The Brexit referendum campaign has generated much heat but little light as the leave and stay campaigns trade claim and counterclaim in an attempt to answer the Pythonesque question – what has the European Union ever done for us?

The campaign, labelled by many as Project Fear, has been characterised by a series of striking claims. The leave side has warned that a vote to stay would endanger the NHS and realise the dreams of Napoleon and Hitler, while the remain side, now colloquially referred to as Bremain, warn that a vote to leave would be an economic catastrophe, would add a remarkably precise £232 to the cost of a holiday and increase the chances of World War 3!

BrexitWe have seen opinion polls tighten in recent days, with the Financial Times poll of polls now showing both sides neck and neck with 43% in favour of remaining and 43% intending to vote leave.

The spectre of Brexit has hung over the UK economy, like a sword of Damocles, for much of the year as uncertainty and speculation around the vote dominate political and economic discourse. The result will have obvious repercussions across European and global markets, but has particular significance here in Ireland given our strong economic, social and geographic links to the UK.

As we approach the 23rd of June referendum date, what impact is a leave vote likely to have on the structure of energy markets, particularly in Ireland which imports a significant portion of its energy requirements from the UK?  Any disruption to this trade would have a profound impact on our energy market and economy.

If we assume the worst and the UK votes to leave the EU, we would expect to see sterling weaken materially. New arrangements would have to be put in place governing the UK’s relationship with the EU. The vote for Brexit would trigger an application to withdraw under article 50 of the Lisbon treaty. This Article provides that the EU will negotiate a new agreement with the withdrawing country over two years. This can be extended, but only by unanimous agreement.

If we focus on the energy area, it is obvious that Ireland and the UK have become part of an increasingly integrated European market for electricity and gas. The move towards a single market for energy and the Energy Union brings benefits for all members. The single market increases security of supply at reduced cost benefitting all members.

If we look at a House of Commons report (Leaving the EU) published in 2013, it stated that a single market in energy has many potential benefits and concluded “given the multinational nature of energy markets and companies, even withdrawal from the EU would probably not affect the direction of travel.”

The likelihood is that the UK would follow the example of Norway and Switzerland who are non EU member states but are an integral part of the EU’s energy markets and do not face the imposition of energy tariffs. The UK is likely to remain part of European integrated gas and power markets just as Norway is a key part of Europe’s gas system and Switzerland a key gas and power transit state. The UK could retain almost all the energy market benefits of EU membership if it were to negotiate an energy relationship akin to Norway under its membership of the European Economic Area (EEA).

However, in this scenario, while the UK might be consulted it would not have a vote on EU legislation in this area. Whether the UK would be prepared to accept hand me down rules from the EU is a key question. In addition, the EU would have lost an influential supporter of energy market liberalization and a strong advocate of market-led approaches to challenges in the energy arena. The withdrawal of the UK may well reduce the drive toward integrated energy markets and key reforms in areas such as the emissions trading.

The impact of a Brexit on energy markets is far from clear. It will depend, to a large extent, on negotiations yet to take place by parties yet to be determined.  One would hope, however, that all parties would recognise that the UK is part of an increasingly integrated European market for electricity and gas and that the move towards a single market for energy and the Energy Union brings significant benefits for all members. In the event of a vote for Brexit, the UK is likely to attempt to reduce the impact by maintaining cooperation and policy alignment with EU on energy and climate policy.

Bord Gáis Energy has a team of experts who examine and report on the global energy market every day, and develop the monthly Bord Gáis Energy Index. Over the next few months, the team will provide some insight into the drivers behind wholesale energy price movements which will feed through to the  price of the energy used by Irish businesses and residential consumers.
Written by Joe Egan
Joe has worked on the Bord Gáis Energy gas trading desk since 2014, managing gas positions and exposures for retail and commercial customers. Before joining Bord Gáis Energy, Joe worked in equity markets in Ireland and London as a Private Client Portfolio Manager. He also held roles in Institutional Sales marketing Irish equities internationally. Joe holds a Masters Degree in Economics and Finance from Cambridge University.