John Simpson: Energy regulator needs to be much more transparent on price rises in Northern Ireland
Earlier this month, there was UK-wide comment on the prospect of reduced electricity prices because the wholesale cost of natural gas has recently been falling. Northern Ireland energy market observers were surprised to learn on August 14 that the Regulator had approved a 6.1% price increase for domestic customers from October 1.
A contrast between lower wholesale prices and higher NI prices is possible, depending on any major local difference in costs, but it merits a careful explanation.
Power NI, the regulated and largest local supply company, had earlier submitted its business plans to the Regulator, the plans had been examined, reviewed with the Department for the Economy and the Consumer Council, and at the end of this process, they were approved by the Regulator.
In an effort to validate the decision making process, after Power NI had announced the outcome, the Regulator published a 12 page review of the mechanisms used to assess the merits of the proposals. That review of the components of the factors contributing to the setting of the maximum average price which Power NI is allowed to charge is commendable because it identifies (not in adequate detail) the range of influences affecting the viability of Power NI.
However, the review conspicuously lacks enough quantitative information to allow a reader to understand the precise influence of each of the main variables in the assessment.
Rather than demonstrate how a (say) 5% fall in wholesale natural gas prices, the biggest single part of costs, converts into a 6.1% household price increase, the Regulator asks the public (and the Consumer Council) to accept on trust the hidden arithmetic. That poses two questions: why not quote the actual cost assumptions made and, second, why not spell out the tariff implications of each of these main variables? Intuitively, if gas prices have fallen and electricity prices are to rise, there must have been unusually large 'other' costs.
In addition to the changes in the wholesale price of fuel (mainly gas), which includes the increasing cost of carbon levies, the Regulator identifies the other main costs as paying for:
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- corrections to adjust for earlier year over-under allowances
- the NI Renewables Obligation commitments
- the charges for the Use of System
- levies to cover system support services and public service obligations
- the allowed costs and 2.2% profit margin of Power NI
This range of costs is unexceptional and helpfully illustrates the make-up of these costs in determining the revenue needed by Power NI, which can then be converted into a tariff per unit of electricity sold.
Additionally, if the total demand for electricity is expected to fall, then the tariff cost will increase reciprocally.
The deficiency in the explanation by the Regulator of the allowed new tariff is that there is inadequate information on the changes in costs for each element of the calculation and, from that base, the contribution to the total costs of the budget of Power NI, of over £300m.
Since the price of fuel is expected to be lower in the year ahead and fuel makes up about 50% of the total costs, then to reach a conclusion that tariffs should be increased by 6.1%, means that some other costs must have risen, probably, by 10+%.
The Regulator's review of prospective cost increases would be more helpful if it quantified separately:
- the impact of higher carbon costs in 2019-20
- the cost of correcting other 'under' allowances in 2018-19
- the cost of, and justification for, increased imperfections charges to which Power NI attributes 40% of the tariff increase
- the cost of extra payments for stand-by (unused) less efficient generators, displaced by wind generation
- the reason and the cost for using the RPI adjustment rather than the newer CPI index
The Regulator and consultees have done a disservice to customers by failing to offer an adequate explanation of the tariff decision.
Company report: Irish Salt Mining
Irish Salt Mining and Exploration is a long-established company with facilities for the mining of rock salt near to Kilroot, Co Antrim.
This area of east Antrim contains a number of identified and extensive salt deposits.
The company is one of a small number with commercial deposits of salt located in the United Kingdom.
The Northern Ireland-registered company is a wholly-owned subsidiary of English registered ISME Holdings, which in turn is owned by private interests in the United States.
There are three directors with American addresses and the controlling party is Ms Shelagh Mahoney.
The key feature of the registered accounts for the most recent year to the end of November 2018 is the increase in turnover to reach over £30m: an increase which nearly trebled the turnover in the immediately preceding year.
The registered accounts do not appear to attribute the increased turnover either to the volume of sales or the realised prices.
The increase in turnover of nearly £20m has generated an increase in operating profits and pre-tax profits, each of over £10m.
The company reports a small increase in the number of employees to reach 56.
The capital investment programme increased significantly to nearly £2.4m, nearly treble the commitment in 2017.
Post-tax profits were retained in the business, increasing the value of shareholder funds to £38m. No dividends to shareholders were paid.
Turnover 13,493 10,945 30,570 Up 179%
Operating profit (loss) 1,087 140 10,861 Large increase
Pre-tax profit (loss) 1,147 166 10,916 Large increase
Capital expenditure 625 857 2,357 Up 175%
Employment (ave. no) 54 54 56 Up 4%
Shareholders' funds 29,214 29,381 38,235 Up 30%
2016 2017 2018 % change annually