Energy Traders Brace for Market Chaos in No-Deal Brexit

(Bloomberg) -- The possibility of Britain exiting the European Union without a deal is coming into sharper focus for power, natural gas and carbon allowance traders as futures for next month start to expire.

A no-deal Brexit could rattle traders because of the complicated links that hold the EU energy market together. For example, natural gas produced in Norway can be shipped to Zeebrugge in Belgium, where it’s then piped to England to feed a power plant that sends electricity to millions of homes and businesses. Layers of environmental rules and market and financial regulations make the connections even more complex.

“People might hesitate if there’s uncertainty on the ability to deliver,” said Munir Hassan, a partner at CMS, a law firm that has a division specializing in energy. “It’s an interconnected series of actions that happen. Any link in that chain can be a problem. If one person says they’re a bit concerned about this, the mood can ripple across.”

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Questions about what might happen are darkening the climate for investment in the U.K. energy industry. The Big Six utilities led by Centrica Plc are already counting the cost of a tariff cap and a plethora of smaller competitors. Japanese investors Toshiba and Hitachi have walked away from billion-dollar nuclear projects that were part of Britain’s 100 billion-pound effort to replace aging power stations.

‘Known Unknowns’

Most of the “known unknowns” about Brexit have been addressed, yet there’s still a chance something might go wrong, said Tor Martin Anfinnsen, senior vice president for marketing & supply at Norway gas producer Equinor ASA.

“There are so many algorithms and so many manual processes that need to work. Some of those might have been overlooked,” he said in an interview.

And with five weeks away before the U.K. departure date, energy traders are still at a loss as to what will happen and whether markets will surge as they did two years ago. The day after Britain voted to leave the EU in June 2016, benchmark gas prices soared in one of the year’s biggest gains, as the plummeting pound made imports cost more.

Some possible outcomes for power, gas and carbon in a no-deal Brexit:
  • U.K. power prices surge. As Britain is a net importer of electricity, shipments from neighboring France are a crucial element of supply
  • Carbon emission prices plunge. As U.K. emitters crash out of Europe’s emissions trading system, they may sell any spare pollution rights they had to meet environmental rules in the future
  • Coal burning surges. With no replacement tax for the EU emissions market in the U.K. until April 1, there will briefly be no penalty for burning the dirtiest fossil fuel under a no deal scenario
  • U.K. demand for liquefied natural gas cargoes jumps to replace missing piped gas

In a no-deal Brexit, traders may hesitate to trade or even seek to wiggle out of contracts should prices fluctuate wildly.

“If there’s enough money on the table, people will try everything,” CMS’s Hassan said.

So far, markets seem to be downplaying the risks. U.K. natural gas futures for March are fetching about 1 percent more than contracts for April and 2 percent on those for May. The March futures expire Thursday on ICE Futures Europe and April becomes the benchmark.

Energy Traders Brace for Market Chaos in No-Deal Brexit

A cold snap, a demand surge or a significant pipeline or nuclear outage could further increase risk of supply shortages and increased volatility. Last winter, freezing weather roiled markets.

To keep things moving, U.K. and EU officials may announce a series of “no-deal deals,” including for energy, but this is unlikely to happen until very close to March 29 because both sides are still holding out for an overall agreement, Hassan said.

Still, those comfort-providing no-deal agreements, while possible, may never come to pass, said Silke Goldberg, a partner at law firm Herbert Smith Freehills LLP who specializes in energy law.

“The EU has always said it’s not going to do sectoral deals,” Goldberg said.

Earlier Coverage
  • Oct. 17: Crunch time looms for British Emitters
  • Nov. 20: Coal pollution could surge in a no-deal Brexit
  • Nov. 28: Brexit Worry Hits London Energy as Brokers Rushing to Continent
  • Nov. 30: Europe’s carbon market eyes two scenarios for post-Brexit trade

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