The decision to leave the European Union has created a great deal of economic and political uncertainty for the UK.

Jonathan Cohen of Howard Kennedy has analysed some of the key effects of the Brexit decision on the UK’s renewable energy sector and recommends the ways that renewable project developers, sponsors and investors can mitigate the impact of any resulting uncertainties.

Macroeconomic effects

The most significant economic impacts of Brexit to date on the UK’s renewables sector can be captured in the following:

• Depreciation of Sterling – Sterling is likely to stay low and volatile over the medium term, especially as the UK’s negotiating strategy develops. It is recommended that renewables developers and investors review their FX strategies including putting in place appropriate hedging/currency strategies
• Higher wholesale power prices – from speaking to leading energy price experts, Brexit is expected to be positive for wholesale power prices. In the short term Brexit is pushing up prices due to the depreciation of Sterling raising the price of fuel.
• Renewables financing – leading lenders have suggested that Brexit has not changed the availability and terms of credit in the renewables financing market. The debt market remains competitive and fragmented, with a mix of UK, European, Australian and Asian lenders offering short and long term debt. In addition, a number of large renewables transactions have financially closed since the referendum result in June 2016 and many overseas investors consider this to be a buying opportunity given the current exchange rate.

Climate change targets

Following the Brexit decision, the widely accepted view was that the government will continue its legal commitment to decarbonise the UK economy and will not renege on its existing subsidies for renewables. This includes maintaining its commitment to both existing EU level emissions commitments such as the Renewable Energy Directive, the EU ETS, the Large Combustion Plant and the Industrial Emissions Directives as well as UK specific legislation including the Carbon Floor Price and the Climate Change Act 2008.

However, in its Industrial Strategy, published in January 2017, the government did not commit to retaining the EU driven renewable energy targets and so the position remains uncertain.

Renewable subsidies and incentives

On leaving the EU, the UK would have greater freedom to subsidise renewables. Currently, the UK is required to notify proposed aid measures to the European Commission for approval. Whereas on leaving the EU, the government may no longer be bound by these state aid rules and might be able to increase support to renewables in order to achieve its carbon target, although it should be noted that World Trade Organisation anti-subsidy obligations will remain.

Whilst the implementation of new renewables subsidies are unlikely given current Treasury constraints, the ability to implement such subsidies without seeking European Commission approval is a positive.

Single EU electricity market

One of the major areas of uncertainty is around the future of the UK’s access to the single EU electricity market. Four electricity interconnectors between the UK and EU currently exist, with a total capacity of four gigawatts that allows both the UK and its EU neighbours to balance their electricity networks cheaply and efficiently.

The UK currently has seven interconnectors that are planned to come online by 2022 with a total combined capacity of 7.3 gigawatts and it is expected that these will proceed as planned.

It is widely anticipated that the UK energy market’s close integration with Europe is likely to continue, however, this ultimately depends on how negotiations process. Such negotiations include the ability of existing and planned UK-EU interconnectors to enter EU capacity market auctions and market integration initiatives such as market coupling.

Energy trading

Post-Brexit, companies wishing to operate or trade in the EU energy market will need to comply with EU rules on energy trading. The EU Regulation on Energy Market Integrity and Transparency (REMIT) is a central part of EU energy market policy alongside the Third Energy Package (legislation aimed at liberalising European gas and electricity markets), and requires market participants, whether or not established or resident in the EU, to register and report wholesale energy transactions. It is expected that the Government will continue its commitment to REMIT or similar legislation post-Brexit.

Legal review of commercial agreements

It is recommended that all existing long-term contracts that renewable developers have entered into should be reviewed to determine the risk allocation between the parties and, in particular, who bears price and programme risk. Some of the key items for review include:

• Force Majeure and rights of termination – are there any hindrance or delay in performance caused by the effects of Brexit that trigger the force majeure clause and/or a right to terminate?
• Change in economics of the underlying contract – do any of contracts include any hardship, price variation or termination provisions that could be triggered by the introduction of tariffs and/or market volatility and/or exchange rate fluctuations?
• Compliance with Law – is there an obligation on either party to comply with law and if so, how is “Law” defined and could the effects of Brexit have an impact on the ability to comply with that obligation?
• Change in Law – how is change in law dealt with under the contract and what are the consequences of the same?

Conclusion

We have set out above some of the key impacts on the UK’s renewables sector arising from the Brexit result, however, additional areas or risk factors may develop as negotiations progress and the final form of agreement with the EU becomes clearer. 

Jonathan Cohen is a partner and head of energy at law firm Howard Kennedy. He can be contacted at Jonathan.cohen@howardkennedy.com