Transforming Northern Ireland’s haywire electricity market will leave us all lighter in the pocket
Great Britain has been operating an incentive mechanism for renewable electricity supplies that is proving too expensive and must change. Northern Ireland has had a better deal but this, too, must now be changed.
Part of the more immediate problem for Northern Ireland is that the current renewables system has given favourable terms to suppliers of renewable electricity in a pricing system that means that a big proportion of the supplementary payments to generators (in the form of payments for renewable obligation certificates (ROCs) indirectly comes from GB customers.
The minister, Arlene Foster, has issued a discussion paper in which the unavoidable conclusion is that Northern Ireland should face up to the consequences of adapting to the changing UK electricity market.
For the electricity market in GB, the Department for Energy and Climate Change is making two policy changes.
First, for new suppliers of renewable electricity, after 2017, contracts will be allocated based on 'contracts for difference (CFD)', and these contracts will determine the cost of future incentive payments. The current system has created a market for renewables that offers supplier prices that are too high. Renewables are now established as a key contributor to electricity supply, but, competitively, lower prices should be expected.
Second, the expectation is that the market share supplied by renewables will be subject to revised GB/UK targets.
Introducing longer-term CFD should make renewables cheaper in GB. In Northern Ireland, however, the change is likely to make renewable supplies more expensive.
In Northern Ireland, the policy questions centre on whether we should integrate with the GB scheme of CFD or should consider a separate scheme, which, to external observers, seems to point to local renewable electricity prices increasing even more.
The minister's discussion paper points to the merits, efficiency and administrative advantages of linking into the GB scheme.
But the minister faces an uncomfortable dilemma. The simplest decision would be to adopt the GB policy and integrate with the CFD scheme. That would be administratively straightforward. However, because Northern Ireland starts from the lower outcome from the current use of ROCs, the end result will be a higher cost to the consumers.
The opposite choice might be to introduce a separate Northern Ireland scheme, but with no guarantee of a better outcome for consumers. There are formidable difficulties here. It would be tough in the time available, expensive as a standalone process and might need Brussels State Aid approval.
Arlene Foster is caught between options where no outcome retains Northern Ireland's current cross-subsidised advantage.
An extra factor in the decision-making is the economics of a switch to a competitive outcome when deciding the allocation of CFD contracts. These will go to the most competitive bidder, and there is the possibility they will be suppliers based in GB. As a result, Northern Ireland would get less work on the establishment of new renewable capacity and there may be less local investment in renewable capacity.
One consequence of integrating Northern Ireland into the overall GB/UK scheme is that it would no longer be necessary to work to NI targets for renewable consumption. The Programme for Government has put considerable emphasis on the target that NI should reach 20% of electricity generation from renewable sources. Indeed, nearly reaching that target in 2015 is quite a considerable achievement.
In the amended UK scheme, a renewables generation target for an individual region would not be a practical operational objective. A UK-wide objective would be more likely.
The overall proportion of electricity from renewable sources in the UK would remain a critical element of official policy. Consumers would continue to pay for renewables through the impact of a supplier obligation (to purchase a set proportion of renewables in the wholesale market).
For local consumers, the cost of renewables is likely to rise. However, the minister really has little option but to accept this change.
Company report: Shorts Brothers plc
Shorts Brothers plc trades as Bombardier Aerospace in Northern Ireland. To match the reporting conventions of its parent company, the registered accounts are reported in US dollars. The financial figures have been converted to sterling using £1=$1.585 in 2012, £1=$1.565 in 2013, and £1=$1.648 in 2014.
The trading results in 2014 reveal a sterling equivalent increase in turnover of 7% compared to the previous year.
The results measured in operating profits have varied in a contrasting direction when converted to pre-tax profits. A large part of this difference stems from changes in net interest charges and finance costs, and their impact on pre-tax profits.
In 2014, parent company Bombardier announced an organisational restructuring in its global aerospace business. The Belfast operations are now located in a new aerostructures and engineering services business segment, which specialises in the design and development of complex composite and metallic structures, including wings, fuselages and engine housings.
Flight testing for the new CSeries aircraft has resumed. Work on the new Bombardier Global 7000 and Global 8000 business jets is also under way and has reached the stage for the delivery of the first prototype tailcone to the test programme.
Average employment remained fairly stable at just over 5,000 employees. But in the second half of 2014, there was a workforce reduction of 390 in the Belfast operations (as part of a group loss of 1,800 jobs). Three-hundred of the jobs lost in Belfast affected contractors and temporary workers.
The inherited actuarial deficit on the company defined benefit pension funds decreased by 38% as a result of net actuarial gains on the pension funds held.
At the end of the financial year, there was an estimated deficit of just under $83m in the company’s pension funds, down from $134m a year earlier.