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Brexit and Renewables: What Lies Ahead?

Brexit and Renewables: What Lies Ahead?

The Brexit result was just a short time ago and already much has been written about its potential impact on the UK’s renewables industry.  Common themes that have emerged are loss of investor confidence, concerns over energy security and delays in much needed investment into the UK’s energy infrastructure.  At best, the commentary can be described as well informed speculation.  The truth is that nobody can predict the impact with any degree of certainty.

Certainty is something that has been sadly lacking for some time within the context of the UK’s renewables industry, and Brexit, coupled with potential for a second Scottish independence referendum, will only serve to extend and most likely intensify the uncertainty.

We should not lose sight of the fact that the UK will remain a member of the EU for at least the next two years, however the intense debate that is likely to surround the exit negotiations may well delay decisions by the UK government which are of fundamental importance to the renewables industry, for example, the next CfD allocation round.

It must be remembered that the UK’s energy policy has always been made in London, not Brussels, and the EU energy policy has been shaped by the UK’s policy.  For example, the UK’s incentives regimes for renewables (RO, FIT, CfD) have not been the product of EU legislation – these were of the UK government’s creation, although EU state aid rules do have a degree of influence.

However, one immediate impact is the effect of unstable financial markets that we have witnessed since the result.  Instability in the markets has the potential to damage the significant investment needed to create our cleaner environment.  Investors require a stable investment environment, and it is questionable whether this stability will exist in the coming months, perhaps years.  One could foresee a scenario where risk and returns profiles shift resulting in increased funding costs, and the recent weakening of the pound may have an adverse impact on the financial models for projects nearing financial close.  However, this is not to say that investment will dry up.  Indeed, some of the backers of the UK’s offshore wind industry have already re-stated their continuing commitment to developing their UK project, albeit conditioned on future events and there not being a prolonged period of uncertainty. 

The more pertinent concern should perhaps not be with the outcome of the looming EU exit negotiations, but more around the renewables (and general environmental) agenda of the next Conservative government.  An exit from the EU would free the UK government from its obligation to meet the EU-set renewable energy targets, and these targets may be something that the more right-of-centre government that many political thinkers expect will form the next UK government may decide to reduce or scrap.  The latter scenario is probably unlikely given that it is undeniable that the renewables is an industry that continues to attract investment and create jobs and is therefore a contributor to the UK’s economy.

In a continuing world of uncertainty, there is one certainty: the post-Brexit debate that will now consume our country for the next couple of years will be fierce and complex and definitive positions likely not known until further into that process.  Investment will continue and new renewables projects will be built, but parts of the industry will likely adopt a “wait and see” approach and proceed with increased caution until some clarity exists.  The question marks over Hinkley Point remain and with a need for the UK to invest £20 billion a year until 2020 to fill the gaps left by ageing, dirty power plants closing down, the industry can ill afford a slow down in bringing on new forms of generation.

Chris Gotts
Partner

This article featured in Energy Voice on 6 July 2016.

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