Brexit chaos looms

Access to European energy markets is being used as a negotiating tool in Brexit discussions over access to UK fisheries as well as state aid provisions. 

In this episode, we discuss the implications of a no-deal Brexit for the power and gas sectors, and how it seems increasingly likely that the UK will adopt a carbon tax instead of a trading scheme. 

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel, 

Guest: 

• Antony Froggatt, Senior Research Fellow, Chatham House. 

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:29

Hello listeners and welcome to the Montel Weekly podcast. Bring Your Energy Matters, an informal setting. Today we're talking the mess that is Brexit. It seems every day we are here something new, and the 1st of January deadline is looming, helping me to untangle the confusion. Is Antony Froggatt, who's senior research fellow at Chatham House. Warm. Welcome to you, Anthony, and welcome back on the pod.

Antony Froggatt, Senior Research Fellow, Chatham House: 0:56

Thank you very much. It's always good to have a chat about these things.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:59

Absolutely. So where are we at the moment? Where's the state of play? Anthony? It all seems to be from the outside anyway, seems to be very confusing.

Antony Froggatt, Senior Research Fellow, Chatham House: 1:06

Yeah, I think probably from the inside it's probably confusing as well. But I guess what's different probably maybe from the last time we spoke was obviously COVID and that has. Obviously changed the political spotlight in some ways on Brexit. So the negotiations have been affected by it materially in terms of people the ability to meet up. And there was a case of COVID in one of the negotiating teams last week, which slowed and stopped things. But it's also, yeah, there's just less political attention, I think, on it, and less media attention. So in some ways you might argue that's a good thing, that's they can just get on with a job. On the other hand, we are, it's dragging on as feared in some ways, and here we are towards the end of November. It's important to stress at the end of the transitional period. The purpose of the transitional period was that there would be an agreement reached in 2018. You would then have 20 months in which you implement that agreement, and then the UK would lead the transitional period at the end of December, 2020. And we still don't have agreement. So it's less than five weeks away, and whatever deal is proposed still has to be implemented and transposed. So in some ways, we're a bit of chaos if there's a deal, or even if there's no deal because there's very little time for all of the necessary measures. To be put in place. So I think that's true across all sectors, including energy, obviously for some where you have the physical need for customs and those sort of duties, which clearly will apply to parts in the case of energy. But it's not in terms of the daily trade of the materials as it were, it doesn't apply, but it's still front and center of many people's minds. And I think the only reason it's not getting more attention is the COVID is just dominating. Political and media coverage.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:59

Absolutely. But what are the main sticking points at the moment?

Antony Froggatt, Senior Research Fellow, Chatham House: 3:02

It seems that we are still from a high political level on a few issues. One of which is fisheries. And fisheries is a totemic issue. I would argue from a UK perspective, it was held up as one of the key issues. The fisher people of the UK would. Reclaim their sovereignty of the fish and that it was British fish and British waters. But obviously nothing is as simple as that because it's is where do you sell the fish? You sell the fish in European markets. So there is backwards and forwards on this. And so there's this, and there's questions still about application of European laws in general. So obviously one of the red lines that the UK government put forward was the European Court of Justice would no longer apply, but what will apply instead? So there are these two bigger areas that seem to be holding things up. And it was actually reported in the press in early November. It was from the British press. So obviously there's two's and frozen, there's obviously two sides of different arguments, but it was reported that. The access to the European energy market was being held up as a, as one of the negotiating tools around getting from a Brussels perspective, from getting a good deal on fisheries. So there are different elements still in place. And so here we are, as I said, towards the end of November and we still dunno the shape of that deal from an energy perspective. Probably there are. I would argue two or three major issues that will, and in some ways if I look back to the research that we did prior to the referendum, these are areas that we highlighted. There's areas that will still be affected. One that we've covered, and I think we've covered all of these past in the past podcasts, but one, it remains the interconnectors and the way in which from an electricity within the electricity market, these are operated and. It is likely, I would argue that as the UK will remain outside of the internal energy market, that the electricity interconnectors will be operated less efficiently to the extent that there will be a slight potential slight increase in UK bills. Some people are saying in one or 2% so not huge. I would argue that may increase. The economic impact, may increase going forward as we use more interconnectors. The reason that we might use more interconnectors is, as you decarbonize, you need more flexible options to enable you to balance more power that you're getting from renewables. IE, solar and wind. And so being able to operate the interconnectors flexibly is part of that efficiency question. So it's about whether or not you are trading implicitly or explicitly, whether or not you are just you are separating the auctioning of the capacity versus the flows of electricity and outside of the eu. Those two functions will have to be separated. So it just means that nobody seriously suggesting that we will take an ax to the interconnectors and we won't continue to trade. It's just that trade will be less efficient. And I think that is still on the cards. I think that's the most likely option at this stage. I think the extent to which everyone is talking about this being a very light deal, a trade deal, rather than a, I'm not sure you'd express it like this, but I would ex more a regulatory harmonization deal means that. The UK will remain outside the internal energy market and therefore trading across the electricity interconnects will be less efficient

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:21

and possibly more costly as well.

Antony Froggatt, Senior Research Fellow, Chatham House: 6:22

Yeah, I think, yeah, I, the modeling that people have done, and I haven't done it, but that, that is reported, it's in the bounds of one or 2%, which adds to bills. But if we look at, say, the currency impact in terms of the fluctuations between the euro and the pound. That's probably be a, will, probably be a bigger effect than maybe that additional cost of trade.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:43

But as you say, no one's talking about turning off the gas taps or cutting off the flow of power to the uk. Those energy flows will still occur both in both directions,

Antony Froggatt, Senior Research Fellow, Chatham House: 6:51

Absolutely. Trading will continue if there were tariffs placed upon it. If it got that to, to such an extent, they don't apply to electricity in any case in terms of WTO and in terms of gas, it's not 0.7%, so it's not. They won't be significant in that regard. It's the regulatory issues. And so moving away from outside the internal engine market, moving away from EU regulations will make it more difficult for there to be efficient trade and the most efficient trade. And as I said, from a power sector perspective, that's more important because storage is more difficult, so therefore you need more flexibility in the system. So yeah, that's a key area. If I could just say the other key area, which is the European Emissions Trading System. So again, we are waiting and waiting for a decision from the UK government over whether or not the UK will have a domestic commission's trading system or will move to towards a carbon tax. It was said to be the UK's desire to have a emissions trading system that was linked to the European system as of Switzerland. It said that the EU doesn't want that. It's saying that's, that you're leaving the eu, you won't have a link system. Don't know the extent to which that's a nego again, questions of these negotiating or this hard positions, but therefore, the UK could have a standalone emissions trading system or have a carbon tax. The devolved administrations in the uk, Scotland, Northern Ireland, actually Northern Ireland will probably remain part of the ETS. Which is a separate issue, but Scotland in particular and Wales want to have a emissions trading system. The energy minister, KWA Ang was giving evidence to the base committee two weeks ago, and at that time he continually refused to say that the UK would have an emissions trading system. He was saying all options remain on the table. He also said that the IT system had been tested and that it would be possible even at the this late stage to put in place a trading system because there would be delayed registration. But again, it just comes back to this point of what was the point of the transition period if month away from the end date, we don't know what we're transitioning to. So yeah, ETSI think is a really clear example. There is a binary choice. Do we have an emissions trading system or do we go to a carbon tax and nobody really knows and that clearly affects. The energy industry as it affects other industries. The energy industries is the largest in terms of emissions, and it needs to know how it's gonna have to account for its carbon.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:31

Which way do you think the pendulum's swinging? Is the treasury in favor of attacks and base more in favor of an emissions trading system? Yeah.

Antony Froggatt, Senior Research Fellow, Chatham House: 9:39

Absolutely. That is what it is said is the case. I personally think that there is a greater simplicity in some degree of just having a taxation system. But it is less politically stable, and I think it's very easy for governments under a stroke of a pen to remove attacks if they think it's politically difficult for them to keep it or pull it down. If you are part of a trading system, that gives it great greater longevity. And I think in that way, it's advantageous to have a trading system. As you said, I think government is split and it's part of the negotiation, so we will have to see

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:17

this lack of clarity can't be helping companies and installations involved. Who emit, I mean they, only days away really from the 1st of January and they dunno what's gonna happen at the start of the year. This is, it's not ID ideal situation for them.

Antony Froggatt, Senior Research Fellow, Chatham House: 10:30

Yeah, absolutely. And if registration is later, then it's not gonna affect the day-to-day operations. But it's about bandwidth, isn't it? Within the companies, you need to make plans. You need to develop. If you are, continue going backwards and forwards. Is it this, is it that? Then you are taking up people's time when they could be working on other things. And I think that is a, undoubtedly a problem for everyone.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:51

Another sticking point in the negotiations as far as I can see or has been reported is the state aid principle. What's happening in here and do you think, does the UK want to have a much more looser principle and how could that affect, for example, the subsidies towards renewable energy in the uk? Vis-a-vis the European counterparts.

Antony Froggatt, Senior Research Fellow, Chatham House: 11:11

I dunno if this is right. I have a bit of a perverse view on the implications of this because I think if you look at state aid decisions that while the UK was in the eu, it got its way, it is a, there's a legal framework, but there's a political interpretation of that. And if we look at Hinckley, for example, the UK government applied for state aid for Hinckley Point. And got it with very little requirement to change. I think everyone would argue that on Hinckley point, that they are paying over the odds for that power. It's 92 pounds a megawatt hour at the time of agreement in 2013. It's gonna end up costing vastly over and above what any. Renewable or any renewable energy source is gonna get in terms of subsidies. So there's a whole different question about the, whether not this is the right decision. But the point is it got approval for state aid. So even that project that I think everyone would look at and goes, that's really expensive, was approved, and why was it approved? Even though a number of countries objected to it, Austria, et cetera, was partly its political and outside of the eu, I think we have less possibility. Of having state aid than inside because in terms of the energy sector, if at a later date we want to reintegrate and harmonize it becomes, in terms of power trading, if we are hugely subsidizing various elements of our electricity industry, then I think it would be more difficult for us to be integrated into the European grid, and that's something that has economic value. I'm not sure. It's hugely beneficial. And as the governments, we haven't really tended to be handing huge amounts of money to industries. There is a sort of overarching market view. I don't think it's a big issue. And I, as I said, maybe it's a bit perverse, but I do think we've, we're gonna lose out in that regard rather than win.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:07

How about, you touched on Hinkley. How about the nuclear sector as a whole? The UK has already left your atom. What are the implications of that?

Antony Froggatt, Senior Research Fellow, Chatham House: 13:15

Yeah, I think. It's an interesting example that over the last few years I guess since the referendum, the government has been, and the regulator have been quietly getting on with it. And for example, prior to the decision to leave, the UK used Euro atom, for example, for its nuclear safeguards inspectors. So under the international agreements. Countries have to do their own monitoring to ensure that materials are not diverted from civilian uses to military. And these are called safeguards. And all of these were employed by Euro atom. So the UK now has to have its own safeguards, inspectors. It has quietly gone around trading and employing them. So we have adequate safeguards according to the ONS, the Office of Nuclear Regulation to, oh no, sorry to do that function. And we have put in place nuclear cooperation agreements with countries like the United States, et cetera. So in that regard, I think it's fine that switch has occurred. I think probably the biggest area that nuclear will be impacted over will be research and development. So the UK is leaving the framework program, or the framework program is coming to an end. It finishes at the same time as we leave. So that Horizon 2020. The next one is called Horizon Europe starts on the bi, the 1st of January, 2021. non-EU member states have an opportunity to join that, but you then pay. So the question is, will the UK want to continue to funnel its research through the eu? The strange thing is nuclear has its own, so there's all of the EU research programs plus one that's specifically and separate for nuclear. So in theory the UK could join the nuclear one and not the other one, or it could join the other one and not the nuclear one. If it joins the nuclear one. The big question is fusion. So there's the ash, the fusion facility in France. The UK has the research facilities at Jet. Joint European tourist and is buying into that whole process of the LA cataract ITR. So yeah, I don't know what will happen whether not the UK will buy into the Uto framework program or it could even buy into just the ITR. There's the Japanese and the Chinese and the US just buy into that particular program. So it's again, lots of uncertainty. I would just say it's probably gonna be expensive just to buy into the nuclear research program in particular because the cost of building the big fusion at I it has gone up hugely. So if you buy a percentage and the cost has increased, then your cost may increase. So anyway, I think that's a very clear way in which the UK will have to decide what to do. Just worth flagging that we're still waiting on the white paper from the UK government. It's been promised. For months and months, it's likely to come out. They said again, the minister said end of November, beginning of December. Within that will probably be guidance and or. Proposals for reg regulation around the regulated acid BA base. So the next mechanism by which nuclear will be funded. And it said that this will be cheaper than Hinkley, but again, we'll just have to wait and see what that says.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:27

So I think there's an overriding theme here, which is increase in costs or things are gonna get more expensive. Maybe we can return to the regulated asset base and the way of funding nuclear at another date. At another time. Anthony?'cause I think that's a whole, there's a whole whole, the discussion in it in itself. Really what I was gonna also touch on is, the future of the city of London here and potentially, 'cause that's where a lot of these big European companies have their energy trading offices. And I think. Is there a sense that the City of London's role as a center for trading for financial services is under threat as well?

Antony Froggatt, Senior Research Fellow, Chatham House: 17:01

You hear different things, don't you? From the city? I haven't heard so much since we've not been in, in physical meetings but absolutely at the end of last year, beginning of this year, there was, yeah, clear indications that many of the financial institutions would over time move out of the uk. I dunno if that's still the case or if those were just a selected few that I heard about, but I think there's no reason to assume that the energy sector will be any different. So the people that are financing, if finance in general is moving to. Paris or on, or Frankfurt, then yeah, the energy sector will be affected in the same way. So yeah I think it's a clear danger. I think the only thing just to add is that the UK government is hosting COP 26, so this big UN Convention on Climate Change next year. These are normally annually. We haven't done one this year because of COVID, but this COP 26 is a significant one in terms of importance. They go up and down. The UK government jointly hosting it with Italy have put climate finances as one of its key pillars, and it really does want to retain the UK and London as a center for climate finance, which includes green energy. So there's an additional incentive for the UK government to support these activities. So what again we will see what that entails is that a bit of fluff and talk about in relation to a convention and the UK hosting it. Or are, is there real teeth behind it and real efforts to make that happen?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:30

I think if we just round off by talking about the negotiations themselves, Anthony, I think what is the end game here for the uk? It seems to be, you know what's its objective here?'cause it seems to be. These seem, a bit confused or mixed or contradictory at terms.

Antony Froggatt, Senior Research Fellow, Chatham House: 18:45

Yeah, I mean I think the end game is, from the government's perspective is clear is it is gonna leave the transition period at the end of December.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:53

But more in terms of a deal. Deal or no deal. It seems to be, yeah.

Antony Froggatt, Senior Research Fellow, Chatham House: 18:56

So I, I think that's anything that's clear. The second thing is will there be a light deal or skinny deal as it's sometimes tall or no deal? And I think the objective is still. For there to be a deal on both sides because it's advantageous. And after all of this effort for there not to be one I think would be seen as a failure. But neither side is willing to have a deal at any cost. And I think that is what has hardened both in terms of the current administration and they've made it very clear that's the case. But I think also from an EU side, from the sense that I hear from Brussels is COVID and other things are dominating. In some ways Brexit is important, but yet it's not front and center. It's 3, 4, 5 down the list in terms of the things that need to be done. So if a deal's not done, so be it. So I think that makes it more difficult in that regard. But on the other hand, as I said, both parties do want a deal and there is one or two sticking points. And I, if I was a betting man, I would still say that there will be a deal. And that it will occur, but I don't know if the odds are increasing or decreasing. As we come to the wire.' Richard Sverrisson, Editor-in-Chief Europe, Montel: doesn't have the same deadline or a self-imposed deadline mean it can continue negotiating into 20 21, 20 22 if it wants. Whereas the UK government has set this first of Jan as a key end date. Yeah. There is also a political end date within the EU in terms of the research programs. And it's not just the research program that finishes the whole EU budget has come to the end of its cycle. So if the U 'cause the UK. In the transition period is still contributing to the EU finance. So if it carries on into January, then we need to be part of that new cycle. So I, that's why I think absolutely the transition period will end. There may be a period of grace, for example, or we won't enforce it quite so strictly for a number of months. Or who knows, maybe even years it all because yeah, current situation, people don't want more headaches. People may turn a blind eye, to certain issues, but not others. I don't think anyone is thinking that as of the 1st of January things will be normal and it'll just be a bit of a gray area. I think absolutely things will change. We'll have to see how. How smooth that transition is because I think a lot of people are very nervous that it's not gonna be that smooth because we haven't had the time to prepare.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:21

Yeah, absolutely. And I think there'll be, there's certainly a few twists and turns ahead in the meantime, the companies that are behind the interconnectors or emitting carbon in the uk, they will have to wait and see for further details. Yeah,

Antony Froggatt, Senior Research Fellow, Chatham House: 21:34

absolutely. So there was one press report suggest, 'cause the European parliament has to ratify the deal. So they were talking about the European Parliament having to sit on the 28th of December. Which wouldn't, I guess wouldn't Yeah. Increase the goodwill that exists toward the uk where we to ask all the parliamentarians to come back. But anyway, so Yeah. Especially

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:52

if it was in, especially if it was in Strasburg. Yeah, exactly.

Antony Froggatt, Senior Research Fellow, Chatham House: 21:54

So it's strange times for lots of reasons, but in particular, yeah. We're still not sure where we are.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:59

Thank you very much, Anthony, for sharing your views on this and I'm sure it's it's a topic we'll return to maybe in a different way in the coming months.

Antony Froggatt, Senior Research Fellow, Chatham House: 22:06

Thank you very much indeed. It's always a pleasure to speak to you.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:08

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