Post referendum: What does Brexit mean for energy bills?

The British people have voted out of the European Union. In an unprecedented referendum, leave finished ahead, at 51.9 per cent of the vote (1). The fall out of this result has included the resignation of the Prime Minister, the FTSE hitting a 31-year low (2), the pound plunging to levels not seen since 1985 (2) and the UK’s credit rating outlook cut to ‘negative’ (4).

But unless you’re a big investor or currently on a foreign holiday, you probably won’t have felt the effects of Brexit too much so far. And nor will you for some time, as the PM has delayed the instigation of Article 50 until his successor takes over in October. Following that, it could be up to two years before the UK is completely severed from the EU.

However, it’s nice to know what to expect, and particularly where our own money is concerned. So what will Brexit mean for our energy bills in the coming months and years?

What did they predict?

Prior to the vote last week, both sides of the debate made claims about what was likely to happen to our energy bills.

Remain: In March this year, energy secretary Amber Rudd claimed that household bills would rise by around £500m a year(1). This statement was based on a report written by consultants Vivid Economics (1), which was commissioned by National Grid.

Leave: Brexit campaigners have been promising to slash energy bills, initially by being allowed to take the five per cent VAT off our energy charges(3). As EU members, the government was not allowed to remove this tax. It was also claimed that Brexit could lower energy bills through the removal of stringent EU renewable energy targets.

Industry: The UK’s largest energy companies had largely kept quiet on the subject of energy bills, preferring to err on the side of caution and not get involved in the debate. However, one did speak out; SSE. Utility giant Scottish and Southern Energy (SSE) highlighted the benefits of the EU to the energy market, and spoke of the potential risks leaving could bring, in an article to the Financial Times in March(4).

So, who was telling the truth, and what are the impacts of Brexit likely to be on our own energy bills? We’ll explore these claims, and other potential impacts, here.

Impact prediction: Household energy bills will increase by £500m a year

Amber Rudd made this statement back in March this year, but was it true? Yes, and no, because she took this statistic from the Vivid Economics paper, which had been commissioned by National Grid. This paper based its assumptions on the UK getting locked out of the European internal energy market.

Currently, six per cent of the UK’s electricity supply comes from interconnectors that link us to France, Belgium and Norway. According to UK energy policy, this demand is due to triple over the next decade. While there is a possibility that the EU could choose to exclude Britain from the European energy market, it’s not for certain that this will happen.

Utilities including SSE and National Grid have called upon the UK government to ensure the country stays in the EU energy market (9). Remaining not only gives us the opportunity to trade freely with other members, but also ensures important energy security for us for future years. Norway is still a member of the EU Energy Market (10), despite not being a member, so it is hoped that the UK can secure a similar deal.

The truth: Energy bills could rise if we were to be forced out of the European Energy Market. However, there is no certainty that this will happen, so for now we need to wait and see.

Impact prediction: Energy bills slashed by cutting VAT

One of the big claims in the leave camp were that Government would be able to scrap VAT on household energy bills, saving the average household around £60 a year. EU rules said we could not lower VAT on energy bills under five per cent, and following a Brexit, we are now going to be free from those rules.

The government would have to make a choice to remove this VAT, leading to a shortfall in income to the around £11 billion. They would either have to make cuts to services to account for this shortfall, or would need to raise more money from other areas, at a time when public finances are predicted to be under pressure anyway (11). With the value of the pound dropping rapidly, prices are likely to shoot up anyway, so in real terms the impact of a five per cent reduction is unlikely to be significant in real terms.

The truth: Now we are leaving the EU, we certainly can remove the VAT on energy bills. However, the government needs to decide to do this, and will have to ensure they can raise the shortfall elsewhere. The impact of this could be insignificant, if the cost of energy were to rise due to devaluation of the pound.

Impact prediction: Driving bills down by shaking off renewable energy requirements

Leaving the EU means we are able to ditch their renewable energy requirement of 30 per cent of electricity from renewables by the year 2020. The leave camp claimed that this relief may bring some spare cash, as fiscal subsidies will no longer be needed to encourage rapid renewables uptake. But is this realistic, and will that money be used to drive down energy bills?

Prior to Brexit, UK consumers contributed around £7.6bn a year to renewable energy subsidies. Campaigners have presumed that on leaving the EU, energy bills will be lowered as a result of the UK lowering renewables targets and stepping up investment in fossil fuels. But in reality, this will not be the case.

Driving investment in renewable energy outside of the EU’s own targets is the UK’s Climate Change Act, a landmark piece of environmental legislation formed in 2008. This legally binding framework contains even tougher renewables targets than those being met by the EU. In terms of cutting carbon emissions, the Act binds the UK to make cuts of 80 per cent on 1990 levels by the year 2050 (13).

The truth: Leaving the EU might give us a brief reprieve from compliance with some of the shorter term targets that were being chased. However, it is unlikely that this will continue longer term, as investments in renewable subsidies will need to be even larger if we are to meet our 2050 goals.

Impact prediction: Economic turmoil will drive up energy prices

The majority of economists predicted that Brexit would result in economic pain (14), and even the Governor of the Bank of England warned against weakening the pound (15). Since the referendum result was announced last week, we have seen:

Shares move lower(2)
The value of the pound dropped to levels not seen since 1985(2)
The UK’s credit rating outlook cut to ‘negative’ by ratings agency Moody’s(4)
The UK’s biggest banks, including Barclays and Lloyds, posting double digit losses (15)

But what does all this mean for energy bills? For a start, energy imported from abroad will be more expensive to buy with our weakened currency. At least in the short term, this will push prices up. The UK will have more trouble securing loans and investments, which could hamper progress on essential infrastructure improvements, designed to keep the lights on.

Iain Conn, CEO of the British energy company Centrica, highlighted the risks when he said in an interview last week (17):

“If the U.K. is not around the table in the EU, influencing how efficient the European energy market can be, how much competition there is in the European energy market, then the probability is that our customers in the U.K. will see higher energy costs.”

The truth: The weakened sterling will lead to at least a short term hike in energy costs. Longer term, the effects remain to be seen, but will depend largely on how quickly the UK economy can recover.

What does this all mean?

The conclusions we can draw from the collective evidence is that it is unlikely energy bills will be positively affected in the short term at least In the longer term, future energy prices may begin to look more attractive, but for now only time will tell.

References

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