Paul Dawson is Head of Regulatory Affairs for RWE's Supply & Trading division. In our interview with him, we discussed Brexit’s possible effects on natural gas and energy trading, the importance of the market in influencing the eventual outcomes, and the level of risk posed to the United Kingdom’s energy security.
“What’s the best that can happen? We maintain the status quo. What happens if it really goes bad, however unlikely that is? What’s the worst that can happen?”
You are leading a Brexit boardroom here at Flame. Tell me, what is going to be on your boardroom agenda?
The boardroom is going to be an interactive discussion, so there is no set agenda. There’s a huge range of outcomes for Brexit, so I’m hoping to get some different perspectives from the attendees on where they see the real pitfalls, how they’re preparing, and what comes next.
Let’s start with the pitfalls then. What is it that people are concerned about?
Well the commission has put out a notice to stakeholders that highlights the possibility that interconnectors won’t work. That’s probably an unlikely scenario, but it’s the sort of thing that people want to hear about and prepare for in the event that that contingency did happen.
And is that something that can be prepared for, or is that something very much like wait and see what works and what doesn’t?
It’s difficult to prepare for such a huge range of possible outcomes. I mean, the likeliest outcome is that we maintain something very close to the status quo, and that the interconnections both on the gas and power side work very similarly to the way they do now. But with the UK government still failing to work out where it wants to go on the customs union, the risk to the overall deal is still there.
I wonder whether you are getting the feeling from the people that you are talking to that there are almost so many questions, that it’s almost impossible to start to think about the answers before you even know what the questions are.
I think that’s right, there are just a huge range of possible outcomes, and it’s very hard to prepare for such a broad range, particularly because I think some of them aren’t particularly likely. So I think you can maybe define the bounds. What’s the best that can happen? We maintain the status quo. And what happens if it really goes bad, however unlikely that is? What’s the worst that can happen? And you can think through those scenarios and hopefully be in a reasonable place to deal with them.
Do we have any regulations in place that could deal with anything like this?
We do. The European Union has regulations covering the allocation of capacity over the gas interconnections and the power interconnections. The concern is that those rules fall away when the UK leaves, and that leaves a gap. Having said that, it’s only relatively recently – the last three or four years – that those rules actually came into being. And the interconnections used to work fine beforehand, they work fine with third countries at the boundaries of the EU. So the expectation I think is that even if those rules fall away, there will be a way to reconstitute the contractual arrangements that made things work before, and that we will continue to flow gas in and out of the UK in pretty much the same way we do today.
I just wonder whether there’s a sense that actually the market will trump politics in this, and that actually whatever the politics turn out to be, and however that manifests – however Brexit manifests itself – actually the market will make the decision as to how they will see through whatever the outcome.
No I think that’s true, and particularly true with gas. I think it’s harder with other areas of regulation, like the emissions trading regulation, which is an EU scheme. So it’s very hard to be outside of the EU and be squarely within that scheme. But I think on gas, the fact that it’s an international market, and that you do have entry points for LNG in the UK and other places, I think it is an internationally traded market, and the market ultimately will find a way. But I think politically, the risk is that something in the politics leaves you with a hole that can’t be dealt with – probably on a short term basis that causes some short term dislocation. And that’s really what we’re trying to spot.
I think you start off by talking about a worst case scenario, but there must be other challenges and other challenges and other things that people in the boardroom I’m sure will be bringing up and discussing.
Yeah. It’s not just a large range of possible outcomes - it’s the depth of the issues this affects. It affects how we flow power and gas across the borders of the UK; it affects our people as European companies; it affects things like tax, contractual agreements – everything. And staying on top of that huge breadth of issues, across a huge range of outcomes is very challenging. So it will be great to get other people’s perspectives on that, because I find myself going around in circles sometimes, so it will be really really good to get some fresh brains on it.
What are you expecting to hear – what sort of reaction do you think you’ll get?
I don’t know. I mean what I’d like to hear with all this is it’s fine, it’s going to be okay. But I think that’s tempting, and you want to hear that, but the challenge is to really break it into bits and see what might not work.
From a UK perspective the most important thing always has to be energy security, and it has to be wherever the energy is coming from. Is there enough in place to override any further complications of other exporters to the UK that are concerned how it might go after Brexit?
I think the likeliest scenario is that we maintain something very similar to the way we do today, and we’re already dealing with those countries whether it’s Norway or LNG. So I don’t think there’s any scenario where you see the whole thing breaking from a security of supply perspective. I think the market will out, and if there is threat of that dislocation then we’ll see that reflected in prices, and that will bring forward a supply response. So I think we should see the market solve whatever happens. I think it would be wrong to overstate concerns about security of supply.
Okay. So this time next year, what will we be talking about?
We will probably still be talking about Brexit. I don’t think this one is done for a while yet.
