In this sponsored post, Stuart Lloyd-Evans, director of risk and trading operations at Opus Energy, asks what Brexit means for the energy and FM market.
Despite the summer lull in headlines, and even though the vote was several months ago, the shape of ‘Brexit’ remains the ‘known unknown’ in the future of our island. As if there weren’t enough changes in the energy world already, Brexit could become the dominant force over the coming years in shaping the nature and operation of the energy market.
So what might Brexit mean for the energy/facilities management market?
DECC becomes DBEIS
Not directly Brexit related, but part of the fallout with a change in Prime Minister, the erstwhile Department of Energy and Climate Change has become the Department for Business Energy and Industrial Strategy. This may be an early signal that the shift away from climate change priorities could continue as budgets get tight; as well as that an integrated approach to business and energy may be forthcoming.
This change may be welcome news for energy intensive customers, where direct exemption from costs, rather than DECC’s seemingly preferred indirect supplier based compensation of the last few years. However, there has been much media noise about the impact of a loss of climate change in the title, particularly post the COP21 agreement in Paris last year.
Irrespective of a Brexit, a tightknit political union looks to be off the agenda on both sides, causing a state of flux with its associated uncertainty.
Within the energy markets across the EU, it’s uncertain if the march of energy integration would be stopped. Currently, there is an ongoing EU drive for energy market coupling and common security of supply measures (which considering the supply and demand issues experienced, coupled with a trend of rising energy costs across the continent, is not surprising).
Whether the UK would be allowed to (or want to) stay in the club is far from clear now that we’ve decided we’re better off going it alone. Potentially the UK could become an energy island with all the flexibility, and risks, associated with that.
For a facilities manager responsible for energy provision across multiple sites, this potential cost fluctuation may be an influencing factor in business profitability, so a product that supports your business needs will be critical.
In addition, the EU REMIT (Regulation on Wholesale Energy Market Integrity and Transparency) – the obligation to report all wholesale trades and supply contracts over 600GWh – may become out of our reach.
This framework for identifying and penalising market abuse in the UK and across the rest of Europe is designed to help consumers, industry and other participants to have confidence that energy prices are open, fair and competitive.
Again, depending on what the government negotiates as part of a Brexit agreement, would this army of analysts pouring over any wrongdoing be lost to us, potentially rendering the UK open to market abuse? While this is unlikely, it is still something to consider in terms of market parity and competitiveness.
Green power revolution?
The largest single scheme under the new Contract for Difference (CfD) subsidy model has been in the news since Brexit. EDF’s Hinkley Point C nuclear plant was subject to board resignations in France and could have been a pawn in the Brexit chess game, but eventually it was approved by EDF’s board. However, with the change in PM since Brexit there is a potential change in support from within government, with a delay now coming from this side of the channel.
Reported concerns from within the UK government regarding both the cost of the scheme, and its sources of funding mean that this already 8 year old development is unlikely to commence generation on schedule (if at all). As the development will also rely on Chinese funding, there is also a post Brexit unknown about how that relationship will develop and what that could mean for other energy infrastructure funding emanating from the East.
As the UK seeks to carve out a new energy policy for itself, the shape of this, and whether it will include nuclear or not will be a significant factor in the mid-to-long-term price trajectory of the market. This will shape the market over the years to come.
Money, money, money
In the aftermath of the vote, volatility in the Sterling exchange rate has increased against both the dollar and the Euro. As the dollar is the global barometer of energy (oil) and the UK is an electricity and gas importer (in Euro), this had an immediate impact on wholesale prices; increasing the cost in sterling terms for energy. Choosing when to price fix flexible energy supply contracts now means taking a view of the global picture as the UK heads towards independence.
The price of electricity itself could be impacted if the government chose to amend the carbon price support mechanism. Embedded within UK wholesale electricity price is an additional cost of carbon linked to the European Union Emissions Trading Scheme (EUETS); if the UK was no longer a part of that scheme would the link be maintained? France is proposing to adopt its own carbon price support scheme, if the EU develops a pan-European model, the UK could find it hard to resist copying if it wants to provide an incentive for energy to cross the channel.
While there is the possibility costs could decrease, it could well go the other way for a time as the market adjusts to life outside the EU. For a business’ bottom line, this uncertainty could cause a big hit, leaving businesses open to uncertain billing and unpredictable cash flow.
Find out how to mitigate that risk at opusenergy.com