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Why wind needs to buckle up for a Boris Johnson Brexit

OPINION | As the likelihood of a 'no-deal' exit from the EU grows under a new government, developers and suppliers need to be prepared, writes Andy Strowbridge

Whether you are a passionate 'leaver' or 'remainer', most people should be able to agree that a no-deal Brexit looks more likely under the new government of Boris Johnson than it did under Theresa May, so the importance of being prepared has grown too.

It is still not certain whether a no-deal will happen as the political and constitutional pathways remain unclear. Note also that a no-deal does not rule out a future free trade agreement with the EU, but this, and most other agreements, will take time to put in place.

So, what would change soon after a no deal? Major changes we expect include:

  • The value of sterling will drop further as the no-deal exit gets closer and more certain. Many observers expect parity between sterling and euro, a low for the pound never seen before. It will remain volatile for some years after as the implications of a no-deal work their way through.
  • The Governor the Bank of England, Mark Carney, has warned of a "real economic shock".
  • Increased bureaucracy and checks at UK borders will lead to delays. Initially these will be serious, although we expect they will reduce over a period of months.
  • World Trade Organisation (WTO) terms will apply to imports and exports. This will put tariffs and quotas on most industrial goods used in the wind industry. Theresa May’s government proposed to waive these in the short term on selected goods to mitigate the shock to the economy. As a reduction in tariffs cannot be selectively applied to particular countries under WTO rules, this would mean all imports become tariff free, not just those from the EU. We think that the government would not do this for long as it would remove a key incentive for countries to negotiate a trade agreement.
  • For steel in particular, there would not be tariffs if existing volumes continue, but tariffs would apply outside that quota. In addition, UK Steel estimates 4-5% would be added to the cost of a tonne of steel through additional administration, costs and border delays. Logistics complications would also encourage many EU customers to seek alternative steel providers.
  • British workers working in the EU may well need visas to cover their work.

How could this affect the wind industry?

Developers based in the UK are likely to face; extra administration and hold ups on delivery of spare parts from the EU, for a few months; an increase in costs for projects, due to the likely tariffs and the change in the exchange rate; and increases in UK electricity prices, as more than 40% of our gas is imported, as is around 10% of our power.

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For developers who do not use sterling as their accounting currency, in addition to the above, returns will be devalued, as warned by Orsted this week.

Manufacturers based in the UK are likely to face an increased cost of imported materials or components due to tariffs and the expected fall in value of sterling, and improved domestic and export competitiveness, assuming sterling depreciation outweighs tariff and raw material cost increases.

Investment in complex manufactured products needs long term stability. Much of it has been on hold for three years now and would still be challenging. We expect uncertainty over policy direction, exchange rates, tariffs, administration and customs delays to persist for years. The fall in sterling and resultant potential for inflation combined with general uncertainty, could also increase the cost of capital.

In the case of manufacturers exporting, exports to the UK will be less attractive because of the double whammy of exchange rate change and tariffs. International parent companies may realign supply chains, where possible, manufacturing more components for UK projects in the country, and moving manufacture for non-UK projects out of it.

"The fundamentals of climate change, which drive the energy transition, remain."

For service providers, under a no-deal Brexit, trade in services would be governed by the WTO’s 1995 General Agreement on Trade in Services (GATS) which may mean service companies are restricted from doing cross-border business. It is even possible that UK companies could lose the right to sell services directly to the EU, and this risk could have more of an effect than tariffs on foreign companies awarding contracts to UK firms

Would UK energy policies change?

It is difficult to predict the what any UK government will do. We expect they will need to stimulate growth but room for a fiscal or monetary stimulus to counter any no-deal economic drag is likely to be limited.

What we do know is that the UK will remain one of the world’s largest economies. The fundamentals of climate change, which drive the energy transition, remain the same. The UK’s natural offshore wind advantages of strong winds and large, shallow continental shelf remain. The benefit of interconnection with close neighbours to support higher penetration of renewables also remains unchanged. With the cost of imported energy increasing, we do not expect the plans for 30GW of offshore wind by 2030 to be reduced.

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The UK would have more freedom to enforce local content requirements, but we think this is unlikely as this could also increase prices.

Change, whether it is perceived as good or bad, always brings opportunities for those who prepare and respond decisively. As with surfing, you can’t stop the waves, but you can choose which wave you get on and how you ride it.

So regardless of your perspective, I would recommend all firms in the industry to make sure they have appointed a senior person to be responsible for planning for a no-deal Brexit. Read up, consult widely and prepare to mitigate the problems and embrace any opportunities you can identify.

Andy Strowbridge is associate director at BVG Associates

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