Belfast Telegraph

John Simpson: Regulator has questions to answer about Kilroot power station


Kilroot faces closure after its two large coal burners lost contracts
Kilroot faces closure after its two large coal burners lost contracts
John Simpson

By John Simpson

Big changes are about to take place in electricity generation in Northern Ireland. The existing Single Electricity Market (SEM) system will be replaced by the still to be fully presented Integrated Single Electricity Market (I-SEM).

The Utility Regulator's expectation was of a relatively simple change-over accompanied by keeping electricity users in touch with the impact of the change.

Unhappily, the result of the first big contractual change has been an auction that has left the two large coal burning generators at Kilroot without any contract after May 23. The regulator, relying on the professional advice of SONI, believes that NI has adequate supplies without 440mw from two big generators at Kilroot.

AES, the American owner of Kilroot, has responded by saying that at short notice, for financial reasons, this means that most of Kilroot must close.

The logic of the auction now needs to be re-examined. Is Kilroot being unfairly penalised? What are the implications for the four smaller, open-cycle gas turbine generators at Kilroot (with about 120mw emergency top-up capacity) whose capacity was accepted for the auction, and the energy storage system also installed at Kilroot?

The long-term future of coal-based generation at Kilroot was time-limited, as emissions standards increase and alternative energy sources become available. The expectation was that there might be another four to five years of output.

What is important is that an immediate withdrawal of a contractual relationship was not anticipated. This raises critical questions about the role of the regulator. Did the regulator appreciate that the auction might do serious commercial damage to Kilroot? Can AES claim any compensation? Were interested parties adequately briefed on the possible outcome?

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Alternatively, did AES appreciate the need for a more competitive bid?

A fundamental question is whether it was commercially fair to switch to I-SEM, disregarding the disruption to an electricity generator which has had a continuous contribution for over 25 recent years and had, indeed, stepped up to enhance capacity guarantees when capacity shortages were forecast for 2018-20.

AES disputes the regulator's claim that the new contract system will save £50m per year. The calculations need to be published and allow for the variable energy costs when expensive OCGT plant is needed.

The regulator now believes that NI can manage without the Kilroot coal burning units. However, attracting some criticism, the regulator is relying on a repaired Moyle Interconnector for a possible 216mw of capacity. Kilroot has placed a welcome guarantee of 450mw capacity, which now gives way to increased cross-border and cross-channel interconnection.

And there are still questions about whether the auction system has been appropriate. Has the baseline of the installed capacity and its operating costs really given NI (and the whole island) the most competitive outcome? Excluding the lower marginal costs of the coal burning plants tilts the commercial advantage to the more expensive OCGT plants.

Even if the auction contracting was acceptable, the outcome for a business that had an expectation of continuing contracts needs to take account of the commercial fairness of an abrupt contract change. The regulator does not seem to have comparable off-set arrangements to those in Dublin. There is little surprise that AES will feel that NI has not been as welcoming for this American investment as would be appropriate.

Ironically, Kilroot's coal fired generators will earn no revenue after May 23, but they must apply to the regulator and SONI for permission to close.

If the regulator says no … then what?

Company Report: Deka Energy

Deka Energy Associates is the natural gas, supply and distribution parent company which owns firmus energy (distribution) and firmus energy (supply). The purchase of firmus energy was completed at the end of June 2014 at a cost of £78.4m. The results for 2014 reflect part-year transactions.

DEKA Energy Associates paid its first dividend of £3.75m to its shareholding owners in 2016.

DEKA Energy Associates is a subsidiary of iCON Sapphire Holdco Sarl which is, in turn, a subsidiary of iCON Infrastructure Partners LP, registered in Jersey.

Although the value of turnover was lower in 2016 than in 2015, this seems to have been largely a consequence of lower gas sales prices.

The volume of gas sales was nearly constant at over 60.5m therms and the number of new gas connections in the year at 4,287 was significantly higher than 3,882 a year earlier.

Although sales revenue was lower, the operating profit rose by 29% to reach £18.6m.

After the deduction of net finance charges on borrowed funds of just over £7m and a fair value adjustment on derivative transactions, pre-tax profits also increased by 35%.

The company has incurred continuing capital expenditure of nearly £12m in each of the last two years.

A feature of the balance sheet is the scale of the capital assets. Physical assets rose to just over £100m at the end of 2016 and are alongside £78m treated as goodwill. The shareholders' equity is stated as £46.8m.

Significantly, over £116m of the business is financed by borrowed funds.

The business in 2016 employed 103 people, the same as in the previous year.

Belfast Telegraph