Northern Ireland Affairs Committee
Oral evidence: The electricity sector in Northern Ireland, HC 51
Wednesday 29 June 2016
Ordered by the House of Commons to be published on 29 June 2016.
Written evidence from witnesses:
– The Consumer Council for Northern Ireland
– Power NI
– SSE
Members present: Mr Laurence Robertson (Chair); Oliver Colvile; Mr Nigel Evans; Lady Hermon; Kate Hoey; Danny Kinahan; Dr Alasdair McDonnell; Nigel Mills; Ian Paisley; Gavin Robinson
Questions 135 – 235
Examination of Witnesses
Witnesses: Sheila McClelland, Chair of the Board, The Consumer Council, John French, Chief Executive Officer, The Consumer Council, and Richard Williams, Head of Energy, The Consumer Council, gave evidence.
Q135 Chair: Just before we start, I need to refer the Committee to my declaration in the register of interests that I am a paid consultant to Veolia, who deal with energy matters, including in Northern Ireland. That has to be on the record.
Thank you very much for joining us. As you know, we are looking into the electricity sector in Northern Ireland. We are very grateful to you for coming this morning. Would you like to make a brief opening statement before we get to the questions?
Sheila McClelland: Thank you, Chair. We are delighted to be asked to provide oral evidence to you, and thank you very much. To give a short bit of background information about our responsibilities as the Consumer Council, I am the Chair of the Council. John, to my right, is the Chief Executive, and Richard is Head of Energy Policy. We hope we can provide you with factual information in relation to energy provision for the consumer in Northern Ireland through this medium.
The Consumer Council has been an NDPB since 1984, and it has a principal statutory duty to promote and safeguard the interests of consumers in Northern Ireland. Under the Energy (Northern Ireland) Order 2003, we have a specific duty to have particular regard to consumers who are disabled or chronically sick; of pensionable age; with low incomes; or who reside in rural areas. In our statutory role of representing consumers in energy, water, and postal services, we represent both domestic and business customers—this has been an issue that we have had a bit of focus on, but we are clear that in this area we are representing both domestic and business customers. We have a new corporate plan from 2016 to 2021, and a forward plan for this year, and if members of the Committee take the time to look at that, we hope that we have a focus on representing the consumer in these particular areas.
We recognise that energy policy is a devolved issue, now under the brief of Simon Hamilton in the Department for the Economy in Northern Ireland, but as we all know it is very complex, and the submission we presented to your inquiry was based on our existing Consumer Council policy positions, updated and regularly briefed by research that we undertake. There are a number of reasons why we are aware that we have a particular vulnerability. Despite reductions in domestic energy bills during 2015, the cost of wholesale energy remains very volatile. We have already this year seen increases in the wholesale cost of natural gas; it is up 33% since its lowest point in April 2016. Crude oil prices have been rising steadily from historic lows of $18 a barrel in January 2016 to around $50 a barrel now, and these pressures will feed through to both business and domestic energy bills.
The main area of concern for domestic consumers has consistently been, and remains, the cost of home energy. We verified this most recently in May 2016, in our six‑monthly piece of research we do, which said that 29% of people remain very concerned about energy prices. That has topped off at 40% in the past, but it is obviously a legacy issue in that this is still a major worry for them. The latest official fuel poverty figures from 2011 suggest that 42% of households are in fuel poverty, and there is new research just out yesterday that, again, shows statistics about the most vulnerable in society, which we can talk about. The cost of electricity for business users in Northern Ireland is currently, on average across NI business, 33% higher than the EU median. Again, we will talk more about the domestic prices being currently lower; this is specifically about business.
In our submission, as you know, we have suggested some high‑level recommendations, and my colleagues and I will discuss those further through the questions.
Q136 Chair: Thank you very much. To be clear, because this is one of the concerns that we have had, would a domestic consumer in Northern Ireland, as opposed to one in England, let’s say, be paying substantially more for their electricity?
Sheila McClelland: Less, at this point.
Chair: They pay less at the moment.
Sheila McClelland: Less at this point, because we have very clear and transparent impacts from the oil price feeding through, so it will be volatile depending on the oil price feeding through and will have a direct impact on the costs. That is why, at this stage, with lower oil prices feeding through, we would be seeing that we have lower prices, and because the Utility Regulator has been proactive in trying to create the hybrid model, which has better transparency. Yes, at this point it is lower, but the absorption factor is less, and it will spike again with the input of the oil prices going up.
Q137 Ian Paisley: Chairman, if I can come in on that, I do not understand the oil price thing. Two years ago, oil was $148 a barrel. It dropped to $18; it has been back up to $50, and it is going down again. It is about $47 at the moment. I do not understand how there has been no significant change, then, in the price that consumers—domestic and non‑domestic—are paying. How do you explain that? There is no correlation. If you speak to any consumer, they say, “Look at the price of oil—where it was three years ago and where it is today. Why is my electricity bill this price?”
John French: Electricity prices have reduced over that time.
Q138 Ian Paisley: But not as significantly. There is no correlation between the real value of what is being paid for oil on the hedging market and what is being paid by the consumer.
John French: I know you are taking evidence later on from Power NI and SSE, but the international oil price is a spot price that is paid on the day. Energy companies are generally hedging their energy, so it would be slightly more smooth than that. However, energy prices have reduced in line with wholesale prices, both for oil and natural gas and coal.
Q139 Ian Paisley: Again, there is no correlation between spot price and hedging. If you have bought oil on an oil contract on, say, a three‑year term, it is not a price on the day; you have bought it at a particular price that you are paying over a period of time. There is an awful lot of bluff sent to consumers about the price of oil in the oil market and people hedging, and all the rest of it. To me, it looks like a lot of cobblers. People in the oil industry are paying an awful lot less now and sending it through, but the consumer is still paying a high price. Why is that?
John French: That is why we go back to what we have asked for. It is about getting that transparency throughout the market, so consumers know—whether it is through hedging or whatever it is in the market structure—that they are getting a fair price and value for money for that.
Q140 Ian Paisley: Do you think they are?
John French: If you benchmark it on a pure benchmark between the Republic of Ireland and GB, domestic consumers are getting the lower price. Whether that is because the Northern Ireland market is better or the others are worse, I do not know, but it is that kind of transparency that we need. As Sheila was saying, it is clear that larger business customers are paying more for their energy than their comparators in GB and RoI. We, as the Consumer Council, are asking for that transparency, so that consumers know what they are paying, they can trust what they are being told and they feel they are getting value for money for the price they are paying.
Richard Williams: Can I just add one point? Broadly, over the past two years, looking at the reductions that we have seen in wholesale gas prices and oil prices, we have seen those gradually and eventually reflected in the price that domestic consumers have been paying. We have had decreases by Power NI, the incumbent electricity supplier in Northern Ireland. We have had three separate reductions. They do take time to feed through because of the whole process of regulated tariff reviews, but the evidence we have is that they have finally, broadly reached domestic consumers.
It would be fair to say that the analysis we have done indicates that home heating oil prices have reduced similarly to crude oil prices, and looking back at electricity, again, we have seen a reduction of wholesale prices, which are affected by the wholesale price of natural gas. The area where the reduction has not been quite as great is in the around 20% of the bill made up of network charges and other levies, which stay consistent, but the area around wholesale prices has, over the period of about 18 months, come down. We are concerned, particularly for consumers, that we are starting to see those prices rise again at wholesale level. I take the point that oil prices are very volatile, but since January the price has been creeping up. It may have gone down again today, but it is gradually creeping up, and we are seeing the same with wholesale natural gas prices. We are concerned that if that continues, we will see a reversal of what we have seen for the last 18 months.
Q141 Chair: Perhaps we can come back to the difference between the domestic and business users, but just to finish on that point, I think you referred to fuel poverty in Northern Ireland. Can you just state the figure again?
Sheila McClelland: 42% is the identified statistic. The research was undertaken by the Housing Executive for the Department for Social Development in 2013, published in 2014, but reflected demographics in 2011. That is the evidence on which we are basing the information.
Q142 Chair: That means 42% of all domestic users—households, basically—are in fuel poverty. In other words, they spend more than 10% of their income on fuel. Do you know what the UK figure is?
John French: It is a lot less than that.
Richard Williams: In 2011, when those figures were compiled, it was 15% for England.
Q143 Chair: We are going back a few years there. Are there no updated figures available? As Ian has said, a lot has happened since then.
John French: The Northern Ireland Housing Executive are undertaking their next survey next year, in 2017. I know the University of Ulster did some research themselves that looked at extreme fuel poverty in Northern Ireland, but that was still based on 2011 figures. That was when consumers spent more than 20% of their income on energy, and they were saying that 13% of households in Northern Ireland would be in extreme fuel poverty.
Q144 Chair: Do you have figures for pensioners?
John French: A press release came out yesterday from the Department for Communities, which looked at overall poverty within Northern Ireland. It said that 20% of pensioners in Northern Ireland were in poverty in 2014-15, which is just under 60,000.
Q145 Chair: What is the UK figure?
John French: I am sorry; I do not have that, but I can find that for you and get back to you on that.
Q146 Chair: Those figures are probably very important, and I would have expected them to be quite up to date. Is it not your role to have those figures at your fingertips, and for them to be up to date?
Richard Williams: The last survey, as John says, that was done was in 2011. They are currently undertaking their next one. In terms of the figures for England, we wanted to make them comparable, so I take your point, but it is a comparison with what we know the Northern Ireland figure was. We know what it was in England in 2011, so we can do a comparator.
Chair: Okay, thank you.
Q147 Lady Hermon: Thank you very much for coming to give us evidence this morning. If you do not mind, I will call you Sheila; is that alright? Thank you.
Following on from the points we have been making about fuel poverty in Northern Ireland, you mentioned in your introduction, which was very helpful, that the Consumer Council, under the Energy (Northern Ireland) Order 2003, has a statutory duty to look after those who would be described within that order as vulnerable consumers. Given that so many households are in fuel poverty, what steps has the Consumer Council in Northern Ireland taken to represent those views to the current Executive? What are you doing to reduce fuel poverty?
Sheila McClelland: We undertake six‑monthly research to identify the trends in relation to the perception of people’s wellbeing in the areas of consumer protection we have. Those are then articulated. We then go back to the Departments and reflect those views into the particular Committees, and to the Ministers, to try to affect the policy.
There has been a shift in our approach over the last number of months; we are trying to be involved more in the policy development area. It is a quieter space, if you like; we are involved in a lot of think tanks and emerging policy areas with permanent secretaries and with senior officials in Government, which will help reflect the position of the most vulnerable.
The most recent launch has been of an energy switching comparator website. That will allow people in that space to understand where energy might be best sourced for them—which provider might give them the best provision.
Lady Hermon: A website—that is based on an assumption—
Sheila McClelland: Yes, that people can have access to the net.
Q148 Lady Hermon: It assumes that people have access to websites, and that is not always the case. How do you engage with vulnerable consumers who do not have access, or who even if they had access do not have the training to go online and go on your website?
John French: We are working very much in partnership with National Energy Action—NEA, which is the fuel poverty charity throughout the UK—and work strongly with others like Macmillan. We formed, back in 2010-11, the Northern Ireland Fuel Poverty Coalition. About 100 or so organisations have joined that coalition, and we jointly lobbied, last time around, to get fuel poverty as one of the indicators within the Programme for Government. We would work strongly with the likes of the citizens advice bureaux, Advice NI, and those kinds of bodies to try to get their information from the ground, and we would train advisers and members of the public about how to get the best deal for their energy.
We have our website, as Sheila mentioned, but we also have lots of simple books that we hand out. Several thousand people download them every month, but we try to get those out both in physical copies and through the website.
Sheila McClelland: There is also an outreach team that works in communities; it goes out and has events in communities, and talks about money affairs and, generally, how you can make your budget stretch. We have also embedded quite a bit of this work in the Northern Ireland curriculum; there is work with CCEA to ensure that this information is embedded at key stage 3 in the classroom. It is a multi‑strategy approach, so we are trying to proactively go to the communities; we have initiated work relatively currently with Girlguiding, for instance, to try to inform young people through that mechanism, so they can stimulate the parents to be more informed about how they can shop around and use the competitive market to make their budget stretch.
Q149 Lady Hermon: The one outlet that I was waiting for you to mention—because I know that the Consumer Council takes an active part in it—is On Your Behalf on Radio Ulster on Saturday mornings, which is a very good medium for connecting with consumers. As a fan, I am just saying thank you for taking part in that, and perhaps it could be another outlet that you could make further use of.
Richard Williams: Could I make a point on this? As Head of Energy, I am aware of some of the particular campaigns that we run. One of the main areas that we see as being beneficial to all consumers, particularly those who are fuel‑poor, is the ability to switch their energy supplier. As has been mentioned, we have the comparison tool, which has recently been launched, but we have our Switch & Save campaign, where we have gone out to community organisations across Northern Ireland. We did 46 events last year. We do go out on On Your Behalf; I have been on myself, and I have talked about Switch & Save. We know that consumers can save at least £100, and there have been instances where people can save £200 a year—high energy users—by switching. It is a major campaign area for us.
The other area, which is obviously of major concern in Northern Ireland, is our over‑reliance on home heating oil. We have worked with Bryson House to try to develop more oil buying clubs and provide access for people to oil buying clubs where people and communities come together to buy. We are doing some work on that, and we have built links with the Northern Ireland Oil Federation as well to try to promote good practice in the home oil industry.
Q150 Lady Hermon: That has been very helpful.
If you have tuned in and watched earlier evidence sessions, you will know that we were told in evidence—I think this phrase was used—that the lights will go out in 2020, or go out in 2020. Presumably, consumers are contacting the Consumer Council expressing their concerns about the future of the energy supply in Northern Ireland. How do you reassure them, and what is your connection with the industry itself?
John French: We are central to that. Part of the Energy (Northern Ireland) Order 2003 is that there are three main statutory bodies in relation to energy. It is the Department that sets the policy, it is the Utility Regulator that enforces and regulates that policy, and we are the consumer advocate within that setup. We will work strongly to ensure that, on issues like price controls—which set the price for the next five to seven years—we advocate strongly on behalf of the consumer. We also have a complaints function within that statute; we would take complaints on behalf of consumers relating to natural gas and electricity. We would then feed those complaints back into policy makers and the companies to try to make sure they are overcome.
In terms of constraints, and consumers worrying that the lights will go out, I do not think that is an immediate concern to consumers. It is accepted as a basic need that when we switch the light switch or the plug, the electricity comes on or the gas comes through the cooker or radiators. From 2021 onwards, there could be constraints on the Northern Ireland system, and that is obviously a concern, because as a first-world economy, we would expect our lights to stay on and the gas to flow.
Q151 Lady Hermon: Finally—because I know my colleagues want to ask questions as well—you have said on a number of occasions that you feed in your suggestions to the relevant Departments, permanent secretaries and officials. Do you feel you are taken seriously? Do you see the results of your labours and the consultations?
Sheila McClelland: Certainly in my time there, I believe the strategy that we have taken has worked. We have made significant inroads in other areas, for instance public transport. There is much more respect, if you like, for what we have to say when we say it in these quieter spaces, and our requirements are fed through and are threaded through the public policy that is produced. Also, we have worked very well with the Utility Regulator, certainly in my time, and any concerns we have are reflected in their thinking. We respond very clearly to the different approaches in relation to the price‑setting and tariff‑setting initiatives, and we would have no concerns about the fact that our position has not been reflected. Would you like to add to that, John?
John French: We can see where our policy positions have been reflected. We would like more, but the likes of the Utility Regulator have to make a balance between the consumer and the business. We recognise that, but we will always be pushing for more in terms of what the consumer wants, and basing it on evidence that we have found from surveys, from consumer panels, or from our complaints function, feeding it back into that process.
Lady Hermon: That is very encouraging. Thank you very much indeed.
Q152 Dr McDonnell: We have talked about a lot of the detail. Overall, do you think that we get reasonable value for money? Are you satisfied that we get reasonable value for money, or are we just getting reasonable value for money at present because the oil prices are low, and that value for money will disappear when oil prices begin to pick up again?
Richard Williams: As you are aware, there are different parts to the supply chain, and some have greater regulation than others. We would focus on competition in the supply end of the market. We have a hybrid domestic supply market here at the moment, in which we have one regulated supplier—Power NI—and we now have competition with five other suppliers that have come in.
That effectively creates a situation where the regulated price is a price to beat for those other suppliers, and currently we are seeing that the price of domestic electricity is substantially below what is being paid by GB consumers. We see the regulated supply, the regulated price, and we have full transparency on it. We know what costs go into that from the single electricity market. We know what the NIE network cost is that goes in, and we know what the VAT is and what the levies are, so we broadly know what that price is. It is being beaten by competitors, which is a good thing and something we are very much in favour of. We look across the water and see a different situation; the CMA have just concluded their inquiry into that.
On the network side, it is fully regulated. There is so much money and complexity that goes into that. We have recently done some consumer engagement with NIE for their next price control, which is a great step forward and one area where we have really won something, because that was never in there before. We are getting greater input into that price control. Time will tell, when that price control outturns, what figure it will be, but it is transparent, and what we can see is very positive in that respect.
The area around generation is perhaps a bit more difficult. It is a hugely complex area with the single electricity market. We note that Ulster Business recently showed that some of the profits of the companies within the single electricity market—the generators—were higher than other businesses within Northern Ireland, or within Ireland. That is the area where we believe more work needs to be done, which is why we have raised the issue of transparency within the development of the integrated single electricity market, so that consumers can understand, and perhaps have greater confidence in, that end of the market. The other end of the market is operating in a transparent manner.
Q153 Dr McDonnell: Have we too few generators? Is that what you are implying—that it is a sellers’ market?
Richard Williams: In Northern Ireland?
Dr McDonnell: Yes.
Richard Williams: The thing is, we are part of a single electricity market. There are plenty of generators on the island of Ireland, and one of the big asks—which I think everyone is clear on—is that there needs to be greater interconnection. The north‑south interconnector is an absolute essential, because that would give us access to cheaper generators in the Republic of Ireland. There are constraints on the system that mean we do not have that access. If we did have that access, it may not be necessary to have that much more generation here.
Q154 Dr McDonnell: This is not to put you on the spot, and I accept that you are fully free not to answer the question if you are not comfortable, but have you done any assessment as to what last week’s vote will do to the market, if anything, and what impact it may have on electricity?
Richard Williams: At the moment, it is too early to tell. The development of the integrated single electricity market is something that was initiated from Europe, but it has far wider drivers than simply that. I could not really say at this stage, to be perfectly honest.
Dr McDonnell: Thank you.
Q155 Danny Kinahan: Thank you very much for coming today. If I could go back, initially, to fuel poverty, it always felt like we struggled to deal with fuel poverty, because it is just Northern Ireland that is financing how it deals with it. Would we be better off trying to work on helping fuel poverty with an all‑UK approach? If you follow my logic, you would have bigger firms and bigger numbers of people and are able to put the finances in to be able to help, rather than just dealing with it from a Northern Ireland aspect.
John French: A lot of good work has been done. Fuel poverty is down to three main things, as you know: the income of the household themselves, the energy efficiency within the household, and ultimately the price that the consumer pays. Unfortunately, in Northern Ireland, income levels are lower than the rest of the UK; as we have been saying, fortunately, prices are higher; and energy efficiency is a bit of a mixed bag. Northern Ireland is more of a rural economy, so houses are more isolated and do not have the heat that they could get from their neighbours in an urban environment and things like that. There are various things that go against Northern Ireland. It is an issue of trying to build around those three areas, trying to hit each area: looking to see how we can increase income, keeping the present low prices stable, and bringing in schemes that ensure that ultimately consumers do not use energy as much as they currently do. That means bringing energy efficiency measures and insulation measures into the household so that it is secure for the long term.
Richard Williams: We may not have addressed that issue directly, because we do have energy devolved.
Danny Kinahan: That is why I asked the question.
Richard Williams: For us to change that would be a huge step.
Q156 Danny Kinahan: It is more about how we all work well together; we can still have devolved government.
If I can move on, in the electricity sector, do we have the systems set up in the best way? Are there major changes that we are not looking at because we are always focusing on ourselves? Is the electricity sector set up in the best way, or are there major changes that we should be looking at as to how we run it?
Sheila McClelland: Starting on your previous point, we all recognise that the fuel poverty thing is really complex. From the stats that we have here, the disposable income levels in Northern Ireland are just about half of the UK average, and the average salary in Northern Ireland is lower, £14,645 compared with £17,965 in the UK. We have the highest percentage of workers on or below the minimum wage, at 10%, and the average household in Northern Ireland had £100 per week of discretionary income in quarter 1 of 2016, compared with £198 for the average UK household. It is about the income as well as the price of energy. We take a very holistic approach in relation to improving employment opportunities in this space, so more income would mean less fuel poverty. I think the draft Programme for Government is trying to look at those sorts of interconnected outcomes that should make a difference.
The consumer, as I said earlier, and the domestic consumer specifically, is still very worried about the fact that they could be in an extremely pressurised situation. Obviously they are not; the price has come down, but that just has not been reflected in the diminution of their concerns. We would all expect that with renewables and so on there is going to have to be further investment. It is about making the benefits of the investment understood to those domestic consumers and the business consumers, so that if prices have to be inflated to cover that investment, that will, in the long term, give us more security of supply. That has to be understood by the layperson, who is ultimately in a very compromised situation, because they have to be a customer.
Q157 Danny Kinahan: That is why I am saying that if you worked as the whole of the UK, you could get more resources and more people to be able to lend you a hand in how you help people deal with fuel poverty.
Can I go back to the question of how we are set up to run our electricity sector? Is there some major change in how we are doing everything that should be looked at, or are you comfortable with the way things are set up at the moment?
John French: One of the things we asked for, in terms of our evidence, is that there is that holistic approach—that, going back to my earlier point, consumers can trust what they are being told about value for money. That means looking through the whole electricity supply chain to see whether they are getting the best for generation, transmission, distribution, and then ultimately supply. Ultimately, consumers are interested in the final price they pay. Is that the best value for money for consumers? There needs to be that greater transparency. There is an unknown in price differences between the Republic of Ireland, Northern Ireland and GB, and an effort to understand that is needed.
Danny Kinahan: Thank you.
Q158 Oliver Colvile: Energy supply is incredibly important, and there is a real feeling that we do not have enough energy capacity to build into it. Do you perceive that there is going to be a shortage of energy, principally electricity, into Northern Ireland?
John French: EirGrid have stated that there could be constraints after 2021, yes.
Q159 Oliver Colvile: How are we going to try to deal with this as an issue? As you rightly say, the one thing we do not want is the lights being turned off for any reason at all.
John French: No, exactly. That is why things like the north‑south interconnector are important. Increasing interconnection with Great Britain and the Republic of Ireland is important for that security of supply. It is about making sure we have the right generation once that interconnector is there across the island, and that we also try to look at energy efficiency measures so that we are ultimately reducing the amount of electricity that consumers and businesses are using in Northern Ireland.
Q160 Oliver Colvile: Are you looking at trying to encourage more work to be done with the use of renewable energy and things like that? I am a great advocate of maritime energy production, using tidal and wave activity. What is going on in Northern Ireland to try to deliver that?
John French: We are not technology‑specific or anything like that, but it comes back to making sure that Northern Ireland has a robust energy market; that there is security of supply there; and that it is done at the least cost to consumers, so we are not gold‑plating the process and consumers are not paying for technologies or infrastructure that are producing a higher price than necessary.
Q161 Oliver Colvile: The interconnectivity into southern Ireland is now somewhat in the mix, given that the British people have decided to withdraw from the European Union. That is going to be quite a difficult issue for us to try to deal with.
Moving on to the issue of fuel poverty, I have also long been an advocate of getting rid of the standing charges on gas and electricity, especially for people living in fuel poverty. I understand that if you have a large family, that is a minor part of your electricity bill, or, for that matter, your gas bill. If, on the other hand, you are an old-age pensioner, living by yourself in a property, a significant amount of your bill is to do with your standing charges. What is your view on how we can help people who are living in fuel poverty? Do you think it would be a good idea to get rid of the standing charges?
John French: The energy market in Northern Ireland is slightly different on that already.
Oliver Colvile: That is helpful to know. Thank you.
John French: That is not really a problem in Northern Ireland; the regulators have already addressed that. Don’t get me wrong: there are positives to the energy system in Northern Ireland. We do have a higher percentage of consumers using prepayment meters, and there is not the difference in cost that you see in GB between standard rates of electricity and prepayment meters. There has been a lot done; it is just about getting that overall stability and holistic price for consumers at the end of the day, and as Sheila was mentioning, income levels in Northern Ireland are one of the major factors around that higher level of fuel poverty.
Richard Williams: The standing charges do still exist on gas. Across most electricity charges, they do not; as John says, that is an issue that has been dealt with. Gas still has standing charges, which are historical; they are to do with the requirement to ensure that people did not burn gas because of the very immature, if you like, or relatively recent introduction of gas to Northern Ireland. It was to make sure there was a certain level of return.
John French: Another major part is the usage of home heating oil in Northern Ireland. 68% of houses use home heating oil as their primary heating source. When the fuel poverty figures were compiled back in 2011, heating oil prices were virtually double what they are today, so that was a major impact on people buying their 500 or 300 litres of fuel to fill up their oil tanks on the day. Although heating oil, comparative to GB, is lower in Northern Ireland, it is a different heating source from natural gas, which the majority of households here would use, and is hedged, generally. There are not the spikes that you see in heating prices in Northern Ireland compared with Great Britain.
Q162 Gavin Robinson: Good morning to you all. You mentioned 33% higher costs for business users on average, against an EU average. Have you given any thought to the impact on domestic consumers now business users are seeking their own independent generation of energy to reduce their cost? If that happens and continues to happen—we know that applications are in—will that exponentially increase the cost for domestic users?
John French: That is definitely a concern. Your pipe, your wires or whatever have to be paid for by somebody, and if big slices of that pie are taken away from the large energy users, more of it will fall to domestic consumers. That is a concern.
Q163 Gavin Robinson: As a concern, has there been any work done on it, any modelling, or any representations made to the Department for the Economy or the Utility Regulator to try to make sure that if larger energy users are coming out of the market, there is not a disproportionate impact on those who are finding themselves in fuel poverty?
John French: We have raised that. We do not know the costs of who is going to take themselves out, but we have long raised that point as an issue. You also see it with generation in Northern Ireland, for example. There is less use of gas‑fired plants in Northern Ireland. Domestic consumers pay more for their natural gas because the pipe has to be paid for by somebody, so if generators are not using gas, then that burden has to fall elsewhere.
Q164 Gavin Robinson: So individual companies could end up having a huge impact on those who already find themselves at a level of fuel poverty.
John French: Yes.
Richard Williams: It is possible. One of the issues around that business cost is that because the business market is fully competitive, it is opaque; we do not have transparency. Policy makers at a strategic level can look at the domestic energy price; you can work out the number of consumers and the price that they are paying. You could do a calculation to work out those costs, but no one really knows how much business customers are paying, apart from the business itself and the energy company they are paying it to, because it is all individually negotiated. Absolutely, in principle, that is correct, but to get the fine detail of exactly how that would go, we do not have the transparency on the business side of the market.
Q165 Gavin Robinson: If you had any call to make at this stage, would it be for Government to be alive to the prospect and the fears associated with a change in the balance between domestic and non‑domestic users?
John French: We are a member of the Department for the Economy’s permanent secretary’s strategic policy group, and we will be raising those points at that group.
Q166 Gavin Robinson: What is the relationship like with the Utility Regulator?
John French: It is a good relationship. We have an MoU with them. It is a good and positive relationship.
Q167 Gavin Robinson: If you are championing the cause for consumers, does that bring you into conflict?
John French: From time to time.
Q168 Gavin Robinson: That is healthy. Does the Utility Regulator support the call that you have made in your written evidence to have published figures on an annual basis, and a mechanism for action that will be taken, if we move from what is described here as an average target?
John French: I don’t know. You would have to ask them. They have not expressed a view on that.
Q169 Gavin Robinson: Is this the first time you have pitched it, in your written evidence today?
John French: No.
Gavin Robinson: They are aware that you have made this call.
John French: It is within the strategic energy framework, as well, that there should be a narrowing of difference between electricity prices in Northern Ireland, other regions of the UK and the EU. We are just asking, if that is the direction of travel—whether it takes 10 years time or 20 years—how well are we doing year on year? It is a call for lower prices: how are we actually getting towards that target?
Sheila McClelland: It is also a way of showing that in some areas we have achieved it and are beneath it. In the domestic market, we currently have achieved it; the prices are beneath the EU median.
Q170 Gavin Robinson: When you say “achieved”, what have you done to achieve that? It may be the case, but are you saying that the Consumer Council or the Utility Regulator has achieved that? Was that a proactive decision? Is that a consequence of something you have done positively, or is that just how it is?
Sheila McClelland: I would suggest that we would be very supportive of what the Utility Regulator has done in relation to the price setting for the one provider, which has then influenced other behaviours, and then that has invited other people into the market and that competition has driven down the cost. We are back to the model where we are all in it for the general good; it is not just us. We would hope that we would have been part of the scrutiny and focus, but the Utility Regulator is definitely key to having an influence in the market.
John French: You are right; 60% of the price is the wholesale market, and no one has any real influence on that.
Richard Williams: We have a large input into price controls. We work closely with the regulator on those to scrutinise, to the extent that we can, and our relationship with them is very positive around that. We have had certain gains. As I have mentioned, we engaged on the price control with the regulator and NIE a few years back. There was no consumer engagement; there was little input for consumers at that time. We have recently concluded a process; a report is being published today, hopefully, which is from the Consumer Council in conjunction with the regulator, the Department for the Economy and NIE Networks. It gives some indication of what consumers want from their electricity supply and how they view it. A lot of that is very positive, but it also gives some indication about how much money they are prepared to pay. That report will be used by NIE and the regulator to inform, ultimately, the outcome of the price control in about six months’ time, or a bit more than that, which will deliver the end price to the consumer.
Q171 Ian Paisley: Thank you for your evidence so far. Let’s go back to the juxtaposition that you are in between the domestic consumer and the non‑domestic consumer. Which consumers are you championing, first and foremost?
John French: It sounds a bit of a legal answer, but the consumer was first defined last year in the Consumer Rights Act. A consumer is an individual who buys a good or service, but within the Utility Regulator’s regulations and licences, it talks about a customer, which includes business customers. We went out earlier this year on a consultation in terms of our corporate plan, to clearly define what we would do and what we would not do. We said we would look primarily at domestic consumers but, in terms of energy, we would look at both.
Ian Paisley: Sorry, you have given me a headache that an aspirin would not cure with that answer.
John French: Sorry. We look at both, simply.
Sheila McClelland: In essence, it is both.
Q172 Ian Paisley: You cannot; you have to champion one over the other. Paragraph 3.1 of your statement says: “Businesses need energy at a cost which enables them to compete, both at a national and international level. Competitive local businesses are essential for providing employment and driving the overall Northern Ireland economy forward.” Then paragraph 3.2 says that you are going to fight for a fair price for the domestic consumer. In order to achieve one, the price to the other is going to go up. Do you accept that if you want to have non‑domestic consumer businesses getting a lower and fair price, so that they are able to compete, the only people that are going to have to subsidise that are the domestic consumers?
John French: It depends.
Ian Paisley: You are not going to give me another headache?
John French: No, I am not going to give you another headache, and apologies if I have done so so far. Either you reduce the size of the pie, or you cut it differently, and we would always say that in energy we try to reduce the size of the pie—if that is not too much of a headache.
Richard Williams: Energy efficiency is one of the major ways forward, and there is plenty of scope for business as well as domestic consumers, to bring more energy efficiencies in.
Q173 Ian Paisley: Yes, but it is long‑term infrastructural investment that would achieve those savings. Is that not right?
Richard Williams: They may be quite short‑term changes, but it is certainly something that is strategically looking forward. This question is about balance. The concern would be that the position of Northern Ireland domestic consumers is that currently the price of electricity is at quite a low level, but we are still over‑reliant on home heating oil, and even though oil is currently low, we are seeing all of these prices going up. We would be concerned that if the prices were to be put on to domestic consumers, we would see the peaks that we had back in 2008 on electricity prices, and with oil prices, domestic consumers in Northern Ireland pay a lot more than GB consumers because of that reliance on home heating oil. It is a balance.
Q174 Ian Paisley: It is, but the two are ultimately going to be in conflict, are they not? We have already seen business users who cannot afford the electricity price if they want to be competitive, and the only way to impact immediate changes in that is for the domestic consumer to pay more for their electricity. It is not a popular thing for a politician to say, and it is a less popular thing for a consumer advice service to say, I appreciate that.
Richard Williams: If you look through the figures that the regulator has produced—this transparency report about the difference in the price compared with the EU median—they break down the business market into different sectors as well, so there are differences between different businesses, and it is the largest users who are using the most. The point I am making is that it is just not domestics who sit separately from business.
Ian Paisley: It is the largest businesses that are using the most.
Richard Williams: Yes.
Q175 Ian Paisley: You are not telling us anything significantly surprising there. The likes of our huge refrigeration companies or huge industries are bound to use more. Bombardier and the like are bound to use more. The price to those companies makes business very difficult and probably, ultimately, no longer sustainable. The only way is a radical change, and that means their prices will have to come down. We want to keep them and we want to attract new businesses, and the only way I see of doing that in the short term is for the domestic consumer, unfortunately, to be told they are going to pay more. That is an incredibly unpopular thing to say, but it is probably a realistic place to be. Do you accept that?
John French: If you are making those short‑term changes to the market, as we have mentioned previously with the levels of fuel poverty in Northern Ireland, it has to be a balance between the two. You can have high energy prices if a domestic household has high energy efficiency within that household, so they are using less energy. Energy policy is full of unintended consequences, and our concern was that if you, in the short term, pull one policy lever to improve things for business, you will cause other unintended problems down the line. Going back to my pie analogy, we feel that there should be more space for trying to reduce the size of the pie by looking at things like the north‑south interconnector first and foremost. If those are not working, that is maybe a different conversation.
Q176 Ian Paisley: I agree with you that there has to be that out‑of‑the‑box thinking. That is infrastructural investment that is required, is it not? The sorts of changes that you are advocating are not going to happen in the next year.
John French: However, if you make short‑term policy decisions that occur now, are they going to be reversed when the infrastructure comes into play? Our concern is that you are putting things into place whereby, when or if wholesale prices do bounce back, consumers will end up with energy bills such that they cannot afford to heat or power their home. That is not right, either.
Q177 Ian Paisley: No, it is not, but if there are no jobs there, or if the jobs decrease, it is an ever‑decreasing circle. It is the quandary you are in; I am just saying that from your point of view, I would have thought that it would be easier for you to say, “Look, we are here for the domestic consumer, end of; we are going to fight for the domestic consumer. We are going to fight poverty, and we are going to make sure that those issues are properly tackled, and quite frankly the businesses can sort themselves out.” You ultimately have to take a stand on this, one way or the other. It may be that you want to take a stand for the business consumers and say, “If we want to have a new Northern Ireland that is attracting jobs and employment, we have to address this for the business consumer.” It cannot be both. This is where, unfortunately, you are stuck on this issue.
Richard Williams: We do have a role with business consumers, particularly in relation to small business consumers. There is currently a proposal out from the regulator to deregulate the small business market on electricity. If this comes through, the only regulated section left would be domestic consumers. One of our concerns about that would be that small businesses—we are talking about corner shops, hairdressers and the like—are in a similar position to domestic customers, in that they are not really savvy when it comes to surveying the market and making the most of competition.
There is certainly a role for us in terms of what we have been doing with domestic consumers, in working more closely with organisations like the Federation of Small Businesses to promote competition and the access to competition. We would really like, ultimately, to do electricity tariffs on the website and that kind of thing for business consumers, because there is no transparency at the moment. If you are a small business, you have to ring up the supplier, and they will give you an individual price. If that proposal comes through, there is certainly a role for us in relation to small businesses there.
Q178 Chair: Can I just have one final question? What is your approach to the contracts for difference? Do you suggest Northern Ireland joins it or not?
Richard Williams: Our position is that Northern Ireland consumers have done quite well out of the renewables obligation scheme. The contracts for difference scheme that is mooted is going to substantially increase the price to both business and domestic consumers; we are talking about perhaps trebling the current price from what is paid under the current NIRO. As I am sure you are aware, the CFD scheme is a competitive auction across the whole of the UK, and we are just concerned that there is no guarantee that the renewable energy schemes will be based in Northern Ireland and hence bring all their economic benefits and help us achieve targets. Consumers are essentially risk‑averse, and if we are looking at trebling the renewables subsidy with no guarantee of any return, that is a real concern to us.
Q179 Nigel Mills: That leads on to the question that I was going to ask, which was where you sense consumers’ priorities are on the energy trilemma of price, security and being environmentally friendly. What is the ranking you would give it?
Richard Williams: We have done some research on that for a number of years. In terms of what is most important to them, 80% of consumers put the cost of energy as their most important concern. About 72% said the reliability of supply, and that is not the larger issue of security of supply, it is more to do with the actual power cuts issue—the running of the network. About 29% thought renewable energy was important. Consumers have consistently told us that cost is the most important thing to them. Reliability is next, and having green energy is really quite well down their priorities.
Q180 Nigel Mills: How do you square that with the priorities that various Governments set on this, which you might argue are the opposite of that? Are you saying, “We get it, but perhaps people are being a bit naïve or short‑sighted,” or are you saying, “You need to be looking for as cheap an energy policy as you can get within the bounds that you are going to set yourself”?
John French: It is about trying to meet those Government needs at the least cost to the consumer. Technology, or whatever is put in place, should look for the cheapest renewable or conventional generation to provide that security of supply that is needed.
Q181 Nigel Mills: From the last panel we had, there was a claim that onshore wind was now the cheapest way of generating electricity, but when we tried to get some numbers on it, we could not find any that were lower than gas, which was a little confusing. Presumably, at some point, you need to give a message that says, “The consumer does not want higher bills and is not really very keen on paying for a lot of the more expensive generation capacity.” That is not what the Executive or the UK Government are really doing, though, are they?
John French: That is a bigger policy decision in play. It is clear that consumers want things at the best value but understand that there are international climate change targets and various targets that have to be met. All we have consistently called for is that they are done at the lowest possible price for consumers.
Richard Williams: This is what consumers have told us, and when we are discussing the issue of contracts for difference, we have a policy that is trying to reflect that. There are other, wider policy issues.
Sheila McClelland: We want them to provide transparency: to try to inform the consumer or customer about what is being passed on to them, and ask the agents—whoever is delivering that or whoever the supply chain front end is—to make sure that there is an understanding out there of how the bill is made up and what they are paying for. If they are paying for long‑term sustainability, that should be made clear through various information campaigns.
Chair: Okay, thank you. We need to move on to the next session, but thank you very much indeed.
Examination of Witnesses
Witnesses: Stephen McCully, Managing Director, Power NI, William Steele, Settlement and Regulation Manager, Power NI, Marian Troy, Head of Corporate Affairs (Northern Ireland), SSE, and Andrew Greer, General Manager Northern Ireland, SSE Airtricity, gave evidence.
Q182 Chair: Thank you very much for joining us. Would anyone like to make a brief opening statement, or shall we go into questions?
Stephen McCully: I am Stephen McCully. I am Managing Director of Power NI, and to my right is William Steele, who heads up regulatory affairs at Power NI. Just as an overview, Power NI is the price‑regulated incumbent electricity supplier in Northern Ireland, currently supplying over 540,000 customers, with 65% of the domestic market and around 50% of the business market, primarily the micro and SME sector. We supply about 20% of the volume to the business sector. We employ 240 staff on three sites: Belfast, Antrim and Omagh. The main role of a supplier is to source wholesale energy as competitively as possible, and compete for and sell to end customers. Importantly, suppliers also manage the risks of volatile energy prices and complex markets through processes including hedging, which allow customers to enjoy stable prices for an agreed period of time.
In our written evidence, we emphasised points around prices, security of supply and renewables, and I would just like to pick up on each of those, if I may. On prices, I would like to clarify a point: generally, for the vast majority of customers in Northern Ireland, domestic and at the small end of the business sector—which is where a large number of businesses are—prices are around the European average, and indeed, in the domestic sector, well below it. However, there are very important customers, large‑consuming customers, that do at the higher end of the European average. There is an opportunity to balance that, and it is about allocation of network costs.
Finally, we emphasise the importance of security of supply, the strengthening of interconnection, the reliability of the Moyle interconnector that is already in place, and also the urgent development of the north‑south interconnector. Renewables play a very important part in the overall energy mix in Northern Ireland, and it is a natural resource that we have. It is important that it is supported by efficient and reliable traditional generation, and possibly also supported with new technologies—the likes of storage—and proper market structures.
Q183 Chair: Thank you very much. We have heard this morning about volatility of prices. We have heard that there is a security of supply issue. What, from your point of view, are the main issues? What are the main problems that are contributing to all that?
Stephen McCully: From the point of view of the supplier, it is getting access to competitive prices—to hedges—so that we can buy in the forward market to provide price stability for our customers. The single electricity market is not a terribly liquid market, and we try hard to buy ahead as best we can. We are enjoying a period of quite low wholesale energy prices, predominantly due to lower gas prices. We have talked about oil prices, but gas is the important fuel in the single electricity market that sets the marginal price. That is one area. We have talked about the importance of greater interconnection in the longer term to ensure that we have proper access to the lowest possible price for customers.
Q184 Chair: Sorry, Ms Troy, I cut across you then. I think you were going to make a short statement; I apologise for that.
Marian Troy: That is okay. I was just going to introduce myself. I am Marian Troy, the Head of Corporate Affairs with SSE in Northern Ireland. If I might just give a small introduction to SSE, we are a FTSE top 40 company, headquartered in Perth in Scotland. We are the second‑largest generator on the all‑Ireland single electricity market, and the second largest energy provider in Northern Ireland, where we employ 200 people, predominantly in our Belfast office but also throughout the region. We supply over 350,000 customers with energy in Northern Ireland.
Andrew Greer: My name is Andrew Greer; I am the General Manager for Northern Ireland for SSE. If I may make a few comments on the opportunities and challenges facing the electricity sector in Northern Ireland, as you have already heard from a number of people, wholesale electricity in Northern Ireland is currently traded in the single electricity market—the SEM—in a joint market with the Republic of Ireland. The market has brought increased transparency and competition to the electricity sector since its inception in 2007. This has brought increased investment in the energy sector, including the half a billion pounds invested by SSE in the Northern Ireland economy since its arrival in 2008.
Competition has grown steadily in the market, and there are now seven active suppliers available to industrial and commercial customers and six active suppliers for domestic customers. This has brought benefits to consumers; for example, our domestic customers have realised electricity cost savings of around £20 billion so far by switching to our introductory energy tariffs. Furthermore, we have introduced sophisticated risk management products for our business customers, allowing them to buy products that fit with their own particular risk appetite.
There are a series of challenges that the sector faces in Northern Ireland, such as geographical remoteness, limited economies of scale, high dependency on imported fossil fuels, a high proportion of rural customers resulting in higher network costs per consumer, and limited interconnection. There are a series of key strategic deliverables that are required in order to support competitive and affordable pricing and a low‑carbon economy for Northern Ireland, in the form of, for example, the north‑south interconnector; the new market arrangements called the integrated single electricity market, or I-SEM; and the DS3 programme.
The energy outlook for Northern Ireland is most challenging post‑2020, as outlined in the generation capacity statement published by EirGrid. Delivery of security of supply in energy prices as cost‑effectively as possible for consumers requires a stable long‑term policy framework to underpin low‑cost investment. The upcoming review of the energy strategy to 2020 and the development of a post‑2020 strategy presents the Executive with the opportunity to develop this framework and deliver secure, affordable and competitive electricity prices for Northern Ireland.
Q185 Chair: Thank you. Just going on from what Mr McCully said, a number of witnesses have referred to the lower wholesale prices. How, then, is the capacity going to be generated? What attraction is there for people to come into the generating business so that we do not end up with a security-of-supply issue and the lights going out?
Marian Troy: At the moment, on the island, there is sufficient generation capacity, and the absence of the north‑south interconnector is what creates the immediate problem. It is fundamental to ensuring the security of supply. There are other elements that we could look at, perhaps in the shorter term. Demand‑side management is something that we would advise customers to look at in any case, to see if there are ways—through energy efficiency or through their running—that they might reduce demand in a way that is beneficial to their businesses. There are a number of ways you can look at it.
Andrew Greer: The market also offers a capacity mechanism. In the future I-SEM market, that is intended to continue, and that offers an investment signal for future investment in generation. We would support that continuing.
Q186 Lady Hermon: It is very good of you to come and give us evidence today. We do appreciate it; thank you. You will have heard—because you were present when the evidence was given to us by the Consumer Council for Northern Ireland—that there was a call that was repeated, and that was for greater transparency for customers. They need to know what they are paying for. When do you plan to give greater transparency to all customers in Northern Ireland, be they businesses or be they home users of electricity? What are your plans?
Stephen McCully: We are quite fortunate, because we are price‑regulated. There is full transparency. Our prices are regulated in the domestic market and in the SME sector as well. The price reviews are fully transparent. We consult with the Consumer Council, as well. There is a great degree of clarity of what goes into the final price, and a lot of information is publicly available on that.
Q187 Lady Hermon: What was your profit margin last year?
Stephen McCully: Part of our price control is that we are regulated to a profit margin of 2.2%. Our operating costs are fixed as well; we have a fixed allowance for our operating costs, so we are very much tied down as a regulated supplier. We continue to be regulated, because we still have a large market share in the domestic sector, and this was the case in GB as well, but market share has reduced to a level in the market where we are opened up to competition.
Q188 Lady Hermon: What was your profit last year?
Stephen McCully: In our last published accounts, our turnover was £420 million, and we made £26 million. Some of that related to the regulated part of the business, but we also have unregulated business relating to energy services and the supply chain, and also energy sales to the deregulated sector.
Q189 Lady Hermon: Likewise, what was your profit margin last year for electricity, Mr Greer?
Andrew Greer: We do not have those figures with us; we will provide them to the Committee afterwards. However, like Power NI, we also operate a regulated gas supply business in the Greater Belfast area, supplying domestic and SME customers. Our allowed profit margin is 1.5%; that is scrutinised by the regulator. That sets a benchmark for the market. In terms of domestic markets, we compete against the likes of Power NI and other suppliers. We have to be competitive to encourage customers to switch. You have heard from Power NI what their operating margins are, and therefore with having to attract customers and having additional costs of sales, for example, we tend to operate at lower margins.
Q190 Lady Hermon: Do I take it from the replies so far that, in fact, you do not see any need to improve the transparency of your pricing policy for customers?
Stephen McCully: It is vitally important that we are transparent. The regulator has introduced greater transparency for the entire market, not just price‑regulated suppliers, and that is very important. We are providing reports and updated information on a regular basis to feed into that process. It is true that the wholesale market is very complex. Part of our regulation is that we have to demonstrate that we are procuring from the wholesale market. We have a licence requirement to demonstrate that, so there is a fair bit of transparency around that as well.
Q191 Lady Hermon: Thank you. Moving on to a different topic—and staying with you, Mr McCully, if you do not mind—you said in your evidence at the very beginning that renewables play a very important part in the provision of electricity. I would agree with that. You also went on to say that it is important that “it” is supported—presumably renewables. What does Power NI do to support renewables? Do you invest your huge profits in renewables?
Stephen McCully: We all have a renewables obligation. There is a percentage of renewables that we must purchase; we must demonstrate that we are purchasing a level of renewables to meet our customers’ demand. If we are not able to do that, we pay a penalty. All suppliers have a renewables obligation. The obligation sits at the minute at 11.9%; this amount of our energy must come from a renewable source, and that will steadily increase. For 2016-17, that goes up, I think, to 14.8%.
Q192 Lady Hermon: What is your main source of renewable energy?
Stephen McCully: We buy from right across the spectrum. We buy spill from domestic sites, mostly solar installations. We also contract with the one‑off wind turbines that you find in rural locations, and we have anaerobic digestion plants that we have contracted with, larger-scale wind farms, and indeed larger-scale biomass. There is a good diversity of sources that we procure from, and that is an important part of the business. It is an important natural resource that we have in Northern Ireland, but it has to be part of a wider mix to get the optimum price for customers.
Q193 Lady Hermon: Thank you. Ms Troy?
Marian Troy: We are a wind generator in Northern Ireland. We have a number of wind farms; we have constructed them there, and we have two wind farms in construction at the moment. We develop, first‑hand, and operate those wind farms. We meet our renewables obligation predominantly through that wind from Northern Ireland. The comment that wind is a resource that Northern Ireland has is an important one to consider.
If I might just give the Committee some context, we developed Slieve Kirk wind park, which is the largest wind farm in Northern Ireland, and from the investment in that wind farm, £55 million was spent with local suppliers and developers, so there is a knock‑on benefit to the economy. I know we spoke about employment in the context of energy prices, but through the development of wind farms and other infrastructure, employment is also created.
Another point is that we are seeing green energy act as a differentiator. Particularly in the Republic of Ireland, there has been an attraction of data centre development, and one of their asks is for green power. We hope that Northern Ireland can similarly, through its renewable energy target, attract that type of industry and investment.
Q194 Lady Hermon: Just staying with you, if you do not mind—this is my last question—I think you said that the north‑south interconnector is fundamental. “Fundamental” was the word that you used. How do you convey to both Governments, the Irish Government and the Northern Ireland Executive, the essential nature of pursuing some agreement and fulfilment of this commitment that we should have a north-south interconnector, particularly in the light of the referendum result last week? What representations have you made since that result, if any?
Andrew Greer: There are a couple of points. The first point is the cost that has been imposed on consumers in the island of Ireland through the imperfections charges, because there is not an efficient flow of energy. We have estimated that, through some modelling, to be between £15 million and £20 million per annum across the island.
The second important point has been referred to already: the grid capacity statement. That certainly signals that Northern Ireland is at risk beyond 2020, and for Northern Ireland to go out and attract inward investment, that sort of statement is a huge concern for any potential large investor coming into Northern Ireland, in terms of when they do their due diligence. That report also makes reference to the north‑south interconnector and how that could solve the capacity crunch in Northern Ireland. Taken together from a cost perspective, and from the strategic perspective of Northern Ireland Inc. selling to the world, it is absolutely essential that is constructed.
Q195 Lady Hermon: Do you think last Thursday’s referendum will have any impact at all?
Andrew Greer: In the short term, there will not be any changes. It creates policy and regulatory uncertainty; however, the SEM itself was a bilateral arrangement between Northern Ireland and the Republic of Ireland, so there is no reason why that cannot continue. Certainly from an SSE Airtricity perspective, we feel that we are well positioned to deal with whatever outcome arises from the Brexit decision last week.
Q196 Lady Hermon: Mr McCully, I could see you nodding your head, so perhaps you would like to say something.
Stephen McCully: No, I would agree. It is very important that it remains firmly on the agenda; it is very important that we can access the best price in the wholesale market. Northern Ireland does have a disadvantage of scale, so it is desperately important that we have stronger interconnection with the Republic of Ireland and with GB. It is an important part of the transmission system in Ireland.
Q197 Gavin Robinson: Thank you, and apologies that I cannot stay for the end of the evidence session; I mean no discourtesy. Mr McCully, can I ask you about the statement you made in your written evidence that we have relatively low domestic energy costs? How do we expand upon “relatively low”? Relative to what?
Stephen McCully: Relative to a GB average. As of today, domestic prices in Northern Ireland are about 16% below the average GB price. We track that, and one of the main reasons for that is that we are enjoying very low gas prices and very low spot electricity prices in the single electricity market. One of the advantages of not having a terribly liquid market to secure forward prices is that we are not hedged as far out, so we are able to access the cheaper prices earlier and pass those through to customers. The GB market has a much longer period of hedging opportunity, and I suspect what we are seeing there is that they are locked into higher prices for a longer period of time.
Q198 Gavin Robinson: I do not mean to be unfair, but do you have a copy of your written evidence there with you? I would like some helpful illustration around one of the graphs—yes, that graph there on your right‑hand side. You can see the UK in red and Power NI in blue. What are the units to the left? It says “p/kilowatt hour”.
Stephen McCully: That is price per kilowatt hour.
Q199 Gavin Robinson: So, that is 14.5 pence per kilowatt hour. What is the UK, then?
William Steele: Just over 15 pence per kilowatt hour.
Q200 Gavin Robinson: How is there a 16% differential, then?
William Steele: That is as of today.
Q201 Gavin Robinson: So the gap has increased, and the cost has reduced for Northern Ireland but not the UK? Is that the case? The reason I am asking is not to trip you up; it is to get some helpful information.
Stephen McCully: The average in GB is probably changing more rapidly than our price. We have an annual cycle of price reviews, so our price is very much in place for a year, but the GB average is constantly changing.
Q202 Gavin Robinson: Is it fair to say, then, that in a year’s time or two years’ time, ours will increase to a similar level to that of GB?
Stephen McCully: Unfortunately, in the energy market, what goes down tends to go up again. In relative terms, we would see today’s prices as being low. Today, domestic customers are enjoying a price that is about 17% below the year before privatisation. They are extremely low prices, and it is important that we try to lock in as much as we can through the next year to year and a half.
William Steele: It is that locking‑in that is key to the price in the forward market, where we have relatively low liquidity, which has enabled us to reflect spot prices sooner. The forward position largely depends on the UK economies.
Q203 Gavin Robinson: Over the page, then—the non‑domestic graphs—is it right that for small to medium businesses, Northern Ireland is the second highest cost in Europe, with only Italy higher? Is that a fair way to read that?
Stephen McCully: Yes. When you look at the European categories, the majority of Northern Ireland business customers are at the very small end, so there is greater comparability with the European average. However, as you move up, there are about 20 customers that are very important to the Northern Ireland economy. Those customers are very much adrift of the European average and at the higher end of the European spectrum.
Q204 Gavin Robinson: You have talked about the price risk to Northern Ireland customers, and in paragraphs 31 to 33, you talk about some of the options, including efficient use of excellent wind and renewable resource. We had some evidence a number of weeks ago—and I think Mr Mills enjoys probing on this question, so you might get questions later—about kilowatt-hour cost from renewables, the fact being that the capital cost is up front and therefore the kilowatt-hours are more expensive than for fossil fuels, where the capital costs have largely been paid for many of the plants. What is the experience with the renewable energy used now? Is it already markedly more expensive than traditional methods of generation?
Stephen McCully: As of today, where we are seeing a very low cost of gas that feeds into thermal generation, renewable energy would be higher; there is no doubt about that. However, in the long run, it competes very well and has many other advantages to the economy. It is just one part of the broader mix; it really cannot be the total solution.
Q205 Danny Kinahan: Thank you very much. We are turning around the line of questions, so if we can start on renewables, I was intrigued to find that on solar energy, which no‑one seems to focus on—it is always wind and the others—one of the comments that we got, although I cannot remember from exactly where, was that there seems to be a blockage to bringing in solar. Is it something that you would favour—that we should be trying to work more on, so that it is not all just wind or hydro or others?
Stephen McCully: We are contracted with about 70 MW of solar energy. The model in Northern Ireland is slightly different; it is very much distributed over domestic households. You probably see this as you drive around. The larger‑scale solar schemes have not come forward. They are probably caught up with the same difficulties of getting connections to the network. There is still a fairly large capacity of solar out there, but it is biased towards the domestic market.
Q206 Danny Kinahan: If it is taken on by larger companies to provide their own power and reduce their electricity costs, do you see it as knocking on and bringing in higher prices for the other consumers who are not choosing it?
Stephen McCully: Sorry, I am not sure that I get your point.
Danny Kinahan: We have been told that if we have too many renewables, it raises costs for domestic and business. Do you see that as the case, or is there a mechanism for allaying that and bringing in more?
Stephen McCully: It is one part of the mix. We are sitting at about 25% of energy in Northern Ireland coming from renewable sources. If the plant that has applied for planning permission and for connection agreements comes forward, that could edge up towards 40%. Some of the work that was done on the benefits case for renewables indicated that 25% was around the optimum level, and thereafter there would still be a positive benefit to Northern Ireland but it would decay as you get into larger percentages. There are still opportunities to grow, but it has to be the most efficient renewable forms.
Marian Troy: On the question around renewables and cost per kilowatt-hour, when the wind is blowing you will see that the price in the all‑Ireland single electricity market is depressed, so it reduces the price when it does generate. Our view on renewables—without getting into technologies—is that it is about making the decisions that are most cost‑effective for consumers. That is a very important consideration when making decisions about what sort of fuel mix we should have.
You make the point around what we would call self‑generation or auto‑generation for certain factories or installations. Ultimately, that is a question for the businesses themselves, to see whether it is an investment and a risk that they have to take. Every type of technology will need to be out for maintenance at some point, so during those periods they may need access to the grid. It is up to them to work out whether that is an effective and efficient way for them to operate. The question around how grid costs are allocated in that type of a world is something that policy makers would have to think about. It is not something we see as an immediate issue, but it is one that deserves some consideration.
Q207 Danny Kinahan: Thank you. I asked the Consumer Council earlier whether the current structures are appropriate. My concern is that we are always focused just on Northern Ireland. You have talked about the interconnector and working with Ireland, but talking about the UK, are we too stuck with our structures? Are we too insular? Are we not making the most of our connections to the rest of the UK in how we have our policies set?
Marian Troy: We talk about the north‑south interconnector, but equally important is the interconnection that is in existence with Great Britain, and that interconnection is also used to access the cheapest prices when they are available. We would see interconnection with both.
Q208 Danny Kinahan: Are we too insular in our policy? Our Consumer Council has been set up for just Northern Ireland. We need to be looking bigger so that we are working with everyone else.
Marian Troy: I suppose the integrated single electricity market project is to enable that better trading across interconnectors.
William Steele: Ultimately, one of the drivers behind the single electricity market was to get that kind of scale on an all‑Ireland basis in the wholesale market, so that we were not just looking at the Northern Ireland market in isolation but looking at a larger scale through the single electricity market. Marion is correct: the I-SEM market is designed to use the interconnection more efficiently. That is part of the fundamental goals of the I-SEM design: to use both the Moyle interconnector and the east‑west interconnector more efficiently.
Q209 Ian Paisley: If I could characterise your business, you sit between the generator and the consumer. You are the classic middleperson in that relationship, in terms of making sure that they get a fair supply. I must admit, over the last 12 years, my perception of the profile of complaints in the electricity sector as a constituency MP is that it has fallen off, and that probably reflects oil prices as well. There is less pressure at some levels for the ordinary domestic consumer. However, there has probably been an increase in complaints from larger businesses. I understand that you supply SMEs, microbusinesses and some of the larger companies in Northern Ireland.
Stephen McCully: We have some customers at the large end, yes.
Q210 Ian Paisley: I think you know where I am going to go with this. Some of the largest companies come to me and complain, “We are not going to be competitive. We are going to be put out of business. What can you do?” What can you do?
Stephen McCully: The Utility Regulator’s report on the allocation of network and policy costs across various categories identified that, for the very large customer, there is disproportionately high allocation relative to their counterparts in the Republic of Ireland. That is one of the key issues. It is quite a narrow group of customers, but they are very important to the Northern Ireland economy.
Ian Paisley: It is probably about 20 companies.
Stephen McCully: Yes, 20 companies at the top end are probably pushing 10% of the volume of energy.
Q211 Ian Paisley: And they employ maybe 5,000 people—probably more.
Stephen McCully: Yes. I think you asked a question earlier about what would happen if that allocation were rebalanced. It is not the case that it would fall on domestic customers; it would be evenly spread between domestic customers and micro‑enterprises and the SME sector. It may not have a terribly big impact on price overall, but it is something that would have to be looked at. It would have to be cost‑reflective. It really is all about allocation, and different arguments can be made on the issue of allocation.
Q212 Ian Paisley: Some of those large companies will decide to invest in their own generation, whether that is thermal, solar, wind or whatever. That price, which is their saving, would go on to the domestic market. Is that right?
Stephen McCully: Yes, that would be a problem. If there is a fairly high proportion of their network cost that sits with them and they choose not to take from the network, that cost has to be picked up by other customers anyway.
Q213 Ian Paisley: Would that principally be all of the customers?
Stephen McCully: It would be smeared over the entire market, yes.
Q214 Ian Paisley: As you know, I have lost one major company in my constituency, and they have said that it is because of electricity prices. That is Michelin tyres. How do you say to a company like that, “Stay,” whenever our prices are disproportionately high, and how do you say to new investors, “Come in”, whenever they see those customers going out? What is the magic answer?
Stephen McCully: For very energy‑intensive industries, it is difficult. With the regional disadvantages that Northern Ireland has, the best it could ever target is around the European average. We are never going to have the cheapest energy in the world, but some of the work that DETI have done recently on the cost of doing business highlighted that about 8% of the overheads of a typical manufacturing company relate to energy, and about half of that relates to electricity. It is clear, for some types of industries, that energy is a much more important percentage of their input. It is extremely difficult.
We have to look at the combination of getting the best possible price from the grid, possibly supplemented with some self‑sufficiency around renewables, and demand‑side response—incentives for them to manage their profile, so that it is a flatter profile. That can be important, as well as the general overall energy efficiency of the plants. There are ways to tackle it.
Andrew Greer: To reinforce what Mr McCully has said, in addition to the network side of things, if we look at the wholesale market itself, we have already touched on the delivery of I-SEM and increasing the amount of liquidity and trading that are potentially available to suppliers, which they can ultimately offer to their customers through rather sophisticated products, where effectively they can lock in for a long term or lock in portions and buy and sell and trade. Certainly, we have found that customers across the island—larger, more sophisticated customers—have benefited from that, particularly in a falling market where they do not have to put all their eggs in one basket today by buying. They can buy a portion, and buy and sell different portions before the point of delivery. That is one aspect.
The second aspect is related to the I-SEM as well. It is that whole capacity mechanism and that incentive to bring forward generation of all types. We note in the Republic the potential increase in data centres and other large inward investment. That is going to increase the demand on the island. Electricity pricing is very much a simple supply and demand, which sets the marginal price that customers have to pay. If there is more demand and no increase in generation capacity, prices are naturally going to go up. Certainly, with that in mind, we need positive signals for future investment.
Q215 Ian Paisley: I am going to ask about new nuclear in a minute, but has the situation in Ukraine and Russia affected your ability to hedge and spot-buy more effectively for the consumer here?
Andrew Greer: Gas prices are created globally. We take reference to the GB gas prices, so any trading that we are doing is in reference to that. Everybody knows the volatility that we have seen in gas prices. Unfortunately, when some incidents happen on the geopolitical level, they create short‑term spikes.
Q216 Ian Paisley: Has that put a noticeable spike on the price?
Andrew Greer: I do not think so.
Q217 Ian Paisley: Russia is one of the biggest gas generators in the world, and we have stopped some trade there. Is there no spike in the price as a result?
Andrew Greer: GB gas prices trended downwards until the start of this year and have now gone up. They went up last week by 8%, because of some storage issues in GB over the winter, so it is a very volatile and liquid market that reacts to a whole series of different inputs, including Ukraine and Russia but also the availability of LNG, the temperature and so on.
Q218 Ian Paisley: What about new nuclear? Is that offering an opportunity to address the capacity and supply?
Stephen McCully: All forms of generation should be considered, directly or indirectly, over the interconnector. Decarbonisation is an important goal in the overall mix, and renewables would be seen as an important part of achieving that. Nuclear is used in other locations, and indeed GB has interconnection with France and enjoys some of the benefits of access to nuclear in the French market.
Q219 Ian Paisley: Marion, did you want to come in there?
Marian Troy: Yes. Again, our message is that it is for the market to deliver investment signals, to deliver capacity when it is needed, and deliver those signals in a technology‑neutral way and encourage the most cost‑effective generation, whatever that may be.
Q220 Dr McDonnell: I want to quickly ask about smart metering. Have any of you given any attention, investment or encouragement to spreading the load, as it were, through smart metering?
Stephen McCully: We are quite fortunate in Northern Ireland. We introduced the keypad meter, which is a semi‑smart meter; it does not have the full functionality of the chosen GB meter, but it is very popular with customers. 40% of households in Northern Ireland have access to a keypad meter. They have a home display; they can see what their usage and costs are on a daily basis. It really puts them in touch with their spending habits, and we are very proud of the fact that we were able to position that product below the standard price of electricity, because as a supply company, we were able to get our money earlier and pass that benefit on to customers. We are unique in that. That is a combination of metering and the tariff structure working in the interests of customers.
Q221 Dr McDonnell: Has that had much impact?
Stephen McCully: We did some research initially on the impact on the usage pattern of customers. There was a very slight reduction—a 2% to 3% reduction—in their overall consumption when you are putting the customer much more in touch with their usage.
William Steele: Could I just add to that? It is important to recognise that the keypad meter is free for customers. It is a single meter that they can get installed in their property, and there was a small reduction in usage once people had that access to their information. DETI, the Department for the Economy, were looking at all of that information in the round in terms of the cost‑benefit analysis for the smart metering programme, so that will play into the eventual decision on smart metering if the cost-benefit analysis comes out as favourable.
Q222 Dr McDonnell: That is part of the story, but have they had any impact on spreading peak demand?
Stephen McCully: Half‑hour meters are available for a large number of business customers, and they do respond to higher‑price energy. If the price tariff is offered to them in a seasonal time-of-day structure, they do respond and they do reduce their demand; they try to avoid the winter peaks. They shift production around, and in some instances they use standby generation to minimise their exposure to those peak prices. It does work with the more sophisticated customers in business. There have been a number of pilots for domestic customers, but the response initially has not been sustained. The jury is out on that particular market.
Q223 Lady Hermon: Thank you. Just following on from my colleague Alasdair’s question, I am intrigued by the keypad metering. Is it free to all customers?
William Steele: A customer can choose to avail of a keypad meter, and the meter will be installed free of charge.
Lady Hermon: Free of charge?
William Steele: Yes.
Q224 Lady Hermon: Is that still available right across, or is it only to your customers?
Stephen McCully: It is for all customers, not just Power NI’s.
William Steele: Currently, about 45% of customers have prepayment.
Q225 Lady Hermon: Why do you think the take‑up has not been much higher? I am intrigued to know. Only 45% have had these free keypad meters.
Stephen McCully: It is a prepayment meter, and that does not always suit customers. We have the highest proportion of customers on prepayment in any market not just in the UK and Ireland but in Europe as well. There is a very high proportion of customers on prepayment, and they enjoy the benefits of a lower price.
Q226 Lady Hermon: Why is it a lower price if you have prepayment plan?
Stephen McCully: A keypad meter, from a commercial perspective or from the supplier’s perspective, de‑risks the chance of a customer running up a debt. If they are paying every three months, they may get into difficulties. We as a supplier get our money in earlier, so that reduces our overall cost, and we pass some of that benefit back to customers as well.
Q227 Lady Hermon: Mr Steele, you look as if you are going to add something.
William Steele: No, sorry. I was just going to say that it does reduce cost to the supplier, and that has been reflected in the unit rate that is charged through the prepayment meter.
Andrew Greer: In the gas business that we operate in greater Belfast, 60% of our domestic customers use prepayment meters, similar to what has already been outlined; customers pay in advance.
Q228 Lady Hermon: It is obviously popular in the payment of gas.
Andrew Greer: It is very popular. The majority of new installations that we see are also signing up to a prepaid meter.
Q229 Lady Hermon: That is really interesting. Is there a connection with new houses being built? Is this something that house builders know to speak to you about?
Stephen McCully: Yes, in many new installations, a keypad will be installed.
Q230 Lady Hermon: Does that happen automatically?
Stephen McCully: Automatically—at the customer’s request.
Q231 Chair: Thank you very much. I want to finish in a couple of minutes, because a number of us have to get to the Chamber for Questions, but can I just ask you about the contracts for difference scheme? In written evidence, SSE have proposed that an all‑Ireland support scheme would be best. Is that your view?
Marian Troy: We have said that Northern Ireland now has a choice as to its 40% target and how it achieves it, or whether it reconsiders that target. The CFD scheme, I suppose, is one option, but another option is to look at the Republic of Ireland’s support scheme, which has shown itself to be successful and cost‑effective compared with equivalent schemes across Europe. There may be other models of support schemes that Northern Ireland could look at, but seeing that the wholesale price is single between the Republic of Ireland and Northern Ireland, there may be efficiencies of scale in having a similar scheme.
Q232 Chair: What is Power NI’s view?
Stephen McCully: We are approaching the 40% target. There needs to be a strategic review of what, ultimately, the target should be, and the support mechanism should be developed to support that. We believe the CFD mechanism would impose costs on Northern Ireland customers without the actual benefits being guaranteed. That would be very dangerous for Northern Irish customers, and certainly if there were going to be a support mechanism to grow renewables to a higher percentage, the all‑Ireland solution is one possibility, because it is viewed as a very cost‑effective means to support new renewables.
Q233 Chair: Would it require a political policy that that is the direction that both jurisdictions should be going in?
Stephen McCully: Yes, it certainly would.
Q234 Chair: As you say, it could have an impact on prices.
Marian Troy: Yes. There are a number of ways. Even if both Governments decided that they wanted to pursue a similar support scheme, there are a couple of questions within that as to whether each region maintains its own targets and how costs are allocated. It is at a very initial stage of the thought process.
Q235 Chair: It is an issue that, as a Committee, we should look at in a little bit more detail than we have time for now. It does seem a bit of a conundrum, in a way, but at the same time it is an important issue.
Marian Troy: The Northern Ireland Executive are reviewing their Strategic Energy Framework, and from that we expect a clearer message on the future of renewables. I would suggest that after the outcome of that review, we will know more and can move forward.
Chair: We can keep an eye on what they come out with. Thank you; that is very useful. Thank you very much. You have been very useful.
Oral evidence: the electricity sector in Northern Ireland, HC 51 31