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Brexit leading to increased energy prices

Brexit-leading-to -increased -energy -prices

Research by UCL stated that consumers on an average paid $95 more in the year after the EU referendum for gas and electricity

A hard Brexit could lead to a further average rise $77 per year in the event of further devaluation of sterling to pound-euro parity.

UCL researchers found that energy bills increased overall $2.54bn in 2017 due to the lower value of sterling relative to the euro and the US dollar. On an average, there was a rise in prices of electricity and gas by 18% and 16% respectively in the year after the referendum, which translated into a $44 increase for electricity and $50 for gas.
The lead author, Dr Giorgio Castagneto Gissey, from the UCL Bartlett School of Environment, Energy & Resources, stated: “We know that exchange rates fell after the EU referendum but we can now look at the effect this had on wholesale and consumer energy prices.”

“The exchange rate depreciation plus the fact that energy prices are now much more volatile means consumers have been paying more and are facing even higher bills over the next several months.” He added.

Wholesale gas prices made up 39% of the price paid by the consumers, so the 16% increase resulted in a 6% increase in retail prices. The variability in wholesale gas prices increased by 60% in the year after the vote.

Co-author Professor Michael Grubb, also from the same school, said: “Forecasts always carry some uncertainty, but this research pinpoints historical fact: the referendum result, through its impact on exchange rates, has been the principal factor driving up UK household energy prices over the past two years.”

The Government passed a law in July giving Ofgem the power to set a price cap, and subsequently a cap said to save the average household $95 a year on standard tariffs has also been proposed. The predicted price rise of a further $77 resulting from a hard Brexit, breaks down into $36 from electricity and $40 from gas.

This corresponds to a predicted extra $1.91bn added to consumers’ annual energy bill from the end of March 2019 to the end of March 2020.

The academics, who analysed the behaviour of the wholesale electricity price in the UK alongside the sterling to euro exchange rate between 2012 and 2017, found that dramatically falling exchange rates after the EU referendum led to increased electricity prices over the subsequent year—which offered a direct reflection of the higher costs of energy imports.

The prediction following a hard Brexit is based on an assumption of a further depreciation of sterling to sterling-euro parity, with a 12% drop from the exchange rate of 1.14 on the 3 November 2018. The change in annual bills was calculated assuming everything else is held constant between 29 March 2019 and 29 March 2020.

The researchers also took other major European markets in consideration in order to understand the principal determinants of electricity. The countries included Germany, France, Italy, Spain, Netherlands and Norway, in the time period ranging from 2012 to 2017.

Great Britain was overall found to be among the most cost-reflective of a sample of European electricity wholesale markets.

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