Now that the UK has a slightly clearer picture of Brexit after Theresa May’s speech, and the following Supreme Court Ruling last week, the GBP has increased and the markets have seen a downward turn. The premiums being built into market prices are beginning to drop, so what does this mean for 2017? All market intelligence seems to point towards another volatile year as seen in the last six months of 2016.
Theresa may’s speech regarding the twelve steps to tackling Brexit seemed to provide some indication of planned strategies in place, and after six months of having little information of the Governments plans, financial markets responded well and the value of the Pound increased. The fact that the Prime Minister has given some certainty to UK economy, it means the GBP has boosted since its drop in June 2016 and further decreased in value in October 2016. Furthermore, the Supreme Court ruled that the Government cannot implement Article 50 without an act of Parliament. This added strength to the Pound once more, as many believe that if the Courts must decide on the UK’s approach to leaving the EU, the process will consist of a softer split rather than the harsh tactic from Theresa May. We will continue to see market volatility in the time leading up to major Brexit decisions being made in spring, though perhaps less so than previously expected.
Within the energy industry, there are many variables that may be subject to change and volatility during the Brexit process. For example, the UK receives around 10% of its energy from European sources that have been imported, and so prices for these imports are expected to fluctuate as the GBP and EUR pair interchange. Once Article 50 has been triggered, the attitude towards leaving the EU should become much clearer, however many are unsure as to whether there will be risk premiums being built into gas and power prices or not. Uncertainty remains in the market for now, though many believe that leaving the EU in general will increase the cost of imported gas and power supplies.
The proposed interconnectors that have been approved of already are also at risk. Brexit could impact on the development of both the Nemo interconnector, and the NSN link which should provide electricity to the UK from Belgium and Norway respectively.
The NSN interconnector – once completed – should be able to provide 1.4GW of interconnection to the UK and the NSN Link should provide a further 1GW, and both are scheduled to come online from 2019/2020. However, if Brexit does hinder this, the future of the UK’s power supply could be delayed, putting pressure on power prices and squeezing the gap between supply and demand.
Further uncertainty lies within the energy regulation sector. As the UK abides by agreements and legislation currently in place through the EU, many have argued which environmental laws and legislation will remain in place, and which of these will be scrapped after the split form the EU. Some have speculated that Fracking onshore in the UK could increase, the closure of coal power stations could cease, renewable energy projects could be scrapped, etc. This means that not only will there be a lot of volatility in the markets, but the future of energy supply in the UK is unclear, and could be affected by Brexit and the aftermath.
Sources: National Grid, BBC News, Npower (RWE), the Guardian, the Telegraph, EDF Energy, Engi