likely to mean that investors will seek higher returns for their projects before committing investment, a report commissioned by transmission system operator National Grid in the lead-up to the vote said.

The UK government has pledged to close all of its remaining unabated coal-fired plants by 2025 and replace them with new gas-fired and nuclear plants.

The pound had dropped to its lowest level in more than 30 years this morning, with a weaker pound not only effectively lifting the relative cost of importing power, gas and coal, but also lifting the cost of imports for the materials and equipment required to build new energy infrastructure. Planned new plant projects may now face final investment decision delays, which could mean that remaining coal-fired plants are required to remain on line to ensure security of supply.

The owners of the country's coal-fired plants had been required to make a decision by 2020 as to whether they wish to invest in the required emissions-reduction technology for compliance with the EU's industrial emissions directive (IED) or face closure. The UK's vote to leave the EU may allow such facilities to evade this deadline and continue operating into the mid-2020s, but the country would have to remove the legislation from its national law for this to happen.

The UK is also likely to have to re-negotiate its membership of the European internal energy market (IEM) during the planned two-year negotiating period for securing its exit if it wishes to remain a part of it, and retain the associated benefits of power market coupling initiatives and cross-border market balancing.

EU membership is not mandatory for involvement in the IEM, with Norway having joined despite not being a member of the EU. But even if the UK did re-join the IEM, energy minister Amber Rudd — who campaigned to remain in the EU — has previously said the country's influence on rule changes and regulation is likely to decrease.

Membership of the IEM is likely to affect plans to increase the UK's interconnector capacity over the coming years, with new interconnections with Norway, Denmark, Belgium, France and Ireland planned.

UK utility SSE said today that the referendum outcome presents no immediate risk to its planned investments, but urged the government to outline its plans for the country's involvement in the IEM, in order to avoid a prolonged period of legislative and regulatory uncertainty.

The UK's vote to leave the EU also raises questions as to the future operation of the Irish single electricity market model, with the Republic of Ireland and Northern Ireland power markets currently conjoined independent of Great Britain. Northern Ireland will leave the EU as part of the UK.

But a UK exit from the EU may allow the UK to alter the criteria of its capacity market, which is currently technology-neutral in line with EU laws on competition.

The scheme, introduced by the previous coalition government as part of its electricity market reform, is designed to ensure security of supply and incentivise the construction of new gas-fired plants. But the first two auctions held under the scheme have procured only two large-scale new gas-fired plant projects, with carbon-intensive small-scale diesel-fired and coal-fired plants taking advantage of the technology-neutral entry criteria and gaining capacity contracts. Former energy minister Ed Davey has previously called for EU rules on competition to be altered to allow governments to favour applications for new projects over those of existing plants.

Without having to comply with EU laws on competition, the UK may be able to restrict the scheme's entry criteria to new gas-fired plant projects, which would ensure that such capacity is contracted in future auctions.

Non-EU membership may also accelerate the process of awarding contracts for difference (CFD) subsidies for low-carbon infrastructure projects, as such contracts would be unlikely to require state aid approval from Brussels before being awarded by the government.

EU state aid approval for the CFD for the UK's planned 3.2GW Hinkley Point C nuclear plant took 10 months to be awarded, while the anti-nuclear power Austrian government has since challenged the decision at the European Court of Justice. Project developer, French state-controlled utility EdF, is yet to make its final investment decision for the scheme, but said today that the UK's vote to leave the EU has "no impact" on its plans to build the plant.