Having adequate electricity supplies is a balancing act
The ability to keep sufficient, sustainable and competitive electricity supplies for businesses and households in Northern Ireland recently came under threat from the unexpected clash between the Regulator and electricity generator AES, owner of Kilroot and Ballylumford power stations.
The announcement by the Regulator earlier this year that the main large power units at Kilroot had failed in a competitive process to win a capacity contract for electricity supply after October 1 came as a surprise. The Regulator, backed by the expertise of the system operator, SONI, gave assurance that the new capacity contracting system ensured that there would be enough electricity even without the two large generators at Kilroot. Supplies would be available from elsewhere across the all-island network including, incidentally, from Ballylumford.
The contract failure by AES Kilroot was quickly followed by a request from the managers of Kilroot to be allowed to close down the two large Kilroot generators at the same date as the new I-SEM system would become operational. Ironically, although these generators would not have a capacity contract, they needed to give due notice of plans to shut down. As events have developed, that particular request became irrelevant.
With hindsight, the original contract process and outcome seems to have been flawed: flawed partly from weaknesses in the original contract bid by AES Kilroot and flawed partly by an inadequate appreciation of the serious consequences of the result on the immediate financial viability of Kilroot.
Whilst the inappropriate outcomes were still in the planning process, because of the contract failure, AES Kilroot published its accounts for 2017 showing an impairment of its shareholder funds by almost £90m.
Pending the launch of the I-SEM, delayed to October 1, unbeknown to outside observers, it is now known that AES raised legal doubts about the decisions, asked the Regulator to allow the transfer of some contract capacity from Ballylumford to Kilroot, and failing that option asked for a derogation to close four units at both places because of the financial consequences for all the local operations of AES.
To the people with inside knowledge, during the last three months, it may have seemed that serious long-term damage was possible and that security of supply (particularly in Northern Ireland) could be eroded. With hindsight, the Regulator was forcibly reminded of operational and financial considerations that should be taken into account.
I-SEM was launched on October 1 but, to some surprise to those outside the system, Kilroot remained in production. No announcement had been made about how this has been managed financially. Obviously, private detailed negotiations were in progress leading to an announcement on November 9 by the Regulator, with agreement from AES, that a one-year deal with contractual changes had been reached.
The Regulator has agreed:
- To transfer a capacity contract from one Ballylumford unit to one at Kilroot;
- A new one-year system support services contract with the other unit at Kilroot;
- A derogation to allow early closure of two older generating units at Ballylumford;
- AES was allowed to withdraw its derogation requests for the two large Kilroot units.
The commercial implications of these regulatory decisions have not been fully evidenced. However, the support systems services contract is an additional cost, not previously covered and is quoted as costing around £6 per annum per household.
Independent estimates are that, when business tariffs are included, this part of the deal may cost customers about £14m.
At this stage, firm conclusions cannot be made about whether I-SEM is now settled. There are continuing issues:
- During 2019 there will the next steps in implementing I-SEM and further capacity or systems auctions;
- Greater detail on the main variables in continuing I-SEM operations should be released and publicly reviewed periodically;
- Public awareness on the next contracting stages for electricity will be stronger;
- The Regulator will need to carefully explain how the Brexit negotiations will potentially affect NI customers.
A complex regulatory agenda?