Leaving the EU: negotiation priorities for energy and climate change policy Contents

7Investor confidence and the future UK energy system


101.The decision to leave the EU should not distract from the Government’s policies to provide secure and affordable energy supply and to seek ambitious plans to decarbonise our energy system.203 However, many submissions expressed concern that leaving the EU may undermine domestic policy, notably on investor confidence, access to skills and funding, research and development, and energy costs through wider supplier chains. This chapter provides a brief overview of the level of investment and growth in the sector, before considering the implications that Brexit may have in these areas.

102.The UK’s energy sector requires significant investment. The Committee on Climate Change estimates that up to 200 TWh of new electricity generation will be needed in the 2020s to replace energy generation from retiring coal and nuclear plants and meet expected increases in demand.204 The government’s National Infrastructure Delivery Plan (2016) anticipates up to £138 billion of energy investment beyond 2021.205

103.This level of investment is driven in part by a profound transition in the UK energy system. The reduction of UK domestic gas and oil production and our commitments to emissions reductions are transforming our energy system; changing our energy mix, use of network, and consumption. Renewables now provide nearly 25% of our power, and new technologies including energy storage, smart meters, and electric vehicles, are expected to change our traditional demand profiles and the nature of our electricity networks, moving from ‘one-way’ flows to more a decentralised and dynamic system.206

104.The move towards a new UK energy system is seen as a real opportunity for the UK to take the lead in developing new technologies, services and products. The Committee heard from Ian Simm, Chief Executive of Impax Asset Management:

We are in the early years of a multi-decadal revolution in energy, prompted by storage technology, electric vehicles, distributed generation and opportunities for interconnection all around our region. The huge challenge is to structure a market using the grid transmission and distribution to facilitate the flow of electrons in the most efficient way possible. [ … ] It is an enormous opportunity and it will address the key elements of the energy trilemma very concretely. We really need to seize that.207

105.The Government highlighted the importance of maximising the economic and investment opportunities of the UK’s transition to a low carbon economy through continuing to support Foreign Direct Investment in its submission to this inquiry.208

Investor confidence

106.In March 2016, the former Energy and Climate Change Committee concluded that the Government’s actions over the previous summer had adversely affected investor confidence. It identified six factors, including a lack of transparency in decision-making and insufficient consideration of investor impacts. The Committee noted that given the scale of investment needed in our energy infrastructure they were hopeful that—if the Government was willing to learn from its mistakes—things could move in a more positive direction.209 In response to the Report, while the Department for Energy and Climate Change recognised that significant investment is needed in our energy sector and that it remained committed to ensuring investment continues, it noted there was no hard evidence to suggest the cost of financing had increased for renewables or other technologies.210

107.Submissions to our inquiry suggest investor concerns remain and have been exacerbated by policy uncertainty due to the EU referendum.211 National Grid cited analysis undertaken by Vivid Economics which suggests that:

Even a moderate change of 50 basis points on the cost of financing, arising from a potential drop in confidence following Brexit, could add hundreds of millions of pounds to costs, and therefore consumer bills, over the medium term.212

108.We received anecdotal evidence that incoming investment had fallen following the referendum result, with one estimate of around a 10 percent reduction.213 The Renewable Energy Association also told us that some projects have become commercially untenable due to the weakening pound, and that financial uncertainty has meant there is little appetite for future projects.214 However, we also heard from two international banks that the last quarter of last year was probably one of their busiest periods.215 Similarly, National Grid explained that uncertainty had not affected major projects such as a planned interconnector to France.216

109.Kirsty Hamilton, an Associate Fellow at Chatham House, told us that:

Across the second half of last year [ … .] [i]n the environment of higher uncertainty caused by Brexit, there was a focus—particularly because there was a new Government and a new departmental setup—on what that meant for looking ahead. Transactions that were under way were continuing, because the environment around them was already known.217

However, Kirsty Hamilton also drew attention to how the lack of clarity on the Government’s longer-term objectives in the context of Brexit has complicated decisions for future investments:

Brexit is like a big moving part on top of another set of moving parts as the energy sector is under transition. Investors look for visibility on what that means in the UK market.218

Alejandro Ciruelos, UK Head of Project & Acquisition Finance at Santander, similarly explained that uncertainty due to leaving the EU has not necessarily translated into a drop in investment, because the fundamentals of UK policy have not changed—but he again emphasised to the Committee that the Government’s long term vision continues to be a concern:

For someone to have a project ready to build in 2020 or 2021, they basically have to make a decision today about investing in capital and resources. Some of what we are missing today is the vision beyond 2021. What is the right policy mix or energy mix that the Government are really looking for the investment community to deploy? 219

110.By far the most widely-suggested means of promoting investor confidence was clear, coherent, stable and long-term policy, including sign-posting of future changes and demonstrating consistency across related areas (e.g. energy and planning). Around one third of witnesses raised this.220 Submissions highlighted the need for assurances on the continuation of existing policy commitments and support mechanisms, as well as clarity on the market environment in which investors will be operating both during and after the Brexit transition.221 Some described the need for the Government to provide clarity on the negotiation process, including how stakeholders will be consulted, as well as the need to avoid conflicting messages from spokespersons and to set clear and realistic negotiation targets specific to the energy sector.222 Witnesses also called for clarity on the Government’s long-term energy objectives,223 and in particular highlighted the need for prompt publication of a strong Clean Growth Plan (formerly known as the Emissions Reduction Plan).224 ENGIE said that:

Despite the adoption of the fifth carbon budget, longer term uncertainty over the UK Government’s climate change and emissions reduction plans exist. Given the strong link between climate and energy policy, it is clear that uncertainty in long-term climate change ambitions directly impacts the UK’s ability to provide a clear signal to the energy industry. Clarity in this area is vital for investment within the energy industry, particularly given the Government’s priority is to ensure a secure and affordable supply of energy in the UK. 225

111.We stress that the lessons of the previous inquiry on investor confidence should be reflected upon during the process of leaving the EU, and that the Government should provide clear long term commitment to its energy and climate change policy. Responding to our request for a commitment to an ambitious forthcoming Clean Growth Plan, the Minister of State for Climate Change and Industry told us:

UK leadership is enormously important to us. We have the potential to build on real leadership in lowcarbon vehicle technology. We have existing leadership in offshore wind and smart energy systems. There are huge new opportunities in lowcarbon heating, energy efficiency services, advanced manufacturing and, last but not least, one thing we know about this transition to a lowcarbon economy is that it will require a lot of private capital.226

Opportunities outside the EU

112.Whilst most witnesses saw few positives in leaving the EU, we did hear examples of opportunities arising from the removal of some constraints of EU membership, such as the Renewable Energy Directive and state aid rules.227 The Energy Intensive Users Group told us that arbitrary and uncosted targets for renewable energy consumption have resulted in significantly increased costs for users, and that freedom from the EU could allow us to abandon this approach.228 The University of Cambridge noted opportunities to relax state aid rules and unbundling requirements, and to shift away from a technology-focused strategy.229

113.For others, the Renewable Energy Directive and state aid rules were seen as important for supporting investor confidence and efficient delivery of low carbon technologies.230 Energy UK told the Committee that the EU Renewable Energy Directive has been effective in driving investment in renewable energy in the UK and other Member States.231 E.ON also emphasised that state aid guidelines have helped preserve the principle of being technology neutral and warned of potential increased costs if the Government was to drift towards “picking technological winners”.232

114.In response to speculation that the Government is preparing to withdraw from a commitment to meet the EU energy targets after leaving the EU,233 the Secretary of State told us that the Government had not made any decisions about the targets after we have left the EU.234 We recommend that the Government provides a clear and long term vision for the UK energy sector to support investor confidence, and this should underpin its negotiating objectives on energy and climate change.

EU funding and research and development

115.The UK currently receives substantial EU funding for energy infrastructure projects and research and development. Chatham House and the UK Energy Research Centre (UKERC) told the Committee that the UK energy sector received €8 billion from the European Investment Bank (EIB) between 2011 and 2015, and that the EU’s Horizon 2020 research funding scheme had provided UK based organisations €2.6 billion—the second largest share of any country.235 Chatham House and UKERC also noted that while both the EIB and Horizon 2020 allow access to non-EU members, 90% of EIB funding and 86% of Horizon 2020 recipients were from EU member states.236

116.Carol Gould, Head of Power and Renewables of the European Investment Banking Division at the Bank of Tokyo Mitsubishi UFJ, told the Committee that:

We see the EIB as most useful in the very large offshore wind projects, where maybe you need to raise £1.5 billion to £2 billion in what is still a relatively niche market. [ … ] It will certainly leave a funding gap of around £250 million that will need to be filled by other banks, and potentially more expensive banks, bringing up the cost of the debt across the whole piece.237

117.In its written evidence, National Grid noted that Horizon 2020 acts as a key platform for collaboration. It also highlighted that the Connecting Europe Facility (CEF) as important in stimulating cross-border infrastructure.238 According to Chatham House, the UK received £59 million in 2014 and 2015 from CEF, and ranked as fourth highest recipient under the scheme.239

118.Witnesses highlighted the need for clarity on the retention of funds awarded by other schemes, and the UK’s longer term access to EU funds and financial institutions.240 Noting the dependence of some energy projects on EU finance, stakeholders emphasised that if access cannot be preserved, the Government should commit to replacing EU funds and institutions with credible alternatives.241 Antony Froggatt, Senior Research Fellow at Chatham House, emphasised the point:

A lot of the R&D and the co-operation is funded by the EU, so my guestimate is that around 400 million a year of research undertaken on energy and transport in the UK is funded by the EU. I guess the Government can choose to take some of the money that is not given to the EU and spend that on UK energy research, [and] it needs to do that if it wants to maintain the current level [of research], and then it can have the opportunity to choose its partners in other parts of the world.242

The University of Cambridge noted however that while priority should be given to ensuring collaborative European energy projects continue, increased domestic funding may allow expansion in collaboration with other leading countries such as the US, Japan and China.243

119.The Government stated that the UK would “welcome agreement to continue to collaborate with our European partners on major science, research, and technology initiatives”, including on “clean energy”.244 It has also guaranteed to underwrite the payment of Horizon 2020 awards made before the UK leaves the EU, an initiative welcomed by witnesses. While the Secretary of State would not confirm whether he thought the UK may continue to get access to EU funds, he assured us that:

There is a lot of common ground about countries needing to work together on this, so a focus on energy innovation—in the context of the biggest funding commitment to science research and innovation in this country since 1979—I can confidently expect will be a core pillar of the Clean Growth Plan.245

120.The UK energy sector currently receives substantial funding from the EU, for infrastructure projects and for research and development. Maintaining collaboration with the EU in funding and research and development is important for investment in, and long term development of, our energy system. These are also opportunities for the UK to increase domestic funding and wider international collaboration in the energy sector to support the UK as a leader in low carbon technology. We recommend that the Government should seek ongoing access to EU financial institutions and funds and continued collaboration on science and technology. Where this is not possible, we recommend that the Government seeks to develop credible alternatives to ensure that the UK does not lose out in these areas. It should also seek to expand domestic opportunities for research and development, and wider international collaboration.

Wider supply chains and skills

Trade barriers

121.A number of witnesses raised concerns that leaving the single market may have a detrimental impact on energy sector supply chains, as well as the efficient trading of energy over interconnectors.246 Witnesses did not envisage that restrictions on trade and labour, through tariffs or other barriers, would affect the operation of energy systems, but rather that they would increase the cost of energy services. According to a survey undertaken by Dong, its suppliers are already losing contracts due to uncertainty over future exchange rates and potential export tariffs.247

122.Centrica provided a detailed discussion of the effects of reverting to WTO rules, which it considered would likely have a moderate impact on costs across its supply chain. These would require the EU to trade with the UK on tariff terms which are no less favourable than those offered to other WTO members (this is known as the ‘most favoured nation’ rule). A range of goods and services in the energy sector would attract a tariff ranging from 1% to 4%. Centrica noted that some UK companies would be hit by both import and export tariffs, although gas and electricity imports are currently exempt from duty and import VAT, and would likely remain so. They further suggested it was imprudent to assume that the UK would automatically enjoy its current concessions and rights as a WTO member upon exiting the EU.248

123.Dr Nina Skorupska CBE, Chief Executive of the Renewable Energy Association, explained the effects of falling back to WTO rules on the cost-competitiveness and sustainability of bioenergy technologies:

For one-third of the renewable power we enjoy today, we import biomass, and we anticipate that [WTO rules] will impact the cost of that fuel [ … ] All of a sudden we will see a rebasing of how some renewable technologies can deliver value-for-money electricity249

Nobody has talked about those [new free trade] agreements undercutting what we already do now, for instance [if they lead to] importing very cheap biofuel from the likes of America or Canada because maybe they have lower quality standards than we introduce or different priorities or poorer quality [ … ] I am concerned that we automatically think we can default to WTO and everything will be fine on the night.250

She also raised concerns about the scale of tariffs that might be applied to imported storage technologies: “we could see some tariffs increasing, up to 24% on the cost of those wonderful batteries that we want to be able to use”.251 Leaving the single market may increase overall energy costs through additional tariffs or other barriers to wider supply chains.

Skilled labour

124.We also heard widespread concerns about access to skilled labour. A recent Energy Institute survey of 543 energy professionals showed a widely perceived shortage of qualified workers across almost every area of the UK energy sector.252 The Committee was told that the loss of easy access to European skilled workers may increase employment costs and have operational implications.253 The Institution of Engineering and Technology highlighted for example how French technicians have been used to repair storm damage to distribution equipment.254

125.The impact of leaving the EU on access to skills appears to already have affected the UK. Dr Nina Skorupska told the Committee that some UK developers have already experienced problems hiring foreign expertise.255 Witnesses also noted concerns that energy sector innovation, research and development would be adversely affected by restrictions on the movement of labour.

126.However, some witnesses were optimistic, highlighting opportunities for UK expansion in energy skills and for wider international collaboration. For example, Nick Winser, Deputy President of the Institution of Engineering and Technology, argued that the UK should grasp the opportunity to attract skills into new energy innovation and technology.256 Professor Michael Pollitt, from the University of Cambridge, argued that:

In terms of where the action is in energy, clearly the most interesting countries in the world continue to be the US, China and perhaps Japan in terms of energy R&D and innovation, and accessing the talent pool there or the research networks there is just as important as accessing the EU … if we take Brexit as an opportunity to widen where we look for talent, that could be a good thing.257

127.The Secretary of State was clear on the importance of continuing to access skills and on the opportunities to look further afield:

it seems clear to me that where you have people of very high technical skills working in an international business, there has never been any suggestion that they should be excluded from this country… there are opportunities beyond the EU member states, but I come back to the point that it is in all our interests, selfevidently, to maintain the strength of our relationship on energy with our European neighbours and friends.258

128.We recommend that the Government, as part of its negotiations, seeks arrangements to ensure that the UK energy sector can access a skilled and mobile workforce, while recognising public concerns about migration levels.

203 38 Degrees (LEU0034)

204 Committee on Climate Change, Power Sector Scenarios for the fifth carbon budget, October 2015, p6

206 Digest of UK Energy Statistics (DUKES) 2016, p11. National Infrastructure Commission, Smart Power, 4 March 2016, p16

207 Q178

208 Department for Business, Energy and Industrial Strategy (LEU0036)

209 Energy and Climate Change Committee, Investor confidence in the UK energy sector, Third Report of Session 2015–16

210 Energy and Climate Change Committee, Investor confidence in the UK energy sector, Third Report of Session 2015–16, Appendix: Government’s response to our work on investor confidence in the UK energy sector

211 Carbon Connect (EUE0005); UK Energy Research Centre (EUE0026); Chartered Institution of Building Services Engineers (EUE0040); Kingspan Insulation Ltd (EUE0046); Aldersgate Group (EUE0050); RenewableUK (EUE0055); Renewable Energy Systems Ltd (EUE0059); AES UK & Ireland (EUE0065); Renewable Energy Association (EUE0066); Ecotricity (EUE0071); Polar Research and Policy Initiative (LEU0016); Dairy UK (LEU0027); Energy Savings Trust (LEU0035); Aldersgate Group (LEU0038)

212 National Grid (LEU0026)

213 Chatham House (LEU0041)

214 Renewable Energy Association (LEU0009)

215 Qs151-153 [Alejandro Ciruelos, Carol Gould]

216 Q11 [Ian Graves]

217 Q156

218 Q156

219 Q175

220 National Farmers Union (LEU0004); Renewable Energy Association (LEU0009); The Prince of Wales’s Corporate Leaders Group (LEU0012); Nuclear Industry Association (LEU0013); E3G (LEU0017); British Ceramic Confederation (LEU0020); Dong Energy (LEU0021); EDF Energy (LEU0024); National Grid (LEU0026); Dairy UK (LEU0027); Oil & Gas UK (LEU0032); Energy Savings Trust (LEU0035); Aldersgate Group (LEU0038); Energy UK (LEU0040); Centrica (LEU0041)

221 Aldersgate Group (LEU0038); Centrica (LEU0041); EDF Energy (LEU0024); Nuclear Industry Association (LEU0013);

222 The Prince of Wales’s Corporate Leaders Group (LEU0012); Dairy UK (LEU0027)

223 Energy and Utilities Alliance (EUE0039); Institution of Building Services Engineers (EUE0040); Carbon Capture and Storage Association (EUE0064); AES UK & Ireland (EUE0065); Renewable Energy Association (EUE0066); Renewable Energy Association (LEU0009); E3G (LEU0017); National Grid (LEU0026); Energy Savings Trust (LEU0035)

224 ENGIE (EUC0046); National Farmers Union (LEU0004); The Prince of Wales’s Corporate Leaders Group (LEU0012); Enjergy Savings Trust (LEU0035); Aldersgate Group (LEU0038); Centrica (LEU0042). The ‘Clean Growth Plan’ is the new name for the Emissions Reduction Plan, also previously known as the Carbon Plan, which will set out the Government’s strategy to deliver the fourth and fifth carbon budgets.

225 ENGIE (EUC0046)

226 Q263

227 Brian Catt Individual (LEU0028); Energy Intensive Users Group (EUE0036); University of Cambridge (LEU0005); New Nuclear Watch Europe (NNWE) (LEU0033)

228 Energy Intensive Users Group (EUE0036)

229 University of Cambridge (LEU0005)

230 Renewable Energy Association (LEU0009); Energy Saving Trust (LEU0035); BEAMA (EUE0021); Citizens Advice (EUE0032); E.ON UK (EUE0073); Overseas Development Institute (EUC0023); Renewable Energy Systems Ltd (EUC0026); Mineral Wool Manufacturers’ Association (MIMA) (EUC0027); University of Manchester (EUC0036); Energy UK (EUC0049)

231 Energy UK (EUC0049)

232 E.ON UK (EUE0073)

234 Q279

235 Chatham House UKERC (LEU0006)

236 As above

237 Q165

238 National Grid (LEU0026)

239 Chatham House (EUE0016)

240 BEAMA (EUE0021); Aldersgate Group (EUE0050); RenewableUK (EUE0055); Carbon Capture and Storage Association (EUE0064); National Grid (EUE0079); The Prince of Wales’s Corporate Leaders Group (LEU0012); British Ceramic Confederation (LEU0020); Centrica (LEU0042); Grantham Institute, Imperial College London (LEU0002)

241 E3G (EUE0011); Citizens Advice (EUE0032); RenewableUK (EUE0055); Carbon Capture and Storage Association (EUE0064); Greenpeace UK (EUE0070); Chatham House UKERC (LEU0006); UKOTCF (LEU0007)

242 Q189

243 University of Cambridge (LEU0005)

244The government’s negotiating objectives for exiting the EU”, Prime Minister’s speech, 17 January 2017.

245 Q262

246 Renewable Energy Association (LEU0009); DONG Energy UK (LEU0021); Centrica (LEU0042); Ecotricity (EUE0071)

247 Dong (LEU0021)

248 Centrica (LEU0042)

249 Q218

250 Q218

251 Q218

252 Energy Institute, Energy Barometer 2015: Views from UK energy professionals (December 2015), pp 24-25

253 Institution of Engineering and Technology (LEU0010); EDF Energy (LEU0024); New Nuclear Watch Europe (LEU0033); Energy UK (LEU0040); Centrica (LEU0042)

254 Institution of Engineering and Technology (LEU0010)

255 Q189

256 Q190

257 Qs187-189

258 Qs234-236

4 May 2017