Unplugging from EU could set back UK energy investment

* UK referendum on EU membership set for June 23

* Uncertainty after Brexit would delay investment

* Britain faces looming energy supply crunch

By Nina Chestney

LONDON, June 16 (Reuters) - A British vote to leave theEuropean Union next week would make UK energy infrastructureinvestment costlier and delay new projects at a time when thecountry needs to plug a looming electricity supply gap.

Energy has been far from central to debates about whether toleave the EU - a move dubbed "Brexit" - but the sector wouldstill be impacted by a decision in the June 23 referendum toquit the 28-nation bloc.

After a Brexit vote, all EU laws apply in Britain until twoyears after London starts the process to leave. Then none wouldapply but Britain could try to stay part of some frameworksthrough negotiations, a process that could take years.

Uncertainty about the type of relationship Britain wouldhave with the EU after Brexit would make energy investors demandhigher returns for the risk of less favourable conditions.

Oil and gas majors BP and Shell are amongseveral energy companies that say leaving the EU would affectthem and the sector negatively.

"I can't see any upside for the energy sector of the UKcoming out of the EU. The risk premium going up will increasethe cost of capital," Ian Simm, chief executive of UK-basedImpax Asset Management, said.

"We have mostly run our power assets down over the past 25years. Therefore, we do need investors to be confident enough toput their hands in their pockets and commit to the next wave ofpower plants," he added.

UK-based consultancy Vivid Economics has estimated the costof exclusion from the internal energy market, excluding impactson investment, could be up to 500 million pounds ($708 million)a year by the early 2020s.

"The scale of planned infrastructure investment in theelectricity sector over the next decade means that even smallincreases in the cost of financing could have large consequencesfor total investment costs," it said in a report.

"Further upwards pressure on costs would result from thelikely devaluation of the pound, given the role imported goodsand services play in UK energy supply."

According to a Reuters poll this month, the British poundwould sink 9 percent against the dollar after Brexit.

UK UNPLUGS

Britain faces serious energy supply difficulties over thenext few years as coal plants have to close by 2025, the nuclearfleet is aging and weak economic conditions curb investment innew gas-fired power plants.

Renewable energy is growing, but more interconnections andenergy storage are needed. The British government has estimatedthat the required energy infrastructure will cost 275 billionpounds by 2020-2021.

French utility EDF's plan to build two huge nuclearreactors at Hinkley Point in Britain would help plug the supplygap. The company's chief executive said earlier this year thatBrexit would not change its plans, but it has not yet made afinal investment decision.

"The 3.2-gigawatt Hinkley nuclear project looks to be afinancing headache in any scenario, given the parlous state ofEDF's share price and balance sheet," Michael Liebreich,chairman of the advisory board of Bloomberg New Energy Finance,said in a blog post.

Investment in interconnectors is also important for Britain.UK wholesale power prices are higher than the EU average, partlybecause interconnections with other countries are able only tosupply around 6 percent of peak electricity demand.

However, efforts to link the UK's electricity grid withother European power networks could be set back due to Brexit,with some projects likely to be put on hold because Britainwould no longer automatically have a say in the formulation ofEU energy regulations, Norton Rose Fulbright lawyers said.

Investment in renewables could be hampered. Changes by thegovernment over the past couple of years to renewable-energysubsidies have already dented investment in clean energy.

"There is investor uncertainty already but the only thingthat gives it any kind of framing is through the UK'sobligations to the EU. If I was a cleantech investor I would beconcerned," said Anthony Hobley, chief executive of think-tankCarbon Tracker Initiative.

Britain could also lose access to funding for renewables,particularly offshore wind, from EU institutions such as theEuropean Investment Bank, said Charlie Thomas, manager ofJupiter Asset Management's Ecology Fund. Such assistance lastyear totalled around 7 billion euros.

"But at the same time, our view is that there is significantappetite from private-sector institutional investors to step into any funding gap," he added. ($1 = 0.7060 pounds)

(Editing by Dale Hudson)