Navigant Research Blog

The Automotive Industry and Brexit

— July 1, 2016

Electric VehicleThe referendum on the United Kingdom’s membership in the European Union (EU) had been a long time coming. In 1975, the country voted to join what was then the Common Market. Despite multiple treaty changes and political promises, no referendum was offered until June 23, 2016, when the majority (52%) of voters chose to leave the EU.

The EU was established as a customs union to set tariffs on goods coming from outside the EU, with member states not allowed to negotiate their own trade deals. Every deal made by the EU is binding on all members. The EU is a tariff-free trading area among the member states.

Because of the need to wait for a new prime minister and extensive treaty negotiations, the Brexit process is expected to take 2 years or more. The biggest unknown facing business is the nature of trade after the exit. Will there still be free trade between EU countries and the United Kingdom, or will tariffs be introduced? If tariffs, at what rate? If no new deal is made, the World Trade Organization (WTO) rules mean the United Kingdom and EU would be obliged to apply to each other the tariffs and other trade restrictions they apply to the rest of the world. Other possibilities include membership of the European Free Trade Association and/or the European Economic Area, or even a unilateral free trade policy (e.g., Hong Kong). All of the options must be considered by the U.K. Government, so a quick decision is unlikely.

The Automotive Impact

A free trade deal for goods between the EU and the United Kingdom would allow OEMs and suppliers to continue business pretty much as usual. European manufacturers are likely to lobby hard for such an arrangement, both to continue selling U.K.-built vehicles in the EU and to retain access to the lucrative U.K. market for vehicles assembled on the continent. Car buyers in the United Kingdom may benefit from lowering or eliminating tariffs from countries outside the EU, putting downward pressure on pricing.

In a scenario where WTO tariffs are imposed between the United Kingdom and the EU, new free trade deals could cause changes in business processes across Europe. The United Kingdom has the potential to become a European hub for international trade, building cars mainly for local sales and export to non-EU countries. If that happens, in the longer term there will be a need for suppliers to invest in parts manufacture in the United Kingdom. No longer restrained by EU state aid rules, the U.K. government would be able to offer additional support to companies that wish to open new facilities. Factories within the EU could then focus on producing vehicles for the internal market.

An Industry in Flux

It is, however, important to recognize that this new European trading issue comes at a time when the industry is facing major changes due to other factors such as stricter emissions regulations, greater powertrain electrification, autonomous driving, wireless connectivity, and the growth of carsharing and ride hailing. The Navigant Research white paper Transportation Outlook: 2025-2050 offers more insight on these changes. The United Kingdom could become a test bed for new technology before it is rolled out globally.

While industry waits for the U.K. Government’s detailed trade negotiations with the EU, automotive companies can take advantage of the short-term business-as-usual to analyze their engineering and business processes and value chains so that they are prepared for any outcome. There is potential for increased efficiency and profitability in the long term for those companies that adapt best to embrace the future of clean mobility on demand. Brexit may turn out to be a catalyst for positive change.

 

What Does Brexit Mean for the United Kingdom’s Energy Policy?

— June 27, 2016

Energy CloudOn Thursday of last week, Britain voted to leave the European Union (EU) in a referendum known as Brexit. The vote to leave won 52% to 48%, with 17.4 million voters in favor of leaving the EU and 16.1 million voting to remain. In the wake of the vote, the world has expressed mixed feelings on the outcome, including rage, frustration, excitement, anger, pride, and sadness. While the vote may not mean a huge shift for in the energy field, it is a historically significant event, not only in Britain, but for the rest of the world as well. One of the largest initial changes to occur as an outcome of the vote is that Prime Minister David Cameron, a leader of stay campaign, will resign. The pound plummeted to its lowest level since 1985, and further economic impacts are yet to be determined. Britain is the first nation to leave the EU, and one thing is clear: the vote means significant global change and uncertainty.

The EU’s Energy Directives

The EU has been a leader in energy efficiency regulations and requires its member states to create and update their own National Energy Efficiency Action Plans every 3 years. The requirements set forth by the EU have pushed member states to proactively create and enforce their own policies surrounding increased energy efficiency, greenhouse gas (GHG) emissions reduction targets, and increasing renewable energy.

Navigant Research’s Global Energy Efficiency Policy Analysis report discusses the role of the EU in driving global energy efficiency policy. The United Kingdom’s GHG emissions target is to reach 80% reductions below 1990 levels by 2050, in compliance with the EU’s minimum regulations of 20% below 1990 levels by 2020. The EU’s Renewable Energy Directive aims to minimally fulfill 20% of its total energy needs from renewables by 2020, which is set to be achieved through the accomplishment of individual member targets. Even within the EU’s already notable energy efficiency requirements, the United Kingdom is a leader in many policies, having surpassed many base requirements.

Brexit and the EU’s Energy Policies

The EU’s targets for GHG emissions and renewables are based on all member states achieving their individual goals. The exit of Britain from the EU does not mean the EU will no longer be able to achieve its targets, but increased targets will need to be met in the remaining member states to make up for Britain’s portion. In 2010, only 7% of the United Kingdom’s electricity came from renewables, but this increased to 18%-19% by 2014 and is on target to reach 30% by 2020.

While Brexit would mean the United Kingdom can relax on some efficiency policies, overall, it would not drastically affect the country. The Climate Change Act requires tougher GHG emissions targets than the base EU requirements. In order to hit the 30% renewable goal, many projects, such as new wind farms, have been given subsidy contracts and granted planning authorization. The vote won’t affect the project to build the Hinkley Point nuclear power station, as EDF CEO Jean-Bernard Lévy stated that, “We think that this vote has no impact on our strategy.

Leaving the EU will make it easier in the future for Britain to relax its energy policies and emissions targets, as these changes would only require domestic legislative approval. Even if Britain does not change its policies after its exit from the EU, it will lose other valuable assets, such as negotiating support with Russia, which supplies the country with 16% of its energy imports.

With the all the uncertainty surrounding Brexit, there is no way to predict the impact this vote will have on energy policies in the United Kingdom and the EU, but they could become a dominant subject in the years to come.

 

Efficiency Directive Could Boost Energy Services in Europe

— May 27, 2014

Last month the United Kingdom published its National Energy Efficiency Action Plan (NEEAP) in compliance with the European Union (EU) Energy Efficiency Directive (EED), which is to be legally implemented by June 5, 2014.  Addressing energy efficiency in the broadest sense, the EED targets a 20% reduction in primary energy consumption by 2020Responsible for 40% of final energy consumption and 36% of greenhouse gas emissions, the building sector constitutes a key target for this directive.

The EED is as remarkable for its comprehensive coverage as it is for its ambitious goals.  Compared to previous measures such as the Energy Performance of Buildings Directive, the EED is distinctive in targeting the existing building stock, not just new construction, and thus engages with an important and previously neglected source of energy consumption.  In formulating their responses, member states must construct long-term renovation strategies that address the specific characteristics of the building stock in their countries.  For companies operating in the smart building sector, the published Energy Efficiency Plans (EEPs) hint at some potentially promising market developments.

Frame in Place

Unfortunately, all but three EEPs (from Denmark, the Republic of Ireland, and Croatia) were criticized in a report published by the Coalition for Energy Savings for lacking detail, miscalculating savings targets, and relying heavily on exemptions, collectively reducing the potential annual decrease in primary energy consumption to 0.8% from the targeted 1.5%.  For the United Kingdom, traditionally considered a leading market for energy efficiency in Europe, such a finding is disappointing.  Yet, the plans do illuminate the routes that EU member states are choosing to pursue to accomplish their energy efficiency goals.  Significantly, the U.K. NEEAP advocates the establishment and expansion of the energy services sector as a cornerstone aspect in realizing a low carbon building stock.  As a nascent business model in Europe, the policy attention directed at energy performance contracting (EPC) could help energy services across Europe.

To promote the EPC model, especially among small- and medium-sized enterprises, the U.K. government will provide additional information on typical contracts, maintain a list of accredited EPC providers with the development of quality labels, and deliver a guide to best EPC practices.  Referring to Greater London Authority’s innovative RE:FIT pilot, in which public organizations use energy service companies (ESCOs) to implement energy efficiency measures along with boarder energy management plans, the U.K. NEEAP asserts government ambitions to roll the RE:FIT program out nationally.  That could significantly expand the market opportunity for ESCOs.

Thus, even though national responses to the EED have been criticized for their shortcomings, they represent an unprecedented framework for addressing the energy consumption of Europe’s aging buildings.  In the United Kingdom, this is being translated into favorable terms for the ESCO market.  It will be interesting to see to what degree the EPC model can penetrate the U.K. market.

 

Winter Coming, Europe Looks to Battery Storage

— November 7, 2012

As Europe prepares for the looming winter season of high peak electricity demand, large grid operators and utilities in Europe are increasingly looking to the value of battery storage on the grid.  Several notable projects have emerged this year that highlight a preference for established battery providers and for one battery type: lithium ion.  Each highlights a different potential pathway to market for advanced batteries in Europe.

Italy and Spain, both markets that lie at the edge of the European Union’s emerging Super Grid, are now home to two significant lithium ion battery installations.  In Italy, which imports significant volumes of power, Enel has awarded a contract to NEC for the installation of batteries at a substation in the southern region of Calabria.  While no substantive details about the project have been released, NEC brings nearly a century of experience developing technology and a global presence to the project.  Working directly with the utility Enel highlights one potential pathway through which batteries might populate the grid.

In Spain, renewables developer Acciona has partnered with Saft to pair utility-scale solar with a 560-kilowatt-hour lithium ion battery installation. The falling costs of solar power are driving solar installations globally, but distributed systems pairing solar with batteries have only begun to emerge, thanks to unique financing mechanisms like solar leasing.  What Acciona and Saft are undertaking may highlight what independent power developers can do with bulk solar and utility-scale battery systems, when backed by significant experience and capital.  Acciona’s 2011 revenues exceeded €6 billion.  In this case, the business models for developing merchant power plants that combine renewables and batteries remain unchartered territory.  The coming years will be illustrative to this end.

Providing market experience and technical knowledge, these projects could open the door for battery storage.  With each installation the grid storage industry discovers a new technical or market issue, either resolved or in need of modification.  The pace at which the industry is developing could allow for the emergence of new technologies, ones that may be more cost-effective or technically savvy.

These two projects highlight different approaches to battery storage development, with Enel embodying a growing technical need for storage on the part of utilities.  Conversely, Acciona may offer a glimpse of a merchant developer approach.  Regardless, with these early projects, Saft and NEC are carving out important first-mover positions in the European market, relying on reputations of technical achievement and deep pockets which will help them bridge the gap to the emergence of a commercial market, a market Pike Research believes is still a number of years out.

 

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