Will Brexit mean higher energy prices?
Nobody really knows if Brexit will mean higher energy prices. But we’re prepared to stick our neck out and say we think it’s likely.
Energy isn’t a sexy subject. You won’t hear politicians or journalists on either side shouting about the impact Brexit could have on Britain’s energy prices and supply.
But energy costs have a huge impact on domestic consumers and businesses alike. In fact, the economy just won’t run without a cost-effective and efficient energy supply.
Unfortunately, Britain’s energy supply isn’t secure… and with the added uncertainty of Brexit, that means higher energy prices.
So why will Brexit mean higher energy prices for us all?
There are a few reasons why you’re likely to see your energy overheads go up as the Brexit process moves forward:
1. A cut in EU investment
When it comes to energy, infrastructure is about a lot more than the cables that get dug up in the street at inconvenient times.
In fact, the UK is connected to Europe by four interconnectors – long cables that stretch from our island to the European mainland. The UK imports 5% of its electricity and 12% of its gas from the European Union, so these cables are pretty important. Eight more of these cables are planned for the future.
Here’s where Brexit kicks in: these interconnectors work because EU member states enjoy completely frictionless trade… something that won’t exist between the UK and the EU when the UK leaves the EU’s internal energy market.
That means everything from possible tariffs to supply shortages in extreme weather events or unplanned energy generation outages – and all of these things mean higher energy prices.
2. Increased transportation costs
Without the principle of frictionless trade between members to prevent it, the EU may decide to impose tariffs on the use of the interconnectors between the continent and the UK. This would definitely affect prices for both domestic and business consumers, making it harder for British businesses to compete internationally.
3. Leaving the EU ETS
Never heard of the EU ETS? Don’t worry, you’re not alone.
But it’s tremendously important to the UK’s economy, as well as the environment.
In its simplest terms, the European Union Emission Trading System is a greenhouse gas emissions trading scheme.
Each year, the ETS sets a carbon emissions limit for power stations and industrial plants in Europe, then issues carbon permits to the biggest polluters.
These power stations and industrial plants have to measure and report their carbon emissions to the scheme, and hand in one permit for each tonne of carbon they release into the atmosphere. Because companies can buy and sell their permits, they’re incentivised to reduce their carbon emissions.
For example: burning coal produces more carbon than burning gas, so a coal power station needs more carbon permits than a gas power station. The gas power station can sell permits it doesn’t need and the coal power station has to buy them. So the cost of burning coal increases, making it more expensive to operate coal power plants – and encouraging their closure, which is better for the environment.
So how does this very complicated system affect the price you pay for your energy?
Power stations and energy suppliers don’t know how much carbon emissions will cost once the UK leaves the EU ETS. That means it’s difficult for them to price the power they’re generating. It’s particularly difficult for energy suppliers, which have to allow commodities traders to buy and sell their energy years in advance.
There’s a good chance that power generators and energy suppliers will raise their prices to compensate for this uncertainty in carbon pricing.
That’s bad news for big businesses… and it’s worse news for small businesses, which already pay 50% more for their energy than large organisations.
4. No replacement for Euratom
Euratom is the nuclear cooperation agency for the European Union. Nobody knows for sure what will happen but, with the UK government investing heavily in nuclear power, it’s likely that withdrawal from Euratom could have a serious impact on the UK’s ability to generate nuclear power in the future and negatively affect our energy security.
Energy insecurity means higher prices for consumers and, because our energy supply isn’t secure, possible problems with supply.
5. Currency fluctuations
This is the big one. According to researchers at University College London, the sliding pound has already added at least £2bn to the UK’s energy bills since the referendum.
How? We’ve outlined above that the UK imports energy from the EU… but the EU isn’t our only source of energy imports. The UK is also reliant on liquefied natural gas (LNG) imports from the Middle East. That’s on top of oil that can’t be supplied from the North Sea oil fields.
Simply put, the pound doesn’t buy as much energy as it used to. When energy suppliers are spending more to provide the same amount of energy, consumers will always feel the pinch.
Uncertainty costs money
Uncertainty in business always costs money, and the energy industry is no exception. A lack of clarity around the regulatory frameworks and infrastructure that allow the UK to import energy is putting energy suppliers under pressure.
Add in currency fluctuations, and suppliers are highly likely to increase their prices to compensate.
That’s bad for domestic consumers, and it’s even worse for businesses. Higher energy prices will make the UK’s businesses less competitive – just when they need to be at their most competitive.
What you can do to protect your business
Brexit is out of your control, and so is the impact it will have on the prices that energy suppliers can offer you.
But all is not lost!
There are a couple of things you can do to mitigate the impact of energy price uncertainty on your business:
- Pay close attention to your next renewal date and shop around to find the best energy deal (we’ve got a really quick and easy way for you to compare business energy prices). By finding a new contract in plenty of time, you’ll avoid deemed rates (which can be up to 80% higher than your supplier’s standard tariffs) and you could also end up paying less overall.
- Consider signing up for a fixed term contract to get your business through this period of uncertainty. How long you should fix your contract for depends very much on what type of business you’re running and how high your energy overheads are. A manufacturing business might be better off fixing for a longer period of time. A smaller, office-based business may be better with a 12-month contract. (Speak to the experts if you need help!)
It’s important to be proactive and find the best energy provider before you fall out of contract. We know that over 500,000 of the UK’s businesses are already paying too much for their energy because they’re already on deemed rates after falling out of contract.
And British businesses are already losing over £500m every year by not picking the best energy deal.
Finally, you can also look at finding ways to become more energy efficient. According to The Carbon Trust, a 20% cut in energy use can have the same bottom line benefit as a 5% increase in sales. We’ve put together a great guide to help you get started.
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