Markets & Policy

What Brexit means for UK’s renewable energy development

The United Kingdom of England, Wales, Scotland and Northern Ireland has voted in yesterday’s referendum to end its membership in the European Union. What does this mean for the country’s renewable energy sector?
Ilias Tsagas
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Ilias Tsagas

So, this is it. Brexit is the result of the referendum been held yesterday in the UK regarding its membership in the European Union (EU) bloc. The winning camp of the Britons supporting the termination of the UK’s EU membership has suggested that exiting the bloc will repatriate the UK’s policy-making power from Brussels back to London. Is this true and how the new policy-making structure will affect the UK’s renewable energy sector?

Despite of where one stands in the referendum debate, the fact is that the UK’s energy policy was always made in London, not in Brussels.

UK energy policy was always UK-made

The UK liberalised its electricity sector in 1989 (via the Electricity Act 1989) and from this point onwards power investment was led by market forces alone, with natural gas being the preferred investment.
Contrary to the referendum discourse, it is the UK that shaped the EU energy policy at large, not the opposite. The EU policy of unbundling the electricity sector (implying the separation of the generation assets from the transmission and distribution grids) was promoted based on the British case, which together with some other EU countries (e.g. the Nordic member-states) had already unbundled their electricity sector.

In fact, the adoption of the so-called ‘third legislative package’ in 2009, which is the EU directive promoting the liberalisations of the bloc’s electricity sectors, was considered from London as a very weak one. The EU directive asks from member-states to separate the management of the transmission networks from the power generators, but the UK was in favour of the full ownership unbundling, meaning total ownership separation of the generators and the networks, which the EU directive makes optional.

UK renewable energy policy

Specifically in the renewable energy sector, the case of a distinct UK energy policy is also visible.
The EU has been the world’s renewable energy powerhouse. The 2001RES-E directive on the promotion of electricity from renewable energy sources constitutes the earliest most significant piece of legislation for renewable electricity in the world.

However, contrary to the Brexit proponents, the EU legislation did not impose the policy mechanism to comply with the EU directive goals. Instead, renewable energy remuneration schemes were left totally on the member-states jurisdiction.

Most of the European countries adopted the so-called premium tariffs (also known as feed-in tariffs). The UK adopted its own, separate remuneration model based on a quota system.

Where feed-in tariff (FIT) policies prevail, the pricing laws establish the price per kilowatt hour (kWh) and let the energy market determine capacity and generation. Quota systems work in reverse: the government sets a target of power production from renewable energies and lets the market determine the price of power.

UK’s wind and solar industries

The UK developed its renewable energy sector based on the Renewables Obligation (RO), a quota scheme, that led to the only publicly subsidized electricity investments in the country, post the 1989 privatisation era.

Initially, wind investments led the way in Scotland, which is the UK’s windiest part, and later to the rest of the country.

In the last years, following the major decrease in the solar PV technology costs, the RO scheme supported a new wave of solar PV investments too.

Meanwhile, in 2010 the UK government also introduced the FIT scheme for supporting small scale low-carbon installations up to a maximum capacity of 5 MW.

According to the latest UK statistics, 4.4 GW of capacity is confirmed on FITs, of which the vast majority comes from solar photovoltaic installations. Furthermore, from 2007 until today, the RO scheme has supported about 11 GW of wind power capacity and about 5 GW of solar PV installations.

There have been arguments that in the initial stages of renewable energy technology, the FIT schemes helped the EU countries, like Denmark and Germany, to develop domestic renewable energy industries, while the quota systems are less encouraging. Whatever the case is, this was always a member-state policy decision. The lack of domestic UK manufacturing renewable power technology industry cannot be blamed on the EU.

Statist sector

So, where is the UK now? The solar PV stakeholders know the answer well. The UK has recently abandoned (or drastically cut in the case of PV FITs) its past renewable energy subsidy schemes and the country’s electricity sector post-2014 is governed by the Electricity Market Reform (EMR).

Based on the EMR, all electricity investments are publicly subsidized: the fossil-fuel sectors receive subsidies via the capacity market and the renewable energy sector via the Contracts for Difference (CfDs) scheme.

The implementation of the EMR in the last two years has shown the government is not interested in renewable power development. It has run only a CfDs auction dedicating a fraction of funding compared to the capacity market, while in addition it is about to support the building of a nuclear power plant, further supporting the centralized energy system of the past.

What the referendum result adds is that it frees the UK government from its obligation to meet the EU-set renewable energy targets.

At the same time, energy markets in the rest of Europe move in opposite direction than the UK. EU countries work towards an internal EU energy market, build electricity interconnectors, decentralize their systems and rely on each other to achieve higher penetration of renewable energies and a stable grid.
UK’s post-Brexit energy sector will be left in the continent’s corner, meddling though the subsidies that allow it to keep its fossil-fuel fleet running and been disadvantaged from the energy co-operation that takes shape in the EU.
Some prefer to argue that Brexit will bring the removal of duties to solar PV panels imported in the country from outside the EU and that this might boost the UK solar sector. This point is valid, but the downside is it focuses on the specifics of the sector while missing the whole UK energy picture.
Another argument is that the country has a very ambitious climate change bill in place. While this is true, the parties and political figures aligned behind the Brexit campaign, and soon to be in the UK government, neglect climate change and have opposed renewable type of energies.
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