It’s now been a week since the momentous decision by the British electorate to turn its back on EU membership, and the markets have responded with predictable volatility. The questions we are all asking, alongside the obvious ones about what form our exit will take, is how long will market volatility last, what will be the impact on the UK investment climate, and whether we are facing an extended period of economic contraction.

As this is a largely unprecedented situation, by definition there are few clues as to what lies ahead. Some draw a level of comfort from the experience of Switzerland in 2014 which voted to amend its constitution to introduce preferential treatment for Swiss citizens in the job market, in conflict with the EU’s rules on Free Movement of People. Quarterly GDP fell in the quarters after the vote, but subsequently recovered, and while the Swiss franc fell slightly against the US dollar, it strengthened significantly against the euro throughout 2015, forcing the Swiss National Bank to abandon the currency cap and highlighting the franc’s ongoing status as a “safe-haven” currency.

There has also been some commentary around the impact on the Swiss energy market, as the vote meant that negotiations on electricity trading between Switzerland and its neighbours were suspended. Particularly affected were negotiations relating to flow-based market coupling, which according to the article linked above, has had a double-digit adverse effect (in CHF) on the Swiss energy market.

 

What next for the UK energy market?

The UK market continues to face many of the same challenges it did before last Thursday. A narrowing supply balance, high consumer costs, a decarbonisation agenda that has seen the roll out of a new generation of small diesel units winning capacity contracts, investment uncertainty for both conventional generation and renewables in a changing subsidy environment.

The government now has an opportunity, free from the constraints of EU directives and state aid rules, to define the future energy market that is right for the UK. So what are the choices available to the government, and what should they do now? This is an opportunity for creative thinking from stakeholders across the industry to set out their view on the way forward.

Smart meters
As described in a previous post, I am sceptical that the current smart meters programme will deliver the objectives of the government. The obsolescence risk alone convinces me that this programme is premature, and by abandoning it much of the £11 billion price tag can be immediately saved. The risks of delaying the scheme to a future time when it is more affordable and the technology is more mature seems to carry minimal risk and so is an obvious first step.

 

Continued…

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