I have spoken about Brexit on several occasions, both before and after the referendum and my view has remained unchanged in that it will create short term price volatility. In the longer term, unless Brexit causes a global recession, it may not be very significant and ultimately balance itself out. As we are fundamentally part of a global market, global demand/supply is unlikely to change significantly just because of Brexit.
Below I have highlighted the main price drivers for the energy market that are impacted by Brexit:
Carbon Market and Emissions Debate
There has been some concern in the market that, because UK has voted to leave the EU, the Carbon EUA market will be compromised. Personally I do not believe this and do not think the CO2 market will fall apart. The primary reason for this view is because the UK will still remain committed to reducing carbon emissions and in fact, the UK has tougher guidelines than most if not all other EU countries anyway.
Accordingly I expect the UK to remain part of an active carbon market. Any further changes to the carbon market are more likely to be driven by other factors than Brexit. Please see part 1 for the impact of Brexit on various levies and exemption schemes.
There could be some impact here due to Brexit, primarily because UK will not be limited by the same rules as far as subsidies are concerned. There may also be import tariff consideration, which could make some potential non-EU suppliers more competitive than before – perhaps this may be a reason the UK Gov’t is reviewing Hinkley Point.
Foreign Exchange Rate
This has and will no doubt continue to add volatility to the UK energy price in the short term. However, longer term I expect this to balance out. It is worth remembering that the recent FX rate changes have seen opposing impacts on gas & power in comparison to oil. i.e. a weak £/€ tends to increase gas and power prices but a weak £/$ tends to decrease global oil prices.
UK’s Economic Performance
The potential effect of Brexit may differ with political views however the result will not be clear for several years, though in the meantime it will no doubt create some volatility.
Personally, while I think Brexit is not a good thing for UK, I do believe it will not be as bad as some commentators have said. Nevertheless, it is unlikely that Brexit will cause a global boom in trade though there is a small possibility it could cause a global recession (albeit unlikely in my view).
In such circumstance the global supply/demand balance will shift back to overweight and oil prices could plummet again bringing UK’s energy prices down though demand will clearly drop too. If the UK economy loses ground somewhat relative to other countries, demand in UK will drop, again dropping price though this could just be considered on offset to the increased price due to a weak £/€ (though NB: a weak £/€ will make UK exports look cheaper and encourage inward investment). If the UK economy improves as expected by ‘Brexiters’, then we will see the foreign exchange rate recover and everything will be back to normal.
Obviously one cannot predict the impact of any political meddling in the market, though it is hard to think that we will see significant policy changes with respect to energy; UK in general will continue to believe in free trade albeit some trade restrictions may result in EU but unlikely for energy. The bigger political concern for me is whether Brexit could encourage other large EU countries to leave, (Frexit, Nexit, Itexit etc….) destabilising the EU as a whole.
City of London
Much has been said about the City losing business to EU centres. London has been a focal point for the financial services market for several reasons, primarily due to our legal and regulatory systems, and this should not change (especially if we remove the EU imposed restriction on bankers bonuses!). The main problems could be in relation to transaction ‘passporting’ or Euroclear though provided EU remain rational, these will just be a matter of negotiation.
So in essence, unless we get a global recession or a very bad UK recession, the likely scenarios will balance out and we are unlikely to get a real long term impact on energy prices – other factors, like storage (which can exaggerate or smooth market responses) and supply disruptions, will be more significant.
Dr Tony West was formerly Director of Trading and Marketing at Innogy (now Npower), Head of Trading at Scottish Power and amongst other senior wholesale trading roles recently advised Gazprom on their power business development strategy.