Written by Matthew Dolman, Senior Account Executive, Madano Energy Practice
You would be forgiven for tuning out much of what’s going on in politics a year on from the EU Referendum – the initial aftermath of Brexit is nothing if not chaotic, discordant and noisy.
For the energy sector, highly regulated and interconnected with Europe, the resulting uncertainty and delay makes for an ear-splitting headache – as well as weakened investor confidence and a real risk of missing climate targets.
Defining the problem
Several things are clear:
Brexit is a massive undertaking, and the Government’s majority is wafer thin, so it has little bandwidth to do anything but the bare essentials.
The energy sector has a long list of wants and needs, many of which need resolving quickly and not all of which are complementary.
Ministers have much to do, so listening is difficult. Even when they try, it’s likely there will be too many voices to make out the tune.
Finding a solution
Speaking as an ex-musician, I like the way the World Energy Council uses three musical scenarios to explain policy change.
Players in the energy industry need to find a way to sing in harmony, cut through the Brexit noise, and communicate effectively to Government.
The question is, can it be done with so many disparate voices in the sector?
At this week’s Energy Institute debate on how Brexit impacts energy – just after the publication of the Energy Barometer – the most interesting take-away was the consensus on things like agreeing transitional arrangements, not exiting EURATOM, and negotiating access to the Internal Energy Market (IEM).
If there is consensus on big-ticket items, I think it is possible to steer the Government towards outcomes that are beneficial for the UK and palatable to the EU.
Forming the choir
What are the solutions?
Influencers in the sector need to focus on the number one priorities – examples include the Clean Growth Plan, answers on EURATOM, and our trading relationship with Europe. Everything else is white noise.
Where possible, industry should come together on areas of commonality, potentially building to a ‘sector deal’, and communicate a clear, crisp message with a single voice.
Given Whitehall’s limited bandwidth, Government will struggle on a holistic view of energy – but as a technical sector that isn’t a political hot potato, it’s possible to deliver smart market insights and intelligence in a way that hands ministers the answer.
There’s no guarantee of success. Only this week, BEIS deferred its Clean Growth Plan, which while understandable probably won’t help alleviate concerns in the sector.
Despite this, the old wisdom rings true: appreciating your audience’s concerns and priorities, and clearly outlining your needs and the available solutions, is the best way to get what you want.
For energy, it’s a matter of singing from the same hymn sheet and building up the harmony.
Madano’s Energy Practice solves complex issues for UK and international clients around the energy transition and emerging technologies. The team helps companies and organisations tell their story against the backdrop of profound transformation and disruption in the energy sector through strong insights and research, strategy, narrative and message development, government stakeholder and media relations work, and content development.
Almost a year to the day since the historic referendum vote in favour of Brexit, and with those negotiations now (just) underway, many in business have waited patiently for some ‘meat on the bones’ of where the much lauded preferential trade deals might occur?
And with a stunning absence of any details from our politicians and leaders, the Madano team thought it might be interesting to use our data mining and analytics skills to consider where might actually be a good place for the UK to start thinking about making deals and where might we be most successful.
We asked ourselves, what can we understand about the UK’s negotiating position based on the relative trading importance to other countries? In other words, not just the absolute size of the various trading partners, but where currently, countries export more to us, than we to them – where we might have an advantageous negotiating position. In other words, who’s got most to lose?
The IMF further demonstrated the critical importance of the economic strength of trading partners to a country’ own economic circumstances in a research paper that constructed these trade relationships in a similar way. In a regression analysis, the authors found that – keeping all things equal – a 1% increase in economic growth amongst a country’s trading partners is correlated to a 0.8% increase in domestic growth.
Therefore, as well as being a measure of relative influence – the relationships themselves are extremely important to ensuring economic growth for a country.
How we have approached the task?
We started by creating a dataset of 40,000 trade relationships by collating data on the $ value of Goods exports for each country in the world to every other country using the UN Comtrade 2015 international trade statistics (the latest year for which data is available) as our foundation.
We should stress that this data considers ‘goods’ but not the trade of ‘services’. Principally because countries seem to be poor at reporting their service exports and imports, and so the data found was too patchy to use.
From this dataset of trade relationships, we have assessed the proportions of trade that exist between the UK and each of the UK’s trading partners.
So what have we found?
The chart below illustrates the relationships between the UK and our top 25 export destinations. These trading partners account for two thirds (66.5%) of UK exports.
The country dot sizes equate to the amount of UK exports that go to that destination.
The dotted line represents the axis of ‘negotiating influence’.
The lower half, below the dotted line, represents areas of potential ‘negotiating advantage’ (the proportion of exported goods to the UK is higher than the proportion of goods the UK exports to them).
The upper half, above the dotted line contains those countries where we have a ‘negotiating disadvantage’ (the proportion of exported goods to the trading country is higher than the proportion of goods the trading country exports to the UK.)
So, in spite of Prime Minister Theresa May’s dash to the USA and the hands of President Trump, the US is the market where the UK has the most significant negotiating disadvantage – with the USA accounting for just over 15% of UK’s total exports, whilst the UK accounts for around 3% of the USA’s total exports. The US is followed by other major markets in Germany, Switzerland and China where UK exports proportionately outstrip their exports.
On the positive side, the UK has potentially an advantageous negotiating position with a cluster of countries, from Ireland and Norway, to the Netherlands, France, Belgium, Spain and Italy (Norway aside, all members of the EU!).
However, given the UK is already struggling to find skilled negotiators, a job that hadn’t had much call for in the past 40 years, we thought it made sense to think pragmatically, and consider whether it may be easier for UK to start its other negotiations with trading blocks of countries, with ready-made agreements in place, rather than looking for bilateral arrangements.
The chart below shows the UK’s negotiating influence in relation to the major trade areas.
Unsurprisingly, the balance is skewed towards a negotiating disadvantage with these blocks overall – as they each combine the economic weight of several countries. However, here we need to consider the balance between the negotiating position of the trading block and that of its constituent members.
This dichotomy will be at the forefront of the Brexit negotiations.
Taken as a whole trading block, we can see that the UK has little relative strength compared to the EU – together the other members account for over 40% of UK’s exports, whilst the UK accounts for less than 10% of the countries’ combined exports.
Yet, when considered with the outcomes from the Top 25 Exporter analysis, we can see that there are many countries where the UK has a stronger negotiating position at a bilateral level – including France, Spain, Belgium and Italy – as we account for a higher proportion of their exports than they do of the UK’s.
Ireland is the country with the most to lose from Brexit, as the UK takes 14.1% of Ireland’s exports, with 5.6% of UK exports going the other direction. The Chief Economist at Ireland’s Central Bank has even suggested that a hard Brexit could cause Irish GDP to fall by 3%. This is also a concern for the UK. Indeed, in a recent joint letter to Greg Clark by the CBI, British Chamber of Commerce, Federation of Small Businesses, EEF and the Institute of Directors, maintaining frictionless borders with Ireland was listed as one of their three economic principles that should be sought in Brexit negotiations.
But where else should the UK look ? The European Free Trade Association?
Former Chief Secretary to the Treasury, Liam “there’s no money left” Byrne recently argued that the UK should re-join the European Free Trade Area – a collection now of four countries (Switzerland, Norway, Iceland and Liechtenstein. This group has access to the single market – although that includes the free movement of persons, the opposition to which was likely a big part of the decision for many Leave voters last year.
From a negotiating strength position, it all looks good on the surface – the UK has roughly the same proportion of its exports going to EFTA member countries as they together do to the UK (around 10%). However, looking a bit more in-depth at what that trade involves shows a slightly different picture.
MIT Media Lab’s ‘Observatory of Economic Complexity’ has breakdowns of products traded between all countries – with fantastic interactive visualizations. For Switzerland, for example, we can see almost a quarter of the exports to the UK (23%) are in Precious Metals and Jewellery, and 5.7% are in Arts & Antiques. For UK exports, over three-quarters (77%) of its exports to Switzerland are Gold. A trade deal with Switzerland may not be the job creator that the Government is looking for.
Norway similarly has a complex picture. On the negotiating strength chart it looks like the UK is the standout winner – with 20% of their exports going to the UK, and just 1% of UK exports going to Norway. However, 87% of Norway’s export to the UK is in Oil & Gas – and the lights going out may not play too well with the voting public. Indeed, Norway’s European affairs minister last year indicated that Norway wouldn’t be keen on the UK joining – and would use their veto to block it doing so.
Joining the North American Free Trade Association (‘NAFTA’) has similarly been touted as an option. John Weekes, Canada’s former chief negotiator on NAFTA, recently suggested that the UK joining, ‘would make a lot of sense‘.
NAFTA is clearly having some of its own problems – with President Trump calling it ‘the worst trade deal in the history of trade deals’ – negotiations are about to start between its three members as to what its future should look like.
As we have said, UK’s negotiating influence with the US tips heavily in their favour. However, the UK has a stronger position with Canada (accounting for 3% of their total exports, compared to 1% of UK exports). Mexico is relatively similar – and insignificant – on both sides, at 0.5% of Mexico’s exports and 0.4% of UK exports.
The UK joining NAFTA negotiations at this time could, however, offer negotiating strength for Canada and Mexico against the threatened Amerexit, and opportunities for existing members to gain better access to European markets.
And what of the much vaunted Commonwealth?
Former CBI Director General Lord Digby Jones has argued that business leaders want the UK Government to prioritise establishing better trade relationships with countries in the Commonwealth – such as Singapore, India and South Africa.
Looking at the negotiation position that the UK has with trading blocks, we can see that SAFTA (South Asian Free Trade Association), CARICOM (Caribbean Community) and SADC (South African Development Community) all have the UK with higher negotiating strength, and all have a high number of Commonwealth members in them.
However, this relative strength of the UK could in many instances still be due to its colonial legacy of economic and social depletion. British trade officials have been criticised for referring to their rekindling of trade negotiations with Commonwealth countries as ‘Empire 2.0’ – although is likely to be more of a sardonic moniker aimed at the perceived jingoism of those who believe that such a concept is possible. However, ultimately the UK’s relative trade strength here could be too powerful to make trade agreements viable – even if scepticism at the UK’s motivations could be overcome.
So what’s our advice to the Government…
The current Chief Secretary to the Treasury, Liz Truss, famously vented anger at how much cheese the UK imports. However, for the time being at least it may be more prudent to employ less isolationist rhetoric. At 9.9% of a total £4.1bn exports, to slightly labour this example, France’s cheese makers are no doubt keen to maintain a good trade relationship with the UK.
In the negotiating influence area, the UK should probably encourage perceptions that it’s a valuable trading partner – amongst EU member states and elsewhere. Ultimately, the argument of who needs the other most is heavily diminished if the country looking for preferential agreements starts by saying that they can go it alone.
As the Brexit negotiations begin, Madano will continue to use data and analysis to shine a light on to some of the key issues, helping you to better understand the rapidly evolving landscape and navigate a successful future path.
Data is principally based on reported export of goods. Where a country had not reported exports to another country, we checked whether the importing country had reported the corresponding import and added it in place. Reported import value is generally slightly lower than reported exports, as it includes things like delivery, and perhaps a few things falling off the back of the lorry.
So, the voting public in the UK have thrown another curve-ball to the politicians, the media, pollsters (generally), businesses – and possibly themselves?
Days before entering into negotiations with the EU over Brexit – arguably the most important episode in British life since the post-WW2 compact – Theresa May’s call for larger majority to give a ‘stronger and more stable’ negotiating platform has disintegrated.
Since 8th June, we’ve had a government reshuffle, two party leaders resign, continuing negotiations over a deal to prop up a minority Conservative government, and all of this with formal Brexit negotiations beginning today.
An historic Election
In what has rightly been described as an historic Election, the Conservatives led by Theresa May spectacularly gave up a +20 point lead over the Jeremy Corbyn headed Labour Party when the PM announced the snap Election.
Mrs May’s Conservatives came out of the Election with 318 seats out of the 650 available, losing 13 seats and ending the Election eight seats short of an overall majority.
She is clearly significant weakened. Whether she is ‘a dead-woman walking,’ – as Evening Standard editor, George Osborne gleefully described – remains to be seen.
While many commentators have opined at length on the highly ineffective presidential-style Conservative campaign, clearly the Labour Party (and Mr Corbyn in particular) had a great Election, outperforming critics, pundits and many in the Party itself, who had feared the worst – a Conservative landslide.
In that context, for Labour to have added 30 seats to end the Election at 262 MPs is a considerable achievement. Mr Corbyn engaged with young voters and offered a clear and differentiated vision for a future Britain, irrespective of enduring concerns about it financing.
However, amidst all the present Labour positivity – they did fail to actually win for a third successive Election cycle, and it remains to be seen if the current collective ‘togetherness’ will stay intact, given the deep divisions that have recently existed in the Parliamentary Labour Party.
A return to two party politics
Overall, the Election saw a return to the two party politics of yesteryear, with Labour increasing its vote share to 40% (30.4% in 2015) and the Conservatives, also increasing its share of the popular vote to 42.4% (36.9% in 2015).
UKIP was destroyed. Having polled 12.6% of the popular vote in 2015, it suffered a disasterous night, reduced to 1.8% nationally and its then leader, Paul Nuttall, finishing a distant third in his attempt to win a seat in Boston & Skegness.
The other big losers were the Scottish Nationalists, rowing back from their high-water mark in 2015, down 21 seats to 35, and in the process losing their Westminster leader Angus Robertson and former leader, Alex Salmond.
Nicola Sturgeon’s gamble on a second independence referendum – ‘IndyRef2’- backfired, giving both Scottish Labour and a resurgent Scottish Conservative Party, led by Ruth Davidson, the opportunity to make significant in-roads, the latter moving from 1 to 13 seats and achieving a vote share not seen since 1983.
A wounded re-shuffle
The Prime Minister has carried out a limited Cabinet reshuffle, with the most senior Ministers remaining in their pre-election posts.
Before the election result, there was speculation that Theresa May would carry out a major reshuffle, moving ministers such as Philip Hammond into different roles or sacking them altogether.
Given her loss of personal credibility post-election, this has not been possible. May’s ally, the moderate ‘remainer’ Damian Green has been promoted to a role which is essentially Deputy Prime Minister, providing a smoother conduit to the Party itself. She was forced to sack her two joint Chiefs of Staff in the face of strong criticism from the Conservative Party, replacing them with former Housing Minister Gavin Barwell.
In terms of other leading roles, Chancellor Philip Hammond, Foreign Secretary Boris Johnson, International Trade Secretary Liam Fox, and Brexit Secretary David Davis retain their previous roles.
Greg Clark remains in post as Secretary of State at the Department for Business, Energy and Industrial Strategy (BEIS).
Michael Gove has returned to Cabinet as Environment Secretary, replacing Andrea Leadsom, who moves to become Leader of the House of Commons.
So, what’s happening now?
Prime Minister Theresa May gave a statement on 9th June announcing her intention to form a government, supported by Northern Ireland’s Democratic Unionist Party (DUP) and its 10 MPs in a ‘confidence and supply’ arrangement.
This would not be a formal coalition, with the DUP given ministerial jobs, but rather an arrangement that will most likely see the DUP support the Conservatives on security issues, Budget Statements, or Votes of No Confidence.
The Prime Minister has stated that two parties will work towards a ‘successful Brexit deal’ and secure a new partnership with the EU which guarantees long-term prosperity for the UK.
Of course, a deal with the DUP led by Arlene Foster is not without controversy in itself.
Aside from DUP policy issues in areas such as same-sex marriage and abortion, there are real concerns about the effect an arrangement with the DUP will have on a UK Government’s position as an ‘independent’ arbiter in kick-starting once more the power sharing process in Northern Ireland under the Good Friday Agreement.
With post-Election politics set aside once more as a result of the dreadful fire at the Grenfell Tower, it is now possible that the details of that deal won’t be announced until next week (wc 19th June).
The State Opening of Parliament and delivery of the Queen’s Speech has been delayed. Originally slated for Monday 19th June 2017 – the same day that formal negotiations with the EU over Brexit were slated to begin – it has been pushed back to Wednesday 21st June.
The State Opening of Parliament marks the formal start of the parliamentary year and the Queen’s Speech sets out the government’s agenda for the coming session, outlining proposed policies and legislation. It is the only regular occasion when the three constituent parts of Parliament – the Sovereign, the House of Lords and the House of Commons – meet.
And the near future?
Well, you won’t be surprised it is very hard to predict the near future… but here goes today’s crystal ball gazing….
A compromise deal between the Conservatives and the DUP will be concluded and a minority government formed;
A limited legislative agenda for the next Queen’s Speech;
Negotiations with the EU will commence with the potential for a less ‘hard’ Brexit stance from the UK Government;
The Conservative Party holds off on immediate demands for Theresa May to step down – the appetite for another General Election, that they may well lose – is low;
A new leader for the Liberal Democrats following Tim Farron’s resignation, with newly re-elected Jo Swinson as a leading runner;
The phoenix like rebirth of UKIP leader, Nigel Farage, back into the limelight he clearly craves;
A secure leader in Jeremy Corbyn and revitalised Labour Party that will offer a real challenge to the Government with continued growth in party membership (for as long as the Parliamentary Labour Party keeps its internal hostilities under control);
Significant focus on Northern Ireland and its relationship with Westminster and Dublin.
This is a time of great political change and flux. Being intelligently informed and engaging with a wide spectrum of political stakeholders has arguably been never important.
Written by Gareth Morrell, Head of Madano’s Insights & Intelligence Practice
We’re a demanding electorate that expect our choices at the ballot box to be as tailored to our preferences as our interactions with Google and Amazon Prime, but parliamentary democracy can never be that personalised – we’re just redefining our ‘tribal affiliations’.
Prior to last week’s election, over half of the electorate said they did not feel any political party represented their views. A reflection of political apathy? A lack of interest in politics? A failure of politicians to connect? Apparently not.
Turnout appears to have risen a couple of percentage points overall in this election and a bit more sharply amongst younger voters (though not as sharply as first thought); political party memberships are also up across the board. Instead, the claim that people don’t feel represented may just reflect important shifts in the role of political parties and the challenges they face in consistently maintaining a committed base of support amongst a demanding electorate.
It’s easy to say that in the old days, life was simpler – we block voted. It’s certainly true that we were less mobile (socially and physically) and belonged to more obvious political tribes based on class and geography. Results were more predictable – polls and the media were normally right. But did this mean that parties (normally two, sometimes three) were capable of perfectly representing the views of every person on every subject?
What’s more likely is that today’s electorate are increasingly unwilling to accept or feel represented by a party that we only mostly or partially agree with. As our lives have become immediate and society more complex, so our political demands have become more personalised and the old dividing lines are seeping away.
And we’re used to this level of personalised service, with companies attending to our every whim and preference with highly bespoke services. Amazon recommends products, Netflix suggests programmes and an entire industry of algorithms pushes towards us the things that we, on average, are most likely to want to see. Where 30 years ago you bought an album and effectively had to buy into every track on the album, and wear it on your sleeve, today Spotify lets you listen to what you want, when you want. So, why not demand this from your politics?
So on this basis, before the election we may have expected lower turnout. If people don’t feel represented in the absence of a ‘political Spotify’, why did more of us vote and why did they do so in larger numbers for the two main political parties than for decades?
As Rob Ford, polling expert at Manchester University, shows in a recent piece in The Guardian, rather than leaving us with atomised and apathetic voters, personalisation is encouraging the electorate to define new tribes. True, these tribes sit under the banners of the same two political parties, but the dividing lines are re-drawn. Simply put, the younger, educated and metropolitan vote Labour; the older, less well educated and suburban/rural vote Conservative. This could be a further electoral demonstration of what David Goodhart describes as two new tribes: the ‘somewheres’ and the ‘anywheres’, first seen in last year’s referendum on EU membership.
As we search for these new tribes, we often unite in opposition. Of course, Jeremy Corbyn galvanised a large part of his vote though the hope of a ‘different kind of politics’, but there are plenty of commentators that feel that the late surge for Labour was also a response to a Conservative campaign seen as calculated, negative and arrogant. After all, recent political successes in France, the US and the UK by very different politicians have only one thing in common – the candidate enjoying the obvious and late surge stood against some definition of the ‘status quo’. In the US, Trump stood against the status quo of the mainstream media and the Washington narrative; in France, the previously unelected Macron and his brand new En Marche party stood against the status quo of the traditional political parties.
My sense is that the increase in turnout and a return to a clearer but re-drawn two-party dynamic is not a reverse of the demand for personalised politics. We still vote very much on what affects us; but we increasingly have the tools and analyses to tell exactly how a collection of policies will affect us individually. We want to pick parts of the views and values of politicians, but then collate a world view that doesn’t always have a candidate or party that perfectly aligns. Online echo chambers reinforce this, meaning we’re less willing to tolerate the parts we don’t like in order to fully support and identify with a given party.
This presents challenges for political parties – how they tell their story in a meaningful way without alienating, on the one hand, or being too ambiguous, on the other. It will be some time before we understand whether these new dividing lines will create more ambiguous umbrella parties or lead to a more fractured political party landscape. But in this climate of personalisation, shifting political allegiances and the ability of effective social media campaigning to galvanise protest and hope at the same time, one thing is clear – there are more unpredictable elections to come.
For the energy sector, a hung parliament creates significant challenges across a range of difficult policy areas.
However, with swift action and clever positioning, it also presents a number of opportunities to influence policymakers and shape the UK’s post-Brexit narrative:
1) Delays to large infrastructure projects
A number of major initiatives are currently in the pipeline like HS2, Heathrow’s third runway, new build nuclear, and a pathfinder tidal lagoon project in Swansea Bay.
Ministers will find it more difficult to secure backing for potentially controversial projects. There is backbench opposition to expanding Heathrow, and recent plans for nuclear plants have faced setbacks, which will require Government-led solutions.
On the other hand, with HS2 and tidal lagoons, there may be a cross-party majority in favour of sign-off. As with all infrastructure projects, a strong message on wealth, jobs, and export potential could help to win over a government desperate to present itself as in control, forward-looking, and trade-focused.
Larger energy companies are certain to step-up efforts to convince BEIS to water down its plans. It’s hard to see how ministers can resist this pressure, given their precarious position.
It will be critical for companies on all sides of the debate to find their voice and communicate effectively on the risks and opportunities that come with intervention in consumer markets.
3) Brexit just got a lot more difficult
There is now a major question mark over the shape of the Government’s plan for Brexit negotiations, due to start this month.
The internal energy market and Emissions Trading Scheme (ETS) were not major campaign features, leaving the direction of travel unclear. On EURATOM, Labour and others support continued membership, but without knowing the Conservative position it’s too early to tell what will happen.
It has been reported that senior ministers have urged Theresa May to drop plans to leave the single market, while BEIS Secretary Greg Clark has moved to generate momentum for a “business-friendly” Brexit. It is crucial for companies to seize on this chance to shift the agenda in their favour.
4) Lack of bandwidth across government
After years of civil service cuts and with a weakened hold over Parliament, the Government has almost no bandwidth to make progress on difficult issues.
Along with passing the ‘Great Repeal Bill’, likely to be the UK’s most complex ever legislative project, there is a massive backlog of energy initiatives jammed in the machinery of Government.
Announcements and papers are imminently due on a range of issues including the Industrial Strategy, Air Quality Plan, and a roadmap for small modular reactors (SMRs).
Ministers will be looking for ‘easy-wins’, meaning that proponents of particular projects will need to convince the Government that their agenda is both easy to achieve and beneficial to the country.
Charting a course
The next few months are going to be unpredictable, with potential for change at any moment.
The best thing for energy sector companies looking to change policy will be to formulate rapidly a cohesive communications strategy and make their case to influencers across Government.
By moving quickly, companies could achieve a great deal amid an uncertain climate and a new reality.
Madano’s Energy Practice advises a range of domestic and international energy clients across the industry. The team helps clients tell their story against the backdrop of profound transformation and disruption in the energy sector through strong insights and research, strategy, narrative and message development, government stakeholder and media relations work, as well as content development.
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