12/04/16 – Brexit: good or bad for UK energy?

Speakers: Rt Hon Peter Lilley MP and David Mowat MP

12 April 2016 – meeting notes

Brexit – good or bad for UK energy?

Peter Lilley MP

My initial thoughts are that Brexit won’t make much difference because we pursue such perverse policies, even without being required to.

The Treaty has 4 objectives – functioning of energy markets, interconnectivity, security of supply and promotion of energy savings and renewables.

The rest of Europe follows our market liberalisation of the 1980’s. The UK set up the basic system and the EU codified it, but even with that our markets are not quite the same.

The interconnection of networks is organised bilaterally, so is not such an issue in the case of Brexit.

Security of supply: EU directives have damaged that with policies leaning towards the closure of coal-fired power stations. Without the EU we would not have the early 2025 closures of power stations.

There is an element of the treaty which could be quite serious for the UK as it would, in certain circumstances, require the UK to share our North Sea energy resources with the EU.

Promoting energy savings and promoting renewables has been a pressure, with the Climate Change act merely creating an additional set of overall objectives

The bulk of emission reduction has not been because of renewables, rather because of the following:

  • Outsourcing of industrial emission to China.
  • The 90’s dash for gas.
  • 2008 recession.
  • Closure of coal-fired power stations.

UK government policy on renewables: meeting EU targets has been a driver of UK energy policy. 15% of energy to be supplied by renewables from 2020. Brexit would let us off that hook.

The EU focus is on renewables rather than energy efficiency has been expensive

Leaving the EU would mean that the UK escapes some of those effects, there are cheaper ways of achieving the objective of reducing emissions that the scheme currently in place. The UK’s targets are more ambitions than the EU ones, which UK policy then adds on top, as-it-were. The UK reduction target is twice as much the one set by the EU; however the UK’s onerous efforts don’t reduce emissions by very much, overall.

In terms of the carbon tax, the UK has also made life difficult for itself. Leaving the EU, the UK could achieve more and do it more cost effectively.

David Mowat MP

I am voting to remain but not for the energy policy, I agree with much of what Peter Lilley has said.

The impact depends on which bit matters most; security or decarbonisation?

Security: Recently Amber Rudd tenuously argued that Russia might be an issue. We are increasingly an electricity importer from the EU, from countries that are far more carbon heavy.

Having been part of the EU has probably stopped progress on nuclear being as quick as it might have been.  The EU position on nuclear and fracking are not helpful. The impact overall on energy is quite marginal.

Cost: The net impact of the EU policies are far less onerous that what we are doing ourselves with our Climate Change Act and the carbon budget. Given that still 70%-80% of our energy is fossil fuel and the majority of that is imported, there is an exchange rate exposure, in terms of cost. It is said that Brexit could result in the pound falling, in the area of energy, given how much we import, that is likely to produce higher energy prices than we otherwise would have had.

The large combustion directive, which is now in UK law, does not seem to be resulting in closures of coal-fired power stations in countries such as Germany (where they are opening new ones) so the closures that Peter mentioned seem to be more of a UK policy than  an EU one. However where the EU has cost us money (and still is) is the error of principle made in energy policy a decade or so ago: to couch everything in terms of renewables not decarbonisation. That was a severe error which has had very profound impacts. The 15% target for the UK; which we may or may not meet (some say it might be easier to pay the fine) it’s a symptom of a secondary target. The objective of decarbonisation policy is not to build renewables (it is just one way of going about decarbonisation). The result is that we have done less in CCS, much less in nuclear (30% of the electricity across the EU is generated by nuclear, however the EU are not including that as a core part of the solution). There has been a tendency not to use gas as an option. If we were to replace all the coal in the world with gas it would be the equivalent of five times more renewables than there are now. The consequence of this error is that you have countries, such as Austria and Germany, with significantly higher renewables and carbon emissions than the UK. That is a logical consequence of focusing on the wrong target. The two countries with the lowest carbon emissions per capita are France and Sweden, countries which have the most nuclear power.

Since 1990 the UK has decreased emissions. Holland has made no decrease at all since that time. Austria has increased emissions between 1990 and 2014. In Paris, the EU collectively signed up for a 40% reduction over 40 years. However the UK Climate Change Act mandates an 80% reduction over 60 years. It means that the actual reduction by the rest of the EU is significantly lower.

What we would lose if there was Brexit? In the context of the original error of principle being increasingly fixed, for which we can thank Ed Davey, in part, the targets now to come out of the EU are increasingly on decarbonisation, a debate which the UK has led. For those of us who care about decarbonisation, that is a good thing.

If I were a big manufacturer, using a lot of energy, I would be concerned by a big one-off change in the exchange rate which might put prices up by as much as 20% or so.

David Lewis: thank you both for your contributions.

Questions and comments

The problems the UK has are not related to membership of the EU, such as the gas interconnect agreements and emissions targets that are being set.

Peter Lilley MP: Agreed, the UK has set more ambitious targets. However, the commitment to renewables has meant that we are taking the more high cost route to reducing emissions. We would not necessarily have set a target of 15% on our own.

David Mowat MP: We cannot assume that just because we leave the EU we will change our policies or reduction targets. We have set ourselves emissions targets that are far higher than any other EU country. The EU set renewables targets are particularly difficult for the UK.

Will EU membership affect investment in the North Sea and nuclear? Would there be a change in the relationship with Norway, our biggest bilateral energy partner.

David Mowat MP: I cannot see a reason for North Sea investment to change with or without EU membership. The factors there are the oil price and tax regime. There is no reason for EU membership to matter to things like Hinkley.

Peter Lilley MP: We have a commercial agreement with Norway, Brexit would not change that. They want to sell to us just as we want to buy from them.

David Lewis: there is some anti nuclear feeling in Europe, we are subject to state aid rules. Do you think that we would have done more on nuclear if we had not been EU members?

David Mowat MP: there is a possibility we might have done more. Having said that, the Austrians are still suing the commission around state aid on nuclear. There is, in Europe, a feeling against nuclear, as we see with Germany switching off nuclear and replacing it with coal. I even heard the French energy minister say they would be concerned to underwrite Hinkley C if they thought it would affect renewables (the agenda there seems to be less about decarbonisation and more on promoting renewables).

The decarbonisation targets are also looking at transport (with a 10% target) if the EU targets are having such an impact on renewables, why are they not having a similar impact on heat and transport?

David Mowat MP: The climate change act looks at everything (including transport) one of the difficulties with the target is having to replace petrol cars with electric cars. We have not met those targets yet. Transport is one of the toughest areas for decarbonisation.

Peter Lilley MP: It is one of the targets where Ministers would be most willing to be relieved of the target (with a Brexit). Bio-fuels have been a difficult area, so would probably see policy changes if we left the EU.

David Mowat MP: The 10% target (whilst legally binding) is a secondary target, given the overall objective is to reduce carbon, there are different ways of doing it. One of the consequences of the targets is that the EU has gone for diesel (not just green diesel) which now has some perverse side effects, with emission particulates killing people. There is a big drive towards electric cars, at the moment we produce 80% of our electricity from fossil fuels, so electric cars are likely to cause more emissions than petrol cars because you have losses as you transfer from coal to electricity. We have to be careful about some of these things. Until we produce our electricity from low carbon sources, electric cars are not all-that-helpful.

On security of supply, won’t the market solve the problem (with the high volume of coal and gas around) rather than politicians? Is it fair to say that the EU has saved the UK from some of our worst sins?

Peter Lilley MP: The EU has not stopped us from doing certain things. It has made us pursue a more costly route towards the objectives. Even if we had just accepted the EU objectives (and not had a Climate Change Act) it would still have been less efficient because there are multiple objectives rather that one over-riding objective, achieved by the cheapest means.

David Mowat MP: I agree with the idea of security of supply, we are not going to run out of oil, we may not even be at peak oil yet.

What levers are available for renegotiation? Could the situation with Tata Steel have been averted if there had been less of a difference between UK and EU pricing?

Peter Lilley MP: We’ve not been saying that pricing between the EU and UK have been unfair, there have been perverse consequences of our Climate Change Act and having to interact with EU set targets, which are broadly the same for all of Europe.

David Mowat MP: Our electricity prices (for whatever reasons) are very high, compared to the rest of the EU. That affects all manufacturing, but energy intensive industries particularly and indeed consumers. It is difficult to tell if this makes a real difference in the Tata situation. I note that the German, Dutch, Italian and Spanish steel industries (who also have Chinese dumping) do not seem to have such difficulty as ours is having. That may be partly because of energy.

Peter Lilley MP: We have tended to take the costs of renewables and carbon tax evenly on both industrial and domestic users. In Germany they have loaded it much more on consumers, so household tariffs have gone up far more tariffs. 300,000 users are cut off a year because they cannot pay. It has become a really serious issue in Germany. Germany has also done more to compensate high energy users than we have in the UK. We have been slow in asking for it, but while it also depends on negotiating with the EU to see how much we are allowed to, it is largely self-inflicted.

David Lewis: Even if you are burning coke, the carbon floor price will have an impact on that.

David Mowat MP: The carbon floor price is not a particularly green initiative, it is something of a tax on manufacturing. Even after we have introduced the exemptions for energy-intensive users, bills will still be higher than in competitor countries. The Germans have been able run the system as they have, without falling foul of state aid rules, is because they have been doing it since before the state aid rules started. Or so I have been told.

What are the big issues of the referendum, as energy policy is not a key issue for most voters?

Peter Lilley MP: There are 3 things, trade (do people see this as cutting us out of the EU market or opening up to trade with the rest of the world) I voted in favour in 1975 because there was a viable economic case. We should be negotiating trade deals with the rest of the world, but we cannot on our own, whilst EU has difficulty doing, because it is difficult to negotiate deals for 28 different countries.  We can organise trade deals by ourselves, that is the economic argument.

Immigration speaks for itself, getting some control over our borders and the effects immigration has on areas such as housing.

Democracy; do you make your own laws or allow someone else to make them for you?

David Mowat MP: Agreed, those are the three areas. Germany exports 10 or 20 times as much to China as we do, the EU has not stopped that from happening. There is also an issue of risk and transitional costs. Immigration is a very emotive subject, as is sovereignty, for many people.

The Great British public are not, on a whole, very well informed and the issues are very complicated. Is the issue likely to be based upon emotion rather than facts and figures?

David Mowat MP: In every election some people are more informed than others. It is true.

Peter Lilley MP: There are two things that I have learned about the British electorate: A: people are much more intelligent than we give them credit for; B: people are much less well informed than we would like them to be. They will be a lot better informed on the subject by June 23rd.

The scheme in Germany allows industrial users to approach their local authority that supplies the energy, put forward a case for a reduction in their energy pricing, as an industrial consumer, negotiate the price, and whatever discount  you get is then passed onto the resident population.

David Lewis: That is not an option available in a market where domestic consumers have a choice of supplier. The EU is looking at stopping that way of regulating consumer prices.

The meeting came to a close at this time.