UK’s ability to keep lights on weakens after the Leave vote

AS IF managing the Brexit crisis were not enough, the UK government also needs to find £100bn to keep the lights on countrywide after 2020.

With more than a dozen power plants due to close in the next decade, Prime Minister David Cameron’s government has been working to lay out incentives that will draw in money for new electricity infrastructure. Finding that investment would be made more difficult by voters’ decision to leave the EU, said Fatih Birol, executive director of the International Energy Agency.

“Decision makers don’t like uncertainties, especially in the economic outlook,” Birol said. “The UK’s electricity system is one of the oldest in the world. It’s ageing very quickly, and we need to bring in new capacity.”

There is already evidence of investors rethinking British projects. Vattenfall, which is planning a £5.5bn wind farm off England’s east coast, said it was reassessing the risk of working in the UK. PensionDanmark, which also is funding energy projects in Britain, has said it would lose interest in new deals if the UK voted to leave.

That is unsettling for the government’s effort to attract the £100bn it says is needed for energy infrastructure by the end of this decade. Already, the UK is facing the risk of price spikes this winter after a number of plants finish their life in service, according to Deutsche Bank analyst James Brand. As much as 7GW of closures were announced for 2016, equivalent to 11% of UK peak demand.

“We were already fearing severe problems of grid control in coming winters,” said Paul Younger, a professor of engineering at the University of Glasgow. “The challenges just got a whole lot worse.”

To date, the government has focused on stimulating offshore wind and new nuclear power plants as part of a programme to boost energy security, cut pollution, and keep electricity affordable. The board of Paris-based Électricité de France is considering whether to make a final investment decision on new reactors at Hinkley Point in southwest England. Several large offshore wind farms in the North Sea obtained financing last year.

The Department of Energy and Climate Change has not detailed how the Brexit vote will reshape its policies. Ministers are due to adopt a target this week on slashing carbon emissions by 2030. After the vote, Energy Secretary Amber Rudd said in a tweet that the government was “still committed to making sure consumers have secure, affordable and clean energy now and in the future”.

Even so, uncertainty created by the Brexit decision might slow investment decisions in the energy industry for two or three years, said Simon Currie, global head of energy at Norton Rose Fulbright.

“It’s not like the UK can say, ‘We’re a steady state and we don’t need to build anything, we can just keep going’,” Currie said. “That’s not where we sit. We need more investment. We can’t have the entire industry pause for two years.”

The next government might renege on its deal with EDF over Hinkley because the project would push up electricity bills, said Elchin Mammadov, an industry analyst at Bloomberg Intelligence. The reactors would sell power for double the current market price — and for more than the cost of wind turbines or natural gas-fired plants.

“Hinkley Point is a big issue,” Mammadov said. “The current government has been pushing to get the deal done. The next government may start asking questions about whether we need it. It’s very expensive, and it’s an EU project.”

CEO of EDF Jean-Bernard Lévy said on Friday the utility was undeterred by the referendum and was pressing ahead with its consideration.

The aftermath of the vote “brings considerable uncertainty and market turmoil”, said Stephanie Pfeifer, CE of the Institutional Investors Group on Climate Change, which represents more than 120 pension, insurance funds, and other institutional investors across Europe.

Not everyone is fazed by the vote. Energy UK, a trade association that represents more than 80 generators, said: “People need not worry: the lights will stay on and power and gas will continue to flow to homes and businesses.”

Dong Energy, the world’s biggest offshore wind developer, said it was confident the UK would stick with offshore wind, in part because its long coastlines and high-wind speeds are favourable for investment. “UK energy policy is not dependent on EU membership,” said Marianne Wiinholt, Dong Energy’s chief financial officer.

Even so, leaving the EU stands to tear up some of the structures that financed projects. The status of the European Investment Bank, an EU development bank based in Luxembourg, is one of the many details policy makers will have to work out. The institution has loaned €42bn to the UK over the past eight years, including €7.7bn in 2015. Almost half went for projects that fight climate change.