Long-term vision is needed in the great power game
The electricity sector is changing in ownership, names and performance, reflecting the competitive supply market alongside a regulated monopoly utility.
Confusion of names is easing: Power NI is the renamed Viridian subsidiary that is currently NIEES (Northern Ireland Electricity Energy Supply). It supplies electricity to households and, in competition with others, to some business customers.
NIE (or Northern Ireland Electricity) owns the electricity grid. It was a Viridian subsidiary but is now a locally controlled subsidiary of the Irish ESB, bought for £1.2bn. NIE now has its own local board of directors chaired by Stephen Kingon.
The regulator has started to examine the decisions that must be made for a new pricing review, RP5, due to be implemented early in 2012.
NIE has tabled a demanding capital plan costing £898m over a five-year period. NIE is seeking what it considers to be reasonable adjustments to secure the quality of the grid and allow an agreed return on its capital investment.
Understandably, the regulator will critically review NIE's proposals.
If accepted, the NIE proposals, on their own, might eventually add 8% to electricity bills.
NIE annual accounts to March 2011 show that the company earned revenue of just under £229m, giving an operating profit of £69m. However, that operating profit had to meet finance charges of £45m, leaving a pre-tax profit of £24m. This was a lower pre-tax profit than in any recent year and, unusually, it paid no dividends.
Dividends in the year to March 2010 cost £55m.
The trading performance of NIE in 2010-11 has been less buoyant than in earlier years. The regulator can expect to be asked to approve a stronger performance by NIE affecting capital spending and approved revenue.
Two particular features of NIE merit scrutiny.
First, the new owners of NIE have inherited a significant pension fund deficit.
The actuarial assessment in March 2011 was a net liability of £41m against assets of £705m.
The net liability is down from the £136m a year earlier, but this improvement is largely from an actuarial gain of £89m (some of which came from an accounting shift from an RPI base to the lower CPI formula). A significant pension fund deficit would be a legitimate claim in the review (partly because for the new owners it is an unavoidable cost).
Of even more significance for NIE is its claim that the regulator should approve capital spending of £898m over the next five years, compared to £374m in the last five.
The justification is that £609m is needed to maintain the reliability and quality of today's services - a 'business-as-usual' bid. Another £217m is identified as necessary to cope with the expansion of electricity supply from renewable sources (largely wind farms) and critical upgrading of core transmission links, with a further £76m for the Irish interconnector.
Central to the NIE submission are details of necessary re-enforcement, replacement and the introduction of smart technology into an electricity grid where there is a growing risk of supply failure and a realistic risk that Government aspirations for 40% of electricity from renewable sources will not be met.
Three other energy projects will enter into the debate about the price review, RP5, and further ahead.
First, there is a proposal that the electricity connector with Scotland, the Moyle Interconnector, should be upgraded to a possible 500mw, either east-west or west-east.
Second, key parts of the main 275kva grid, should be programmed for a 10-15 year replacement.
Third, to avoid frustration of the objective of linking more renewable capacity, the cross-border Tyrone-Cavan interconnector should be hastened.
Not only does Northern Ireland need an RP5 which incentivises early investment, there is also compelling logic in a longer-term vision not only to 2017 but possibly to 2030.
The current regulation and planning framework should not be constrained by a short five-year planning horizon.
There is a realistic risk that hopes for 40% of electricity from renewable sources will not be met