Is Brexit a Cause of Rise In Energy Prices?

Sellindge High-Voltage DC Converter Station; picture by Jonathan Billinger, CC BY-SA 2.0

Shh! – Don’t Tell the Public

A fire broke out at a National Grid site at Sellindge, Kent, on 15 September, and then by 19 September the national news was telling the British public to expect a big rise in energy prices. What is going on? Why does this fire cause price rises?

The fact is that a significant proportion of UK energy needs are met by imports from Europe, called interconnectors. Some of these come to our shores in the form of gas pipes under the North Sea from Norway, while electricity arrives from France by a cable under the Channel. It is this cable that is now inoperable until 13 October.

The Truth, the Whole Truth … ?

National media have given a variety of reasons for the projected price increases to UK consumers: resurgence of economies after Covid, world shortage of gas, not enough wind around the British coast, and so on. They seem to be unable to utter the main reason… which is, of course, Brexit.

Since withdrawal from the EU, the UK is no longer able to participate in the internal energy market of the European Economic Area (EEA). This participation is based on rules administered by the Court of Justice of the European Union (CJEU), in which EEA states that accept the authority of the CJEU, such as Switzerland and Norway, can participate, but not states like the UK that reject the CJEU.

Internal Energy Market Of the European Union

This EU internal energy market developed across the years from 1996 by a slow process of agreeing to principles and rules of operation:

  • Free market of energy companies rather than monopolies
  • Risk-preparedness
  • Setting up ACER, the agency of cooperation among energy regulators
  • Consumer protection, with right to smart meters and choice of provider
  • Pay for hosting interconnectors, and fee for use of them by third countries
  • Rules against state subsidies for power plants
  • Single platform for allocating TSOs (transmission system operators)
  • Single Day-ahead system for EU electricity market
  • Nominated electricity market operators (NEMOs) to participate in this
  • Incentives to move towards greener energy

Most of these rules are incorporated in the UK Withdrawal Act, for example REMIT, (EU) regulation 1227/2011 which prevents market manipulation. But as a “third country” now, the UK is barred from the day-ahead sales and has to rely on spot auctions which result in much higher wholesale prices.

OFGEM

In the UK, OFGEM (Office of Gas and Electricity Markets) controls the market link. From its website, we learn that the UK now has 49 active energy suppliers, 37.2 percent of them being foreign owned, like French EDF.

OFGEM prevents extortionate prices by fixing rates a year in advance, currently with the guarantee that the standard variable rate for a UK household is £1 138 for a year’s supply. What we have heard on the news is that this is likely to rise next year as soon as OFGEM announces the next price cap.

Some 40 percent of a consumer’s energy bill consists of wholesale energy prices, and the increase in these prices is what consumers will have to suffer. The energy suppliers make very little pre-tax profit: Gas at 0.044 percent and electricity is now –1.82 percent (ie a loss), which explains why the smaller companies are going out of business. The larger companies will be compelled to take on the customers of these failing companies, and the government will lend them the money to do so.

Acknowledged Reasons For Rise in Energy Prices

It is sad that public money will have to be spent on this, rather than investing in greener energy or subsidising better home insulation. National UK media are giving the reasons for the crisis as :

  • World increase in gas demand, as part of post-Covid recovery;
  • Not enough supply of liquid natural gas from Qatar;
  • Not enough wind around the UK coast;
  • The fire at the interconnector cable in Sellindge.

The Reasons That They’re Not Telling You

But discerning readers can also note some long-term trends that our politicians have ignored:

  • Declining gas from the Continental Shelf; while most of UK electricity is from gas-powered generators, we are now more reliant on imported gas;
  • Aging nuclear plants (Dungeness is being decommissioned), so more reliance on the interconnector that delivers electricity from the French nuclear plants;
  • Incentivising new small energy suppliers not big enough to face an economic crisis of supply and demand, post pandemic;
  • Choosing a hard Brexit and opting out of the EU internal energy market.

One Possible Upside!

The only advantage of the last maybe is that the UK government may be able to subsidise companies for innovative greener energy technology, because this kind of state subsidy is ruled out by EU market regulation. But it looks like most of such UK money for energy is likely to go on bailing out the customers of the failing companies. This is not necessary in EU countries where energy prices are better protected by the internal energy market. 

So a significant cause of pricier energy for UK residents is Brexit, even though the “patriotic” media are keeping very quiet about it.