Energy bills and Brexit

“Energy bills would soar by £500m a year if the UK left the EU, Amber Rudd, the energy secretary, will claim.”

The Guardian, 24 March 2016

It’s been claimed that a Leave vote in June’s EU referendum would add £500 million to UK energy bills. Questioned on this by the BBC this morning, the energy secretary conceded this was an uncertain figure.

That’s right—the economists who produced it said that the cost to the energy sector of leaving the EU’s internal energy market could be “up to” £500 million. These costs would ultimately be passed on to energy suppliers and their consumers. But Brexit doesn’t need to mean leaving the EU’s energy market—Norway is part of it despite not being an EU member.

And it’s wrong to portray the £500 million as their estimate of the impact on energy bills from Brexit. Access to the energy market isn’t the only way the referendum outcome could impact bills in either direction, and the report doesn’t try to put a figure on what might happen to bills.  

The economists thought the bigger impact of Brexit would be to damage the confidence of energy investors, which could further raise costs. It didn’t put a price on this.

On the other hand, members of the Leave campaign have argued that leaving the EU could allow the UK to drop some of its green targets, and that this could lower bills.

£500 million is the forecast cost from leaving the internal energy market

The EU’s “internal energy market” is used to, among other things, trade energy across borders.

In November Vivid Economics, which was commissioned by the electricity and gas system operator National Grid to assess the impact of Brexit on the energy sector, said:

“The impact of the UK being excluded from the IEM could be up to £0.5 bn per annum in the 2020s. Most of these impacts could be effectively mitigated if the UK is allowed to remain in the IEM, although there would be a loss of influence over policy design which has not been quantified in this analysis.”

Most of that potential £500 million cost was to the electricity system, rather than gas. It said not being part of the internal market could reduce trading across borders and reduce investment in ‘interconnectors’, which allow the UK to access energy generated in other parts of Europe.

It was a tentative estimate, put together based on existing research. The economists said they hadn’t seen the underlying data behind all the estimates used.

A complicated business: the EU’s impact on bills is wider than the IEM

Vivid Economics doesn’t think Brexit’s biggest effect on the energy sector would be that estimated £500 million cost.

In a report released yesterday it said that higher investment costs are “the most significant Brexit risk to the energy sector.”

It said it thought energy investors might react to uncertainty around the UK’s position if the UK votes to leave by demanding higher returns on their investments. In other words, they’d want to be sure the energy could be sold at higher prices in order to offset their greater risks.

The report also said that changes to the exchange rate following an exit could push up prices—for example if the pound falls in value that would make importing equipment from overseas more expensive.

The Leave camp has said that bills could go down after a Brexit. One reason given is that freeing the UK from EU green energy targets would allow the UK to invest in cheaper fuel sources, reducing bills.

Leaving the EU wouldn’t automatically remove all of those targets. The UK has its own domestic targets on carbon emissions, for instance, which would still be in place unless MPs decided to abolish them.

The House of Commons Library has said that leaving the EU could affect the UK’s international climate commitments, which it currently negotiates as part of the EU.