After NIE Energy and Phoenix Natural Gas gave notice of forthcoming tariff increases, Utility Regulator Iain Osborne looks at the diverse challenges facing Northern Ireland’s energy sector.
It's not often in life that we get a glimpse of what the future might be like. When we do, it gives us a chance to prepare. Today’s energy costs are higher than most of us can remember. Although crude oil prices — which broadly underpin price movements for gas, electricity and coal — have eased from record peaks in recent weeks, it will be some time before we can determine whether a clearer trend is emerging.
For now, these record-high price spikes allow us to imagine what the world could be like in a couple of decades, forcing us to ask: Are we ready?
The US Energy Information Administration suggests that crude oil prices will remain at $120 a barrel for this year and next.
Indeed, the majority of independent analysts agree that the era of cheap fuel is over – maybe forever.
This scenario presents us with a serious dilemma.
Northern Ireland buys all its gas, oil and coal on international markets, and so has no control over these prices.
Wholesale gas prices for the coming winter are 95% higher than a year ago, and two-third of our electricity is generated from gas. Oil prices overall are up over 90% since summer 2007.
My office, the Utility Regulator, exists to protect consumers.
Around 40% of your energy bill is made of costs within Northern Ireland. These we control.
Just last year we implemented new controls that will save consumers around £60m. We are also working to encourage competition — we set up a new all-island electricity market for generators that is much more open to competition. We are now considering how can encourage new suppliers to offer choice for household energy consumers.
We encourage Northern Ireland suppliers to shield consumers from short-term price fluctuations by buying ahead, so we can already see the cost trends.
We expect further very substantial price increases this autumn. We will scrutinise the companies’ proposals carefully before settling the precise level of increase.
But it is already clear that this autumn’s electricity price rise would need to be much larger than this summer’s increase if the suppliers are to cover their costs.
People often ask, why don’t shareholders’ profits take the pain? My answer is — what profits? In the absence of competition, Northern Ireland suppliers’ prices are closely regulated.
NIE’s supply business makes just 1.8% margin, Phoenix only 1.5%. Regulation prevents excessive prices, there is no pot of gold to be raided.
What of the longer term?
High prices do seem to be reducing demand and many countries are investing to boost supplies. Optimistically, we might look for the current very high prices to last a couple of years.
But these unprecedented world-wide price hikes serve as a reminder. Oil prices drive the cost of gas, which just now drives the price of power.
Electricity prices will also reflect the cost of carbon dioxide emissions. Paying these costs is the right thing to do — we must work at reducing our carbon footprint. However, they will tend to drive energy costs up.
We are not well prepared. Northern Ireland has the highest carbon footprint in the UK.
We are addicted to our cars. Most of us heat our homes with carbon-heavy oil instead of cleaner gas. Despite massive government support, we still produce only 8% of our power from renewable sources, despite our superb wind resources.
We need to change — not just because it’s the right thing to do — but because not adapting will be very costly.
As regulator, we will play our part in meeting these challenges. We have recently consulted on how we can boost sustainable development. But no single player controls this game: government, industry and individual consumers all have a role to play.
Together, we must heed the wake-up call. This year’s prices give us a glimpse of the future.
Will we be ready?