Has Brexit Clashed with Energy Prices?

It’s 1976; in a small disused railway warehouse in London, arguably one of the finest exports of the punk movement are being formed…..The Clash.

Both the Clash and the punk movement rapidly gain popularity and by 1982 mohicans and safety pins move out of the subculture and into the main stream. The song ‘Should I stay or should I go’ the band’s only number one single, is released and is sung not by lead vocalist Joe Strummer, but by guitarist Mick Jones and rumours about the song’s content surface, as it seems to pre-empt Mick’s exit from the band.

Upon Mick’s decision to exit, the Clash start a 4 year period of tension before eventually breaking up. The punk movement declines and the UK economy becomes uneasy, unemployment rises to a record 3 million, the miners’ strike is on the horizon and we start to emerge from a recession.

Fast forward 34 years, and we are in a not too dissimilar state of unease following the Brexit vote. Regardless of how you feel about Brexit, if/when we eventually leave the EU, it is difficult to predict how long the uncertainty will take to settle and what its effect on us socially, politically and economically will be.

What’s Happening Now

Being energy consultants, we are concerned with how Brexit/leaving the EU will affect the energy markets and more specifically how it will affect clients. The graph below shows how the price of energy changed in the lead up to and after Brexit.

A steady rise post Brexit, but on the run up, an even steeper one. You would probably expect to see this the other way around given the level of uncertainty, so what does that tell us? – the world has an in-built economic fear of the unknown when energy is concerned? A predictable allergic market reaction to instability? Or maybe it’s just not that big a deal? But, what we do know is there are more factors than just Brexit that have gone into this.

The £

The lower value of the £ means it is more expensive to import energy, impacting on our Wholesale costs. There is also uncertainty on what impact there will be on future investment, specifically raising concern over replacing lost generation and our plans beyond 2025. Short term supply appears healthy though.

Phew…

We currently have a positive supply situation in the UK for Gas and Electricity, Gas import availability is increasing and we have measures in place to secure Electricity for future demand.

…However.

We have also seen the shutdown of Rough until March / April 17, which is our largest Gas storage facility. Traditionally this is filled in the warmer months for use in the winter or when there are other supply issues. Although this is an added pressure to prices, the impact has not been as severe as it would have been, due to the increasing availability of LNG and imports from Europe.

The Future

There is a lot of emphasis on ‘the future’ in the energy industry. Suppliers and generators pay a lot of money for analysts to predict the future for them, so they can shape their future decisions. We don’t have a crystal ball but we do have an Indigo one. Here are our thoughts on what will affect prices moving forward.

Liquefied Natural Gas (LNG)

LNG is becoming more widely available and with a move away from using Coal for Electricity generation due to environmental concerns and the cheaper availability of Gas, other countries are building facilities to receive LNG, creating more demand.

This may impact on the UK as prices to secure LNG could go up with demand. We will be more reliant on LNG to replace closing Coal and Nuclear operations.

Leaving the EU

So far the UK has led the way in going beyond requirements in terms of carbon targets, but will Theresa May continue to support renewable energy and carbon targets? We have already seen delays with Hinkley Point C power station.

Physically, nothing is likely to change between us and Europe as we will still import and export Gas and Electricity, the politicians just need to make sure the mechanisms/policies remain in place to facilitate this as favourably as possible.

More legislation, more cost, more demand

We have seen considerable swings in what makes up our delivered Electricity bills as well as legislative requirements for companies to comply with. A growing proportion of bills are formed from levies, introduced to incentivise us to reduce consumption, to invest in small and large scale Renewable projects and also, to try and make sure we have enough generation to meet demand.

Uncertainty

Basically, there is a lot of uncertainty and it will continue with widely speculative tabloid headlines until legislation is put into place post exit. In terms of energy costs, we’ll just have to see how leaving the EU eventually trickles down to affect businesses, but as Mick Jones from the Clash once sang, “If I go there will be trouble, if I stay there will be double.” Let’s hope the economy mirrors his sentiment.

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N.B. If you are a business in Norwich and want to know what 8 things you can do to make better decisions about your energy, we will be presenting a free workshop through the Norfolk Chamber of Commerce on the 11th of August, spaces are limited.

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Article originally from Indigo Swan website:indigoswan.co.uk/blog/should-i-stay-or-should-i-go-now/