Northern Ireland Affairs Committee
Oral evidence: The electricity sector in Northern Ireland, HC 51
Tuesday 6 September 2016
Ordered by the House of Commons to be published on 6 September 2016.
Members present: Mr Laurence Robertson (Chair); Mr Nigel Evans; Mr Stephen Hepburn; Lady Hermon; Kate Hoey; Danny Kinahan; Dr Alasdair McDonnell; Nigel Mills; Ian Paisley.
Questions 281 – 380
Witnesses
I: Jenny Pyper, Chief Executive, and Jo Aston, Wholesale Director, the Utility Regulator.
II: Robin McCormick, General Manager, SONI.
Written evidence from witnesses:
– SONI
Witnesses: Jenny Pyper and Jo Aston.
Q281 Chair: Thank you very much for joining us. As you know, we are looking into the situation with regards to the electricity market in Northern Ireland, with particular emphasis on renewables but also security of supplies and all sorts of other issues. We are delighted you are able to join us this morning for the first session back after the recess. Would you like to perhaps very briefly introduce yourselves and make a brief opening statement telling us, basically, what your role is? I think that would be useful to the Committee. Thank you.
Jenny Pyper: Chair, thank you, and thank you to the Committee for the opportunity to attend the session. This is a very wide‑ranging inquiry that you are undertaking and we are grateful for the chance to be with you. A quick introduction: my name is Jenny Pyper. I am chief executive of the Utility Regulator. I have a background in the civil service, having worked particularly on energy policy in the Department of Enterprise, Trade and Investment, which is now the Department for the Economy. With me is my colleague Jo Aston, who is director of wholesale markets within the Utility Regulator, and Jo might want to say a little word about her background.
Jo Aston: My profession is a civil engineer. I worked in the motor industry for some 21 years and I have been working with the Utility Regulator now for the order of 10 years, setting up the water framework but now taking the lead for the redesign of the wholesale market on the island of Ireland.
Jenny Pyper: The Utility Regulator, as the Committee probably knows, is the economic regulator for the electricity, gas and water industries in Northern Ireland. We have quite a unique portfolio as a multi-utility regulator. Our functions would be broadly similar to Ofgem in relation to electricity and gas, and Ofwat in relation to water. We are an independent non-ministerial Department, but we work within the policy framework that is set by Ministers. That is an important point. We are not a policymaking Department. We have no Minister, and Ministers make policy, but we do not operate within a vacuum in Northern Ireland. We operate within the policy framework that is set by the Northern Ireland Executive and by its Ministers. We seek to discharge our statutory remit in the context of the strategic policy framework that is set by the Executive.
Our statutory remit is to protect the consumers of electricity, gas and water, both in the short term and, importantly, for the longer term. We do this, among other things, by making sure that consumers get good value for money for the services they are paying for. We do it by challenging companies to make sure that they operate efficiently and deliver that value and that quality service for consumers. We also work to improve competition and choice in energy markets.
I recognise that this is a broad inquiry; I do not really want to say any more. You have heard some excellent evidence from other witnesses. I know you have received a lot of written submissions as well. Jo and I are here today to assist you in any way that we can, based on the evidence you have already heard but also through other questions that you might have for us. I will leave it at that, Chair, and let you take over.
Chair: That is very useful. Thank you very much. I should say at the outset, referring to the Register of Members’ Interests, I am a paid adviser to Veolia who operate in Northern Ireland in waste, electricity and water. I know one or two Members have to leave fairly early so I will come straight to them.
Q282 Danny Kinahan: Jenny and Jo, it is very good to have you here, and I was lucky enough to get a good briefing from you when I was on the ETI Committee. I mentioned outside that one of my biggest concerns was the NIRO, the renewables system, which seemed to have a lot of people piling in to get free money for heating barns and different things. Are you going to set up an inquiry or something to look into all the different angles? I think the budget we heard about was overspent by £25 million and there was talk of another £120 million coming out of the coffers. Will you put an inquiry together and look into everything?
Jenny Pyper: The renewable heat incentive is a pure policy mechanism; it is not something that is subject to regulation. The Utility Regulator was not involved in it as a policy initiative; nor were we involved in its implementation or its monitoring. Obviously, if Ministers want to hold an inquiry, as you will know from your water background, the Utility Regulator would look to see if that was something we could do. We are not going to proactively investigate this. The issues may be considered by another Committee in Northern Ireland, but it is not a policy initiative in which the regulator was involved. While we are aware of the problems that it has caused, particularly the financial implications, that is outwith our remit at present.
Q283 Danny Kinahan: That is sad, but do you not see that we need to look at how we do things in the future and do them better? Do you not have a role in that?
Jenny Pyper: It is a key question and I know it is one that this Committee has taken quite a bit of evidence on in terms of the future of renewables within Northern Ireland in policy terms. The NIRO has been in many ways incredibly successful in terms of sending a signal to renewable generators, but we are at a point now where the grid is, as you know, saturated. We have a very large proportion of very small scale generators. We have a long queue waiting to get connected before the NIRO closes.
From my perspective, what we would want to contribute to is the future policy direction in terms of renewables. What are the priorities? Are there particular technologies that the Executive would want to see supported? Will Northern Ireland be part of the CFD scheme going forward? Is there scope for an all-Ireland approach to renewables? Those are the sorts of big policy questions and we would certainly want to be part of that debate; we would want to feed into it. I do not know if that answers your question, but for me it is the future strategic direction that is the important question.
Q284 Danny Kinahan: If I can stick with the future direction for the last question, with Brexit coming in, how do you see all of that working? If we are going to work all-Ireland, will you be able to put your case to the Executive and to the Secretary of State in the Northern Ireland Office to get the points across? How do you feel we should be linking with Europe?
Jenny Pyper: It is a key question for the Utility Regulator, because we have a single wholesale market on the island and obviously Ireland remains a member of the EU. For me, the important thing is that the driver for the single electricity market—indeed the last time I was here in the Palace of Westminster I was taken through the legislation to create the single electricity market—was economic. It was not mandated by Europe. It was not mandated by London, Dublin or Belfast. It was facilitated, but it was driven by economics.
Similarly, while the creation of the improved integrated I-SEM will allow Ireland, and Northern Ireland, absent Brexit, to be compliant, the rationale for the I-SEM is to make sure that on this island, where our market is only the size of Greater Manchester on the entire island of Ireland, we are operating that market in the same way as in GB, which is very similar to the way markets operate elsewhere in Europe. Europe has recognised that when the SEM was created we did a very good thing. It was the first cross-jurisdictional market across Europe. It was welcomed, and there is a real opportunity to make the case that that I‑SEM should continue.
Now, obviously, it depends what the negotiating arrangements are in terms of Brexit. We have a period of time before Article 50 is triggered. In that space, we are doing a lot of work, as you mentioned, with the Northern Ireland Departments and with the NIO. We have very close linkages, as you might imagine, with Ofgem. Again, Ofgem recognises that we are creating a market on the island of Ireland that is going to absolutely integrate with the market in GB and create a bigger market in these islands. It is something that Ofgem is supportive of.
As part of ACER, which is the European regulators network, and as part of all the European machinery, I have an opportunity, along with my opposite number from Dublin and my opposite number from Ofgem, to talk to senior officials in Europe about the market, and we have to make sure that everything possible is done to protect it. Europe recognises that it is in the interests of consumers on these islands that the markets are increasingly integrated and that the playing field is increasingly levelled, so that we can improve competition, see new investment and, through improved interconnection, ensure we have more efficient and competitive markets.
Q285 Chair: Because they are two jurisdictions, are there any tensions with regards to regulation now? You have one market but you have two regulators. Are there any tensions or does it not play that way?
Jenny Pyper: It is a really interesting model. Yes, there are two national regulators: the Utility Regulator in Northern Ireland and the Commission for Energy Regulation in the south of Ireland. The regulatory mechanism for the all-Ireland market is a single body, which is known as the SEM Committee. It was set up in 2007 when the original wholesale market was created. We have three representatives from Northern Ireland, three from the Commission for Energy Regulation in the south and then two independent members.
Our current independent members are Professor David Newbery, who is a world expert on energy policy from Cambridge, and Odd Hakon Hoelsaeter, the former system operator of the Norwegian market. That is the regulatory body for the all-Ireland market. It is a balanced and separate regulatory organisation. There are healthy tensions when it comes to the interests of consumers in Northern Ireland and the interests of consumers in the Republic of Ireland, but the legislation that was put in place charges the SEM Committee with considering the interests of all the consumers on the island of Ireland.
Q286 Chair: I was going to ask you where it gets its power from. You refer to legislation. Is that north and south?
Jenny Pyper: It was parallel legislation in 2007 in this House and in the Irish chamber, the Dáil.
Chair: That is interesting. Thank you very much.
Q287 Kate Hoey: Welcome to the Committee. It is my fault, but I had not realised you regulated water as well. That is obviously very different from mainland Britain. Can you, for the purposes of myself and perhaps others, explain very briefly—it is not your actual responsibility—the position of water rates for the people in Northern Ireland, what they pay, what they do not pay and how they pay?
Jenny Pyper: I will say a little bit, but then I will hand over to Jo because she set up the regime. The situation in Northern Ireland is that domestic consumers do not directly pay Northern Ireland Water for their water. There is a charge contained within the local council rates, but there is no direct charging from Northern Ireland Water. There is a government subsidy to cover domestic consumers, but business customers do pay and pay directly, and expect a level of service from Northern Ireland Water.
Q288 Kate Hoey: Where is the debate on water charges being introduced?
Jenny Pyper: That is a good question. I would not say it is actively on the agenda at present. It is not something that is actively under consideration by the Northern Ireland Executive at present. We wait to see what comes through in the programme for government, but obviously, as regulators, we would look to the long-term sustainability of the water and sewerage industry in Northern Ireland. We would believe that some form of charging regime is necessary to secure the long-term investment that is going to be needed in future.
Q289 Kate Hoey: Can I just ask you about your budget? It went up by £1 million in 2015‑2016. On what have you spent that extra £1 million and do you think it was worth getting it?
Jenny Pyper: I would say, having come from a public sector/civil service background, I am extremely conscious of the tight fiscal environment. The exercise that we are engaged in at the moment in terms of transforming the all-Ireland market is unique. It is the biggest single change. It is not a simple tweaking of the existing market. It is a very significant redesign of the market, and the extra funding in my budget is largely for Jo and for her team in terms of working to develop this new market.
Bear in mind that it is a market worth €2.7 billion, so it is a big market. We need to make sure that the market works, and works for consumers. We also have to make sure that the systems are there so the stakeholders who are involved in generating and trading electricity can operate effectively and the market works. That is primarily what that increase in budget was for. I do not know if you want to say any more, Jo.
Jo Aston: Working with the Utility Regulator, what happens with any regulator is their budget peaks and troughs as you got through price controls of network companies. You spend a lot of money and a lot of consultancy to bring in the extra expertise that you need to work through the programme robustly and settle on the right answer in terms of what consumers should pay.
In terms of the I-SEM, Jenny is absolutely right about the redesign of this market and the €2.7 billion per year. It is far more important that we spend and get the additional expertise in, in terms of market power, in terms of liquidity and in terms of the design of the energy trading arrangements. There is so much complexity in relation to what we are doing. It is terribly important that we spend a lot of time. We do a lot of consultative work. We do a lot of workshops. We receive a lot of consultation sponsors, because this is revenue in commercial entities’ pockets, and they are very engaged in the process. We need to feed that information to them and to be capable of getting the feedback and coming out with the right answer. It is an expensive exercise, but an absolutely crucial one in terms of getting it right.
Q290 Kate Hoey: I was not suggesting that it was taken off you again. Say I was sitting in Northern Ireland as a consumer and I saw the role of the regulator and how much money it costs. Can you think of something specific in the last two years, say, that as a result of your work has made life better for someone sitting at home using their electric, their water or their gas?
Jo Aston: In 2015, we did a review of the capacity mechanism within the wholesale market, and that resulted in a reduction of £60 million per year that year. That will carry on subsequently. Again, on the I-SEM, I fully expect pressure on prices to go down with the introduction of the I-SEM.
Jenny Pyper: More generally, not just looking specifically at the wholesale market, the work that we have done since 2009 has resulted in over £2 billion of new investment in infrastructure in Northern Ireland across electricity, gas and water. We estimate that our price controls, which is how we manage the spend of the network companies, primarily, and ensure that it delivers value for money, have probably saved about £500 million for Northern Ireland consumers, set against the opening budgets that the energy companies would have wanted. It is quite hard to translate that down for domestic consumers.
A more tangible measure for most of our consumers would be the extent to which we have been able to ensure that the falling cost of wholesale gas has been delivered through our tariff reviews. Domestic consumers in Northern Ireland have seen their bills fall by about 20% over the last two years, and that is broadly mirroring the fall in wholesale gas prices, because we still have end-price regulation in the domestic sector. That is something that we can point to. While we are not responsible for the wholesale gas price at all, our price reviews ensure that customers can be satisfied that they are getting the benefit of that fall in wholesale gas.
Q291 Ian Paisley: We had the miracle of the water into wine. I thought we were going to have the miracle of electricity into water when we went into the regulation. You said, Jenny, at the beginning of your introduction about how you do not set policy but how you have to react to policy. For the benefit of the Committee, what are the key policies that are your touchstone referrals that you have to keep going back to, to make sure that you are implementing them? What are the main ones?
Jenny Pyper: I suppose the single biggest driver that informs how we approach the price controls for the electricity network companies has been the 40% renewables target by 2020. We have operated within that to facilitate investment by the network companies, both transmission and distribution, to facilitate achievement of that 40% target. I am sure this Committee has heard already about references to the trilemma, which is always what you are trying to balance in energy policy and regulation: sustainability versus affordability versus security of supply.
Q292 Ian Paisley: But that is a policy that essentially makes sure that the generators do a good job and also are profitable.
Jenny Pyper: We do want to see good, efficient and successful utilities in Northern Ireland. That does not mean they are not allowed to make profits, but we want to make sure they deliver value for money. For example, in the last price control of Northern Ireland electricity that we did, RP5 as it was known, we did not agree that NIE’s budget should be as large as they put into their business plan. We worked to try to get a more proportionate budget, and that was something that was welcomed widely by stakeholders, so that the level of investment was seen as being proportionate.
Our price controls give companies set amounts of money for five or six years against a business plan that we assess as being efficient. We will benchmark what the companies look for. We benchmark all our utilities against best-in-class elsewhere in the UK, asking what a water or network company in GB serving a larger market would be capable of delivering. That is the standard that we want to set for our utilities, so that they are ever better in terms of efficiency and ever better in terms of the service they give to customers.
Q293 Ian Paisley: What other polices do you have?
Jenny Pyper: That was the main one on renewables. The other area that we prioritise and the Department prioritises in terms of policy is security of supply. That is probably the absolute no-brainer, certainly for all Ministers: to keep the lights on. We have a shared responsibility with the witness who is coming after us from the System Operator of Northern Ireland, Robin McCormick, and the Department, so the three of us will work together to try to ensure not just short-term but longer term security of supply. That is the sustainability and security of supply bit.
The other big driver is affordability, and our work is focused on making sure that we are driving down prices as much as we can in all the sections of the energy chain: the wholesale market, the networks piece and the supply piece. We are also working under a policy driver to create an all-Ireland market that is compliant with Europe. Anything that comes from Europe or the UK in terms of energy policy has to be looked at and translated into implications for Northern Ireland. We have progressively worked using policy drivers from Europe to implement progressive opening of the market and liberalisation through the IME3 process. Those are the big policy drivers. I suspect where you are maybe looking is in terms of how costs are allocated to consumers.
Q294 Ian Paisley: Let us look at the consumer issue, because it is the balance. You will not be surprised by this, but we have had a view that the manufacturing sector has taken a kicking in Northern Ireland, especially the big energy‑using manufacturing suppliers. I have felt it myself in my own constituency, with Caterpillar recently, and Michelin and other companies, which are really under pressure. Of course there are intensive meat industries as well that use the electricity. How do you get that balance right in terms of making sure the manufacturers are attracted to come to Northern Ireland to set up shop in Northern Ireland because their electricity can be driven down; but at the same time ensure that consumers get a fair deal? The two cannot be balanced, or do you think they can?
Jenny Pyper: It is tricky. This Committee is well aware that, no matter which bit of energy you look at, as soon as you start to examine it or pull it, it impacts on another area somewhere else. If we look at the three big chunks that make up consumers’ bills, whether they are domestic consumers or business, industrial and commercial consumers, the major part, about 60% of the bill, is due to wholesale costs—in other words, what comes out of the all-Ireland market. That chunk of the bill is identical on both sides of the border. The 60% that the SEM produces, the wholesale bit, is identical north and south. We are working on an all‑Ireland basis to try to make sure that market is as competitive as possible. Jo talked about the £60 million we have reduced from the size of that budget. The new I-SEM is designed to make the wholesale market portion as efficient and effective as it can be. Do not forget that it is a market the size of Greater Manchester.
Q295 Ian Paisley: That is not something that you can really affect. You have no say over wholesale supply costs. That is world market and world supply.
Jenny Pyper: Yes, about 65% of the wholesale bit of the bill is driven by wholesale gas prices.
Q296 Ian Paisley: It is the bit that you regulate that I am interested in.
Jenny Pyper: Okay, but we do regulate the wholesale bit in the sense that that is about market design. The regulator’s role there is to create as well designed, as competitive and as efficient a market as we can. The next chunk of the bill is the network’s cost, and that is the grid. That is about 30% of the bill. The final bit is the supply companies like Power NI, Airtricity and so on. That is a very small amount of the bill.
The next big chunk is the networks. There are differences north and south. The network in the south of Ireland is not as efficient as in the north, so it costs more. The key difference north and south is that, in 2010, the Irish Government announced that the cost of the network in Ireland would be recovered disproportionately from different categories of consumers. We recover the network’s cost more or less evenly over all consumers. In GB, the networks piece of your bill is recovered from business consumers, but in the Republic of Ireland more of the networks cost is recovered from domestic consumers. Domestic consumers in the Republic of Ireland pay over 20% more for their electricity than domestic consumers in Northern Ireland, and that is to give a benefit to manufacturing companies in Ireland.
Q297 Ian Paisley: Is there any policy coming forward or that you have to adhere to that says this has to be addressed, or is that just, “Let us stay silent. Let us keep our heads down and forget about that.”?
Jenny Pyper: There is not, and there has not been until recently, any policy debate about whether or not there should be any difference made in Northern Ireland. You will be aware of the work that was done by the Ministerial Advisory Group, which looked in part at this issue. The debate on whether or not Northern Ireland should intervene at the policy level to indicate a skewing of network costs is very active right now. I would go back and point to the fact that it was not the regulator in the Republic of Ireland that decided unilaterally to skew costs more on to domestics. That was a government decision, so I would say it is a very active debate.
Q298 Ian Paisley: Did the regulator in the south advise that that would be a way of addressing it? Obviously the regulator has an expertise that the Government would not have, so it has an advisory function as well as an administrative and implementation function.
Jenny Pyper: I do not know exactly what the Commission for Energy Regulation did in 2010; I was in the Department for Regional Development.
Q299 Ian Paisley: Let me move forward then. You chair a board. Does your board discuss this?
Jenny Pyper: The board would discuss it.
Q300 Ian Paisley: When did it last discuss it?
Jenny Pyper: The board discussed it when the EMAG report of the Ministerial Advisory Group came out. It discussed the various recommendations.
Q301 Ian Paisley: Did you take a vote on whether you should increase or skew costs in a different way, or did you just have a discussion and leave it?
Jenny Pyper: It was a policy advisory group to the Minister. It would not have been within our statutory remit to then unilaterally take the advice of an advisory group to a Minister and seek to implement it, but there has been ongoing dialogue between the regulator and the Department.
Q302 Ian Paisley: I am trying to find out whether you are advising the Minister that this should be changed.
Jenny Pyper: The Minister has not asked for my advice on this matter.
Q303 Ian Paisley: Okay, Simon Hamilton comes to you tomorrow and says, “Jenny, what should I do? Should I look at skewing the charges between domestic consumers and industrial users?” What would you say? “My board’s opinion is”—what?
Jenny Pyper: The board is content that, at the moment, our remit is to protect all consumers of electricity in an even‑handed way that does not distinguish between different categories of consumer.
Q304 Ian Paisley: That is not protecting them, Jenny. That is treating everyone as equal, but it is not necessary protecting them. It is not protecting manufacturing.
Jenny Pyper: If the Minister indicated that the outcome he would like was that some benefit, or some protection as you term it, was given to industrial and commercial manufacturing companies, then we could certainly do the modelling work that would tell him what the costs might be. We could certainly inform him in terms of the implications. We could, perhaps, suggest to him that 66% of the business community have electricity costs at and around the EU median, but there are a small number of energy‑intensive companies. They are, in many ways, our most valuable companies because of their contribution to GDP. There is a small number of them, perhaps 20 companies, and the Minister might want to think about some targeted initiative that would involve skewing costs away from those companies.
Q305 Ian Paisley: In proportion, those companies are paying hundreds of millions of pounds in electricity.
Jenny Pyper: They would contribute to 90%, maybe, of GDP.
Q306 Ian Paisley: We are talking about nearly £1 billion bills in some instances.
Jenny Pyper: Indeed. One important factor is that, under current rules, any intervention to support those manufacturing companies could be viewed as state aid.
Q307 Ian Paisley: Right, but that could change after Brexit.
Jenny Pyper: Presumably that could change after Brexit. That is the tension and it is why it would have to be a policy decision. It would also, I would argue, have implications for other consumers.
Ian Paisley: Yes, it would not be the most popular thing a politician has ever done. I am prepared to accept that.
Jenny Pyper: There would therefore be a balance. We have particular duties to protect the most vulnerable customers, so we would be looking for the Minister to indicate whether or not he felt there needed to be further work done to protect the most vulnerable consumers, if the costs to subsidise large manufacturing were going to be spread over the wider consumer base.
Q308 Ian Paisley: I have one last question. It is on SEM and the SEM Committee. Can you tell us who the Northern Ireland members of the SEM Committee are?
Jenny Pyper: I can: my chairman, Bill Emery, Chairman of the Utility Regulator board; Jon Carlton, former director within National Grid who has since retired and is again a board member of the Utility Regulator; and me. We are the three Northern Ireland members.
Q309 Ian Paisley: You are appointed by the Minister.
Jenny Pyper: We are appointed by the Minister, yes.
Q310 Ian Paisley: For what term?
Jenny Pyper: Now, that is a good question. I am thinking about myself. I am not on a fixed term, so for as long as I am chief executive I am a member of the SEM Committee. For my chairman and for my board member it is for as long as their public appointment to the Utility Regulator board lasts.
Q311 Ian Paisley: Who are the southern Irish appointees to that board?
Jenny Pyper: They are the chair of the Commission for Energy Regulation and the other two commissioners.
Ian Paisley: Thank you very much; that was very helpful.
Q312 Dr McDonnell: One of the things that we have heard a lot about in the past, and hopefully the evidence you are giving here suggests that it is declining, is that the previous single electricity market arrangement allowed the generators to make fairly substantial profits. Do you think the new system under the single energy market will eliminate that gross profit or is there still a potential for them to make a lot of money?
Jo Aston: It is a good question, and generator profitability is a key thing. We would say that profit is not a bad word, but proportionate profit, since consumers pay for it. In the current SEM, it is the structure of the market, in that all the demand you need is met by the generators in pecking order. Therefore, it is the last generator that is needed to meet demand that sets the price, and then everybody behind it gets that price. You find that, generally, the marginal generator that sets the last price is a gas generator, and, for gas generation, in the last profitability report we published they had a profit of 5% to 7%. Coal fell in behind them; peat fell in behind them; and therefore their profit margins are larger, so they would have got 20% profit margin. Wind would have got around 10% profit margin, and, when you went down to oil and distillate, they would have earned really high profit margins of about 40%.
Then you have to look at the proportion of the revenue that they take up. Those very high revenue earners that are profit-making—the oil and distillate—make up only about 6% of the revenue stream, and their payments are largely in capacity, because they are there if you really need them. Understanding the profit underneath is important in terms of how often they are deployed and whether or not they need that profit to stay open as a business. That is an important point to make.
In terms of the new I-SEM, it will be slightly different. In the current SEM, the retailer of the supply and the demand is a price taker. Whatever the price is, they take, so it is not a very active or competitive market. In fact, the price is set four days after it has taken place because the system operator, whom you will hear from afterwards, decides the dispatch of all the generators. In the new market, we will have four timeframes. We will have a forwards timeframe, a day ahead, an intraday, and a balancing of dispatch. What is important here is that the demand will be part of the generation. You will have supply and demand, which you normally have in competitive markets, and that will be a good thing. It will particularly be a good thing when we think about the amount of wind that we have on our system in Northern Ireland. We will be able to have trading during the day and closer to real time, and therefore be able to avail of the wind much more.
I guess the long answer to your question, Alasdair, is saying the competitive environment in the new I-SEM will be much greater, and therefore drive prices down. There will be more competition, more freedom and more pricing signals to entities to control when and how often they use the electricity. It could encourage the demand side to be more active in the market. With all of that environment, we are very much hoping that we will have a better outcome.
Jenny Pyper: To go back to when we set up the SEM, as you will know from your ETI Committee days, when we set up that new market, there was a capacity payment mechanism put in place to try to keep generation in the market, to encourage generators to maintain their plant so that they would be available if they were needed and the demand was there. That mechanism has proved over time to be quite a generous one. It was not terribly specific: any generator that said it was in the market was able to get that payment.
Part of the design of the new market, which is an important lever for us, is a much more focused capacity mechanism that will only reward generators that are available and deliver when they are called on. They will not get the payment just for existing; they will get that payment only if they are called on because they are needed to meet demand and are able to deliver that demand. It is a much more focused and targeted mechanism than the one at the start.
We did, at the time, view that having a capacity mechanism was needed to encourage generation to stay in the market. We still believe that it is important to have a mechanism there, but one that sends the right signals, so that old, inefficient plants that will not be able to get this mechanism because they are not reliable enough to be there when the market calls on them should get what is called an exit signal. They are not efficient. They are not contributing to the market. They should exit. They should leave. They should not get that capacity mechanism. Equally, it should send an incentive mechanism to new generation to come in and play in the market, and be more efficient and more competitive. It is about having a market, as Jo says, that sends those signals and helps make sure that the most efficient generation is there.
Q313 Dr McDonnell: This is what I am picking up, and I may have picked it up wrong. Say there is a crisis next winter, and you bid £10, Jenny; Jo bids £11; Nigel here bids £13 to come in with electricity; and I bid £15. Jo, are you telling us that everybody then gets £15?
Jo Aston: Yes, I am. In the current SEM, if it is the last generator that is required to meet demand, then everybody gets paid that amount.
Jenny Pyper: The most efficient generators—and wind generation is prioritised—will be dispatched first, so they are sure that they will get their money. As you come down what is called the cost stack, the price then gets set at the point where supply and demand cut off.
Jo Aston: That is where you get the value of the wind, although there is a tipping point because wind does not always blow. Therefore, that is why we have the capacity mechanism. You need to ensure that you retain enough of your thermal to back up when the wind does not blow. Being able to put wind on the bars means that it has taken up some of the generation and therefore you are further up the stack, if you like, in terms of calling off the more conventional generator.
Dr McDonnell: If you are short of wind or hot air, we can provide that.
Jenny Pyper: Would you need an incentive mechanism?
Q314 Dr McDonnell: Can I talk about the grid for the moment? I am concerned. We have had evidence all over the place that grid connections and investment decisions are needed, and they need to be strategic. Indeed, our next witness’s organisation has told us in written evidence that the lights will go out if we do not get the north-south interconnector. First, what are the perspectives with the north-south interconnector? What does that do for price? What benefits come from that? Secondly, what are the disadvantages if it is not constructed? Generally my perception and the perception of many is that that is vital. We are not quite sure why it is vital, but there is a sense that it is vital to our viability.
Jenny Pyper: I will start and I will let Jo come in in a moment or two. When the single electricity market was being designed and developed back in 2005‑2006, the north-south interconnector was under discussion then, and originally it was targeted for construction in 2012 or 2014. The way I describe it is really quite simple: it is a route to market. We have a lot of capacity on the island as a whole. We have an all-Ireland market, but the grid is needed to flow the electricity across the island. Northern Ireland can take advantage of the fact that there is more generator capacity in the Republic of Ireland in the period after 2020, when some of the plants in Northern Ireland may close or be on reduced efficiency, in order to meet EU standards.
The north-south interconnector is just like another piece of infrastructure, like a big road. It is a route to market for generators in the south, but equally for generation, in particular wind, which, as Jo has said, exerts a downward pressure on cost in the wholesale market. Any commodity—it does not matter whether it is electricity, widgets or whatever—needs a route to market. You need to be able to trade it. If you cannot trade it, there are limitations on the system in the north, known as constraints. Robin McCormick can probably keep me right on the numbers, but I think the current level of constraints is running at about £10 million in Northern Ireland, because we do not have the second north-south interconnector. There is £10 million a year of benefits that consumers in Northern Ireland are not able to get because of the absence of the north-south interconnector.
It has a role in the market because it frees up the generation. It also has an important role because, as I said, it allows Northern Ireland to access generation on the island. You do not then have to look at Northern Ireland being entirely self-sufficient and having to pay for generation solely for Northern Ireland. You are getting the benefits of an all-Ireland market, and if the market is effective it will be sending investment signals for new generators for the entire island.
If you do not have a route to market, what new generator is going to invest in Northern Ireland? We are seeing the like of Evermore Energy talking about a new power station in the old Belfast West site at the harbour. That is very encouraging in terms of its contribution to our overall capacity margin. It is encouraging that Evermore sees a possible market in the I‑SEM in which it can trade, but it will need to be able to trade that electricity by means of another interconnector. Interconnectors right across Europe are recognised as being valuable ways of allowing electricity to flow and giving access to bigger markets. That, again, creates downward pressure. It is important for the market. It is also important from a security of supply point of view.
Jo Aston: Jenny has covered most of the points, but basically we are trying to work with a financial single market, and yet we have a physical market that is restricted, and that is putting a constraint on. Whenever we have a constraint on the system, it means that we can take less capacity of wind and others into the system. Therefore, we have to take them off. They lose that revenue or the consumer pays an extra cost because we have had to take somebody we would have liked to deploy on to the system off the system and compensate them for that loss.
If we think about the amount of wind that we have on our system as well, and if we start to have to exist as a single entity in Northern Ireland, as Jenny said, then we lose all. We were already a really small market on the island of Ireland. Then you take Northern Ireland as about a quarter of that and we do not really have a market at all. We just have consumers in Northern Ireland having to meet all the costs and all the capacity reserve that we need, to make sure we keep the lights on. It is fundamental. Indeed, in the way we are designing the new I-SEM, we are assuming it will be delivered to maintain a single price across the island. I do not even want to think about whether or not I would have to go to zones and have a higher price in Northern Ireland for our energy than in Southern Ireland. That is not something that I hope I will have to contemplate.
Q315 Dr McDonnell: The question I want to come back to is that, if we do not get the interconnector built, there is £10 million.
Jenny Pyper: At the moment, the absence of the north-south interconnector is leading to constraint payments of about £10 million. If we did not have to pay those constraints, that would come off the cost of the market, and that would be a benefit for the north. That is just the cost in Northern Ireland, but that would be a direct benefit for consumers.
Q316 Dr McDonnell: Should that not be built, and I do hope it is built, are we not in a position with wind, solar or whatever to make up any gap there is before 2020? Do we not have the capacity at this stage to make that up? Are we presuming that the interconnector will be built at some stage and therefore we do not need to invest in other belts and braces?
Jo Aston: No, I am not sitting here saying, “It will definitely be built; I do not have to worry about that.” We can never do that in terms of security of supply. What we are doing for the I-SEM is developing the market so that it is a single market with the expectation that the north-south interconnector will happen. When it comes to security of supply, that is the capacity mechanism that Jenny referred to. Ideally, we would like to go out for capacity, and we are doing it through a competitive process, in that we identify the volume of capacity that we need, go out through an auction process and therefore get the best deal for the consumer in terms of who will meet that if we need it. As Jenny said, it is a punitive system. It is reward and penalty. If you do not show up, then you get penalised.
If the north-south interconnector does not happen, I will have to look at the capacity I need here in Northern Ireland. I cannot look on an all‑Ireland basis; I have to look specifically. We have built into the work‑stream a local issues capacity mechanism whereby, through the auction process, if it turns out that the north-south interconnector does not happen, or indeed happens later than we want it to happen, we have a mechanism on an annual basis to make sure that we can procure capacity where it is needed in the location. That is still in the context that, for our capacity mechanism, we have to go to Europe to get approval for state aid. If that is a sustaining thing, we may well have to look at making it two zones rather than a single zone. Hopefully, that will not occur.
Jenny Pyper: If I take you back to the market before we created the single electricity market, it was a small Northern Ireland‑only market. It was based on bilateral contracts with generators. Having been on the Committee, you are only too aware that those contracts, set up at the time of privatisation, proved to be extremely expensive for Northern Ireland consumers. We do not want, I would contend, to go back to a position where Government has to step in and put in place contracts to facilitate generation. We want to make sure that there is a market there; that there are competitive processes, because that is the best way to drive down prices; that we get a competitive market that generators want to invest in; and that they are not looking for a bilateral contract, which could prove to be very expensive for consumers.
Again, it is back to whether you believe that a market‑based solution is the right one for Northern Ireland consumers, or a bilateral contract type arrangement, where you have guarantees for generators. You expressed a concern about generator profits previously. We believe that a market‑based solution is best.
A market‑based solution demands the north-south interconnector. That is what is needed to make the market work. That is the most efficient way to get the generation that Northern Ireland needs to keep the lights on if the older power stations are forced to close because of EU requirements. Of course, Brexit might change the implications, particularly for one of our coal‑fired plants, in terms of whether or not it can keep generating.
Even if we do not have to close some of the plants because of EU requirements in 2021, I would still argue that the north-south interconnector adds to security of supply and provides a route to market, particularly for the wind generators. Northern Ireland consumers have, through the NIRO, invested in wind generation very considerably. We want to make sure that value is achieved for that. Again, for us, the interconnector is both a security of supply measure and a market effectiveness measure.
Q317 Dr McDonnell: Do you feel the Scottish interconnector has been a success, or, put in another way, have we maximised the effectiveness of it?
Jenny Pyper: The Moyle interconnector was built with that same aim of trying to add security of supply and give the small Northern Ireland market access to the bigger market in GB. It has been a valuable role that the Moyle interconnector has played in the market. There is valuable capacity there that is traded within the single electricity market.
However, we would have some concerns—and Jo may elaborate a bit on this—in terms of the effectiveness of that interconnector to link into the National Grid infrastructure, because we believe some significant grid investment is needed for Northern Ireland to get the maximum benefit of the Moyle interconnector. That investment is in Scotland. It is part of National Grid’s network and therefore not something we would have a direct influence over. It is a very pertinent question. It has provided valuable capacity, but, going forward in the I-SEM, we want to make sure we are getting maximum benefit.
Jo Aston: When I think about the Moyle interconnector, it has delivered a lot of benefits. It has provided the security of supply. It is a mutual company, so any profit that it makes is revenue to the consumer, albeit that any risk it also carries the consumer meets as well. That has been a very positive direction of flow. With the unfortunate incidents of the failures and the faults in the line, which are now fully remedied, obviously they took a cost, but they were largely met by revenue that the Moyle had already earned. Going forward, we look to have a much better return from the interconnectors: both the one in the south connecting to Wales and, indeed, the one in the north connecting to Scotland.
At the moment, they are running at an efficiency level of about 40% to 70%, because the market signals are not there for the flow to be going in the right direction. The redesign of the I-SEM will be sending the right signals for the flow of energy going across to be earning the maximum revenue to market participants. Jenny is right: there is a limitation in terms of the export capacity from the Moyle energy interconnector to Scotland. We are liaising with Ofgem, DECC, National Grid and Scottish Power, and Robin is engaged in those discussions as well. We will look to have that remedied, because it is not very satisfactory to have that limitation on export.
Q318 Lady Hermon: It is very good of you to come and give us evidence here. It has been very interesting. Can I just pick up on something that was said, Jenny, if you do not mind me calling you Jenny? In an early part of your evidence—and I took it down because I was so struck by it, knowing that we were going to ask about the north-south interconnector because so many witnesses have told us it is absolutely critical to stop the lights going out in 2021—you said the words “the grid is saturated”. How do you reconcile what you just said about the vital importance of the north-south interconnector with what you said earlier that “the grid is saturated”? How do you reconcile those two?
Jenny Pyper: When I say the grid is saturated, there is a looseness of language. We are using the grid to describe both the transmission network and the distribution network. The transmission network, I suppose, is the motorways of the grid, including the north-south interconnector. The distribution network would be the A-roads and the B‑roads that connect individual businesses, houses and communities to the bigger grid system.
It is the distribution network in terms of people getting connections, particularly small‑scale wind generators getting connections. The distribution grid was never designed to accommodate the levels of small‑scale renewables that the NIRO has incentivised over the last decade or so. It is at its capacity in terms of connections in very many areas within Northern Ireland. That does not mean that wind cannot flow and be used by the system operator to meet our demands for electricity. It is saturated, in some areas, in terms of new connections. Further investment in the distribution network would be needed to connect more wind, or small‑scale wind in particular.
Q319 Lady Hermon: On that very point, am I right, and please correct me if I am wrong, that it was the Utility Regulator that recommended those small‑scale renewable generators did not require planning permission before they connected into the grid?
Jenny Pyper: On the connection policy, no, not quite. That is how it has been presented by some witnesses, but the connection policy is Northern Ireland Electricity Networks’ connection policy. It is a private company. It is not under government direction or regulatory direction. We price‑control it, in that we set the budget it is allowed to spend, but it owns the grid; it owns the network. Its connection policy did include, until recently, a requirement for planning permission. Before you could get a connection offer, you had to have your planning permission and so on. There were various stages before you would become eligible for the NIRO.
That arrangement had worked extremely well for a large number of years, until one particular developer decided to take a semi-legal challenge to the Utility Regulator. We have quasi-judicial powers to investigate disputes. This particular developer raised a dispute with us about whether or not planning permission was a legal requirement. We ruled on that that it was not a legal requirement. That is where we go into this quasi-judicial role. We have to look at the legal facts of the case. Although I would argue that it is a perfectly reasonable and practical mechanism to have planning permission as part of that connection policy, there is nothing in statute that requires it.
Q320 Lady Hermon: Were you disappointed with that ruling? From what you said, it certainly came across as being disappointed that the Utility Regulator has lost this power.
Jenny Pyper: We do not have a power; that is the thing. It is Northern Ireland Electricity Networks; it is their connection policy. When the dispute was raised, we had to take a look to see whether or not there was anything in legislation that required that planning permission. It was a useful pragmatic step, but it would require the Department for the Economy or the Department for Infrastructure to put in place legislation to require it.
Q321 Lady Hermon: That then joins up with your previous experience. That is what is really striking me here. You said that the last time you were here was when legislation created the single electricity market, and you were very pleased with that. From your previous life and career, you are very familiar with the legislation and particularly interested in energy. When you realised that planning permission was not required to connect into the grid—and you know how legislation works—did you as the Utility Regulator seek to extend your powers, so that you hand on a greater and improved Utility Regulator? I am not suggesting that you hand it on any day soon; I think you are doing a good job with all of this, but did you seek to amend the legislation?
Jenny Pyper: I would not have any powers to amend the legislation. Yes, there was some dialogue with the Department as to whether or not, as part of a future renewables policy, there was any desire to have that enshrined in legislation. It would be the planning legislation, so I suppose it would be the Department for Infrastructure, not the Department for the Economy. It is not legislation relating to my remit. It would be planning legislation that would need to change to make that a requirement. A lot will depend on the future policy direction that the Executive sets for the future of renewables. If we are looking at moving beyond the 40% target, or if we are looking at perhaps incentivising offshore technologies rather than onshore renewables, then I think the whole issue of what the connections process might be will come into focus again.
The one thing about making legislation is that it is not a quick process. It is a detailed, consultative process. It takes time. For many years, Lady Hermon, there was a system that worked, because everyone accepted that planning permission was a good part of the process, but, when someone challenged it to see if it was enshrined in legislation, no, it was a practical working arrangement but there was not a legislative basis. It is something that will need to be looked at if we are in a position of wanting to look at developing our renewables further in the future.
Q322 Lady Hermon: Would you agree, looking at the role of the Utility Regulator, that it is possible that you could enhance the role of the Utility Regulator for the benefit of all consumers across Northern Ireland?
Jenny Pyper: What would really enhance the role of the Utility Regulator is to have a clear strategic energy framework that sets out what the Executive’s ambitions are. We will operate within that framework. Mr Paisley talked about whether or not advantages should be given to certain categories of consumers. If that is viewed by politicians as the right thing to do for the Northern Ireland economy, then my team will facilitate that through our price controls. Similarly, we will seek to facilitate whatever future direction of renewables policy is set.
I do not believe that the statutory remit of the Utility Regulator needs to be amended for us to facilitate further economic growth and economic development. As I think I said earlier, we have facilitated over £2 billion worth of infrastructure investment since 2009, which contributes to the overall economic development of Northern Ireland. I suppose it is which levers are needed. I would argue that, if there is a clear policy framework, targets and a direction of travel set by the Executive, my team will work within that to help deliver the Government’s objectives, rather than setting those for ourselves.
Q323 Lady Hermon: You need the Department and the Northern Ireland Executive to set a clear policy for you. How did you react, then, when you saw the draft programme for government coming out from the newly elected Assembly, which did not even mention energy? How did you react? Was there a speedy phone call to the Minister? How did the Utility Regulator react?
Jenny Pyper: The Utility Regulator board has talked about it and agreed that the programme for government should, in our view, include references to secure, sustainable, affordable supplies of energy for the benefit of all consumers. That is something on which I had dialogue as recently as yesterday afternoon with the Permanent Secretary and the Deputy Secretary in the Department. There is an ongoing process where our views can be fed through to the emerging final programme for government. I am hopeful that we will see an energy‑related outcome and some indicators that will be helpful to us in measuring our progress, as well as to the Department.
Q324 Lady Hermon: I agree entirely. In light of that, how did you respond to the joint letter signed by the First and Deputy First Minister to the new Secretary of State for Northern Ireland? In fact, it was to the Prime Minister and copied to the Secretary of State for Northern Ireland. Presumably you were pleased that energy—
Jenny Pyper: In the context of Brexit, which I understand was the context for the letter, we were pleased that energy featured because, as we have talked a bit about this morning, we think we have a valuable thing in having created the all-Ireland wholesale market. Ireland will have to be compliant with the European requirements. We think that Northern Ireland consumers can benefit from an all-Ireland approach, and we were very pleased that it was raised at that level by our First and Deputy First Minister with the Prime Minister. It is there. It is an issue for discussion so that it does not get forgotten about in the wider discussions about how Brexit will affect the UK. There is a marker there that says, “Do not forget about the special arrangements on the island of Ireland.”
Q325 Lady Hermon: Talking about special relationships, I want to understand the relationship between the Utility Regulator in Northern Ireland and the Northern Ireland Consumer Council. Your remit is very much to protect consumers, and it is the same for the Northern Ireland Consumer Council. Do you meet often? Do you talk? Do you see yourselves as competitors or do you see yourselves working together in the best interests of the consumers? How does it actually work in practice?
Jenny Pyper: I absolutely see us as partners. I do not see us as competitors. In the past, maybe there was some competitive tension between the two organisations, but John French and I, as chief executives of the two organisations, are not interested in a beauty parade about who is the best at protecting consumers. We have different levers. My levers relate to things like price controls, the tariff scrutiny and the work we do to build competitive markets. John’s powers span every sector, not just energy. We work extremely closely.
In fact, I happen to have with me for other reasons a piece of work we developed alongside the Consumer Council and National Energy Action: our consumer protection strategy, which we launched at NICVA back in February. The actions within this are led by the Utility Regulator, but partnering in many cases with the Northern Ireland Consumer Council and with other members of the third sector like Bryson House. We see it as: how can we combine our tools to give consumers the best possible protection?
One of the first things I did when I took over as chief executive was to draw up an MOU between our two organisations that sets out how we co‑operate. The senior management teams of both organisations meet periodically. I am attending the Consumer Council board next week or the week after to talk to the board about the all-Ireland market. The Consumer Council board attended a board meeting with the Utility Regulator board.
Q326 Lady Hermon: Is that unusual or is it something that you would do very routinely?
Jenny Pyper: It is something that we do on an ongoing basis. It maybe was not the case in the past, but we have similar and complementary powers. While there is always the potential for tension, as the Consumer Council has a challenge role that it can exert on the Utility Regulator, John and I are very focused on making sure this is not an either/or and that it is a complementary approach. I believe, having seen the evidence that John and Sheila McClelland provided, that that is a priority for the Consumer Council as well.
Q327 Lady Hermon: I have one final point, and it is an observation: both of you speak with great enthusiasm about the work that you do. What do you see as the best part and the best work that you do as the Utility Regulator?
Jenny Pyper: I will let Jo speak for herself. For me, I came into the civil service.
Lady Hermon: Yes, and then moved out.
Jenny Pyper: I moved out because I felt there was a real opportunity to add value for consumers in Northern Ireland and to make sure that we had an organisation that was at the vanguard of building this new market and championing consumers in all aspects of the market: the wholesale, the networks and the retail. It is complicated. Energy, as this Committee knows only too well, is challenging. It is long term, and for me it is the chance to be involved in something that has a long-term impact for consumers in Northern Ireland.
Q328 Lady Hermon: Yes, and that includes, as my colleague Ian mentioned, the large manufacturers as well as the domestic consumers.
Jenny Pyper: Absolutely. I see that as really important. Northern Ireland will never be the cheapest place for electricity, and if you are a large energy user that is something that you have to bear in mind. However, Northern Ireland has other cost advantages when you look at labour, rental and quality of life—all the things that we perhaps take for granted and enjoy. There are long‑term systemic changes that need to be made. The regulator is as much in that sector as it is looking at the short-term impact of prices that are delivered through wholesale gas and our annual tariffs.
Jo Aston: For myself, I had worked for the water industry for some 20‑odd years, but then, when I came into the Utility Regulator, after a period of three years we had reduced our operating costs by the order of £50 million per year. That is a fantastic benefit, and that was at the same time as improving the levels of service to consumers. That real, tangible benefit works for the company as well in terms of motivating, targeting and focusing the company. That is all through benchmarking.
Moving into the energy side, it is very different and a lot more complex. The first thing I did when I came in was to review the level of competitiveness of the existing SEM, and that resulted in the reduction in the capacity payment. The redesign of the market is so phenomenally important to get right. As Jenny said and we try to re-emphasise, it is tomorrow’s generation as well as today’s that we are looking after. Therefore, in the redesign, it is very much trying to be strategic in terms of what we are looking for and how we protect consumers. It comes back to that trilemma of whether we have got the balance right.
Again, on the capacity side, we are very much targeting what we need and where we need it. On the wind, we are forgetting another element, which we have not mentioned today and perhaps Robin will mention. At the moment, there is so much wind on our system that we can only let 50% of it on system to keep the system stable. We are looking at incentivising the right behaviours of people in the market and provide the right services to get that level up to 75%, to the maximise value. That is where the satisfaction comes in. You really feel you are making a big difference, even though you are unseen. Being understood by the consumer is very difficult in terms of plain speaking.
Jenny Pyper: “Nobody loves the regulator” is the phrase that is often used.
Lady Hermon: With the greatest respect, that is one of the very valuable things about coming to give us evidence at the Select Committee. It is televised and you are no longer faceless. In fact, now people can put a face to the name of the Utility Regulator. It has been a very useful evidence session. Thank you.
Chair: We have run slightly over because it was so interesting, so thank you very much for your evidence today; it has been very useful to us. Thank you.
Jenny Pyper: Thank you. Should there be anything that the Committee feels we could follow up on in terms of further written clarification, we are very happy to provide that if it helps your deliberations.
Chair: Thank you very much.
Examination of witness
Witness: Robin McCormick.
Q329 Chair: Mr McCormick, thank you for joining us. Sorry for the delay in starting this particular evidence session. You were listening to the previous one, I noticed. Would you like to introduce yourself and give us a brief introduction, focusing perhaps on exactly what you do and what your role is? Thank you.
Robin McCormick: Yes, I am happy to do that, and thank you for the opportunity to share in this inquiry. My name is Robin McCormick. I am the general manager of a business called SONI; that is the System Operator of Northern Ireland. We are independent, and when I say independent we are independent of generators or supply organisations. We sit at the core of the electricity system. We have two licensed functions: first, to be the system operator; and, secondly, to be the market operator. You have heard of the single electricity market. We are the market operator. We facilitate all the trading of electricity at a wholesale level across the island of Ireland.
Our licences are set so that we work in conjunction with EirGrid, who are now our parent company. They are based in Dublin and have the same functions as us. We endeavour to work with them to ensure that we operate both the transmission system and the market in an efficient way. The system requires to be operated on a 24/7 basis. Some of you have been in our control room, have seen the lights flashing and have some background in terms of how we manage to ensure that sufficient generators are running to meet the demand at any point in time.
We also look after developing the transmission network. Where a large user of electricity or a large generator wants to connect to the system and they need a direct connection on to the transmission system, they come to us. We also work closely with Northern Ireland Electricity Networks. When they have the need to connect generators or demand customers to their system, then we work with them to assess if there is as impact on the transmission system. Then we develop the network itself. We decide if there are further reinforcements needed to ensure that we have a network that can keep the lights on and does not have unreasonable constraints in terms of operating the market.
In terms of the big ticket issues for us at the moment, you would not be surprised if I said one is the north-south interconnector. That is a very critical project for us. The I-SEM project is a transformational project from an organisational point of view and also a major change for the market participants we work with day by day, in terms of how they will do business and how they will interface with us.
Q330 Chair: Okay, thank you. You work in conjunction with your equivalent in the Republic of Ireland. Similar to the previous session, is there an overarching body that ultimately controls things?
Robin McCormick: We are regulated by Jenny’s organisation: the Utility Regulator. EirGrid is a separate business, based in Dublin, and it is regulated by the Commission for Energy Regulation in the south. Our licences were set up to ensure that we work very closely together. As we plan the network in Northern Ireland, we have to take into account how the southern network has been planned; similarly, they have to take into account what is happening in the north. It is a joined‑up view of the world in terms of operation.
It is a single market, so all the generators on the island of Ireland play a part in the market. They bid into the market, and in the control room in Belfast and in the control room in Dublin, they effectively have the same schedule of generators that need to be dispatched. The northern control room dispatches the northern generators and the southern control room dispatches the southern generators. However, it is co‑ordinated and it is consistent with an economic outturn from the market.
Q331 Chair: You have to match demand and supply, which, correct me if I am wrong, change literally every second. If there are two of you doing that, it must be very difficult to closely co‑ordinate it.
Robin McCormick: It is becoming increasingly complex. Fortunately, the demand is reasonably predictable, so there is a shape to the demand from people to use electricity through the day. We have a reasonably good idea of what is expected in the coming days. We have to estimate how much generation we are likely to get from wind generators. Then we have to make sure that the rest of the demand is met through conventional generators.
Some of those generators require a number of hours to start up and be ready to generate. Obviously, when you are dealing with wind generators, while the forecasting of wind is improving, there are times when the wind does not arrive at the time that was predicted. We then have to manage how we fill that gap: either by bringing on generators that can be started more quickly or taking off generators, if the wind stays longer than we had anticipated. It is becoming more complex.
Q332 Dr McDonnell: Robin, thank you for being with us today and thank you for the evidence up until now and going forward. I am interested in the security of supply. You mentioned the north-south interconnector. I will ask you the same question I asked earlier: how do you see it if it is not built? Without exaggerating or scaremongering—we are not in that pitch—where do you see us running into trouble there? Can we pull in high‑cost, inefficient generation to compensate for the loss of that or the lack of getting it?
Robin McCormick: I will answer your question by going back a little bit. I have personally put a huge effort into trying to promote the need for the north-south interconnector so that we do not have to answer the question that you are asking, a good question as it is. We have been working with all the councils across Northern Ireland to explain why the north-south interconnector is critical. We have been working with the regulator and the network business, Northern Ireland Electricity Networks. We have been working with the business community so that everybody understands why this is critical, why it is needed and why it is now on a critical time path.
We have an issue in Northern Ireland that has been looming for a number of years in terms of generation retiring. We produce a generation security statement each year, which is intended to present the picture to the market so that the market can respond to whatever signals that forecast is sending. All of what we do relies on commercial businesses responding to signals that are sent to them. The wind we have on the system has happened because there is a signal that we want renewable energy on the system. We do not have firm connections for 2020 and beyond. We have some interested parties and they will have to make decisions based on their view of how commercial their business is.
As Jenny rightly said, the interconnector is an entry point to the market. It is difficult to see why someone would want to go and invest commercially in an interconnector behind a major constraint. They would want to be able to function fully in the market.
There are a number of companies that are looking at potential projects. Jo talked about some mechanisms that might be in place through the market to allow for locational signals to be sent to generators. My job is to try to avoid that, because I do not see any outcome where we do not have a north-south interconnector in which Northern Ireland customers do not suffer from an increase in costs. My job on a day-by-day basis is to minimise the wholesale costs to customers, and I certainly do not want to see additional costs being brought to bear on customers because a piece of infrastructure has not been delivered.
Q333 Dr McDonnell: How would you estimate, or is it possible to estimate, the cost benefit in percentage terms? Are we going to be 10% better or worse off depending on the interconnector? How do you see the price of electricity being affected by that?
Robin McCormick: It is hard to throw a figure at it. Certainly, in some of the studies that have been done, the figure that we would quote states that customers on the island are probably paying about an extra £40 million a year because the north-south interconnector is not there. Customers in Northern Ireland have to pay a further £8 million‑plus for the capacity that has been made available at Ballylumford power station. They also pay some money because of the repairs that were carried out on the Moyle interconnector. There is a raft of costs that are being borne by customers at the moment. We want to move on from that and ensure that we have a market that functions properly. The north-south interconnector is a fundamental element of that.
Q334 Dr McDonnell: There was a mention earlier of a new gas power station in Belfast harbour. Would that not alleviate much of the pressure?
Robin McCormick: It would alleviate the capacity pressure, but whether it would deliver the best price of electricity to customers in Northern Ireland is the question. If it cannot function properly in the market and cannot be remunerated through the market, then if Northern Ireland absolutely needs that capacity there will have to be an arrangement made with generators to provide that capacity.
Q335 Mr Evans: There was something I wanted to ask: as far as wind is concerned, what percentage of your capacity is wind?
Robin McCormick: We have, I think, about 850 megawatts of wind capacity on the system at the moment. We have in train the potential for a further 700‑plus megawatts of wind over the next two to three years. Our maximum demand in Northern Ireland is upwards of 1,800 megawatts, so that gives you a sense of the scale of wind capacity. Wind capacity has what is described as a capacity factor of between 25% and 30%. You will get 25% to 30% out of that number on an ongoing basis. The challenge for us as operators is to manage that level of wind generation on to a small island system.
There are other countries in Europe that will have great stories about how much renewable energy they have, but they are operating in a huge, Europe-wide electricity system. We are constrained by geography. We are a little island. Therefore, the impact of every disturbance on the system—so if a generator trips—is magnified on a small island system. Therefore, we have to be very careful about how we manage that wind. We need to have control over it. At the moment, we use the word “curtail”: that is a system‑wide reduction in the amount of wind that is allowed on the system. The figure of 50% was mentioned earlier on. We have actually moved it to 55%, and that is a number that a whole lot of other places would not even dream about. We have had to go through a lot of analysis to understand how an electricity system responds with wind on it.
We believe that we can move that number to 75%. If we can get it to 75%, so that at any point in time 75% of the demand can be met from wind output, then we will get the greatest benefit of the investment that has been made in renewable technology. In renewable technology, wind has been the favoured commercial outcome of the market, of the signals that were sent.
We talked earlier about the policy. There was a target set of 40%, but behind that policy there were support mechanisms provided. The support mechanisms drove the commercial activity that led to wind generation coming to us to say, “We want to connect to your system,” and giving us the challenge. It could have been a different technology, but, at the point in time that renewables were being pushed, it was wind energy that was the most mature technology, and therefore that is the challenge that we have taken on in terms of how we operate the system to the benefit of customers.
Q336 Mr Evans: On average, of the 365 days a year, how many days are there where there is no wind?
Robin McCormick: There are a number of days where there is no wind. I suppose, if you are a system operator, you have a horrible tendency to think about the next worst thing that could happen. You can conceive of those really cold days in the winter where there ain’t a lot of wind around. That is probably the time of the year where I would be most concerned about that. We do have a balance of conventional generation with wind. I have to say, on the other side of it, there are often times where you could lose a large generator, and the fact that there is a lot of wind has helped us to ride through that. It is a bit of swings and roundabouts. There are a lot of small generators out there, so there is diversity and resilience when the wind is blowing in terms of how much generation we can rely on.
Q337 Mr Evans: Can I finally ask: have you ever been worried that there would have to be outages due to insufficient capacity to meet the demand, because a generator has flipped and other things have occurred—maybe no wind?
Robin McCormick: Yes, that is our job, and there will be circumstances, inevitably, even in the summer, where there are a range of generators that are on outage, because that is the most sensible time for them to take time out to do repairs and maintain their plant. If you lose other generators that trip out because there is a fault, you can be close to the wire.
Q338 Mr Evans: How close?
Robin McCormick: We have a system of alerts where we would issue an amber alert or a red alert. We have not issued red alerts, but there have been occasions where we have issued amber alerts just to say, “If a number of other things happen, we could be in trouble here”. We have not had to shed customers as a result of a wind‑related incident.
Q339 Mr Evans: What is plan B if that does happen?
Robin McCormick: Shedding customers. It just means shedding customers. We would have to restrict the amount of demand that we can supply, and to do that you have to switch off blocks of customers. When it comes to that nitty gritty point, you do your mathematics and say, “How much is the demand and how much generation do we have?” If they do not match, we need to take off a certain amount of power. It generally turns out that it has to be over the peak, because it is a short rise and then a fall. That is what we have to do and we have well‑rehearsed plans for doing that, should it be the case.
If it is not anticipated and we lose a generator at the flick of a switch, then there are automatic processes for removing load from the system as well. There are lots of different systems as a safety net to make sure the system remains stable. That is the fundamental baseline for us: to maintain a stable power system.
Q340 Chair: If it gets to the point where you have to switch customers off, are they the ones, as part of the deal, who get lower prices in the first place? Is that how it works?
Robin McCormick: There have been and there are schemes for large customers to be part of that automatic process. As the frequency falls and the speed of the system slows down, there are relays that are watching that, and they can trip off blocks of demand: either industrial blocks or geographical areas. Generally, when you get to the stage of being in trouble, it is large areas of the system that have to be blocked out.
Q341 Chair: We hear a lot about the capacity in GB being threatened. You hear figures as low as 4% at maximum demand. It is probably very difficult to put percentages on it, but how does Northern Ireland compare to GB? How thin is the margin in both areas?
Robin McCormick: We would keep an active eye on the situation in Great Britain, because we will have to make an assessment as to how much we can rely on the Moyle interconnector, or more importantly the system on the other side of the Moyle interconnector, to help us out. We do that assessment each year, as I say. There is a graph in the statement, which has a big red line across it. What you do not want to do is go below that red line.
That is done with a standard analysis and methodology for assessing security of supply. From an all-Ireland perspective, we have enough generation on the island, and we have a market that allows people to consider whether they want to bring more efficient plant on to the system. In Northern Ireland, we dip below that red line come 2020 and you are back to needing the interconnector to provide a market so that people can invest in generation that will be a commercial deal for them.
Q342 Ian Paisley: Good to see you, Robin. Thank you for coming and giving us evidence. In your written evidence, you make it clear that, unless the second north-south interconnector is up and running soon, by 2021 we are in serious trouble in terms of lights going out and Northern Ireland not being able to have an economy that can prosper. It is a fairly important cut-off date and we have to have this thing up and running as soon as possible. Could you tell us who are the main objectors to your proposal going forward?
Robin McCormick: The words I have used are that I cannot be confident that the lights will stay on past 2020. There are lots of things that can happen; whether they will happen is another question. It is a level of confidence and a level of risk in terms of going forward. We are going to lose hundreds of megawatts of capacity, which leaves us in deficit.
The north-south interconnector project will go through the normal planning process for an infrastructure project. That gives everyone the opportunity to have their say, and that is perfectly reasonable. We will be able to give evidence to the public inquiry, which we are hoping will be started as soon as possible, where we will explain the need for the project and the rationale for the technology that has been chosen. Everyone else has an opportunity to put their view on the merits of that interconnector and local concerns around the visual impact etc. That is the process.
Q343 Ian Paisley: I understand the process. Who are the objectors?
Robin McCormick: The objectors are folk who would prefer the overhead proposal to be an underground proposal. They would prefer to have that. They would be generally local.
Q344 Ian Paisley: In what area, what part of Northern Ireland, just so the Committee understands geographically where we are talking about?
Robin McCormick: It is County Tyrone and County Armagh.
Q345 Ian Paisley: The South Armagh border?
Robin McCormick: The South Armagh border, yes. There are groups of people who would be in opposition to it both north and south, because there are two bits to this. The southern portion of the north-south interconnector has gone through an oral hearing, so we are awaiting a decision on that from An Bord Pleanála, which looks after that part of it. We are slightly behind in terms of the process. We are waiting for the Planning Appeals Commission to set a date for the public inquiry.
Q346 Ian Paisley: Have local authorities, public representatives locally or institutions objected?
Robin McCormick: The majority of the councils that I have visited would have been in support of it. There are a small number that would not have been in support of it.
Q347 Ian Paisley: Such as?
Robin McCormick: Mainly the ABC—Armagh, Banbridge and Craigavon—Council, for example. They would have wanted the interconnector to be underground. That would have been their direction of travel. Those are legitimate aspirations, if you like. There are issues with using an underground technology. This is a significant motorway in electricity terms, so it would be a significant infrastructure project to put underground. We could not use the normal technology that we use for the rest of the electricity system. We would have to adopt the technology that is used for the Moyle interconnector that runs across to Scotland. It is effectively an electricity tunnel, for want of a better description.
Q348 Ian Paisley: Have the south of Ireland gone underground or have they stayed above?
Robin McCormick: It is a consistent proposal to be an overhead line.
Q349 Ian Paisley: There is an element that, for part of your proposal, you are disrupting what I would call the silk route—or should I call it the red diesel smugglers’ route? If you go through that particular area, there could be objections from people who make illicit crime pay in that area, as having a huge infrastructure there that is monitored and watched could interfere with that. That has certainly been put up to us as something that has affected some of the objections.
Robin McCormick: I can assure you that all the trading on the interconnector will be perfectly legitimate.
Q350 Ian Paisley: I know all your trading will. I do not think that is the issue I am getting at, Robin; I think you know that rightly as well. There are others who, quite frankly, do not want it there because it is too much observation of what they are at. Coming back to the council, have they formally approved and supported it, and will they go to planning appeals approving and supporting it, or will they go as objectors?
Robin McCormick: We do not know. We do not have visibility of what the various councils propose to do. We have a number of letters of support from councils that have seen the overriding need for the project. We have done a lot of work in the area, because this is something that we have taken over from Northern Ireland Electricity over the last couple of years. We have had to do a little more brand awareness, because people would have been familiar with the brand of Northern Ireland Electricity Networks and not so familiar with SONI.
We tended to be doing a lot of work behind the scenes. We now have a bit more of a public face, and therefore we have had to go out to make sure that the landowners and the councils know who we are. Hopefully they will get a bit of confidence in what we are doing, the rationale for the work that we do and the benefit that it brings to customers and businesses to have a secure electricity supply.
Q351 Ian Paisley: I understand the brand awareness thing that you have to push and make sure it happens, but in terms of going forward what are your critical pinch points and dates for the implementation of the interconnector?
Robin McCormick: We have held to a view that we can still construct the interconnector and have it in place by the end of 2019. That is a challenge just from a project perspective. You obviously have to get access to land. You have to procure the equipment, etc. The two organisations that would be responsible for the project of building it are Northern Ireland Electricity Networks and ESB Networks in the south. They have been working closely together so that, when the whistle blows, they will be ready to play. It is critical that we get a timely outcome from the planning process. Part of the rationale for making this issue more public and ensuring that everybody knows about it is so that the planners, the Planning Appeals Commission and the public inquiry are aware of the urgency of a decision so we can get on with it and get it built.
Q352 Ian Paisley: Are you saying that you feel they are not, or do you think they are aware?
Robin McCormick: I need to do everything I can, and the organisation needs to do everything it can, so we cannot look back and say, “We could have done more to ensure that people had an awareness of it.” It is a significant decision for Northern Ireland and we want everybody to have the full view of the facts in front of them when making that decision.
Q353 Ian Paisley: The next big critical timeline is where?
Robin McCormick: We need the time of when the public inquiry is going to be held.
Q354 Ian Paisley: There is no date for the public inquiry.
Robin McCormick: The Minister for Infrastructure and the Planning Appeals Commission have to decide when that is going to be. We would like that to be as soon as possible. There are processes that have to be gone through, but certainly it looks like early next year.
Q355 Ian Paisley: That would take, what, six months?
Robin McCormick: The actual inquiry I would not imagine would take more than a number of weeks, as opposed to a number of months. Then there is a time before the ultimate decision is made.
Q356 Ian Paisley: If you had a deliberation period that started in first quarter next year and it took three months, by the time you got through the hearings to the decision you would be in the mid-second or third quarter of 2017. If you get a positive decision, you have to be on ground by the last quarter of 2017 in terms of implementation to be there for 2019.
Robin McCormick: It is a very tight timeline at the moment.
Ian Paisley: That is something we might have to publish in terms of our recommendations, Chair: that they have to stick to the timeline if this is going to happen.
Q357 Lady Hermon: It is very good of you to be so patient and sit while the other witnesses gave us evidence for a longer time than was anticipated. Thank you very much indeed for your patience. Following on from my colleague’s questions, what length is the north-south interconnector? How long is this connector? What are we talking about?
Robin McCormick: That is a good question. I think it is just over 100 kilometres, of which about 40 kilometres are in Northern Ireland. I could check those figures for you. It is an investment of just over £200 million in total, and about £90 million in Northern Ireland.
Q358 Lady Hermon: As someone who grew up in County Tyrone, could you be a bit more specific and say where it actually starts in County Tyrone?
Robin McCormick: It starts in an area called Moy and works its way through some of those well‑known towns—
Lady Hermon: Moy, Charlemont, that area?
Robin McCormick: Yes.
Q359 Lady Hermon: Then, rather than just saying, “It crosses the South Armagh border,” where specifically does it cross? It is not going through Crossmaglen. Where does it actually go through?
Robin McCormick: I would not have a specific location for that, but I can provide you with that.
Q360 Lady Hermon: Yes, please, so we can visualise where it is going. It is roughly 40 kilometres in Northern Ireland and the rest is in the Republic of Ireland.
Robin McCormick: Yes, a longer stretch in the south.
Q361 Chair: So it is actually known; you just do not know it.
Robin McCormick: Yes, it is. There is a proposal that has gone through the planning process, which lays out specifically where every pylon is to be built.
Q362 Lady Hermon: Excellent: that pre‑empts what I was just about to say. “Pylons: number of them?” is on my notes here. What are we talking about?
Robin McCormick: Again, I do not have the full set of details, but there are just over 100 pylons in Northern Ireland. They are generally something like 350 metres apart.
Q363 Lady Hermon: How have they been designed to minimise the impact on what is a very rural area, certainly of County Tyrone and Armagh?
Robin McCormick: There has been a huge amount of work done in the selection of the pylon that has been put as part of the planning process. You have to do environment impact statements around all the technology that you use.
Lady Hermon: Of course you do.
Robin McCormick: The structure that has been chosen is not as tall as the structures that we use in Northern Ireland generally for 275,000 volts. The north-south interconnector will operate at 400,000 volts, so if you like it is a wider road, but it will have a smaller profile. That is one of the steps that we have taken to reduce the visual impact to the extent that we can.
Q364 Lady Hermon: In response to Ian’s question about the objectors, a number of them would have preferred putting the connection underground. Presumably the main objection to that is cost, or is it the geology? Maybe it is rock and it is physically too much.
Robin McCormick: It is more than cost. The independent estimate has been that it would cost around three times as much if it was built as an HVDC interconnector. To build it using the conventional alternating current technology that we use elsewhere is not feasible. There simply are no other examples of cables of that length at that voltage. We have to revert to a different technology. This is where it gets a little more difficult to explain. You would have two connections between a small island system in Northern Ireland and a slightly larger system in the south, with one that operates using the AC technology—the normal one—and another that has direct current technology.
If you lose the alternating current one, the normal one, and you are left with this new technology, you have to be able to tell that exactly how much energy needs to flow at every second. It requires a huge, complex control system behind it to be able to drive it, and that is in the middle of a small system where we have benefited from really pushing the bar out on renewable. We are managing high levels of renewable penetration, doing things that nobody else in the world is doing. To put, on top of that, a risk to the operation of the system through this very complex control system does not seem to us to be the best solution.
The other thing to say is that, to provide the 100 kilometres‑plus of cable, you would have to have what is called a converter station at either end. This takes the alternating current, converts it to direct current, sends it along the cable as direct current; and then you have to have another converter station at the other end to convert it back to AC so that it links into the system. If you had, say, a large customer who decided he wanted to connect to the system plunk in the middle of that link, to get them connected to that circuit is significant. You have to put in another converter station and manage all the complexity of that.
It is not as big an issue if you have an overhead line circuit, which is much more flexible. It is easier to find a fault. Faults do happen on overhead lines, but they also happen on cables, and to locate a fault in the cable is not as easy as it sounds. There are examples of fault‑finding on the Moyle interconnector undersea cable, where it was difficult to locate the fault and it took time. You also have to dig a hole the size of a marquee to get down and make a repair to an underground cable of that scale.
Q365 Lady Hermon: You have obviously looked at the advantages and the many disadvantages of putting the cable underground as opposed to the pylons. You will have around 100 pylons. In terms of the landowners who will be affected in County Tyrone and County Armagh—those are the ones I am concerned about, having come from a farming community myself—there will be some visual impact. There will be, presumably, the compulsory purchase of the land that is affected.
Robin McCormick: Ultimately, the Department has powers to make that compulsory. We would prefer to work with landowners to get their agreement to do it, and we have been with landowners, trying to ensure that they understand who we are and the value of the interconnector.
Q366 Lady Hermon: When you say that you have been with landowners, what does that actually mean on the ground? Is there somebody from SONI, or a team from SONI, who go out and meet the landowners right down the length of the pylons?
Robin McCormick: Yes. We have opened an office in Armagh to make ourselves available for anyone who wants to come and have a chat about the project. We have gone to some of the local agricultural shows, again to engage with the communities. It is probably worth noting, in terms of how different places deal with this circumstance, that in the south it had become quite political. One of the policy decisions that was made as they moved this particular project forward was to introduce a community fund and a proximity fund for the interconnector project.
Q367 Lady Hermon: Will the Irish Government pay for that? They fund these social funds or community funds.
Robin McCormick: Yes, they have just said, “That is the policy”, so it will have to be funded through the normal regulatory process.
Q368 Lady Hermon: Do we have the equivalent in Northern Ireland?
Robin McCormick: We do not have the equivalent in the north, and we are looking to see whether that has legs in Northern Ireland.
Q369 Lady Hermon: Have you asked?
Robin McCormick: We have discussed it with the regulator and with the Department. We are working with them to see whether that is something that would be of benefit to the project.
Q370 Lady Hermon: Let me summarise. You are hoping not to have compulsory purchase of the land that would be affected. You work with the farmers; you have people on the ground from SONI who are working with them. You are also hoping that the Northern Ireland Executive would mirror, if I got you right, what has been available in the Republic of Ireland in terms of an additional fund, a community fund—did you call it a social fund?
Robin McCormick: They have chosen to go down the route of a community fund, so along the route, whatever communities are impacted, there would be some fund available to assist them. There is also what they describe as a proximity fund, so if you are close to the circuit there is a payment; if you are further away it is a smaller payment. Probably for the Northern Ireland element of the project, it is just under £2 million worth in a project of £90 million to £100 million.
Q371 Lady Hermon: Is there any possibility of SONI contributing, since SONI is responsible and this is really important? Can SONI contribute to this? I know you are owned by EirGrid; is that not right? EirGrid is owned by whom?
Robin McCormick: They are semi‑state, in the south. Generally, the money that we bring in is brought in through tariffs, and then the business bit of SONI is regulated. Jenny would tell you that she regulates us so that we are an efficient business. We certainly believe we are an efficient business, but we do not generate profits in a manner that can be rolled back into provision of community funds, etc. That is not the way the whole commercial—
Q372 Lady Hermon: I just needed to ask, because I do not understand. The Utility Regulator, who has given us evidence this morning, has emphasised the importance of the north-south interconnector. I wondered if it was even being discussed with the Utility Regulator and with SONI whether in fact there could be a contribution.
Robin McCormick: It is one of those issues that is really a policy issue, because it has consequences. If it was introduced, it would need to be carefully crafted for this project; it would not be retrospective, etc. A bit of work would need to be done.
Q373 Lady Hermon: I am sure you have already noted it very carefully, but if you do not mind I will draw your attention to the joint letter to the new Prime Minister, Theresa May, and copied to the Secretary of State. I am pleased to see that it is a joint letter, signed by both the First Minister and the Deputy First Minister, Arlene Foster and Martin McGuinness. The letter says, “Energy is a key priority, given that there are inherent cost and supply issues in a small, isolated market so we will need to ensure that nothing in the negotiation process”—this is in the context of Brexit—“undermines this vital aspect of our economy.”
Presumably you have picked that up. That letter was sent on 10 August. Has there been a flurry of correspondence with the Deputy First Minister, and indeed the First Minister, about the north-south interconnector, in light of the priority that has been given to energy, and the key that we must not allow Brexit negotiations to affect this?
Robin McCormick: I have not spoken directly in advance of that letter. I met the Minister for the Economy and the officials from the Department with Jenny yesterday. There is quite a lot of dialogue between the various parties, and our view would have been articulated. We believe that the market arrangements that are in place and are developing are appropriate for the island and bring benefits to customers in Northern Ireland. Therefore, we do not anticipate that Brexit will lead to a decision to change that model. We anticipate that it can continue to operate effectively; there are lots of benefits of the system operators on the island of Ireland engaging with their counterparts in Europe.
There is a body called ENTSOE, the European Network of Transmission System Operators for Electricity, and together we would form codes and guidelines of how we run our businesses and the systems so that there is consistency, and so that the market arrangements can benefit customers. I will give you one example: the current market does not permit really efficient trading on the interconnectors. For the Moyle interconnector and the interconnector between Dublin and Wales, there are trading arrangements, but people have to bid in before they know what the end price will be. They have to take a bit of a punt at it, and sometimes that does not come out with the right answer.
The new arrangements will be much more efficient and will better utilise those two interconnectors, both of which were funded by the customers in their respective parts of Ireland. The Moyle interconnector was paid for by customers in Northern Ireland, and the east‑west interconnector was paid for by customers in the south. We need to make sure that those investments are fruitful, that the new arrangements will promote more efficient trading and that they will also allow for folk who want to trade on the interconnector to take a much more global or European helicopter view. The arrangements allow for not only trading on the Moyle interconnector, but potentially through GB into Europe, so there is no compelling case for all that to be disassembled.
Q374 Lady Hermon: Finally, following on, Brexit, according to the Prime Minister, will mean Brexit. We are waiting to see how that translates into reality, but part of the huge body of EU legislation is, as you well know, the directives, the regulations, the legislation that has come out of Europe about emissions. Presumably, when we leave the European Union, those directives will not apply. They will not apply to emissions at Ballylumford, Kilroot and all the other generators. Is it not possible that we could, with some investment, update or modernise those generators, or is that just too expensive?
Robin McCormick: It depends. That is a policy decision in terms of the upside, the downside and whether there are any implications in making those changes to the trading arrangements with the rest of Europe. I do not know the answer to that question, but I know that all of the bits of the jigsaw that have created the market arrangements to date are working. Any changes that occur outside that market in terms of regulations or support mechanisms have consequences. It is important that, as we move forward, we make good decisions and take account of any potential unintended consequences.
We had a carbon price floor policy decision made, and then we realised that would have unintended consequences for the generators in Northern Ireland, because they were operating in a different market arrangement from GB. We managed to catch that and make the right decisions about how that would be implemented. We need to be conscious of that sort of thing, and the consequences of any decisions that will be made as we move forward.
Q375 Nigel Mills: Just one quick question: if we were to decide as policymakers that we wanted to decarbonise our heating and transport systems, and wanted to try to get everybody to heat their houses using electric and have all cars be electric by, say, the mid–2020s or something, is that remotely feasible?
Robin McCormick: You can decide if that would be feasible. The consequences of it would be challenging. We have tried to take account of some of these potential changes in the way that we plan our network. Traditionally, we would have simply looked at the demand forecast, and we would have asked, “What are the economic drivers of the economy?” They tend to be reflected back into the demand for electricity, whereas now there is a lot more activity and we believe that it is more appropriate to start looking at a number of scenarios, because we do not have a clear view of what the direction of travel is.
If there was a policy decision that said, “We are going to have a target for the number of electric vehicles we have on the system”, then we would have to start to plan the system in light of that. There are a whole lot of pluses to it from a system operator point of view. I would be looking at it saying, “Wow, we have batteries hooked on to the system all over the place, so when people are not driving they are charging their battery. If I could get some input into that I could maybe use some of that charge when I really need it.” There is a holistic view of how all that would work together.
From an infrastructure point of view, however, you have all the charging stations, you have a network that needs to be able to support all those charging networks, when people come home and park their car at 6 o’clock at night and put the plug in. The infrastructure needs to be set. At the moment, if you go into a garage and you buy a car, you expect to be able to drive out on to a road network that fits the number of cars that are sold. When you go into a garage, the salesman does not say, “Before I sell you this car, I need to check with the road service, to make sure that there are enough roads for you.”
Similarly, we would need to be, in advance, making investments in the network to make sure that we could control and benefit from whatever technology it is that we are talking about.
Q376 Nigel Mills: Presumably, your home heating and hot water would be even harder in terms of the amount of electricity you would need.
Robin McCormick: There are a huge number of opportunities out there for people to take action around how they use their energy—a lot more remote control of appliances, etc. However, those are all individual actions. The real benefit comes when you find some way of pulling out and co‑ordinating some of that. If I decide I want to switch my fridge off, do I really want to be bothered with having to make a decision as to when it is best to switch it off? Would I not be better to delegate that to a co‑ordinator, who could say, “If we knocked off all the fridges for half an hour at a certain time, that would be a huge benefit to the system”, rather than people making random decisions? It is a whole co‑ordination to be smarter: that will be the challenge going forward.
Q377 Nigel Mills: If we said to you, “We have a vision: we want carbon‑free home heating”, one way we would have to do that is to get people off gas and on to some kind of electric heating and hot water system. Presumably that would be quite a significant electricity requirement, especially on cold winter days when the wind is not blowing. How realistic is it that a policymaker could decide to do that and have that effective in 10 or 15 years’ time? Is that even remotely an option that could be taken?
Robin McCormick: It depends on the scale. If you want to move what is not electricity demand, and create electricity demand, then you need to have a grid system and whatever generation mix you need to be able to meet that demand. There is a decarbonisation pathway there, but whether that is the most practical and cost‑effective is the question. If you want to do it and you are prepared to pay for whatever it is that needs to be done, then that is one direction of travel. If you are not prepared to pay for the infrastructure and the systems that are required, then you have to look at alternative ways that might not be as ambitious as that.
Q378 Chair: Going back to the answer you gave a while ago when I asked about the margins, you said quite rightly that you keep a close eye on what is happening in GB. You will probably not want to get into this area, but the decision on Hinkley C will obviously be important. From your point of view, what are the cost concerns that the Prime Minister is looking at? How have we come to the point where the Government is concerned about the cost, as opposed to the private sector?
Robin McCormick: It is out of my bailiwick, that one. We are working on creating a market that allows commercial activity to come up with the answer. It is much more complicated where you have to have interventions, and obviously, on a huge project of that scale and the cost vulnerability, there is no wonder people have concerns around any project of that nature. We have concerns about managing the cost around the north-south interconnector, and it is £200 million. That is one for the Government to crack in terms of confidence in the contractor to be able to deliver a project to the timelines and to the costs.
We are running an I‑SEM project, which is basically a huge IT project wrapped around with lots of different business processes, and that is a significant challenge. I would not be surprised if people were concerned about larger infrastructure projects.
Q379 Chair: What I am trying to say, I suppose, is that, if we need the capacity, has government policy been right to give the future assurances? I can understand the concern about the cost, but, if that then rules it out, where are we going? Does that make sense?
Robin McCormick: You are into a bit of a philosophical debate here, because to make a strategic decision about infrastructure you have to make a lot of assumptions around what the future looks like. I can only go to the regulator and say, “We need to build this, because I have tangible evidence that it is required.” Northern Ireland customers may not be prepared to pay for infrastructure that ultimately will be stranded and not used, but it takes time to build the infrastructure. The whole set of assumptions that go into making those strategic decisions are sometimes necessary. The Moyle interconnector would have been built with a strategic view; the transmission system in Northern Ireland has held us in good stead. It was built in the 1970s and we are still reaping the benefits of that strategic decision. However, when it comes to the next step, we have to decide whether to make an incremental investment or a strategic investment, and it is the part of Government to provide that policy to allow us and everybody to follow through.
Q380 Lady Hermon: This will be a small supplementary point that flows from the question about Hinkley Point. The Prime Minister has paused the whole thing, quite rightly, until she sees all of the details. One of the details, I understand, is in fact the security: how do you make Hinkley Point and that development secure? Bearing in mind that SONI is a very complex system of controls and a control network, and without going into details, because I obviously do not want to compromise the details, there must be a concern about how you can retain the security of SONI and your headquarters, and how you prevent hacking into your system.
It would be absolutely disastrous for the consumers and for business, etc, in Northern Ireland. That has to be something you have factored in along the way. I do not want the details, but I want to be reassured that you are protected from being hacked into.
Robin McCormick: It is significantly high in our risk register. Businesses have risk registers.
Lady Hermon: Yes. It is just something we have never discussed.
Robin McCormick: We are constantly reviewing our arrangements. We obviously have a very complex system, which allows us to run the network, to send signals to generators, to switch switches out in the network. That is separate from the system that allows us to send emails to each other, and it is much more secure, with multiple firewalls and all sorts of things that are going on. We take the best advice that we can, and we take steps to ensure that we are not the latest victim of a hacking attempt.
Lady Hermon: Thank you. That is reassuring.
Chair: It has been very interesting and very useful. Thank you very much for joining us.