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.


Consumer Choice in the U.K. Energy Market, Part 2

— June 24, 2016

TabletIn my previous post, I discussed my experience changing energy providers in the United Kingdom and the surge in market share of new players (known as independent providers). This time, I’ll talk about some of the propositions the new players are offering to attract customers.

When I did my research to choose my new energy provider, I was surprised by the number of companies that are now in the market. Back in 2012, the first time I switched providers, there were 14 companies available according to Ofgem, but I can only remember the Big Six and a couple of premium green providers. As of December 2015, Ofgem reports 32 energy providers.

Differentiation through Pricing

Providers are trying to differentiate themselves by using different selling points. The most obvious area to compete in is pricing, and as expected, there are several undifferentiated providers focusing on price alone. Their effect on the average retail price in the United Kingdom is apparent, but some other companies are bringing new ideas to the table.

From variable prices to 3-year fixed prices to different levels of greenness to buy local options like Bristol Energy (a company owned by the city council), companies are trying to stand out from the crowd. Tempus Energy offers a so-called sunshine tariff, which matches prices with peak solar generation for customers in areas with high solar penetration. Others offer smart energy hubs and management tools as a hook for the service. I couldn’t find any that would manage your house for you to reduce consumption, but Tempus Energy does offer some flexible contracts for commercial customers that include time-of-use rates in their tariff structure as well as demand-side management. Most of the new players don’t have generation assets, but others—like Octopus Energy—started as renewable project developers and then moved into retailing.

Better Options Needed to Fit Consumer Needs

It took some time for Ofgem to simplify the switching process enough to make it hassle-free, and a faux pas from the Big Six’s price strategy helped encourage people to take the plunge and make the switch. But now that the process is in place, I can see energy shopping becoming a yearly ritual. It is up to energy providers to develop options that better fit consumers’ needs and tastes.

During my latest switch, I went for a contract of 100% renewables generated by the provider’s solar and biogas projects, which beat most of the competition in price. I also chose a variable rate without any exit fees. For the time being, I don’t see a price spike coming unless the United Kingdom gets a long, cold winter in 2016. But I’ll be happy to switch if something better comes to the market.


Consumer Choice in the U.K. Energy Market, Part 1

— June 15, 2016

AnalyticsThis May, I switched my energy supplier for the second time in the 13 years I have been living in the United Kingdom. The first time I switched, back in 2012, it was a painful process that took over 6 months and involved long calls with three different energy suppliers (my first choice told me they couldn’t offer me their service 2 months into the process), my electricity network operator (UK Power Networks), and my gas network operator (National Grid). It was a frustrating experience, but being that I’m involved with the industry, I followed along until the end.

I wasn’t really looking to change my energy provider for this second switch, but I had used a price comparison site to renew my telephone contract earlier in the year and kept receiving emails with tempting deals.

A Streamlined Process

This time, the process was completely different. Overall, once I had chosen my new provider, the switch took about 5 minutes of my time, mostly to fill out a short form with my details to set up an account and send my meter readings to my new provider through their app. I estimate the whole process took about 2-3 weeks in total, but I don’t really know how long it took as all the dealings were between my old and new providers and did not involve me. I all know is that this June, the bill came from my new provider and it was about 20% cheaper than before.

Apparently I’m not the only one changing energy providers. A recent report on U.K. energy suppliers market showed that the combined market share of the Big Six established players (British Gas, RWE npower, EDF Energy, ScottishPower [Iberdrola], SSE, and E. ON) fell 5% for the second year in a row between June 2015 and June 2016. New players now control 17.4% of the market, up from about 1% in 2012, the year I switched my energy provider the first time.

More Customers Making the Switch

Recent data from U.K. regulator Ofgem shows that 53% of all switches in March 2016 were to independent suppliers, up from 35% a year ago. The total number of switches has also reached a new high, hitting 454,000 in March—16% more than in February.

Switches in March were the second highest for a month since 2010 and only the second time more than 400,000 customers moved companies in any given month. The record was set at a whopping 606,000 in November 2013, when the Big Six were caught in a media storm when they tried to raise retail prices when wholesale prices were falling.

While the number of customers switching in November 2013 is impressive and retrospective, the switch happened in a moment in which consumers realized that the legislation to simplify switching was working. I find the new high more interesting. This time, new providers are convincing people to switch companies even though the United Kingdom had a very mild winter and energy prices are at the lowest they have been since 2009—in other words, retail energy prices are not making headlines.

Players in a new, fragmented, and fiercely competitive market will need to bring new propositions into the market to attract and retain customers. Some of the emerging propositions in the U.K. market will be explored in the second part of this blog series.


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