CBI ENERGY CONFERENCE

28 January 2009

Douglas McIldoon

When lightening strikes twice

• is electricity a service or a commodity?

• should we be in the Single Electricity Market?• are you paying too much for electricity at home and at work?

3 questions:

A service or a commodity? The key questions

• when did you hear a politician not claim that consumer interests were paramount?

• who doubts that electricity is essential?

• whose interests determine policy – customers or producers?

The official consensus view

• consumers come first;

• reliance on fossil fuels must be reduced

• electricity should be produced at least cost;

It follows that we can agree what are reasonable tests by which to judge our electricity market, ie;

So we are agreed on what we want!

• are we producing electricity in the cheapest possible way? and

• are we making the transition efficiently to a low carbon system?

A little bit of history!

Remember our long term generation contracts?

Out turn availability payments capacity and generated units in the period 1992/93 to 1997/98

 

RPI(Oct)

Actual Availability Payments

£m (nominal)Capacity

MW

Units Sent Out

GWh

Pence per

Kw/hr

1992/93 139.9 136.8 2243 6830 2.00

1993/94 141.8 145.2 2243 7058 2.06

1994/95 145.2 143.6 2243 7182 2.00

1995/96 149.8 150.8 2243 7370 2.05

1996/97 153.8 141.0 2123 7567 1.86

1997/98 159.3 142.6 2123 7683 1.86

In 1997/98 the cost of generation net of fuel was 1.86p per kilowatt hour.

If NI generators had been sold at GB prices it would have been less than 1p.

The inflation factor since then is 1.324.

This year we look like paying in the region of 1.4 billion Euros for 41,000 gigawatt hours. That is 3.4 Euro cents.

Therefore on the overpriced privatisation formula we would be paying 2.46p today.

On a fair cost basis we should be paying at most 2p.

Why the increase in generation?

• in a monopoly system customers pay for capital investment once;

• since 1993 we have always paid more than it cost;

• since 1993 we paid in effect a heavy tax to the Treasury;

• this ‘tax’ costs on average £80M per annum – say £1.2 bn;

• now we pay a market price which bears no relation to the cost of procurement.

• in a monopoly system customers pay blended fuel price;

Why the increase in fuel costs?

• in our market customers pay highest marginal cost;

• in a monopoly customers do not pay carbon cost for renewables;

• in our market we pay for the carbon that is not there;• in a monopoly market customers benefit from prudent fuel purchasing;

• in our market this is less likely

The SEM market

• accurately and efficiently prices electricity in real time;

• tries to do too much.

Why it is inefficient!

SMP

Time of Day

‘b’ infra-marginal rent

‘a’ Fuel price

The reward to each generator is the sum of its ‘b’s

Transition to a low carbon electricity system

• too many horses pulling the cart in different directions;

• our commitments to be 40% renewable by 2025;

• the long term nature of generating investment;

• need to be selective about what we let on to the system;

• SEM does not manage this because SEM is not a planning tool!

• no effective policy delivery mechanisms.

Existing renewable commitment

• 40% of electricity from renewable sources in 16 years.

• about 5,000 gigawatt hours by 2025;

• this means closing some fossil fuel plants

But:

the SEM’s rationale is to encourage new fossil fuel investment.

Should we be in SEM?

There is a case for being in SEM;

But the worst of all is - being in SEM and taking no policy responsibility for it!

There is a case for not being in SEM;

The case for SEM

It is the first step in constructing an energy market which best matches our needs and our potential.

Our island is a 21st renewable energy “Gulf State” – we should bless our good fortune.

“We will harness the sun and the winds and the soil to fuel our cars and run our factories.” President Obama: 20 January 2009

The potential to protect ourselves from volatile fossil fuel markets and rising cost of carbon.

Generation needs should be identified;

Reforming SEM

The “carbon premium” paid to renewables should be reinvested in the system.

Grid based generation planning should be informed by energy efficiency, demand management and on site generation;

Low carbon/renewable generation should be fostered with tailored contracts;

Generation which has been fully written down should be given retaining contracts;

Generation should be procured by competitive contracts;

Why do we need to reform SEM?

• energy costs may fall while the recession lasts;

• prey attracts predators and we are the prey.

• medium term fossil fuel prices will rise;

• to reduce our electricity costs below GB’s.

Conclusion

- Present energy policy is riddled with contradictions;

Perhaps a Government which believes in “evidence based policy making” should face the evidence of the legitimate well informed anger of its citizens.

- We are on course for at least another 15 years of excess electricity costs.

- Anger is justified - Northern Ireland’s energy consumers have been abused by Government ineptitude now for 15 years;