There is a fundamental tension between those in government advocating for complete immigration autonomy and those advocating for access to the European market, accepting that freedom of movement (even if moderated) will be required to achieve this. This will dominate the debate on most matters, including power and water.
1. Energy Industry needs access to the EU Internal Energy Market (IEM)
The energy industry is particularly well connected through the EU. The UK has helped drive the liberalisation of the European energy market with electricity and gas able to move relatively freely. There is strong opposition to any moves that will undermine this. UK access to the IEM can be secured without EU membership but the UK will need protections against changes that it cannot influence.
2. Continuity of Gas Supply imperative
In the short term, security of gas supply is likely to be the UK’s biggest concern. The government has a small majority in the Commons and will not want the lights to go out on them. The support for Hinkley C has a significant influence on the long-term energy mix but the short-term political concerns are likely to be a greater influence on the negotiations.
3. Water
European water markets are domestic and there has been little cross-border market integration. However, EU regulation of water quality, environmental and wastewater treatment have driven common standards across the EU. The UK may be able to reduce some aspects of EU water regulation post-Brexit – for example, to prioritise economics over the environment. However, as with energy, much EU regulation has already been transposed into UK law, suggesting that the scale of any EU “red-tape cull” is likely to be modest unless attacked root and branch.
4. Uncertainty is bad for business
The pound has weakened against the dollar and euro and now sits over 10 per cent below where it was prior to the referendum. As a result, the cost of imports has risen and the margins for investors have reduced significantly. These additional costs are likely to be passed on to customers wherever possible (and power prices have moved upwards already) but it remains to be seen whether the UK will be able to attract the scale of investment required to deliver the power and water infrastructure projects that it needs. The government’s proposed restrictions on foreign ownership of “critical infrastructure” risks further undermining the UK’s investment appeal.
5. The UK is still a member of the EU
The people have provided a close but clear view that they would prefer to leave the EU than to remain in it. However, no-one is clear what the terms of the exit would be and there is no legal obligation for the UK to leave. A significant number of EU members are undergoing domestic turbulence, much of this focused on issues such as migration and economic co-operation. It is likely that the implications of EU membership will be very different as a result of this domestic turbulence, whether the UK leaves or remains. It is entirely possible that by the time a settlement needs to be reached, the terms on which the UK would remain in the EU would by supported by the majority of its population. That would leave the government with a very difficult decision to make.