An Interview with Jostein Kristensen, Partner at Oxera in UK

Jostein Kristensen on impact of Brexit on UK Energy Supply

The looming EU referendum has caused sweeping uncertainty across the UK, and one sector facing significant disruption from a ‘yes’ vote in June is the energy market. Today the policy of the UK government is to subsidise imported electricity through capacity mechanism. In light of this, the UK is likely to impose tariffs on imported electricity in the event of a Brexit (Britain Exit). Currently, there is not a level playing field for British electricity generators to compete with their EU counterparts – differences in carbon prices and charges on generators between countries distort trade in electricity. Brexit could allow the UK government to mitigate such distortions by levying a tariff on imports on electricity.

Jostein Kristensen, Partner at Oxera (a global economics consultancy firm in UK) provides further insight about the impact of Brexit on UK energy supply.

Jostein Kristensen focuses on market analysis and regulation in the energy and related infrastructure sectors. He advises companies, governments, investors and regulatory authorities on antitrust and regulatory investigations, commercial disputes, and transactions. Within the energy sector, his work has covered coal, electricity (including renewable and nuclear generation), natural gas and oil.

1) Today the policy of the British government is to subsidise imported electricity through the capacity mechanism. In light of this, why we would impose tariffs on imported electricity in the event of a Brexit?

Jostein: The capacity mechanism is designed to ensure security of supply and incentives to invest in energy generation. In competitive markets like energy generation, you would expect these capacity payments to be passed on to consumers in the form of lower prices. It is unlikely that the capacity mechanism is subsidising electricity imports.

GB generators face a higher tax on CO2, as well as higher transmission and balancing charges compared to generators in the rest of the EU. This makes equivalent generation in connected EU markets cheaper than in GB, meaning that GB and continental EU generators do not compete on a level playing field. A tariff on electricity imports into GB could be used to level the playing field between GB generators and generators in connected EU markets.

2) Historically the government cares more about the price of energy than the security of supply. Why should the government be concerned by the security of the country’s energy supply in the medium/long term?

Jostein: Current generation capacity in GB is sufficient to meet peak demand. However, the retirement of (mainly) coal plants between now and 2023 will mean that the amount of flexible generation capacity in GB is expected to shrink in the medium term. Unless there are appropriate incentives for investment in new thermal generation capacity in GB, available capacity may slip below the level of peak demand in some periods in the not too distant future.

3) If security of supply was the greatest concern of the government, why would we subsidise imported energy?

Jostein: The current structure surrounding carbon taxation and charges on generators related to transmission and balancing costs are the product of many considerations that are unrelated to security of supply. Border tax adjustments or import tariffs, which are not allowed under current EU rules, could counteract the distortionary effects created by differences in CO2 taxes and in transmission and balancing charges.