Brexit and Irelands energy supply: time to look seriously to LNG?

By Seán Kelly MEP, (pictured)
Autumn 2017

Sean Kelly, MEPThe United Kingdom's decision to leave the EU has brought with it significant uncertainty that has been well documented at this point. There is no EU Member State that stands to be more affected by Brexit, and the ongoing negotiations, than Ireland. With the Irish and UK economies still closely linked, particularly in terms of trade, for Ireland there is no upside to Brexit - the question is, how bad will it be? One area that has been given less media attention thus far, yet is probably one of the key issues in the Brexit talks is energy, and particularly how Ireland will be impacted.

Ireland currently has two main sources of gas supply - the Moffatt Interconnector from Scotland, and the Corrib gas field off our west coast. Up to recently, Ireland was around 95% dependent on the Moffatt Interconnector for our gas supply. While Corrib gives us some temporary relief from this almost total dependence, we will likely be back to that situation again sometime in the mid-2020s as the Corrib resource depletes. During this time, according to Gas Networks Ireland, our gas demand is set to increase – likely by around 30% by 2025. This increase will be mainly due to a move away from coal and peat, and indeed the completion of the North South Interconnector between Ireland and Northern Ireland, creating additional gas demand in the power sector.

This projection also accounts for the expected drop in residential demand due to increased energy efficiency, demonstrating that the expected additional contribution of gas to the Irish power mix is significant. On top of this, as part of the Clean Energy Package, the Commission proposes to put an emission performance limit on electricity capacity payments, which would effectively rule coal out of such subsidies. It is clear, therefore, that for Ireland, as an island country, gas will continue to have a crucial role in the medium term at least. Maintaining a secure and competitive supply will be vital for Ireland’s economic prosperity post-Brexit.

A key point here is that we are not fully clear exactly what impact Brexit will have on the Irish energy system. While we do not necessarily have an impending security of supply crisis, some interesting points made by commentators recently raise some important concerns. Firstly, the UK will no longer be under the same regulatory regime as the EU, nor under the jurisdiction of the European Court of Justice.

Regulatory divergences down the line could put additional costs onto the gas that Ireland imports. Additionally, as pointed out recently by Dr Thierry Bros of the Oxford Institute for Energy Studies, imposing regulations on EU-UK pipelines to push up UK energy prices could be tempting for some EU Member States seeking to increase their competitiveness against the UK, something that would not be in the interests of the Irish energy consumer. Similarly, Ireland's security of supply is something that the UK could potentially use as a bargaining chip in Brexit negotiations; the UK is well aware that EU negotiators cannot put at risk the energy security of one of their most pro-EU members. A diversification of Ireland's supply would therefore seem to be very much in the interests of the EU-27.

The IEA's recent report "Gas 2017" offers some very interesting insights into global gas markets and their rapid development. Gas demand is expected to grow by 1.6% year-on-year to 2022, with the growth in LNG supply capacity predicted to grow at a faster rate than global demand. The most interesting parts of this report relate to the development of US LNG exports. US production is expected to increase at an annual rate of 2.9%, and this is bringing changes to the international gas market. LNG is creating competition with pipeline gas, and price and contractual rigidities are softening.

While piped gas will continue to dominate the European market, LNG now offers significant market benefits, as well as an option to diversify supply and to mitigate the risk of shortages. Improving the EU's capacity to buy LNG on the global market - which includes the better utilisation of existing regasification capacity - will increase flexibility and exert downward pressure on the European gas spot prices, to the benefit of EU consumers and industry.

With Brexit, Ireland's case is slightly different and arguably more pressing given our reliance on a country currently preparing to leave the EU. An LNG terminal in Ireland would reduce our exposure to any potential supply shocks; lest we forget, Ireland's storage capacity is limited, and post-Brexit, the UK will not be subject to EU solidarity rules on security of gas supply. Most importantly though, the option of LNG imports could shield us against the effects of some of the longer-term market uncertainty I have mentioned above. An LNG terminal would bring market flexibility and enhanced supply security for Ireland and ultimately contribute to further eliminating our historical economic dependence on the United Kingdom.

The European Commission's Projects of Common Interest (PCI) offer probably the best solution as Brexit looms. The proposed Shannon LNG terminal in Co. Kerry on our South-West coast has been identified as a key project for the completion of the internal EU gas market, and in the context of Brexit I feel that this project now becomes more of a priority. The project offers a ready-made solution to all of the above, and I believe that it is time for political leadership to ensure that the project comes to fruition as soon as possible. The more independent from the UK the Irish economy can be, the better the prospects for the EU-27 as we face into two more years of Brexit negotiations.