The UK and European energy co-operation post-Brexit

The UK should seek to remain part of the European Internal Energy Market (IEM). This would deliver economic benefits significantly greater than the cost of adherence to regulations and a membership fee. By increasing the prospect of new infrastructure developments being constructed, it would also deliver energy security benefits. If based on the Euratom definition of free movement of labour, which applies only to those with the right qualifications, it would be politically possible for the May government to sell this to areas which voted to leave – and to its own backbenchers.

Brexiteers argued before the referendum that EU membership increases UK energy costs. For example, Dominic Raab claimed in February 2016 that 'skewed EU energy regulation will add £149 to bills by 2020' (http://www.thetimes.co.uk/article/a-chance-to-take-pound33bn-burden-off-shoulders-of-small-businesses-qmq2jhrs7xf). However, this calculation was based on regulations and policy changes not related to the EU, such as the UK's Electricity Market Reform. (See https://ucl-brexit.blog/2016/06/17/would-brexit-lead-to-lower-uk-energy-prices/)

In fact, Brexit will probably lead to higher UK energy costs. Vivid Economics calculate that leaving European energy market integration processes, such as cross-border balancing, would cost the UK more than £500m per year by the early 2020s. Leaving the IEM would also increase the cost of capital for energy infrastructure investment, because of increased regulatory instability. (See http://www.vivideconomics.com/publications/the-impact-of-brexit-on-the-uk-energy-sector)

Remaining part of the IEM would entail the UK having to follow rules agreed in the EU. Many of these rules aim to increase energy competition, and the UK already has already more competitive energy markets than several other member-states. There are also many environmental regulations. But, given public concern about air pollution, the UK government will almost certainly not to repeal the key EU air quality regulations, the Industrial Emissions Directive and measures on pollution from vehicles.

The EU has not used regulation for climate policy. Instead, it has used a market mechanism, the Emissions Trading System (ETS). This has failed to deliver a meaningful carbon price. The UK has a carbon price floor of around four times the EU-wide price. So remaining part of the ETS would not require the UK to do anything extra. The main value of the ETS is revenue raising: EU institutions now propose to spend E12bn on low-carbon innovation. Remaining part of the ETS would enable the UK to bid for some of these funds (which are subject to co-financing), so strengthening British involvement in European research and development post-Brexit.

IEM membership would not necessarily require the UK to accept complete free movement of labour. Instead, the UK government could argue that it should continue to operate free movement of qualified labour in the energy sector. This is the approach written in to the Euratom treaty, which London is also leaving (following legal advice). Negotiating an agreement with Euratom is essential if the UK is to retain access to nuclear fuel post-Brexit. This will require the Government to accept free movement of qualified labour in the nuclear sector. This approach is consistent with the May government's emerging line on immigration, so should be proposed for the wider energy sector.

IEM membership would increase the UK's ability to participate in European infrastructure programmes. Interconnectors will probably be built anyway – other European countries want to be able to sell more electricity to the UK. But more strategic projects such as a North Sea grid, essential for harnessing one of the UK's main energy resources, offshore wind, will not be built without significant intergovernmental co-operation. The UK should work with the Norwegian and Dutch governments on this. (see http://www.clingendaelenergy.com/publications/publication/the-north-seas-offshore-grid)

This approach would not amount to signing up to the EU's Energy Union. The Energy Union emerged from proposals by Jacques Delors, in 2010, and Donald Tusk when he was Polish Prime Minister. Delors and Tusk sought a single buyer for European imports of fuel, mainly gas and mainly from Russia. Member-states, led by Germany, have rejected this approach. The Energy Union label is therefore now a label attached to measures the EU would have done anyway (as I argued in February 2015 – see http://www.cer.org.uk/insights/commission%E2%80%99s-energy-union-%E2%80%98strategy%E2%80%99-rebranded-work-programme. There has been much discussion, but the situation hasn't changed significantly since then.

The Energy Union is an unhelpful piece of 'more Europe' grand narrative. European co-operation should now be presented more pragmatically: a series of specific evidence-based measures to deliver economic and security benefits. In seeking to retain membership of the IEM on economic and energy security grounds, the UK government could contribute to this pragmatic approach.