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Why intervening in energy market is not easily done

By John Simpson

Published 11/10/2016

The electricity market in NI is a complex one
The electricity market in NI is a complex one

The biggest users of electricity in Northern Ireland pay significantly higher tariffs than comparable businesses in Great Britain and the Republic of Ireland. This difference has provoked a suggested review of the way in which these tariffs are set, a search to identify the causation of the differences, and the scope (or practicality and desirability) for Government intervention to reduce the adverse differences.

Although on this island we have a Single Electricity Market (the SEM), this 'single market' produces different prices in the north and south.

The existing single market applies only to part of the market structure. It is essentially a wholesale market mechanism with separately determined distribution and delivery cost elements (known as network costs).

In Northern Ireland, the electricity tariffs have emerged as the outcome of allocated network costs which have gone through the network price controls set by the Regulator, the indirect influence of the regulatory mechanisms of the Single Electricity Market and, as a final stage in setting tariffs, the charges set outside formal regulation by the competitive action of the electricity suppliers.

The tariffs which business users, large and small, pay, is the outcome of these different decision-making strands. There is a competitive element, dealing with suppliers, and there is network charge, set through a regulated framework.

Added to these two variable outcomes there is also the wider influence of the SEM.

The complexity of the tariff setting elements illustrates some of the problems if, as an official policy, the Government wanted to deliver a different outcome.

Does the adverse impact on 20 large scale users of electricity justify official intervention, and if so, how?

Alternatively, is there an argument that the network charges are allocated unreasonably?

The regulator, Jenny Pyper, acknowledged these questions recently when she spoke to the NI Energy Forum.

"Network costs make up about a quarter of the bill... clearly the allocation of network costs is an element of the bill where action could be taken to help large energy users, if that is an outcome which the NI Executive desires. That is not a decision for (the Regulator). We can provide ministers with evidence and advice," she said.

The momentum to review the impact of higher electricity charges for large users stems from the recent complaints made when Michelin and JTI (formerly Gallaher Ltd) decided to close production plants, both coincidentally based in Ballymena.

Both made adverse comment on electricity prices, although the causation was described as contributory rather than fundamental.

In a comparison of the tariffs north and south on this island, part of the explanation for a lower priced outcome in the Republic of Ireland is that the Irish government has directly implemented a tariff redistribution (or allocation) which favours the large users. Should the minister in Northern Ireland, Simon Hamilton, consider direct intervention?

A plea for intervention merits some caution. First, if Northern Ireland was to decide, by appropriate political steps, to change this allocation, there is a possible challenge under the (still remaining) State Aid rules.

Second, and more problematic, any intervention must also consider the impact on all customers.

Reduced tariffs for large users would need to be offset by higher tariffs elsewhere with other customers. A notional cost of from £20m to £30m each year, would mean about an extra £20 a year on average household bills.

In turn, that points to a debate about who would pay higher charges: all customers, only commercial customers, including or excluding all farmers?

Domestic households in Northern Ireland pay electricity bills which, on average, are nearly comparable with households in GB. Northern Ireland is a comparatively small scale electricity market so that, taking fixed overheads into account, a system which keeps charges close to GB averages is itself worth retaining.

The case for lower tariffs for large users lies outside the remit of the regulator and needs a decision by the Executive ministers.

Belfast Telegraph

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