Belfast Telegraph

Tuesday 29 July 2014

It is time for joined-up thinking on our energy

Households here pay the highest electricity prices in the UK. The Executive must overhaul its energy policy and make the Tyrone-Cavan interconnector a priority, argues John Simpson

Power NI has been given permission to increase electricity charges by an average of 18.6% - this will leave its already hard-pressed customers paying 10% more than the average across other regions in Britain.

The immediate regulatory realities in 2011 make most of this increase almost inevitable. There are, however, important questions about how we got into this unenviable position in the first place - and, more importantly, what needs to be done to get more acceptable long-term answers.

Prices charged by Power NI are regulated. Its permitted profit-margin is set and any excess (or shortfall) is adjusted in the following years. This price review has been verified by both the Utility Regulator and the Consumer Council.

The regulator, Shane Lynch - to his credit - has published a full explanation of the forecasts, along with a cost breakdown for the last two years.

The increased prices will apply from October 1 and will apply for the next year. An important starting-point is whether the prices in the current year are appropriate. If not, this would affect the baseline for 2011-12.

Unfortunately, Power NI has not given any evidence on this and has not published its trading results for 2010-11. In the absence of evidence or complaint, the assumption might be that this is not a problem. But read on.

This starting-point is critical since Power NI argues, controversially, that since the last price change was two years ago, this year's review should look at cost changes over two years, not one.

The price increase is attributed mainly to higher fuel costs, which have impacted on the electricity generators. That is evidenced both by Power NI (by proxy through fuel prices) and the regulator (using cost data from single electricity market sources).

The regulator shows an 18% increase in direct generation charges (not to be confused with the price change of 18.6%), which implies an average fuel-price increase of nearly 40%.

Taken alone, fuel price increases of 40%, leading to overall generation costs rising by 18%, and then adding unchanged normal operating overheads, would have justified a price-rise to customers of 11% - not the 18.6% that has been announced.

The regulator points to other factors affecting prices. These have wider implications for the electricity policies of the Stormont Executive.

The regulator shows that, of the price-increase of 18.6%, generation costs account for about two-thirds. Overheads and other supplementary charges account for the rest. Two of these add-ons have relevance to the Executive's energy policies.

In a calculation of 'market imperfections', the price-increase allows an extra £11m charge. Decoded, this is an estimate of the extra costs to local customers of the inadequate cross-border interconnections as part of the all-island single electricity market and the knock-on need to hold higher levels of reserve generating capacity.

Because the capacity of the existing cross-border interconnection in Armagh is small and - critically - the Tyrone-Cavan interconnector has not yet been built, there are more operational constraints on the optimal all-island allocation of workload to the cheapest generators. Competitive, unconstrained economic dispatch is not possible.

In addition, in a twist which should have been made clear if the starting baseline had been fully specified, the regulator has accepted a submission from Power NI for a sizeable under-recovery of revenue in the past 24 months. This correction factor added £14m to costs in 2011-12.

Neither Power NI, the Consumer Council, nor the regulator has offered a fuller explanation of where the original allowance proved incorrect. These corrections are not objectionable, nor are they unavoidable. However, greater clarity would be helpful.

These two features alone account for nearly three percentage points of the 18.6% increase. Other overheads and payments for renewable obligations account for the remainder.

The increase from October 1 has been approved after careful scrutiny. For policymakers, this should not be treated as a 30-day wonder which will be out of sight and out of mind when everyone adjusts to the new regime.

Northern Ireland domestic customers pay some 10% more than in comparable regions in Britain and by a similar margin on many other EU countries. On present trends, this disadvantage will remain. It can be reduced by careful policy developments. It is unlikely to be removed by government subsidy, tighter regulation or appeals for stronger competition.

Northern Ireland does not have long-term policies which will narrow the price gap.

As a priority, there should be commitment to integrate the networks on this island through the Tyrone-Cavan link and also with structures in Britain. Interconnection, through the Moyle link and the new Irish East-West link to Wales, must be embedded to allow access to cheaper supplies in Britain to enhance local competition.

The ambitions to expand generation from renewable sources, including large offshore wind-farms and significant tidal energy, should be built into firmer commitments, assuring Northern Ireland that we can sell variable amounts of renewable energy to Britain when the wind is blowing hard and that the British system will supply electricity when the wind is light.

Northern Ireland must plan to have access to the increased natural gas from Corrib and the Lough Allen basin. The present, more passive approach to policy planning must change.

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