Report on the Committee’s Review into Electricity Policy Part 2: Electricity Pricing

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Executive Summary

Background and Purpose of the Review

The Committee was very concerned to hear evidence from Manufacturing NI that large Industrial and Commercial (I&C) electricity consumers are paying amongst the highest prices in Europe for electricity. The Committee was informed that this has resulted in the possibility that electricity costs will prevent large companies from being able to expand their businesses in Northern Ireland and, in some cases, may eventually lead to the loss of some businesses. This would result in job losses to the economy and increased electricity costs to both business and domestic consumers.

The 17.8% increase in electricity prices for most domestic consumers which came into effect from July 2013 gives considerable cause for concern. The increase, coupled with the wide fluctuations in electricity prices, which have been seen year on year, creates an uncertain environment for consumers, many of whom are already in fuel poverty.

Having established that there are considerable current and potential future problems relating to electricity pricing, the Committee agreed to undertake this review.

The Electricity Tariff

Electricity markets are generally highly complex in nature and the Northern Ireland electricity market is no exception. There are three key elements which make up an electricity tariff, namely generation costs, network costs and supply costs. In addition, there is an incentive paid to generators of renewable electricity through the Northern Ireland Renewables Obligation (NIRO) in the form of Renewable Obligation Certificates (ROCs) for each megawatt (MW) of electricity generated. Each of these tariff elements has its own complexities associated with it.

Transparency in the Electricity Market

Generation costs are the largest component of the domestic electricity tariff. They account for around 44% (Table 1) of the domestic electricity bill. Generation costs are determined through the System Marginal Price (SMP). Generators bid into a gross pool at the marginal cost of generating electricity. The SMP is paid to all generators for the electricity they generate, regardless of the cost of generation. It is determined by the price paid to the highest cost generator in each half-hour period. The profit is the difference between the marginal cost and the SMP. There is evidence of a lack of transparency in relation to competition in electricity generation and network charges and whether the rewards are proportionate to the risks. The Single Electricity Market Operator should undertake a review to consider how generation costs can be made more transparent (Recommendation 1) and the Utility Regulator should undertake further work to improve the transparency in network charges (Recommendation 2).

System Marginal Price

All generators receive the SMP in each half-hour period regardless of the cost of generation. This results in zero cost generators, such as wind, receiving the same price in each half-hour period as the highest cost gas powered generator. The Committee believes that all generators should receive a reasonable rate of return however there is evidence that some renewable generators can potentially receive high rates of return which are not commensurate with the associated risks. The Committee believes that the best way to reduce generation costs is to de-couple the price paid to renewable generators from the price of electricity generated from fossil fuels. It is recommended that, the Department and the Utility Regulator must review the way in which renewable generators are rewarded (Recommendation 3) and the Single Electricity Market Operator should de-couple the price paid for renewable generation from the price of electricity generated from fossil fuels, whilst ensuring a reasonable rate of return is provided to all generators (Recommendation 4).

Cost of Carbon

An element of the SMP includes the cost of carbon in the fuel used by the highest cost generator. This is included in the SMP for all generators regardless of whether or not the generation they use produces carbon. The Committee considers it unreasonable that generators of renewable electricity receive the cost of carbon despite the fact that most renewable generated electricity does not produce carbon. Regardless of whether Recommendation 4 is accepted or not, the cost of carbon must be de-coupled from the System Marginal Price to ensure that generators receive a return on the cost of carbon which is directly linked to the carbon they produce (Recommendation 5).

Capacity Payments

Any generator which is available and open to operate on the system receives a capacity payment to be available. Capacity payments constitute around 17% of generator revenues. These add a further 10% (Table 1) to generation costs. The Committee considers the provision of capacity payments to any electricity generator to be questionable but in particular to wind generators. Wind is intermittent and is therefore not always available. It therefore does not fulfil the requirement of a capacity payment to be available. Wind generation is always put on the system as it is the least expensive form of generation. Therefore it is not reliant on a capacity payment to maintain availability when not needed. The Single Electricity Market Operator must review the capacity payment mechanism with a view to removing capacity payments from forms of generation, such as wind generation, which neither meet the requirement nor require the payment. In addition, the review should consider the requirement for a capacity payment mechanism to be in place for any form of electricity generation (Recommendation 6).

Imperfection Costs

There is an element of the electricity tariff known as imperfection costs. These are mostly made up of constraint payments. Some renewable generators receive constraint payments when the electricity they generate cannot be used on the system. This usually results because, in some areas, the electricity grid needs to be strengthened, and also because there is a need for further interconnection with the Republic of Ireland (RoI) and GB. The Utility Regulator, DETI and NIE have informed the Committee that the delay in delivery of the North-South Interconnector is leading to increased constraint costs for consumers on both sides of the border. The Planning Appeals Commission must set an early date to reconvene the inquiry into the planning application for the North-South Interconnector so that a decision can be made (Recommendation 7). Mutual Energy must work to ensure that a permanent solution to the faults on the Moyle Interconnector is put in place at the earliest opportunity (Recommendation 8).

Use of System Costs

Use of System (UoS) charges constitute around 22% of the domestic electricity tariff (Table 1). These costs pay for maintenance and investment in the electricity transmission and distribution networks. They are allocated at a standard rate on each unit of electricity consumed. The electricity network needs to be upgraded due to both its age and the increasing need to support both large-scale and small-scale renewable electricity generation. This will most likely lead to an increase in network charges in the future.

Large I&C users complained to the Committee that they suffer from some of the highest electricity charges in the EU. They outlined the difficulties this created, not only in expanding their businesses, but also in actually staying in business in Northern Ireland. There is significant evidence that high electricity costs may result in some large I&C energy users deciding not to expand their operations in Northern Ireland. These are large businesses with potential to create further large numbers of jobs. There are two other possible impacts on large I&C users resulting from high electricity costs. These are:

i.        To decide to generate large amounts of their own electricity; or

ii.       To move their Northern Ireland operations to other regions with much lower energy and transport costs.

Both of these impacts would result in increased electricity costs for all consumers as the overall network costs, which would remain the same, would have to be distributed over a smaller number of generated units and a smaller number of consumers. One large I&C user already has plans in place to generate its own electricity.

The loss of a large I&C user would also result in the direct loss of large numbers of jobs and have wider impacts on the economy through loss of support jobs and business.

The main concern of the large I&C sector is the way in which network charges are allocated. It is argued that network charges in Northern Ireland are apportioned in favour of domestic consumers and small businesses to the detriment of large I&C users whilst, in the Republic of Ireland (RoI) and other EU Member States, they are apportioned more in favour of large energy users. The Committee welcomes work being done by the Utility Regulator to model the impact of network costs across different customer groups as it is essential that these charges reflect the costs to consumers of all sizes. As a result of work currently being undertaken, the Utility Regulator must be in a position to demonstrate how the current apportionment of network charges reflects the costs incurred by each consumer group including large I&C consumer, smaller I&C consumer and domestic consumer (Recommendation 9).

Northern Ireland has one of the highest levels of fuel poverty in the UK. Therefore, any move to reapportion network charges in favour of large I&C users must ensure that smaller I&C and domestic consumers are not disadvantaged by increased electricity prices relative to the current position. This may be achieved by implementing recommendations relating to generation costs prior to any consideration of reapportionment of network charges. Before there is any move to re-apportion network costs in favour of large I&C consumers, work should be undertaken to reduce costs through generation and other means so as to ensure that no consumer suffers detriment as a result but that large I&C consumers in particular benefit from reduced electricity costs (Recommendation 10).

Public Service Obligation

The Public Service Obligation (PSO) relates to costs for the electricity supply IT system, Single Electricity Market costs, NIE land bank costs and the NI Sustainable Energy Programme (NISEP). Despite concerns from the large I&C sector about the level and allocation of PSO charges, the Committee is satisfied that the overall PSO charge should decrease very significantly over the next two years. However, the Committee questions the appropriateness of funding an energy efficiency scheme such as the NISEP through the electricity tariff. Before the NI Sustainable Energy Programme comes to an end, the Executive should plan a further programme to promote and improve energy efficiency for vulnerable consumers. In doing so, the Executive should explore how such a scheme can be funded through means other than the electricity tariff (Recommendation 11).

Incentives for Renewable Generation

Renewable electricity brings both costs and benefits to the electricity market. The benefits relate to increased security of supply and to reduced electricity costs in the long-term through lower generation costs. Costs are associated with increased network costs because of the need to reinforce the electricity grid and to increased interconnection. There are also costs associated with the need to incentivise renewable electricity generation.

Incentivisation is done through the Northern Ireland Renewables Obligation (NIRO) which is paid for through the electricity tariff. Large-scale renewable electricity generation requires much less incentivisation per unit of electricity than small-scale. For example, small-scale wind farms are incentivised at four times the rate of large-scale wind farms. Representatives of large I&C users believe the current policy is bidding up expensive forms of renewable electricity which is adding unnecessarily to the requirement to strengthen the grid because many of these installations are in relatively remote regions. They believe support should concentrate on a small number of large-scale projects rather than on a large number of small-scale projects.

The Committee was informed that there is considerable potential to reduce the need to strengthen the grid by investing in smart grids. Smart grids are electricity grids that use digital technology to deliver electricity from suppliers to consumers. They save energy, reduce costs and reduce the need for grid strengthening. The Committee welcomes DETI’s plans to undertake a comprehensive analysis of the costs and benefits of renewable electricity and to review the Strategic Energy Framework (SEF). The Department’s review of the Strategic Energy Framework must consider how intelligent energy systems can be fully utilised to reduce the need for grid strengthening and reduce costs to consumers (Recommendation 12).

The Committee welcomes the introduction by DETI, from 2017, of a Feed-in Tariff with a Contract for Difference. As a result, consumers will be protected from renewable generators being over-rewarded when electricity prices are high. However, this will only apply to developments commissioned from 2017 onwards.

Supply Costs

One of the key drivers for the review of electricity prices was the 17.8% increase in the Power NI electricity tariff from July 2013. The evidence has demonstrated that, whilst Northern Ireland domestic electricity prices are currently around the European average, this is against a background of very high levels of fuel poverty in the context of wide year-on-year fluctuations in electricity prices. The Committee believes every conceivable effort must be made to protect domestic consumers from both high electricity costs and frequent wide fluctuations in electricity prices. Work must be done by the Utility Regulator, DETI, the Consumer Council and electricity supply companies to consider what mechanisms can be put in place to insulate domestic consumers from wide fluctuations in electricity prices year on year (Recommendation 13). As all barriers to switching electricity supplier have been removed, DETI, the Utility Regulator and the Consumer Council should work together to develop and implement an extensive awareness campaign to inform electricity consumers of the ease of switching suppliers, and to encourage them to save money by securing the best deals (Recommendation 14).

Impact of Integration of EU Electricity Markets

Electricity markets across the EU are required to comply with rules to integrate electricity markets. The Single Electricity Market (SEM) between Northern Ireland and the RoI must become compliant by 2016. This provides an opportunity for the regulators on both sides of the border to, not only reconfigure the SEM to match EU requirements, but also to provide the most efficient and effective electricity market in the long-term for consumers. Robust oversight by both governments is essential to ensure the success of these reforms. In order to ensure that the project is given the highest priority, energy issues in general, and electricity issues in particular, must be assigned a high priority at meetings of the North South Ministerial Council especially during the SEM Committee Review and the EU Integration Project. This may require Energy to become one of the areas of co-operation under the auspices of the North South Ministerial Council (Recommendation 15).

Summary of Recommendations

Transparency in the Electricity Market

Recommendation 1

The Single Electricity Market Operator should undertake a review to consider how generation costs can be made more transparent.

Recommendation 2

The Utility Regulator should undertake further work to improve the transparency in network charges.

System Marginal Price

Recommendation 3

The Department and the Utility Regulator must review the way in which renewable generators are rewarded.

Recommendation 4

The Single Electricity Market Operator should de-couple the price paid for renewable generation from the price of electricity generated from fossil fuels, whilst ensuring a reasonable rate of return is provided to all generators.

Cost of Carbon

Recommendation 5

Regardless of whether Recommendation 4 is accepted or not, the cost of carbon must be de-coupled from the System Marginal Price to ensure that generators receive a return on the cost of carbon which is directly linked to the carbon they produce.

Capacity Payments

Recommendation 6

The Single Electricity Market Operator must review the capacity payment mechanism with a view to removing capacity payments from forms of generation, such as wind generation, which neither meet the requirement nor require the payment. In addition, the review should consider the requirement for a capacity payment mechanism to be in place for any form of electricity generation.

Imperfection Charges

Recommendation 7

The Planning Appeals Commission must set an early date to reconvene the Inquiry into the planning application for the North-South Interconnector so that a decision can be made.

Recommendation 8

Mutual Energy must work to ensure that a permanent solution to the faults on the Moyle Interconnector is put in place at the earliest opportunity.

Use of System Costs

Recommendation 9

As a result of work currently being undertaken, the Utility Regulator must be in a position to demonstrate how the current apportionment of network charges reflects the costs incurred by each consumer group including large I&C consumer, smaller I&C consumer and domestic consumer.

Recommendation 10

Before there is any move to re-apportion network costs in favour of large I&C consumers, work should be undertaken to reduce costs through generation and other means so as to ensure that no consumer suffers detriment as a result but that large I&C consumers in particular benefit from reduced electricity costs.

Public Service Obligation

Recommendation 11

Before the NI Sustainable Energy Programme comes to an end, the Executive should plan a further programme to promote and improve energy efficiency for vulnerable consumers. In doing so, the Executive should explore how such a scheme can be funded through means other than the electricity tariff.

Incentives for Renewable Generation

Recommendation 12

The Department’s review of the Strategic Energy Framework must consider how intelligent energy systems can be fully utilised to reduce the need for grid strengthening and reduce costs to consumers.

Supply Costs

Recommendation 13

Work must be done by the Utility Regulator, DETI, the Consumer Council and electricity supply companies to consider what mechanisms can be put in place to insulate domestic consumers from wide fluctuations in electricity prices year on year.

Recommendation 14

DETI, the Utility Regulator and the Consumer Council should work together to develop and implement an extensive awareness campaign to inform electricity consumers of the ease of switching suppliers, and to encourage them to save money by securing the best deals.

Impact of Integration of EU Electricity Markets

Recommendation 15

Energy issues in general, and electricity issues in particular, must be assigned a high priority at meetings of the North South Ministerial Council especially during the SEM Committee Review and the EU Integration Project. This may require Energy to become one of the areas of co-operation under the auspices of the North South Ministerial Council.

Read the full report here