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Brexit and energy

26 April 2017

The article at a glance

Britain can play the role of an innovative ‘California’ in addressing European energy policy issues post-Brexit, says Professor Michael Pollitt of Cambridge …

Category: Insight

Britain can play the role of an innovative ‘California’ in addressing European energy policy issues post-Brexit, says Professor Michael Pollitt of Cambridge Judge Business School.

European Union and British Union flag flying

Professor Michael Pollitt
Professor Michael Pollitt

Brexit could lead to the UK playing the role of an inventive “California” within Europe in promoting experimentation and the use of new technology in tackling energy policy issues, according to a new paper by Michael Pollitt, Professor of Business Economics at Cambridge Judge Business School.

California often promotes innovation, owing to the relative slowness of procedures at the federal level in the US, and Britain may play a similar role within a relatively slower Europe in innovatively addressing energy matters.

The UK has led the world with large-scale local experimentation with its Low Carbon Networks Fund (now called Network Innovation Competition), but such local experimentation is “not well suited” to central direction from the European Commission, says the paper – “The Economic Consequences of Brexit: Energy”, published in the Oxford Review of Economic Policy.

“This suggests that the UK can play the role of a ‘California’ within Europe in promoting experimentation, the use of new technology and seeking to innovatively address energy policy issues,” the paper says. “The key is that such an approach actually does promote productivity growth rather than productivity regress, and is not captured by industrial policy interests.

“The UK needs an efficient energy sector in terms of the use of resources. The good news is that its RES (renewable energy sources) sources of supply – in particular wind – are relatively abundant in the UK.”

Professor Pollitt discussed aspects of the paper at a Business Briefing in London in March, part of a series of events organised by Cambridge Judge at the offices of BNY Mellon.

Energy plays a significant role in UK tax revenue, with around six per cent of all tax revenue being levied on the energy sector. And although the country imports large amounts of oil and gas, it has relatively little dependence on the EU, Pollitt writes.

“While the single market in electricity and gas is an impressive achievement of the EU in terms of the degree of standardisation and common access, the size of the measured benefits remain small and difficult to qualify,” the paper says. “So it’s difficult to see how UK will lose much at least in terms of energy, even from a ‘hard’ Brexit.”

The paper discusses three major energy goals: energy security, low prices and environmental targets.

It suggests that energy cost shouldn’t be affected by Brexit; energy security might be affected if Ireland, France, Belgium and the Netherlands are less willing to co-operate, as “it is impossible to see how individual EU member states can sign treaties with the UK to preserve market access”; environmental targets are currently set by the EU Emissions Trading System that Britain is part of, and it would be mutually beneficial for the UK to continue to be part of this.

The paper concludes by highlighting the possible energy opportunities presented by Britain’s leaving the EU, including reforming subsidies, revisiting the rolling out smart meters, and relaxing unbundling rules.

“It is therefore possible that the UK will be freed up to lead the way globally on a new round of electricity market reforms, in a way that might not have been possible under continued membership of the EU,” the paper says. “However the UK needs to be careful that leaving the EU introduces more not less cost effective/cost beneficial energy policy, given its historic capacity for adding unnecessary cost to well-intentioned EU-driven policies.”