The renewables driven revolution in electricity pricing

Away from the public eyes, one of the most radical transformations of wholesale electricity markets in the last 100 years is occurring. Since the time of Thomas Edison, almost all the electricity that we use has come from the combustion of fuels. By releasing the latent energy in coal, gas, wood or oil, we convert latent energy into heat, and use that heat to create steam. The steam forces a magnet to spin around a set of wire coils, thus creating a current. It is this innovation in science that created the modern world, but today a growing proportion of the developed (and developing) world’s electricity no longer comes from fuels. I am of course talking about wind and solar.

When power is created from the combustion of fuels it is dispatchable. This means that it can be turned on and off whenever the owner of the power station wishes. While a Nuclear plant will often generate electricity around 92% of the time, making it effectively a constant (hence “base”) generation source, most fuel based generation sources run for much less time. In the USA, coal and gas plants often run less than 60% of the time. By contrast wind and solar are not dispatchable. Rather, their production output is variable. Wind and Solar do not require a fuel to create energy, but they cannot control when they will produce electricity. It is this contrast that is at the crux of the challenge.

To ensure a power grid has sufficient electricity for all consumers, a grid operator such as National Grid, must estimate demand and source that demand on an annual, monthly, daily, hourly and sub-hourly basis. In complex power markets like the UK, the sourcing of electricity supply comes from an auction system. This is why wholesale power prices are in upheaval.

To match supply with demand, national grid asks companies that produce electricity to make offers to supply electricity. Each company states how much electricity it can supply and the price it will accept to supply that level. These prices are then sorted from lowest to highest and national grid will accept all bids necessary until it reaches the supply level it requested. This is called “Merit Order Dispatch”.

To explain this is shown in the table below:

Electricity needed 100MW   
Clearing auction price £30/MWh  
       
Bidder name Bidding price Quantity of power offered Quantity of Power Accepted
Wind 1 £10/MWh 20MW 20MW
Solar 1 £20/MWh 20MW 20MW
Nuclear 1 £25/MWh 30MW 30MW
Gas 1 £30/MWh 30MW 30MW
Coal 1 £40/MWh 30MW 0MW

As wind and solar have no fuel, their cost to run is essentially zero. As such they can bid any price they like. For Nuclear, the cost of fuel is considerably less than building the site, so it also bids a low price. By contrast gas and coal have to buy their fuels to combust them. As shown in the table above, coal can’t compete against wind and solar on cost and so it losses the auction. Everyone else is paid the marginal cost of production, which is the amount that gas receives (£30/MWh) and they supply the grid.

So what does this mean? Essentially as we build more wind and more solar, we will increase the number of electricity supply bids into the market which are below the viable level for any fuel based generation. This is why the USA’s Department of Energy wants to pay a subsidy to coal and nuclear. As wind and solar are not dispatchable, there is a concern that all dispatchable fuel sources will be unable to compete in the price auctions for the majority of the year, except for periods when electricity demand is extremely high. That would make most plants economically unviable, as they would be required to cover all of their capital costs, maintenance and staffing, based on generating electricity for less than 50% of the year. If these plants go, then what will provide the electricity when the sun goes down and the wind doesn’t blow? That is the question that energy market regulators are asking in the UK, USA, Europe and across the developed world.

To many the concept that renewables are cheaper than fuel based sources doesn’t seem correct. Indeed, most renewables remain more expensive than coal (though not in all areas and not by much), when considering the total cost of the system. But it is important to understand that wind and solar are fundamentally different in how they are financially structured and that explains the pricing disruption. Operations and maintenance of renewable power plants are minimal. Building the assets is the expensive part. As a result, Renewables always want to sell their power at any price in order to re-coup the cost of construction. By contrast a coal plant or gas plant will lose money if they try to sell electricity for below the cost of their fuel source. This gives renewables an incentive to bid almost zero, thus guaranteeing that they will be able to sell almost all their electricity they generate at any time.

This is actually worse in countries that have adopted a renewable government subsidy called a Feed-In-Tarriff (FIT). Under a FIT, the government guarantees the owner of a renewable company that they will receive a fixed price for the production of their electricity. However, the electricity has to be generated and supplied to the market in order to claim the subsidy. As a result, renewables have no incentive to put in competitive prices for auctions because they already have a fixed price.

What does all of this mean though for businesses, consumers and investors? Well for now it means that the annual average wholesale cost of electricity has fallen in countries like the UK on a constant basis. That also means that most households and industries have paid less in energy bills than would otherwise have been the case.Wholesale market

But while the costs of electricity have fallen, other costs are occurring across the system. As coal and gas plants cannot compete in the market they are forced to close the plants early and suspend new constructions. A great win for climate change, but an outcome that has cost European utilities half a trillion euros according to the economist. In California, where solar PV deployment is high, prices in the wholesale market now go negative for periods of the day. Yes that is correct. Producers effectively pay other people to take the power that is being produced. In the same is happening in Germany.

The move towards greater renewables in the electricity mix is vital. But like any great transformation there will be unintended and unanticipated consequences. The greater the growth of renewable energy, the more inevitable it will become that wholesale power markets will change. If consumers are focused that could potentially lead to longer term price stability and cost savings. But only if they know where to look.

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All the wrong issues

Despite 7 years of stagnant economic growth in Europe, austerity in Britain and growing inequality in the US, the political left has never looked weaker. That is a problem. All good political systems require competition of ideas to help both sides refine and improve the policies which they offer their electorates. In the founding of any democracy it is widely acknowledged that a failure to create two equal political parties, who can act as counterweights to one another, is essential. Some even believe that if the Russian Communist party had split into two parties in 1990, one moderate and the other traditionalist, it would have fundamentally changed the trajectory of Russian democracy.

But why are the political left so weak? The answer is that they are focusing on all the wrong issues. LGTBQQ rights, climate change, religious tolerance and gender equality are important issues in making our world a better place. But they are not the reason why people decide to vote for one party or another at the ballot box. Hillary Clinton did not lose because every Trump voter is a climate-denier, racist, misogynistic homophobe who wishes to punishes poor people. Though there were likely many of those too. But the reality is that people vote for bread and butter issues and as Bill Clinton once famously quipped, it’s often about “the economy stupid”.

Politicians in the modern era have a tendancy to focus on issues that are at best tangental and at worst, irrelevant, to the day-to-day lives of most citizens. Climate change is a huge issue, one that I passionately seek to help fix every day. But it isn’t something you can explain or resolve in a tweet. It also is something that is extremely hard to explain to citizens that work 9am – 5pm in an office. The same is true with the rise of identity politics issues. It is morally clear that Donald Trump’s ban on transgender service in the military is wrong, but if democrats think that they will win votes over these issues then they are misguided. As sympathetic as the ordinary citizen is to the suffering of others, it takes more than the empathy that one may feel from an article or a youtube clip to vote for a political party that is also raising your taxes or restricting your social rights.

If we acknowledge that the issues championed by left wing parties are the wrong issue to win elections and political power, then intuitively one must ask why parties cover these issues. In part the answer lies in the  membership base and in part it is a feature of the social media age. Political parties draw their strength from loyal members, who contribute funds as well as time to help win elections and in exchange they are granted an input into the policy making process. Today though, members are no longer content with “an input”. Grass root activists, inspired by social justice movements like Occupy Wall Street and other online anarchist strctures, are seeking to rebuild the entire political governance of their parties. In doing so, the parties are sacrificing external clarity of message for the ostensible goal of greater internal cohesion, as all factions and members feel more engaged in the policy creation process.

In the social media age, these internal struggles play out across the public sphere and muddle the waters. Moreover, the areas of greatest acrimony and therefore greatest publicity, are not issues of inequality or climate change (where agreement is much stronger) but rather the extent of engagement with identity politics issues. These topics, ranging from the appropriate use of social pronouns (if such a thing still exists), towards use of public facilities (notably toilets) and removing statues, hold no interest to the vast majority of society but they are fought though they are an existential battle, by left wing activists across social media platforms. In the maelstrom all other issues are lost. The conservatives in the US understand this well. Breitbart, Fox and other right wing activist groups are easily able to distract the political left from delivering clear messages on inequality, healthcare and the economy by effectively trolling the political left with social politic clickbait. Milo Yiannopolous andDonald  Trump are experts at this.

Many could contest that the political left is stronger than it has been portrayed, but the success of Jeremy Corbyn in the UK and Macron in France is misleading. Macron was the ultimate example of the “lesser of many evils vote”, a product ofthe disastrous   Socialist government election process, a crippling leadership scandal in the Republican party and a desperation to keep the National Front out of power. Corbyn is even stranger. A product of the anger felt by many in the UK who suffered disproportionally from the reduction of public spending in social services and a rising anger that the system is rigged which came from the financial crisis. Such anger against elites is ironically why Corbyn and Macron share so many similarities with Trump, in that they are all populists that are riding a wave of anger against the perceived liberal, effete elite. But the perceived success of these leaders is due to electoral circumstance, not the strength of their political positions.

Jeremy Corbyn persuaded young students that their debt would be removed, while sending two contrasting visions of Brexit to Labour voters in the north and labour voters in the south. Macron did even less. It is perhaps unsurprising therefore that Macron’s popularity has dropped faster than any French president in the last 20 years. Meanwhile Labour may being riding high in the polls, but Jeremy Corbyn still polls as a “less trusted to govern” leader than Theresa May. A leader that lost an election and is expected to be removed in the next 12 months.

In politics there is a disctinction between doing the right thing because its right and doing it because it looks right. The Conservative party in the UK will never outliberal the Liberal Democrats and they will never be seen as more progressive than parties whose foundations were built on championing the rights of excluded groups in society. Similarly the Labour party and Democratic party will never win over aspirational voters, who want a better quality of life by championing social issues as their primary selling point.

The obsession with social politics issues is a problem for the political systems of western liberal democracies. If we can’t move on from it and focus on the bigger picture issues that affect the day-to-day lives of millions, citizens will start to wonder what democracy is doing for them anyway. Confused onlookers from China and Sinagpore may be asking that already.

A new governing strategy for the Conservative Party

The Conservative party today lies in tatters. A leader that has lost the support of the public and her party. A party that is seen as out of touch, ruthless and clueless by the British public and nations afar. A government that has no vision and an opponent that offers hope, change and momentum. A momentum towards a past that the Conservative party and its leaders have spent nearly 40 years fighting. Perhaps the only saving grace is that the Conservative party is not alone in its struggles.

Today we see in America, in France, in Italy and across the Western World, that the old political systems and their parties are collapsing. Some are being replaced by new liberal structures. Many are not. During the Cold War the terms of debate were clear and the enemy was clearer. With the end of the Cold War, liberal parties rejoiced in their hard one victory. But they got complacent. They ignored the people and they forgot that Liberalism is not a finite end in and of itself. Rather, it is a mechanism for helping those who govern to make choices for the future. But there was no plan for the future. No dream end game or envisaged utopia. In short, they forgot the most human of all things. They forgot that people need hope of a brighter and better tomorrow.

The problem of the Conservative party today is less the methods by which it governs, than it is about the vision and ideology which it has governed by. In 2010 the British public understood that sacrifices needed to be made under the banner of “Austerity”, but what no-one understood was what was supposed to come after Austerity. What was the reward at the end of the march? It is on this charge that the Conservatives failed to win a majority in 2010 and it is for this reason why the party is so rudderless today.

More than anything what Conservatives of all colours need to show is humility. We underestimated the deep sense of injustice and inequality within society and we did too little to address it. We let our overwhelming desire to replace New Labour cloud our vision of what our party stood for and its principles. As a party we lost track of the fundamental tenants of Liberalism, that a belief in the inherent good of human nature and freedom, requires us to do good to others with that freedom. The free market, if it ever can be said to exist, is not a thing of emotions. The free market is a mechanism that allocates resources to where their perceived value is highest. It does not exercise compassion, fairness, tolerance or diversity. It does not support those who fall or offer a hand to those who need a boost to get started. If Conservatism is to return to its values and principles it must start by recognising that the free market may create wealth but it is people who distribute it. If the wealth creators in society do not see the value in distributing wealth and in helping those less fortunate, then the system will not fix the problem. It was never designed to do so.

Despite her many failings as a leadership figure, Theresa May knew this. As did David Cameron’s team, with their talk of the “Big Society” and Ian Duncan-Smith’s work on benefit reform. Like many problems, it seems less an issue that the sickness hasn’t been diagnosed than a question of how to solve the ailment. It is precisely the failure of the Conservatives to find an answer, while Jeremy Corbyn does offer a solution, that may be the hammer blow for Britain. But all is not lost and the party that led us through our darkest hours in WW2, the financial crash of 1979, the Falklands war in 1992 and one of the strongest G7 recoveries after 2010 is not finished yet.

The Conservative party needs to start by being brave and being honest. It needs a full public confession and admission that it got things wrong. When you have wronged a friend, you do not explain to them your reasoning for why you behaved wrong before you apologise. You apologise first. The British public want and need that apology first.

Further, we need to recognise that if there is no single leader in the Conservative party today that can represent the party as a united body, then we should govern as a party and present ourselves to the people as a party. The Conservatives may not represent the nation perfectly, but there are MPs that represent women, ethnic minorities, different religious groups and sexual orientations. They need to be heard and they need to be seen. Rather than worrying about threats to the leadership, the Tory party needs to show that it is a party that is focused on delivering a better life and better opportunities for the people of the UK before the personal career interests of its own members.

Today the Conservative party must answer two questions: firstly, how would a Conservative government make the country happier and wealthier for all. Secondly the party must explain why Liberalism must be the guiding set of principles to achieve that end and not Socialism.  In the UK we have the ability to choose where our children study, where we want to live, for whom we want to work, the type of car we want to buy and how we want to allocate our pay check across these things at the end of each month. That is the freedom of choice which Liberalism gives us. The freedom to make decisions, both good and bad. But it also requires us to be responsible for the failures which we create ourselves.

The world is not fair, nor equal and in the absence of intervention these market failures will not be improved. Liberalism in the 21st century must begin with this realisation that the public will no longer accept the trade-off of total freedom of choice in exchange for personal accountability of all outcomes. Instead, people believe there are some things that they will always need help to protect themselves against. Modern psychology seems to agree. Study after study shows that life in poverty reduces the most intelligent people into making seemingly irrational decisions, as people are forced to make decisions to live day by day. The ability to plan for the future is a luxury for those starving today. Society needs a basic safety net of human decency and when over 2,000 food banks exist in one of the world’s richest nations, we can safely say that the basic net is not being provided. A new compassionate Liberalism needs to start by understanding that for people to make rational choices they have to be in a position to think rationally.

The Conservatives have always been called the “nasty party” because they have never been afraid to let people fail. But the biggest problem has been that not enough are succeeding. A Conservative party that can breathe life into the promise of Liberalism, with an understanding that no society can be called rich when its poorest must rely on charity to eat, has a chance to turn the tables on the false promises of Labour today.

Make no mistake, today Jeremy Corbyn’s Labour Party is a populist one and it will not be beaten by patronising it or dismissing its central arguments alone. Instead the Conservatives must show the British public once again that they are the only adults in political room that can deliver a better Britain for all. Showing more humility, compassion and humanity would be a welcome place to start.

Why is it so difficult to be a Conservative?

The election today represents a reversion to the mean for British politics. For the first time since 1992, the voters of the UK face a clear choice between Labour and Conservatives. For many this is unsettling. My generation grew up with the Centre Ground. A place where limited ideologies existed and variations between the parties were driven more by local issues and individual biases than existential differences in party governing ideologies. This is how the awfully phrased “millennials” think of politics. A choice between technocratic governments with different faces. Until today.

Today ideology is back, and as I have written before, this has been a shot in the arm for the health of UK democracy. The Brexit referendum marked the first nationwide turnout above 70% in 30 years and repeated polling suggests that the 18-24yr old turnout will be a record 60% or better. But with ideology and passion comes clear winners and clear losers. In part that is why this election is so much harder than those before. There is a trade-off and whoever wins the election will change the face of Britain.

I grew up hearing the phrase that “if you don’t vote for labour when you are young you have no heart and if you don’t vote conservative when you are older, you have no brain”. The polls seem to reflect this adage. Only 17% of 18-24yr olds are due to vote Conservative today, yet over 40% of 65+ voters will vote Conservative. So today I am in a minority in my nation and my generation. As I was for Brexit. So why be the contrarian? Why stand against your own generation and be different? Surely, they can’t all be wrong? And with all of these thoughts comes the question, why would anyone be a Conservative at all?

The charges against the Conservative party are steep. Consistent cuts to mental health, hospitals, schools and police for nearly 7 years, a Brexit campaign fought with no plan B and a leadership election straight after when leadership was most needed. A party that tacitly supports foxhunting, that supports nuclear weapons that could kill millions. A party that cuts taxes on businesses while reducing welfare to those most in need. A decade of lost wage growth and declining real incomes and a boom in food banks. Surely, my generation asks, it is time for something different.

Today stands Jeremy Corbyn as that “different”. An insider of parliament for 30yrs, yet an outsider in his party for most of them. An avowed pacifist, active human rights campaigner and strong defender of minorities. Especially immigrants and religious communities. A brand of politics where all are equal. A deal for the nation – a new social compact for the people. Sounds appealing doesn’t it?

It is difficult to be a Conservative because at its core, Conservatism is about faith. Not religious, though for some it may be. Rather, Conservatism is about faith in people. To be a Conservative means placing your faith that individuals excel when given the freedom to act and the opportunities to improve their own lives. Being a Conservative means holding a belief that it is not the State that can help an individual to find the drive, passion and bravery to excel in their lives. It is people themselves.

This election is about ideology and for many of my generation the wrong conclusions have been drawn. Conservatism is not about every man and woman for themselves, a free market gone wild. Rather, Conservatism is a belief that people know what matters to them more in their own lives than the state does and that people are better able to decide how to use scarce resources to improve their lives than the State.

In the UK today deep inequality and poverty exist. The question is how do we make them better. It is easy to talk about incomes and to compare ourselves to wages in Europe. This is deeply misleading. There is a reason why people from Europe have been desperate to come to the UK, USA and Germany. That reason is jobs. The UK Unemployment rate hovers around 5% and at around 11% for specifically the 18-24yr old range. In France those figures are around 11% and 20%. In Greece, they are nearer 25% and 40%. This is Conservatism in action. A belief that State intervention in job markets and in regulating businesses heavily, will more often tend to privilege a few rather than helping the many. This is the effect of Unionisation across Europe. Lower jobs and fewer opportunities for young people, to protect the few who have succeeded.

If you want to remove inequality and poverty you need to start with jobs. You also need to start by realising the nature of inequality. Today in the western world inequality is different to the 1980s and before. If you look at the houses of millionaires in London, the Home Counties and other leading cities across the UK and you’ll notice something quickly, many are no longer owned by Brits. The rich across the world are not defined by their nationalities. They move freely between nations depending on where they enjoy the highest quality of life for themselves, their families and their careers. London is a symptom of this, but no different to New York, San Francisco, Hong Kong or Geneva. The wealth that this group enjoys cannot be amended by new national taxes or by restrictions on investment. They simply move, as many did from France under President Hollande. No one from the France became richer since then and no-one in the UK will become richer after Labour’s tax raids either.

It is difficult to be a Conservative because people belief that Conservatives lack compassion. It seems brutal, shocking, barbaric and wrong to let people fail, communities fail and businesses fail, while allowing old beliefs and prejudices to exist. In the mindset of Labour and Socialism, this is why Conservatism is so deeply unpopular in public discourse. It is also why Conservatism and right-wing ideologies are so unpopular in the arts. Bands, dance troupes, painters, poets, writers, singers, all rely and draw from a deep community of people who broadly seek to expose the flaws in the world and to dream of better futures. Critiques of the past and a desire for a new idealist future is what drives concepts like Socialism, Futurism and Idealism. The present is awful, but the future can be better. Who doesn’t want a better future? Who is perfectly happy with the present? Often very few.

In the election today these ideas were barely discussed. The campaign focused on personal histories and efforts to show who would be better to handle Terrorism and Brexit. For many, myself included, our votes will have been cast without much enthusiasm. But our votes do matter and will have consequences. I voted Conservatives today because while Theresa May is our PM today, the Conservative party itself is over 100 years old. The belief that individuals can and should be trusted, supported and given the freedom to make a better life for themselves, rather than a patronising, paternalistic hand of the State determining the terms and conditions of our future, remains the core reason behind why I remain a proud Conservative.

Sometimes the right decisions are the most difficult ones. It is easy to be led by the heart and seduced by dreams of a better utopia. But life is about making tough choices and when it comes to determining who governs our nation in its period of deep transition, I put my faith in a party whose ideology is driven by trust in people. Being a Conservative isn’t easy, but it remains the right choice.

“Brexit means Brexit” – a Translation

Following Prime Minister May’s speech on BREXIT, I have attempted to summarise and analyse the insights I have gleamed on the process over the last year below.

Immigration:

This has been one of the biggest areas of focus since BREXIT was announced, but we now have some clear outlines. First and foremost, the UK will not accept the EU’s freedom of movement, as it applies today. Instead it appears that the UK will offer its own equivalent of the American ESTA scheme, an online visa form which is approved quickly and lasts up to two years, for all EU nationals. This would mean that all European tourists, academics, artists and business people in would be able to visit the UK as easily as they can today, absent a 5 minute application online.  The second piece that we can say with a very high degree of certainty is that all EU nationals currently residing in the UK will be offered citizenship. Theresa May already offered this to the EU commission, in exchange for guaranteeing the rights of Britons living in the EU. We also know that the Home Office is pushing this approach as well. The costs and resources needed are extensive and frankly Theresa May’s government views this as an easy compromise that will encounter limited real resistance from within the UK or her party.

On work rights the picture now is also clearer. One school of thought is to create a skills based quota for each year and make it applicable for all global nationals, including the EU, which is in line with the US, Canada, Australia and other developed economies. This aims  to allow a quota of non-UK nationals to enter each year, provided they are sponsored by an employer. This is the approach championed by the Home Office under Amber Rudd (who previously supported Remain). The other option being proposed is to grant an automatic visa to any EU national who has a full-time job offer to work in the UK. This idea has been proposed by former foreign secretary William Hague. The ultimate choice is likely to be determined by the EU’s negotiating position. The automatic right to work, if an employer has made a full-time offer, allows the government to demonstrate that only “working migrants” are entering the UK, thus dispelling the pernicious lie that EU immigration is welfare driven. It also allows UK industry to recruit top talent across Europe, thus helping to address business fears about labour shortages in certain sectors (including the NHS). If implemented properly, this could even be a blueprint for the EU’s relationship with other future members, such as Turkey and Ukraine. However, if the EU appears to push for punishing exit terms and UKIP maintain the pressure on key Conservative seats, then the first option is more likely.

Foreign Policy and Security:

At this time there has been no suggestion that the UK wishes to change its cooperation with the EU at an international level. The UK has continued its increase in troop and materiel deployments to the Baltic states, and there are no signs of a thawing between the UK and Russia (unlike the USA). At the international level the EU often operates in a broader grouping that includes Canada, Australia and Norway at institutions such as the UN, World Bank and other multi-lateral agencies. It  appears clear that the UK will simply remain within this broader grouping, albeit with less influence on the EU’s ultimate position on issues than it previously held.

Amazingly the UK has not made any attempt to link security and NATO related issues to the terms of exit. This is despite a range of arguments that suggest the UK could leverage this angle, especially in light of the changing US position on NATO. While there have been early signs that the UK intends to expand its presence once again “East of Suez” and there have been discussions to re-open UK naval bases outside of Europe. However, given the UK’s limited manpower currently across the armed forces and its shrinking maritime presence, these recent moves appear to be more symbolic of a UK “open to the world” than a sign of significant redeployments to come.

Trade

While the Prime Minister has talked about staying in the customs union, it appears more likely that the UK will leave the EU single market and customs union. Given this outcome, the game will be about Tariffs, Equivalence and Regulation.

Let’s start with Tariffs. While there remain a number of technical issues to finalise, it appears certain that the UK will become an automatic WTO member, after its exit from the EU is completed. This membership ensures that both the UK and EU have strict limits imposed on the level of tariffs they can set on each other and when they can impose tariffs. To put into perspective the current WTO tariff levels, the tariff on cars between the USA and Europe is around 3%. For some areas the tariffs are higher, for example food, but as the UK is largely an importer of goods from the EU it is unlikely that the EU would want to impose large tariffs.

However, where the EU is likely to seek a clearer split with the UK will be around regulation and Equivalence. With an exit from the single market, the UK Financial services sector are likely to lose what are called “Passporting rights”, whereby UK firms can sell financial products directly to EU consumers and businesses without needing to have a local presence. What the net effect of this will be is unclear. The immediate answer will be that costs for all financial services companies in Europe will rise and the UK will lose some staff in areas like FX trading and clearing of some Euro denominated debt. Beyond that the picture is less clear. As the cost of regulation has increased since 1997, the Financial service sector has seen considerable consolidation, leaving Europe with a smaller group of larger companies than existed before the single market. As these players have operations all over the EU, it’s unclear whether firms couldn’t simply hire a staff member and a postal address in the EU to circumvent many concerns. This approach already exists to an extent within the EU today, as it allows companies like Facebook and Google to take advantage of different tax laws, see Luxembourg and Holland.

Again, the more positive outcome for both sides would be an agreement to keep all tariffs on goods at zero and to introduce “Equivalency”. This concept means that the UK financial services sector could sell goods into Europe, like a firm based in Europe, but they would be subject to EU regulation and EU courts. Moreover, the UK would have no influence on EU regulations and firms in the UK could be prevented from doing business in Europe if they did not match EU standards.

On the broader international trade piece, it looks as though the UK priority list will be the USA, followed by Canada, Australia and New Zealand. I would also add, though it hasn’t been mentioned, that Japan would likely be high on that list too. Japan is a large investor in the UK and moreover, the UK and Japan have few sectors of extreme competition, with the UK unlikely to threaten Japan’s agriculture or electronics manufacturing, while Japan poses few threats to the UK services sector. The UK would likely use templates from the failed US-EU trade talks as the basis of terms with the US (50% of all US gains from TTIP were due to come from greater access to the UK anyway) and the UK is likely to use the current EU-Canada trade deal as its template as well.

Closing Comments:

The BREXIT process is subject to a huge amount of political brinkmanship. Should moderate EU parties do well in elections, the global economy accelerates, Theresa May remains popular in the country and Trump remains largely focused outside of Europe, then political leaders should have the breathing space to craft a reasonable and fair deal. If, however, Russia and the US increase pressure on Europe, the migrant deal with Turkey collapses and populists are successful in EU elections, a fortress mentality may set in. The EU, despite its challenges, remains extremely popular in Europe. For this reason I continue to believe that if the survival of the EU becomes more threatened, we are likely to see a youth led backlash in favour of greater EU integration.

The EU is, in the words of Romano Prodi “an unfinished project” and Europeans know this. Thus, how BREXIT plays out is not simply a story that can be told in isolation, rather, BREXIT is also the story of the European Union. Will it become what its fathers dreamed of, a full political union of nations, or will it unwind to an early form. Time will tell.