Markets hate uncertainty and if there is one thing that is not in short supply at the moment, it is uncertainty. What sort of trade deals will the UK be able to negotiate with our disgruntled neighbours? Will we still be able to trade in the single energy market?
The industry is jittery in response, erring very much on the side of caution. A recent report by Cornwall Energy highlights some potential consequences.
Capacity Market Scheme means bill hikes
This Government scheme is intended to offer subsidies to energy companies, in order to have a guarantee that their power stations will generate electricity in future winters when demand is high.
Its secondary aim is to encourage the building of new gas plants, in an effort to phase out coal and nuclear power plants. Due to the uncertainty about Brexit, energy companies are feeling unsure about future costs and are demanding larger subsidies from the government for the guarantee they will produce electricity. Costs to the government look to increase by a sixth, according to leading analysts Cornwall Energy, in its latest report, Brexit and UK Energy.
This will have a knock on effect on consumer energy bills, adding as much as £350m. Cornwall Energy estimate that the proposed building schedule of power plants to guarantee electricity production would have cost £2.1bn before Brexit, but since the referendum result an extra £364m has been added to the bill.
Cornwall Energy’s report has caused waves, particularly their revised estimates on the price per kilowatt likely to be awarded this year – £49 per kilowatt, up from a pre-Brexit estimate of £42.
They state it is reasonable to anticipate a risk premium being priced, “…into all forward capacity market auctions, the cost of which will ultimately flow through to consumers’ bills.” Government has been tight-lipped in response, with a spokesman quoted as saying, “There will be no immediate changes following the result of the European Referendum… The Capacity Market acts as competition, so it’s not possible to predict exact costs. It aims to secure the lowest possible rate for consumers.” Calming words are not enough, however, and markets can be expected to fluctuate considerably in coming weeks and months.
Single Market Uncertainty
As yet it is unclear whether Britain will be able to remain part of the EU’s single energy market. This single market enables energy companies to trade gas and electricity, avoid paying carbon taxes through the Emissions Trading System and to build interconnectors.
These question marks are a headache for companies trying to project ahead, and prices will rise in order to cushion the potential financial blows. A broader economic downturn could also see a reduction in the demand for electricity across businesses countrywide, which could also hit producers running expensive power stations. The only certainty is that difficult times lie ahead, for both energy producers and consumers.