Would Brexit lead to lower UK energy prices?

If the UK were to leave the EU, would  British households face higher or lower energy bills? Nobody knows for sure, writes Stephen Tindale, Director of the Alvin Weinberg Foundation: it would depend on decisions taken and agreements concluded by a post-Brexit government. But claims from Brexiteers that leaving the UK would lead to lower energy prices are misleading. The reverse is more likely, according to Tindale.

Leading Leave campaigners Michael Gove, Boris Johnson and Gisela Stuart argue that outside the EU British bills would be lower: “In 1993, VAT on household energy bills was imposed. This makes gas and electricity much more expensive. EU rules mean we cannot take VAT off those bills..”

VAT on domestic energy was not ‘imposed’ by Brussels: it was introduced by the Conservative government. EU rules state that, once introduced, VAT can be reduced to 5 per cent (as Labour did in 1997) but not to zero. Outside the EU, a British government could remove it. But this would cost around £1.6 billion a year. A future Conservative prime minister would be at least as committed to cutting the deficit as Cameron is.  Removal of VAT from domestic energy therefore appears unlikely.

The 2010-15 coalition government introduced a ‘carbon floor price’: emissions allowances under the EU Emissions Trading System are not sold in the UK if the auction bid is lower than £18 per tonne of carbon dioxide. That is around three times the cost of allowances elsewhere in Europe, which does not help UK competitiveness. The carbon price floor could be scrapped today, it is not an EU measure, although a future Chancellor is unlikely to do so, again for revenue reasons: it raises around £2 billion a year.

Another leading Brexiteer, Dominc Raab, claims that ‘skewed EU energy regulation will add £149 to bills by 2020.’ This figure is based on work by Open Europe: ‘energy-related regulations linked to the EU impose a recurring cost of around £8.4bn per year on Britain, compared to £1.3bn a year for UK derived regulations’. However, this £8.4 billion includes costs of policies that are not related to the EU: the UK’s Electricity Market Reform, roll out of Smart Meters. And Open Europe assume that, outside the EU, the UK would have no policies to promote renewable energy. In fact the UK has been supporting renewables since the introduction of the Non-Fossil Fuel Obligation in 1989, 20 years before Britain’s renewable energy target under the EU’s 2009 Renewable Energy directive.

The EU’s 2010 Industrial Emissions Directive, which limits air pollution emissions from power stations, protects public health but is criticised by some Outers as ‘red tape’. The directive is now written into UK law. Parliament could repeal it after a Brexit, but this would cause major regulatory uncertainty for investors and so hamper the construction of new power stations. And air pollution is quite high on the UK political and media agendas. So the Industrial Emissions Directive would probably remain in force post-Brexit.

So would the UK’s Climate Change Act, which commits the UK to reduce greenhouse gas emissions by at least 80 per cent (from1990 levels) by 2050. This was passed with all party support in 2008 – only five MPs voted against. There are more ‘climate sceptic’ Conservative MPs now than there were in 2008. But there are enough Tory MPs strongly in favour of climate action to prevent a climate-sceptic prime minister repealing the Act, which all other parties bar UKIP support.

The Act requires governments to set ‘carbon budgets’ for four year periods, on advice from a Committee on Climate Change. The Committee’s current chairman, Lord Deben, is a strong advocate not only of climate action but also of EU membership. If the UK votes to leave the EU, he will have less influence over ministers and Conservative MPs. The current Government has yet to accept the Committee’s latest recommendation.  A post-Brexit government would probably adopt a less stringent budget.

David Cameron says that he will remain as prime minister even if the UK votes to leave the EU, but he is unlikely to be given this opportunity by his party. Neither of the most likely successors are strong climate champions.  Boris Johnson writes newspaper columns arguing that record breaking global temperatures are nothing to do with global warming. Michael Gove, when he was Education Secretary, tried to exclude climate change from the national curriculum, abandoning the idea only after strong opposition from the Liberal Democrats.

So under a Johnson/Gove premiership less stringent carbon budgets are likely. They would allow the burning of more coal, so reducing energy costs (though increasing medical costs). But to have a real impact on price, a post-Brexit government would need to scrap the Industrial Emissions Directive, the carbon price floor and VAT from domestic energy, a highly unlikely scenario.

On the other hand, a recent report from Vivid Economics, made for National Grid, which investigates the risks and opportunities of a Brexit for UK gas and electricity markets concludes that this would lead to greater uncertainty, which in turn would raise the cost of financing in the UK energy sector. The authors note that “the scale of planned infrastructure investment in the electricity sector over the next decade means that even small increases in the cost of financing could have large consequences for total investment costs.” They also note that “further upwards pressure on costs would result from the likely devaluation of the Pound, given the role imported goods and services play in UK energy supply.”

Vivid does not quantify these costs. It does note that if after Brexit, the UK is also excluded from the internal energy market, the additional impact (apart from the impact of a Brexit) on the cost of investment could be up to  £500m per year by the early 2020s. Both Johnson and Gove have said that a post-Brexit Britain would be outside the Single Market, so outside the internal energy market. If the UK votes to leave the EU later this month, domestic energy bills are therefore more likely to increase than decrease.

Stephen Tindale is Director of the Alvin Weinberg Foundation. This article is based on a more extensive paper written by Stephen Tindale and Michael Grubb, Professor of International Energy and Climate Change Policy at UCL Institute of Sustainable Resources: Brexit and Energy: Cost, Security and Climate Policy Implications (May 2016).

Note: The views expressed in this post are those of the author, and not of the UCL European Institute, nor of UCL.

This article first appeared on Energy Post.

Photo by Jude Beck on Unsplash

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s