Brexit – Possible outcomes and their impact on the energy markets

UK
politics has been thrown into crisis recently, following continued
Parliamentary deadlock over Brexit. With no consensus on the Brexit withdrawal
agreement and multiple potential outcomes, we have outlined below, the possible
impact that each eventuality may have on the energy market. We have also looked
at the possible likelihoods of each outcome in the context of the current
political landscape.*

Outcome 1 – No-deal Brexit:

If
no withdrawal agreement is reached by 29th March and Article 50 is not extended,
the UK will leave the EU with no-deal. In this instance, the Sterling would
likely soften fueled by short-term economic uncertainty, driving up costs
associated to carbon allowances and increasing levies on power prices. The UK
relies heavily on imports of gas, particularly at a time when domestic storage
is restricted.

A depreciation of the Sterling would therefore be a bullish
driver of gas and power. It would also follow
that without adequate planning and exit from the customs union, imports of gas
via continental pipelines and power via interconnectors may be subject to
tariffs. Risks associated to gas and power imports may be offset however, as
the UK remains a key exporter of these commodities to the continent, and any
tariffs may be returned tit-for-tat.

Such
an outcome has sparked outcry from many MPs in the past few weeks, with the
majority of Parliament appearing to be opposed to such an outcome. It is
therefore unlikely that a no-deal Brexit scenario will come to pass – even if
PM May continues to defy calls to rule out the no-deal Brexit scenario.

Outcome 2 – Current proposal is passed:

If
PM May can pass her Brexit proposal with either minor amendments or assurances,
one would expect much the same action on gas prices. Power prices driven by
carbon allowances would likely experience volatility, as traded volumes
increase following a week of market participants exercising caution. On the
wider energy complex, increased crude oil volumes may be traded if the Sterling
strengthens significantly against the US Dollar – a slight bullish driver for
Brent as this would signify an increase in market demand.

This
outcome is looking less likely with every passing day. Negotiations between PM
May and senior MPs appears to have done little to ease concerns over the NI
backstop that both Leave- and Remain-oriented MPs have been so strongly opposed
to.

Outcome 3 – New deal is renegotiated:

If
the current proposal deadlock cannot be overcome, it follows that a new
withdrawal agreement could be negotiated. The energy markets over the course of
the renegotiation phase would experience volatility – particularly in the
Euro-based carbon allowances, and for the US Dollar-based crude oil. Gas and
power would at first glance be more heavily influenced by fundamentals rather
than currency changes. The exceptions to this rule would be the cost of
importing power/gas through continental interconnectors/pipelines, if the
Sterling weakened against the Euro. The impact of increased import costs for
power would be compounded by increased carbon allowance costs. Toward the
longer term, the price action for energy markets would be heavily influenced by
the state of the revised divorce agreement.

If
the current proposal continues to be rejected, and a new deal is sought after
(with or without an Article 50 extension), the probability of this outcome
would lie solely with EU leaders’ sentiment. The EU has stated that the
withdrawal agreement in its current form will not be amended. That said, the EU
may be wary of a no-deal scenario, and therefore may be willing to renegotiate
to avoid this.

Outcome 4 – New referendum is held:

Should
no withdrawal agreement be agreed upon, the Government may opt to initiate
another referendum, extending Article 50 to gauge public opinion on Brexit
proceedings. In this case, energy markets would likely experience participant
anxiety and therefore volatility during referendum debates. Trends would likely
correspond to the volatile actions experienced during the renegotiation phase
in Outcome 3.

This
scenario is a distinct possibility, with the Brexit impasse seemingly without
end. Opposition parties within Parliament have lobbied for such an outcome, to
afford the general public a “People’s Vote”. The probability of another
referendum is still somewhat low, with PM May remaining steadfast on passing
the current proposal.

Outcome 5 – Article 50 is revoked:

If
no withdrawal agreement is ratified, and the Government is not willing to (a)
extend Article 50 or (b) follow through with a no-deal Brexit, Article 50 may
be revoked. Should this come to pass, energy markets would likely follow the
trends of Outcome 2. Markets participants would be likely to engage with the
market following the lifting of UK-EU economic uncertainty.

The likelihood of this scenario is very low. PM May has
continually stated that it is her intention to follow through the result of the
2016 Referendum. Likewise, it seems unlikely that other party leaders would
defy the result of the 2016 referendum, for fear of the political capital is
would cost.

*Inspired Energy plc provide the report and the included
data it contains “as is,” and you use such materials at your own risk. Inspired
Energy plc make no warranties as to performance, merchantability, fitness for a
particular purpose, or any other warranties whether expressed or implied. No
oral or written communication from or information provided by Inspired Energy
plc shall create a warranty or representation in respect of such information.
Under no circumstances shall Inspired Energy plc be liable for direct,
indirect, special, incidental, or consequential damages resulting from the use,
misuse, or inability to use this report and the included data, even if Inspired
Energy plc has been advised of the possibility of such damages.