Archive for July, 2016

Even before the Brexit vote on 23 June the energy markets had experienced a couple of months of steady increases after a lengthy period of stability. Between April and the referendum wholesale market rises equated to increases of approximately 25% in the cost of gas and 18% in the cost of electricity.

The immediate aftermath of the leave vote saw suppliers pull prices in the midst of currency falls and general surprise and uncertainty. This short-term volatility could well continue, although in the longer-term underlying factors such as the price of oil, new generation capacity, policy changes and investor confidence are likely to be the main drivers.

Energy prices

The fall in the value of the pound will inevitably result in more expensive imports (on which the UK is increasingly reliant).

How long this will last is very difficult to predict, though fears over the UK and European economies could also lead to a weakening of oil prices, stalling their recent rises and negating some of these exchange rate costs.

Energy investment

Of concern is also the impact Brexit will have on the much needed investment in the UK’s energy infrastructure – around £19 billion a year is required until 2020, much of which is expected to come from foreign sources to fund new nuclear, offshore wind and gas power stations.

Until there’s clarity on new trade agreements this investment would well be put on hold, threatening security of supply and carbon reduction targets, which in turn could push up prices.

In particular, the future of the Hinkley nuclear power plant in development by EDF with Chinese backing remains uncertain: will the French Government facing their own economic and political challenges really back a massive and possibly risky investment in a non-EU British project?

In the absence of a new Prime Minister and clarity on a timetable for Brexit – let alone what that actually means – energy prices are likely to continue their recent upward trend, based on an unhealthy mix of uncertainty and volatility.

 

 

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