Belfast Telegraph

Thursday 25 December 2014

Customers need to get to the root of new electricity deal

One of the relics of the expensive deal that privatised the local electricity industry is about to be partially removed.

The regulator, Iain Osborne, inherited a deal that distorts the competitive market for payments to buy electricity from Kilroot and Ballylumford.

The Ballylumford deal was renegotiated but the contracts with Kilroot remain as negotiated, with the earliest date for a termination or variation of the main contracts in November 2010. This is an important decision for electricity customers. A consultation paper outlining the possible outcome was placed on the internet and interested parties are asked to respond by April 26.

The regulator is 'minded' to cancel the generating contracts for the generators at Kilroot that have a capacity of circa 400MW, or about a quarter of the generating capacity in Northern Ireland. He does not intend, at present, to cancel the different contracts for 58MW of quick-response capacity at Kilroot (and similar plants at Ballylumford).

For such a significant decision, it is something of a surprise that the regulator did not issue any public press statement to encourage wider informed debate. The decision is partly about the cost of electricity to consumers, but it is also about the wider implications of energy policies and any risks to security of supply if, for example, some parts of Kilroot were not readily available and the electricity inter- connectors, north-south and east-west, were not available to offset any capacity shortages.

This decision comes from an evaluation of whether the cost to consumers of Kilroot's generation over the next 14 years will be lower with the contracts cancelled.

The regulator has provided estimates (without full details of assumptions and methodology) that cancellation might save consumers £20m per annum next year, rising to £39m per annum by 2020.

These estimates assume that, for this capacity, the variable subsidy by consumers known as the Public Service Obligation (PSO) would be withdrawn.

Because the regulator deems his assumptions (particularly about relative fuel prices) and methodology to be confidential, he is essentially asking the public to accept his own answers. Defending this treatment of his modelling of electricity prices as confidential, he argues that the professional industry forecasts, which he buys, are subject to a confidentiality clause.

In my opinion, that might be challenged. First, could he use his own professional staff to do the market analysis to prepare forecasts? Second, are there no other sources, such as our universities, which would do this work without seeking commercial confidentiality to block public debate?

Regrettably, even a diligent reader of the consultative document will not find enough coherent detail to facilitate reaching an independent conclusion.

A studied reading of the document would leave many non-technical readers unable to follow the modelling, never mind do the arithmetic.

There is no itemisation of each of the variables used in the model and no suggestion of the weightings for the separate parts. The best this reader can deduce is that, from whatever source, the current and future relative prices of generation from gas will be cheaper than from the use of coal, particularly with the extra costs of carbon permits.

As a partial (but incomplete) guide to relative fuel prices, the regulator shows that if gas prices were 15% higher, the cost saving of about £20m per annum would be less than £12m in 2012-13, and only £19m in 2020 compared to £39m at current prices. Without fuller detail of the analysis within the secrecy of the regulator's office, an adequate detached assessment is difficult.

The conclusions reached by the regulator may be appropriate to the new conditions. However, if his assumptions prove to be incorrect, it would not be an acceptable defence that, on the basis of confidential professional assessments, he bought the wrong answers. The regulator is vulnerable to a charge of lacking transparency and accountability. For customers and other stakeholders, is the regulator's approach acceptable?

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