Written Evidence submitted by Power NI for the Northern Ireland Affairs Committee’s inquiry into the electricity sector in Northern Ireland (ENI0005)

Executive Summary

• This submission is from Power NI Energy Limited t/a Power NI.
• It is important to make the distinction between domestic and non-domestic prices in the Northern Ireland context.
• Today’s domestic prices in Northern Ireland are relatively low; however domestic consumers do face price risk.  There is a short hedging window and the SEM suffers from poor forward liquidity. This means that while falling wholesale costs can be reflected earlier (as today) the reverse is also true. Should wholesale costs increase this would be reflected in tariffs earlier than GB for example.
• Unit prices for the majority of Northern Ireland businesses align with those in the Republic of Ireland, the UK and the EU average.
• However, the unit prices for the largest non-domestic customers in Northern Ireland are at the higher end of the comparison spectrum both in terms of Europe and when compared to the Republic of Ireland.
• The Northern Ireland economy does suffer from issues of scale; however comparisons especially with the Republic of Ireland, given the same wholesale market arrangements, are entirely valid.
• In 2014 the Utility Regulator commissioned a study by ECA to look into the allocation of network costs between customer groups and compared to other regions. The ECA Report explicitly states that in relation to network costs “relatively fewer costs are allocated (through the tariff design) to large I&C customer in RoI compared to NI”.
• The absence of further North South interconnection is estimated to cost NI consumers c. £7m p.a. This is a strategically important project which must be completed as soon as reasonably possible.
• The All-Island Generation Capacity Statement 2016-2025 forecasts that Northern Ireland will fall into generation capacity deficit from 2020/21. This reinforces the need for the completion of the Northern South Interconnector and new capacity in Northern Ireland.
• The design of the ISEM and the wider ‘target model’ relies on the interconnection of national markets to deliver an efficient outcome.
• Policy must recognise the specific characteristics of the Northern Ireland market, primarily its participation in the all-island wholesale arrangements.
• There is merit in a targeted support mechanism which looks to at least maintain levels of renewable generation at least cost to consumers e.g. incentivise the replacement of plant exiting support. 
• This policy could be kept under review as developments in technology materialise which enhance our use of renewable assets e.g. battery and other storage technology.

Introduction

1. Power NI is the former public electricity supply company. Following privatisation and the opening of retail electricity markets, Power NI now supplies c.65% of Northern Ireland’s domestic customers by volume and c.66% (520,000) by customer number. In the non-domestic market, Power NI supply c.19% by volume and c.50% (36,000) by customer number. (Source: Utility Regulator Transparency Report)
2. Power NI is part of the Viridian Group.
3. Power NI is however a separate business. Power NI’s legal, managerial and operational separation is mandated via licence condition and it is within the context of being a supplier without vertical integration; that Power NI has considered the questions posed by the Select Committee.
4. Power NI’s market context is illustrated below:

Domestic electricity prices in Northern Ireland

5. It is important to make the distinction between domestic and non-domestic prices in the Northern Ireland context.
6. Today’s domestic prices in Northern Ireland are relatively low. Wholesale fuel cost reductions have been reflected in end user tariffs and Power NI’s tariffs have been subject to independent regulatory scrutiny.
7. Internal Power NI assessment, using published Eurostat figures, illustrates that Northern Ireland domestic prices are currently below the Republic of Ireland, the UK and EU average prices.

8. It would be remiss not to highlight the price risk faced by Northern Ireland domestic consumers.  Prices are currently relatively low due to wholesale fuel costs. There is however a short hedging window and the SEM suffers from poor forward liquidity. This means that while falling wholesale costs can be reflected earlier (as today) the reverse is also true. Should wholesale costs increase this would be reflected in tariffs earlier than GB for example.
9. In comparisons with neighbouring markets such as GB and the Republic of Ireland, it should also be recognised that differing VAT regimes and pass-through environmental costs have an impact.

Non - Domestic electricity prices in Northern Ireland

10. As illustrated in the graphs below, unit prices for the majority of Northern Ireland businesses, which on a European scale fall into the very small category, are close to the rates in the Republic of Ireland however slightly higher than the UK and EU average.

11. The tariff rates for the largest non-domestic customers in Northern Ireland are at the higher end of the comparison spectrum both in terms of Europe and when compared to the Republic of Ireland.

12. DETI’s “Cost of Doing Business in NI – 2015” report assesses that around 8% of a typical manufacturer’s overall business costs relate to energy. The proportion of the energy cost relating to electricity has been estimated at around 30% (or 2.5% of the overall business costs).

Why the difference?

13. The Northern Ireland economy does suffer from issues of scale; however comparisons especially with the Republic of Ireland, given the same wholesale market arrangements, are entirely valid.
14. In 2014 the Utility Regulator commissioned a study by ECA to look into the allocation of network costs between customer groups and compared to other regions. In the Utility Regulators synopsis it was stated:

“The main findings of the research concurred with the initial results of previous UR analysis. In summary the analysis concluded:

•          The overall core network tariff levels do not contribute to higher end-user electricity prices in NI compared with RoI or GB

•          Variances are partly due to the level of allocation of non-network pass-through  charges, as well as the allocation of network costs across customer categories” 

(Source: UR synopsis published alongside ECA paper, 2014)

15. The ECA Report explicitly states that in relation to network costs “relatively fewer costs are allocated (through the tariff design) to large I&C customer in RoI compared to NI”.
16. It should also be recognised that the Republic of Ireland has been very successful at attracting FDI, specifically high energy intensive businesses e.g. data centres which will spread fixed costs over a greater volume of units consumed.
17. The question of cost allocation remains a policy decision however it is clear that general economic growth in Northern Ireland would undoubtedly help improve economies of scale.

What should the price reasonably be?

18. It is not a realistic expectation for Northern Ireland to have energy costs that are materially lower than UK or EU averages given:

1. Geographic remoteness
2. Limited economies of scale in all parts of the supply chain - production, networks, and suppliers
3. Our high dependency on imported fossil fuels
4. High proportion of customers are rural with higher associated network costs
5. Limited access to ‘cheap’ local energy sources e.g. hydro
6. Cost of reinforcing network to support renewables
7. Self-generating LEUs leave remaining customers to pick up their share of network costs
8. Limited interconnection with other networks/markets adding constraint costs.
1. Power NI believes strategies can be developed with an aim to align prices where possible with relevant benchmark prices (i.e. GB, Republic of Ireland and an EU average) across all sectors.

Interconnection

20. The question of interconnection has two primary aspects. The North South Interconnector (which technically in the all-island context is a transmission line) and further interconnection between the all-island market and GB.
21. The absence of further North South interconnection is estimated to cost NI consumers c. £7m p.a. (Security of Electricity Supply in Northern Ireland, An information paper prepared by the Utility Regulator and the Department of Enterprise, Trade and Investment. June 2013).
22. The urgent need for the completion of the North South Interconnector was also highlighted as Recommendation 5 in the Ministerial Energy & Manufacturing Advisory Group Report, March 2016.
23. While Power NI is not privy to the detail of the North South Interconnector delivery project, anecdotally there appears to be a need for improvements in the planning, engagement and consultation process as significant delays have been witnessed.  
24. Interconnection between the all-island market and GB/Europe is also an important strategic consideration. The design of the ISEM and the wider ‘target model’ relies on the interconnection of national markets to deliver an efficient outcome. As an island market this presents a greater challenge.  

Northern Ireland generation capacity

25. The Eirgrid Group, All-Island Generation Capacity Statement 2016-2025 clearly highlights that Northern Ireland is forecast to fall into generation capacity deficit from 2020/21.
26. This further reinforces the need for the completion of the North South Interconnector.
27. The capacity forecast also highlights the need for further new capacity in Northern Ireland.
28. Power NI believes that a transparent contracting round is required to secure highly efficient flexible plant necessary to meet the dual requirements of increasing overall capacity and facilitating renewables.
29. Power NI supported the inclusion of a capacity payment mechanism in the regulators ISEM market design.
30. There is undoubtedly a place for energy storage, demand side management and embedded generation in Northern Ireland’s future generation mix.

Policy impact within an all-island context

31. Power NI believes policy must recognise the specific characteristics of the Northern Ireland market, primarily its participation in the all-island wholesale arrangements. Any policy decision which negatively affects the competitiveness of generation in Northern Ireland in comparison to equivalent plant in the Republic of Ireland will result in a wholesale flow of energy from south to north. 
32. Manufacturing and industrial customers have also highlighted that the Republic of Ireland represents a significant competitor to Northern Irish businesses. Policies which add cost to retail bills therefore undermine their competitive position.
33. Power NI believes that from a policy perspective there are certain underlying common principles that are relevant:
1. Efficient use of excellent wind / renewables resource
2. Promotion of competition
3. Efficient use of energy
4. Diversity of thermal plant and fuel sources
5. Pursuit of scale through integration
6. Consistent allocation of network and non-network pass-through costs
34. These areas represent principles which would enhance “Northern Ireland plc’s” competitiveness.

Renewable developments, targets and policies

35. Northern Ireland benefited from a favourable implementation of the NIRO scheme.
36. The EMR legislation made it clear that such an arrangement would not be continued. This created a difficult policy vacuum in Northern Ireland. To implement EMR or a Northern Ireland specific version would add significant cost to Northern Ireland customers’ bills.
37. The removal of the ROC support mechanism is predicted to reduce the growth in new renewable generation connected to the Northern Ireland system.
38. Renewable developments and targets present the Northern Ireland Executive with a difficult cost/benefit dilemma. 
39. Significant levels of renewable generation have been connected and electricity prices have been cited as a factor in the competitiveness mix.
40. Power NI considers there to be merit in a targeted support mechanism which looks to at least maintain levels of renewable generation e.g. incentivise the replacement of plant exiting support. This would maintain Northern Ireland’s high levels of renewable generation at the least cost to consumers.  This policy could be kept under review as developments in technology materialise which could potentially enhance our use of renewable assets e.g. battery and other storage technology.
41. Further consideration could also be given to other approaches in relation to the deployment of renewables. Such approaches could include mandating solar PV on new build housing and commercial developments. 

31 May 2016