Early Impacts of the Brexit Decision

Martin Sieh

On June 23rd, the people of the United Kingdom voted on a highly controversial issue: Whether or not the UK should remain part of the European Union, a referendum nicknamed “Brexit.” Their unprecedented choice to exit the EU may have a significant impact on business practices and energy policy in the UK and internationally.

The UK government still has to formally register its decision, kicking off a transitional period that will last until at least June 2018. Further uncertainty will exist until October, when England’s Conservative Party elects a new leader to replace resigned Prime Minister David Cameron. It’s far too early to know what the new arrangements and final terms of the exit will be.

Nonetheless, the potential repercussions of Brexit are on everyone’s mind. Ecova is here to work closely with our clients to monitor the developments and prepare for the transition—sharing our answers to some frequently asked questions as well as our strategies for addressing post-Brexit landscape shifts proactively.

 

Q. How will this decision affect Ecova’s services in the UK?

A. The services we currently provide in the UK will continue without change. The UK will continue to retain an important place within Ecova’s strategy. As part of ENGIE, Ecova is a global organization effectively serving clients in nearly 70 countries internationally—including other non-EU countries in Europe like Norway and Switzerland. We will adapt our processes as needed in response to changing UK policies, communicating any changes transparently and early on.

 

Q. Will non-British staff employed in the UK still be allowed to work there legally?

A. The employment of non-British EU-nationals based in the UK is not affected. Despite Brexit results, there will be no immediate changes to rules governing these employees’ right to work or freedom of movement. Ecova will continue monitoring conditions to ensure employed non-British nationals remain supported and informed as any changes occur.

 

Q. Will Brexit have any significant impact on workers in North America?

A. Because of this decision, North American firms with offices in the UK—particularly banks and financial sector companies—may shift operations to other countries in the EU. Should this happen, the transition will directly affect the firms’ employees in North America as well as other North American businesses who receive financial services from these entities. The subsequent economic impact of relocating UK offices will also have repercussions on the financial institutions’ clients.

 

Q. How stable is the pound and UK stock market?

A. Despite the initial post-Brexit plunge, market conditions have now stabilized to pre-Brexit levels. As of June 30th, the Financial Times Stock Exchange (FTSE) 100 Index had reached its highest level since August 2015. The pound continues to be weakened; however, this may actually benefit the manufacturing sector and lead to the UK regaining some industrial jobs. Our close monitoring of the market will position us to act quickly with regards to client purchasing strategy should conditions demand.

 

Q. What about the U.S. stock market and energy prices?

A. After a brief two-day rout, U.S. stocks have already recovered from Brexit losses, with the Dow and S&P 500 up several percentage points for the year. In the short-term, experts predict market volatility will continue until more clarity about post-Brexit conditions is achieved, especially since many of the major U.S. equity markets are near all-time highs. News headlines regarding the progress, or lack thereof, of the exit negotiations will fuel day-to-day market movement. The Federal Reserve will also delay any interest rate hikes, which should work to stimulate business and financial investment in the U.S. With the pound and euro weakening, the U.S. dollar will likely strengthen, which in turn will continue to weigh on energy prices. The budding U.S. Liquefied Natural Gas (LNG) exporting industry could face stronger headwinds as global LNG prices suffer due to weak crude oil prices. The trapped natural gas may also prolong the current supply glut, hampering natural gas and power price recovery. However, with so much uncertainty surrounding the situation, the extent of the short-term and long-term impact of this decision is still unknown.

 

Q. What does this mean for energy prices and demand in the UK?

A. Energy prices have fluctuated significantly since the Brexit decision, making the long-term impact uncertain. Currently, oil prices are down while gas and power prices are rising slightly. Moving forward, energy prices will be largely impacted by two main drivers: 1) Downward pressure on power demand due to elasticity in gross domestic product (GDP) and 2) Upward pressure on energy prices due to the depreciation of the pound and the euro. Experts advise against making reactive changes in strategy while the market is in flux. Ecova is monitoring the market in real-time to discover if this volatility is only a short-term trend, and will advise our clients accordingly about any recommended course of action or updated purchasing strategy.

 

Q. Will the Brexit decision affect climate change measures in the UK?

A. We assume that the UK’s climate change objectives will stay constant. Policies regarding carbon price, renewable targets and coal power plant closure are established at the national level, rather than through the EU. Early intelligence indicates the UK will continue to participate in the EU’s Energy Union, which seeks to ensure European access to secure, affordable and climate-friendly energy. We also believe the UK will keep implementing the EU’s Third Energy Package, a legislative bundle that opened up the gas and electricity market across the EU.

 

Ultimately, Brexit will have no immediate bearing on Ecova operations in the UK or Europe—but we will continue to closely track market conditions to help our clients proactively respond to the post-Brexit environment.

Stay tuned for more. Ecova will continue to provide updates on the potential impact of the Brexit decision.

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