Will Brexit lead to higher energy bills?

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The UK’s exit from the European Union (EU) could lead to higher energy bills, according to a House of Lords committee.

Ever since the government set the Brexit clock ticking – the UK is scheduled to leave the EU on March 29, 2019 - each passing day seems to reveal another area of our lives that will be negatively affected by our exit from the EU, and uncertainty around the energy market is the latest red flag.

How does the UK energy industry currently work?

Before we consider how Brexit could affect energy prices, it’s worth taking a quick look at how the UK energy industry currently works, and what can affect energy prices.

Energy policy

Although the EU sets pollution targets, energy policy is largely determined at a domestic level, with each member state choosing how it mixes its energy production between fossil fuels, renewables and nuclear. So, while Germany is winding down its reliance on nuclear power, the UK is increasing its investment in nuclear, most notably the Hinckley Point C reactor.

As things stand, the UK gas and coal make up almost two-thirds of the UK’s energy mix (30% each), while nuclear accounts for 19% and wind makes up 9.5% of energy generation.  The rest is split between bioenergy, solar, hydro and other forms of generation.

Energy improvements

Part of your energy bill goes towards investing in renewable energy sources and funding energy improvements to hit green energy targets and meet the pollution targets set by the EU.

When the UK leaves the EU, there’s a chance these targets will change, but there’s nothing to suggest these energy targets will be scrapped – why would they be? – but the need for a new trading relationship with the EU, and the fact that no-one really knows what effect Brexit will have on anything, means an increase in the cost of green energy initiatives can’t be ruled out.

And independent analysis from Vivid Economics and Cornwall, both investigating the likely consequences of Brexit, believe the government’s focus on the energy ‘trilemma’ of securing supplies, while cutting carbon emission and providing affordable energy, will remain.

Energy investment

The uncertainty around Brexit means outside investment into the UK is considered to be a big risk. Vivid Economics and Cornwall both fear the UK will struggle to attract the investment needed to fund future low-carbon initiatives, else will put a higher premium on investment to mitigate for any increased the financial risk.

This problem is exacerbated by both the weakening pound and an increase in the costs of importing equipment and services, which could easily push up bills.

How could Brexit push up our energy bills?

As things stand, about 5% of the UK’s electricity and as much as 12% of its gas is imported from the EU, and the four power cables that connect Britain to the continent are scheduled to be joined by eight more in the near future.

Even so, as with all things Brexit, the UK is looking to completely cut its ties with the EU’s internal energy market, which will almost certainly weaken its influence on energy rules, and mean a cut in European investment in the UK’s infrastructure.

And because the EU’s internal energy market is designed to remove trade barriers and promote frictionless trade between member states, leaving this arrangement could lead to supply shortages in the event of extreme weather or unplanned generation outages, and lead to significantly higher prices.

Lord Teverson, the chair of the EU, energy and environment subcommittee, said: “There will be a divergence and we will not be integrated. What that means is energy trading becomes less efficient and retail prices will go up.”

Add to that the problems that could arise should the UK fail to put in place a replacement for Euratom, the EU nuclear cooperation treaty – which could have major consequences for the UK’s nuclear industry, which the government is throwing its weight and money behind – and Brexit could lead to a major energy crisis on all fronts.

Of course, no one really knows what the impact of Brexit will be, but therein lies the biggest problem with what is becoming an increasingly messy divorce.

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