The referendum turnout was 71.8% with more than 30 million people turning out to vote. This was the highest turnout in a UK-wide vote since the 1992 general election.
There will no doubt be implications from this vote and some we have already seen across all industries. As the team headed into the office on Friday, we had no idea just how this news would influence the markets. Of course, we had an idea and Nick was recently in the news discussing the possible implications of BREXIT.
The overriding question is still out as to whether we will look to opt to stay within Europe’s internal energy market. However, this has only ever been also about putting the same infrastructure in place and doesn’t provide for a lower energy bill.
The influence of the global economic outlook
The first impact of BREXIT to consider has to be that on the global economic outlook. It is tough to forecast how the UK leaving the EU might influence the global economic outlook but the consensus seems to be that there could be a negative reaction and a drop in UK GDP. Even if this were the case, the impact of any economic downturn in the UK would make little difference to the world oil markets. As Goldman Sachs explained “If we assume a 2% drop in UK GDP in response to the exit vote, which is on the higher end of our economists’ estimates, then UK oil demand would likely be reduced by 1%. In terms of numbers of barrels of oil, it’s around 16,000 barrels per day. In global demand, that’s the equivalent to a 0.016% hit to global demand, overall the impact here is minimal but would marginally favour a potential decrease in energy prices.
The cost of gas
The UK produces around 50% of its electricity from gas now. Despite the historic relationship with coal, just 6% of our energy production comes from coal now. The majority of this supply, 54%, comes from Europe and another 15% from outside Europe. As the value of sterling has plummeted post BREXIT, the cost of importing this gas has increased. Unless the pound recovers, the cost of gas will increase.
The future of Hinkley Point
The future of the much delayed Hinkley Point C Nuclear Power Station which would construct a nuclear power station in Somerset,potentially lowering energy prices long term. Essentially the chairman at EDF has said Hinkley Point will go ahead, despite the EU leave vote. We should indeed expect investors to consider investment in the UK on its own merits; historically if there is a good deal to be done then global firms are likely to take them.
Great Britain’s bargaining potential
As the fifth largest economy in the world, it’s hard to believe that just because we will no longer be in the EU we won’t be capable of arranging competitive deals with non EU countries. However, the argument stands that European countries, whether happy to invest in the UK infrastructure or not, may impose higher energy prices to the UK. This all depends on the outcome of the very complex wider negotiations with too many moving parts to call it.
Continued funding for energy infrastructure
The UK has always gone further with climate change than required. It’s often first to commit to climate change action or leading the way to make commitments legally binding. Much of the EU funding we lose as a result of BREXIT for energy infrastructure is offset of direct membership savings.
Futher to that, we’ve already made 20 year commitments to our energy infrastructure and are mid-reform. Any UK government taking over in the turmoil could of course un-hinge some of the investment in offshore wind, but with more importance placed on self-sufficiency any BREXIT voters are likely geared to further investment and not less. As we cut ties with our neighbours, governments would have to invest in anything that makes the UK more self-sufficient, potentially lowering prices.
Scottish Independence is another huge talking point in recent days/weeks. With import costs and the possibility of trade sanctions, the attraction to utilise UK energy resources goes up. With our major stock in North Sea oil, Scottish Independence would throw a spanner in the works. A revised UK, without our Scottish neighbours, would see support for higher prices in the UK, however Scotland requires more political support before it will play into trading speculation.
Traded Price of Energy
For the average energy bill, around 50% of it can be accounted for by a wholesale energy costs and the other 50% from the costs of delivery
Wholesale enerby costs have only really reacted to the weakening pound thus far. Other deeper impacts from BREXIT are yet to be felt and on balance as the dust settles we’d expect to see the market do the same. The underlying economics are for bearish movements in energy prices whilst supply is comfortable and worldwide economic data has suggested slower growth in the largest of our world economics. The current expectation is for an unsettled few months whilst traders show uncertainty to the multiple factors in play and knee jerk trading takes place.
For non-wholesale energy costs they can be both in and outside of a business’ direct control. To pay for the infrastructure changes the UK has committed to carbon taxation, which is set to increase by 250% from current levels by 2020.
Such an increase will push the energy bill up by 30% by 2019/2020 from current levels. This is out of any business’s control and, all other factors aside, represents the single largest guarantee of a larger energy bill in 2020. Even with the lowest historic wholesale energy prices we have seen this year some businesses have struggled to get into a savings territory due to this rise in non-wholesale energy costs.
So when it comes to BREXIT and the impact on the energy bill, perhaps we can take a leaf out of the Leave voting book and start to look at a journey off the grid. Battery storage is rapidly developing as a technology for storage, renewables are becoming progressively cheaper and community energy suppliers are gaining support.
From a trading point of view, there’s no clear direction of travel from Brexit and liquidity will be an issue. If you have to arrange a supply contract in the interim, short term contracts make sense. In the longer term don’t forget to consider the impact of rising carbon costs already embedded into the UK charging methodology, BREXIT can’t be blamed for it all.