UK: Would an EU exit matter?

Rachel Parkes

How likely is an UK exit from the EU, and how safe is the Climate Change Act in the current political climate?

Note: this article first appeared in Renewable Energy Focus March/April 2013. Click here for a free signup.

We recently explored what the risk to the burgeoning renewables sector of a UK exit from the EU.

But in reality how likely is this scenerio, and as such should the renewables industry be concerned at all?

The general consensus seems to be that it is unlikely. In order for a referendum on UK membership of the EU to take place, Prime Minister David Cameron and the Conservatives must win the next general election in 2015 – something which is by no means guaranteed. Then, if Cameron keeps his promise, an “out” vote will not be an easy win either, with business leaders currently queuing up to discourage a UK exit.

As such, the uncertainty surrounding the UK's membership of the European Union does not seem to be impacting the renewables sector at the moment, says Ben Caldecott, head of policy at Climate Change Capital. But, he adds, it is early days, and the renewables industry may yet be hit by the wider economic impact of a UK exit from the EU.

“There might be broader macroeconomic impacts on investment across the economy,” he says. “Whether there's a meaningful difference in this sector versus others, I don't think there is at the moment.”

One key factor to consider is that by the time any referendum comes, the vast majority of investment in renewables for the 2020 targets will already have been made. The crucial issue here is decarbonisation beyond 2020 – and this is something that the EU is still yet to commit to fully. Indeed, the EU's 2050 roadmap has still not committed member states to the 80% by 2050 target.

Furthermore, there is the question of terms. If the UK was to leave the EU, under what conditions would it leave? Would it sever all links with Europe? Or would it remain part of the single market, while being politically independent?

What will be crucial for the energy market perhaps is not whether the UK retains its EU membership, but whether it continues its participation in two key EU programmes: European energy market integration, which will see all 27 energy markets liberalised and connected, and the North Sea energy interconnector programme, which aims to significantly increase the electricity connections between the ten North Sea countries, (Ireland, the UK, France, Belgium, Luxembourg, the Netherlands, Denmark, Germany, Sweden and the non-EU Norway).

In addition to allowing the UK to import electricity to help meet its renewable energy targets, these programme will increase the UK's offshore wind farms' ability to sell electricity into the European market, manage intermittency, and potentially bring down the cost of offshore generation. Before a European exit became a possibility, National Grid predicted UK interconnection with the continent could increase from around 4GW at present, to up to 11.6 GW by 2030.

According to Claudia Mahn, policy analyst at energy consultancy IHS, the UK would be hard-pressed to leave the integration and interconnector programmes, whatever the outcome of a referendum. “[They are] really beneficial on an economic scale,” she says. “It's not a political development.

“If anything, it will probably be more flexible and easier to do without the whole political process behind the integration of energy markets within the EU. It would be up to investors and individual governments to strike deals and drive the construction of such interconnectors.”

James Hubbard, economics policy officer at RenewableUK, believes these programmes will ensure the UK renewables industry will be a major player in European energy, whether or not the UK is in the EU. “The EU is moving towards electricity market integration regardless, and there's huge potential out there for the UK,” he says.

“The UK is well positioned with its resources to ultimately become an exporting country. And if we were going to increase the integration between member states that could have a positive impact for jobs here within the UK especially.”

The time for the UK to be a net exporter of energy may be quite a long way in the future, however, especially given the current supply squeeze, and the prediction from the regulator Ofgem that the UK is set to become dependent on gas-fired generation for 60% of its power in the coming few years, up from 30% at present.

Ultimately, however, Mahn believes that the UK would find it extremely difficult to leave the economic benefits that the EU offers. “If the UK were to leave the EU, I think there would remain an economic free trade template,” she says. “It would be too costly for the UK to really say that it was cutting all ties.”

Economic growth versus long-term sustainability

But how safe is the Climate Change Act in the current economic climate? Could the the political argument that we cannot afford a green economy gather enough momentum to undo the good legislative work that has been done?

“There's a re-education process that's going on, about making sure it isn't framed in that way and that it isn't green versus growth,” says CCC's Caldecott. “But it's always a risk. One Parliament can't bind a future one, but it's hard to imagine a scenario where a party gets a big enough majority to do that.”

Moreover, he says, policymakers are also tuned in to the benefits of renewables, not just in terms of tackling emissions, but also in terms of confidence and investment. “We're trying to attract hundreds of billions of pounds into our energy system on the back of new and existing legislation,” he says. “Overturning this legislation would increase political risk quite significantly across the economy and therefore increase the cost of capital and the size of the bill for all the infrastructure investment we require.”

However, with sustainable development now increasingly being pitted against economic growth in the political discourse, IHS' Mahn is less sure that the political fundamentals always add up – particularly when it comes to financial support. “The strike price for low carbon power generation has still not materialised and companies need investment planning security,” she says. “There seems to be a lot of hesitation on the side of the government to really commit to any concrete numbers there.

“Judging from that, an exit from the EU could potentially lead to less ambitious targets, and a greater emphasis on economic growth over sustainability. So on the government side, there's certainly some risk there.” Where Mahn is positive, however, is that the UK renewables sector is likely to be buoyant enough to flourish anyway.

Offshore wind in particular is attracting high levels of investment in spite of the fact that the government has not yet given any definitive long-term signals for support in the Energy Bill. “There is high investor interest and this would continue if the subsidies were to be reduced,” she says.

Gaynor Hartnell, chief executive of the Renewable Energy Association (REA) agrees, and goes further. In her view, renewables are now starting to compete seriously with other technologies – especially other low carbon technologies. “Looking at this EMR [Electricity Market Reform] world: come the time that renewables are competing with carbon capture and storage (CCS) and nuclear, all supposedly on a level playing field, there are a lot of renewables that are cheaper than nuclear and CCS,” she says.

“So really renewables are moving into the era now where they do compete, and possibly out-compete other low carbon options. So although I am less confident about targets being kept because they're targets, I'm confident about renewables ability to compete as low costs means of reducing carbon emissions.”

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