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June 2016

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Editorial comment

On 23 June, the UK will hold a referendum on its continued membership within the European Union (EU). In recent months, campaigners have been stepping up their attempts to sway voters with a series of claims and counterclaims regarding the pros and cons of the UK leaving the EU. Without any clear idea of the definitive implications of a ‘Brexit’, the debate has regularly been reduced to mudslinging and scaremongering. As the BBC’s Economics Editor, Kamal Ahmed, recently commented: “Sometimes this debate can feel a little like ‘my plague of frogs is worse than your plague of frogs’.”1

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Despite the uncertainty, I thought I would take this opportunity to present a selection of forecasts that have been put forward for the gas sector, should the UK decide to go it alone.

In the event of a Brexit, the UK would no longer formally be part of the EU’s single energy market. Although many experts predict that the UK would attempt to remain within this energy market in one way or the other, an exit vote would likely mean that the UK would have to adopt European legislation. In effect, it would have given up its seat at the negotiation table.

Penelope Warne, the UK Senior Partner at law firm CMS, states that the UK may not necessarily decide to adopt EU legislation, meaning that the single energy market could cease to apply in the UK. Under this scenario, the UK would have greater freedom on energy policy, structure and its choice of generation technologies.2 For Warne, this could signal a boost in indigenous gas investment, as well as an increase in gas storage and LNG terminals, in order to secure supplies. Gas imports from the Continent via the Bacton/Zeebrugge interconnectors are important for the UK when it requires extra gas above its long-term contracts, e.g. during cold weather. Warne argues: “It is in that type of scenario that security of gas supply to meet UK demand could be overtly impacted by a Brexit, if the rules in the EU are developed to have an effect on the gas which would be transported.”

Norton Rose Fulbright believes that the UK already has the infrastructure in place to mitigate against supply risks, and expects operations and gas flows to “continue as normal”, whether or not the UK votes to remain in the EU.3 The law firm contends that underutilised LNG capacity in the UK is a supply and demand issue, which is unlikely to be connected to Brexit: “Whether or not the UK will be an attractive destination for spare LNG volumes is more likely to be driven by the price of gas in the UK market than any other factor.”

In a report commissioned by National Grid and published in March 2016, Vivid Economics concludes that the overall impacts of Brexit on the UK’s energy sector are likely to be negative.4 While the report does not expect natural gas to face major cost implications in the near-term – as the UK is “well placed to maintain liquidity, adequacy and supply security even in the event of a Brexit” – it does warn that a UK exit from the EU could result in supply security risks in the long-term: “The UK could find itself excluded from the EU ‘solidarity principles’ in which European nations agree to supply their neighbours in the event of a gas supply crisis.”

As with the entire Brexit debate, the precise implications for the UK energy’s sector remain unclear. While little is likely to change in the short-term, regardless of the outcome of the referendum, a vote to exit the EU would inevitably lead to intense negotiations as the UK seeks to establish a new relationship with its European cousins.

  1. AHMED, K., ‘Brexit forecasts can be wrong, it doesn’t mean they are pointless’, BBC, (23 May 2016), http://www.bbc.co.uk/news/business-36357177
  2. WARNE, P., ‘Brexit: Broadening the debate’, CMS, http://www.cms-lawnow.com/brexit/analysis/broadening-the-debate
  3. ‘Impact of a Brexit on the energy sector’, Norton Rose Fulbright, (March 2016), http://www.nortonrosefulbright.com/knowledge/publications/136979/impact-of-a-brexit-on-the-energy-sector
  4. ‘The Impact of Brexit on the UK energy sector’, Vivid Economics, (29 March 2016).

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