Energy Policy After Brexit

How has policy changed since Brexit? A recent report from UK in a Changing Europe brings together experts in their respective fields to investigate how policy and policymaking have changed in a range of sectors. In ‘Doing things differently? Policy after Brexit’, Jim Watson and Paul Drummond consider how changes to energy policy compare to what was promised before Brexit, and to discuss what further changes lie ahead.

What changes were promised?

The referendum campaign did not focus significantly on energy. Perhaps the most striking claims were made by Vote Leave, whose 2016 briefing asserted that around £90bn of costs from EU regulation of the energy sector could be avoided if the UK left the EU. The briefing focused on EU rules including VAT on domestic energy and regulation of emissions from fossil fuel power plants, without any details to substantiate the figure. It also included a common complaint: that EU ‘Ecodesign’ regulation effectively banned certain types of ‘high-performance’ (and less energy efficient) appliances. As a government spokesperson commented at the time, the Vote Leave figure implied that the UK would scrap its climate change targets after Brexit.

Boris Johnson and Michael Gove also said that VAT on domestic energy would be abolished if the UK left the EU, saving households £2bn a year. However, some independent analysts pointed to the potential costs of leaving the EU’s single energy market. Two separate studies concluded that the costs could be around £500m a year.

What has changed so far?

The main direction of UK energy policy has not changed since the referendum. The UK government has strengthened its commitment to reducing emissions, published a Net-Zero Strategy and submitted its own emissions reduction plan to the UN Framework Convention on Climate Change. Before Brexit, the UK’s plans and negotiating position were under the auspices of the EU.

Following the referendum, the government confirmed the UK would leave the EU’s main carbon pricing mechanism – the EU emissions trading system (EU ETS), but that the post-Brexit approach to carbon pricing in the power generation and industry sectors would be at least as ambitious as the EU approach.

The UK ETS was launched in May 2021, with the same scope and similar design to the EU ETS. Since then, the price of emissions under the EU ETS has steadily increased, more than doubling in value by the end of November 2021 to a previously unseen €75/tonne, largely matched by the UK price. The two schemes operate separately – even through the Climate Change Committee saw advantages in linking to increase liquidity, but that future possibility was held open in the TCA.

Despite speculation, VAT rates on domestic electricity and gas have not changed. The Net-Zero Strategy trailed the possibility of rebalancing taxation from electricity (which is heavily taxed) to gas (which is taxed less). But the immediate costs of leaving the EU’s single energy market did materialise. Analysis for the energy regulator Ofgem in late 2018 concluded that leaving the EU had already cost energy consumers £2bn, before the TCA was agreed – £1bn due to the devaluation of the pound and a further £1bn due to increased gas price volatility.

However, some of the assumptions made by independent analysts during the campaign turned out to be incorrect. For example, Vivid Economics’ expectation of a £500m a year cost from leaving the EU electricity market assumed no further electricity interconnector investment. Since Brexit, two large interconnectors have started operation and another is under construction.

Since Brexit, the UK has also left the North Seas Energy Co-operation platform, established by the European Commission, the UK and other North Sea coastal states to facilitate co-ordination of offshore wind investment. Both the UK and the EU have ambitious plans to expand offshore wind as part of electricity sector decarbonisaton. The TCA states that a forum for co-operation between the UK, the EU and its member states will be established in parallel, but the timetable, and the degree to which it will effectively replicate or build upon the existing platform, is unclear.

There has also been very little divergence from EU ‘Ecodesign’ regulations since Brexit. In 2020, the Government stated that it would maintain or exceed EU minimum standards, and potentially expand their application to other products. In July 2021, UK regulations were amended to replicate new EU product eco-design and labelling standards.

The UK has also left Euratom, the EU’s regulatory agency for nuclear material and its use in civilian (energy and medical) applications. Whilst the announcement of the decision in 2017 caused some concern, the transition has been relatively successful. A new co-operation agreement came into effect in 2020 which replicates many of the previous arrangements – and is complemented by bilateral agreements with other countries to ensure nuclear fuel supply.

What are the possibilities for the future?

In future, the UK could choose to diverge further from EU regulations and policy mechanisms – for example having a more distinctive approach to energy sector decarbonisation. For the time being, however, the UK’s seems intent on cooperating closely with the EU.

The potential establishment of formal links between UK and EU carbon pricing schemes remain very uncertain. In July 2021, the European Commission published proposals to extend the EU ETS to marine transport from 2023, with a parallel system for fuels consumed in buildings and road transport from 2026. The UK ETS may expand sector coverage to marine transport and waste incineration, however initial proposals to extend it to fuels used in road transport and heating are likely to be dropped, at least in in the near-term, to avoid the risk of exacerbating rising energy prices. The potential for the two systems to diverge in sectoral scope allows the UK flexibility to pursue its own decarbonisation policy approach. However, by the same token, this may also permit or result in divergent practical ambition.

In 2020, the EU began consulting on the future of its eco-design regulations, with a particular focus on the inclusion of broader ‘circular economy’ principles, including ‘right to repair’ and efficiency in the use of non-energy resources. In November 2021, the UK government published the initial outline of its proposed policy in this arena, with a similar focus. Maintaining respective market access for regulated products may constrain future divergence in this area. In the longer run, the TCA holds open the possibility of reintegration of the two energy markets.

This chapter was republished with permission from UK in a Changing Europe.

Jim Watson is a Professor of Energy Policy and Paul Drummond is a Senior Research Associate. Both are based at the UCL Institute for Sustainable Resources, part of the Bartlett School of Environment, Energy & Resources.

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

Photo by Nicholas Doherty on Unsplash