Official Report (Hansard)

Session: 2007/2008

Date: 22 May 2008

COMMITTEE FOR ENTERPRISE, TRADE & INVESTMENT

OFFICIAL REPORT 
(Hansard)

Briefing from Firmus Energy

22 May 2008

Members present for all or part of the proceedings:

Mr Mark Durkan (Chairperson) 
Ms Jennifer McCann (Deputy Chairperson) 
Mr Leslie Cree 
Mr Simon Hamilton 
Dr Alasdair McDonnell 
Mr Robin Newton

Witnesses:

Mr Mark Prentice ) Firmus Energy 
Mr Michael Scott )

The Chairperson (Mr Durkan):
The next item on the agenda is the briefing from representatives of Firmus Energy. This part of the session will be reported by Hansard, as have some of the previous presentations on the subject. The briefing will be delivered by Mark Prentice and Michael Scott. A paper has been provided to members, for which we thank Mr Prentice and Mr Scott for that.

I do not think that I need to tell the witnesses that we have had presentations from other organisations in which Firmus Energy’s role in the energy market has been mentioned.

Mr Mark Prentice (Firmus Energy):
I will provide the Committee with an overview of Firmus Energy, describe the progress that has been made in its licence area to date, inform members of how we see the role of natural gas in the future, and detail costs and environmental benefits of natural gas for consumers and businesses. I will also touch on the roll-out of the network across our towns and comment on some queries on network extension and market competition.

As most members know, Firmus Energy was awarded two licences — one for the conveyance or the development of the network distribution of natural gas, and one for the supply of natural gas. We were awarded those licences in early 2005. Our licence covers 12 towns — five in the north-west and seven in the area along the south-north corridor. The towns in the north-west feed off the north-west pipeline that was constructed for Coolkeeragh, and the towns along the south-north corridor feed off the recently constructed south-north pipeline, which connects Gormanstown — north of Dublin — to Ballyclare. The transmission pipelines were built by Firmus Energy’s sister company, Bord Gáis Éireann ( Northern Ireland) (BGE (NI)).

Our head office is in Antrim, which is not only one of the towns to which we supply gas, but the virtual midpoint of our licence area. We operate to what we consider to be a low headcount model, and we use the technical support of our parent company for matters such as IT, billing, finance and systems that, given the relative size of the Northern Ireland market, are expensive to replicate.

Our 50-strong sales and customer management teams are focused on delivering a local customer service for connections, conversion to natural gas and customer management.

In our licence area, we have a franchise of between five and eight years for domestic, industrial and commercial customers. During that exclusive franchise period, we operate under a no-profit, no-loss arrangement. Therefore, any profits that are generated during that time are reinvested into the network, thereby lowering its costs. That arrangement also allows us to price gas to new customers at a discount against the displaced fuel. Our business is about driving connections to the network during that exclusive period.

Our regulatory model is geared around a connection of known loads only, which are large industrial and commercial users, small commercial users, newbuild premises and the estate of the Northern Ireland Housing Executive. However, we are starting to market the availability of natural gas to more owner-occupied properties that lie along the line of our pipe.

Approximately 3,500 customers have connected to Firmus Energy to date, and over 80% of the total industrial and commercial load have contracted for gas. By the end of this year, approximately 90% of our industrial and commercial load will be contracted for gas, and slightly fewer than 5,000 customers will be connected.

Even with the recent increases in the price of wholesale gas, natural gas continues to offer significant savings as a fuel alternative where both installation and ongoing running costs for heating and process loads are concerned. Natural gas has traditionally been the lowest-cost fuel alternative for homes and businesses in Great Britain and Europe.

We are delighted to say that, compared with gas oil, natural gas continues to offer savings of up to 20% to industrial and commercial users. In the past 12 months, customers in the industrial and commercial sector alone who have switched to natural gas have saved a total of over £3 million in running costs. Those costs go straight on to the bottom line to be reinvested in areas such as plant, people, and training and development.

In early 2006, we decided to offer domestic customers a price cap, effectively to insulate them from unexpected movements in the wholesale market. That price cap remains, and it will be in place at least until the end of December 2008. As a result of that switch, customers who have converted from oil to gas make a saving of around 40%, or approximately £320, a year.

Although the cost-price issue is important, the environmental benefits of natural gas should not be neglected. Natural gas is the most environmentally friendly of all the fossil fuels. We recognise that it is not necessarily the final step, but it is a great springboard to move Northern Ireland away from what has traditionally been a heavily carbon-fuel-based economy and one that is still between 70% and 80% dependent on oil. We recognise that Northern Ireland, particularly the areas in which we operate, is 25 years behind GB and the rest of Europe. Natural gas can provide a significant benefit to the Northern Ireland economy, not only now but in the future.

I will touch on some of the issues that affect our network development; indeed, we have spoken already to some of the Committee members about those issues. I am sorry to say that the public sector’s response to the new availability of gas has been of particular concern to us, and it has been evident in a couple of ways. Councils have delayed making decisions on the buildings that are part of their estate, which is ironic, given that most councils have spent between five and 10 years lobbying for gas.

Councils have delayed in converting such facilities as council offices, leisure centres and civic buildings. Given the size of some of the towns to which we are bringing the network, those connections are critical if we are to build the network in an economically viable way. In many towns, council loads are the largest. Council-owned buildings, for example, leisure centres in towns such as Limavady, represent our anchor loads, and we must secure them.

We are also concerned about some of the hospitals that are in our licence areas. For example, a committee Craigavon Area Hospital delayed making a decision on conversion, which has cost around £140,000 over the past seven months because the hospital continued to burn oil instead of gas. Altnagelvin Hospital and Antrim Area Hospital are two large coal-burning hospitals that are in our licence area. There would be significant benefits for those two hospitals if they converted, particularly when carbon is considered. We estimate that those two hospitals could save around 7,500 tons of carbon dioxide emissions every year by converting from coal to natural gas. That is the equivalent of taking around 2,500 cars off the road, so it is quite a significant amount.

Given the existing investment from the UK and the Republic of Ireland Governments in the gas network, particularly in the transmission infrastructure, the fact that more connections to the network will result in lower prices for everyone in the future, and the fact that the Programme for Government includes a CO 2 reduction target of 25%, if gas is available, it should be policy that, as with the Housing Executive, entities in the public-sector estate switch to gas. We recognise that gas will never be available universally across all streets in all towns, so advantage should be taken where it as is available.

I am sure that members are aware that there are issues with the Housing Executive’s heating-replacement programme. Not only are those conversions critical as anchor loads in our licence area, but gaining access to the Housing Executive estate allows us into schools, colleges and other similar buildings. Although money has been released in the Housing Executive this year, it has been released in a piecemeal way. We work to quarterly budgets around which it is difficult to arrange construction activity. We believe that moneys are available for around 2,000 Housing Executive conversions this year.

In those towns that are covered by the north-west and south-north pipelines, Firmus Energy has been asked to carry out around 650 gas conversions. In those areas, where less than 8% of Housing Executive homes have already converted to natural gas — as opposed to 75% or 80% in greater Belfast — the question is whether we should accelerate the availability of natural gas to those domestic properties. That is because we know that customers are suffering as a result of high oil prices and that they are experiencing increasing difficulties in paying for their fuel. The use of pre-payment meters in the gas industry has been welcomed, not only by the Consumer Council, but by the Housing Executive, as those meters assist people in paying for their fuel.

Therefore, the question is whether Firmus Energy can do more to help bring the benefits of natural gas to more consumers, particularly in areas outside Belfast, where there is still a great deal of evidence of the use of solid fuel, Economy 7 and inefficient heating systems.

The last issue affecting volume and connection growth concerns the owner-occupied estate, and, although the focus of Firmus Energy in the first two and a half years of its development has been on the industrial and commercial sector, the focus in the future will be on the domestic sector. To give you a few facts on that, an allowable grant of £600 is available from the regulator towards the conversion of a heating system for an owner-occupied home. That conversion will typically cost around £3,000, so the reality of the availability of gas to owner-occupiers is that those who can afford to change do so. In fact, the masses are not necessarily able to fund that outlay upfront.

Given that 21 of the 23 worst-performing councils in the UK are in Northern Ireland, it is probably no coincidence that those councils predominantly have no availability of gas in the way as councils in the UK. Our question is whether there is more that can be done to encourage more owner-occupiers to convert to natural gas. That could be, for example, along the lines of a programme such as Reconnect, which offers a grant of 50% of the conversion cost. For £3 million a year, Firmus Energy could convert 2,000 homes from oil — or other fuels — to natural gas. We think that we could work with that sum of money, which is not really a huge amount.

A nother query concerns the energy mix, and I suppose that everything points to the need for a robust discussion concerning what sort of energy mix is wanted in Northern Ireland in the future. For example, how much oil do we want to displace? Firmus Energy has continued to engage with Departments and Ministers on joined-up thinking across Departments and on developing a cohesive view of what sort of energy mix the Assembly and the Executive want. We recognise that gas may not be the final solution, but it is an opportunity to bring Northern Ireland closer to the situation in the UK. We are certainly a long way from the point where significant amounts of oil, or other heavy carbon fuels, have been displaced.

With regard to network extension, natural gas has an important role to play, not just in those towns to which Firmus Energy supplies gas already, but perhaps further afield. Firmus Energy is working with the regulator on possible extensions in its licence area to areas such as Portrush, Ballyclare, Cullybackey, Waringstown, Kells, and some other outlying towns. Our sister company, BGE(NI), is in the process of building a second spur on the transmission line of the Kernan above-ground installation (AGI) in Banbridge. Not only will that act as a reinforcement for gas supplies in Portadown and Armagh, but it will actually be sized to accommodate a potential future extension to Dungannon and Cookstown, if those two towns are viable. At this stage, BGE(NI) has already committed about £13 million worth of development to that project, and Firmus Energy is committed to working with the regulator to see how it might be able economically to take gas to towns further afield, such as in the west.

Firmus Energy is committed to becoming involved in the competitive market in Belfast. We have already secured one large industrial commercial customer, and securing that contract was important for learning about the issues that are associated with getting into that competitive market. We have taken those lessons and passed them to the regulator, to the Consumer Council, and to officials from the Department of Enterprise, Trade and Investment. Some remaining issues concern the way in which new suppliers compete economically with the incumbent supplier, but we remain committed to getting into that market, not just in the industrial and commercial sector, but in the domestic sector.

We intimated to the regulator that Firmus Energy is interested in developing a duel fuel offer for gas and electricity for industrial, commercial and domestic users. We intend to use our parent company’s expertise in gas and electricity to develop the right offer for the people of Northern Ireland. We will work with departmental staff and the regulator in the coming months to discuss how we might enter the electricity market.

We are engaged in a price-control process, and we are discussing with the regulator a framework for market opening, which we intend to implement in 2013-14. Firmus Energy effectively operates already as two separate organisations under its licence: a supply company and a distribution company. We publish two sets of accounts, and we have two separate boards. At the outset, we set ourselves up in a way that would ensure that that competition can be realised as soon as the market is right and once we have developed a network that can be opened to customers.

I apologise that our presentation has taken longer than expected, but I hope that it has provided an overview of our development.

The Chairperson:
Thank you very much indeed.

Ms J McCann:
That was an interesting presentation. I am aware that owner-occupiers, particularly the elderly, find themselves in fuel poverty because they cannot afford the lump sum that is required to convert from oil to gas heating, which would be much cheaper. How can the Reconnect scheme be developed to acquire a bigger grant to help people to convert to gas heating?

Most people want to know how Firmus Energy is able to keep its prices constant. I realise that you do not have a large domestic market but, given that the increase in wholesale gas prices caused other companies’ prices to rise, how has it been possible for you to maintain your prices?

Mr Prentice:
I will deal first with your question about the opportunities to further the Reconnect scheme. The regulator, the Energy Savings Trust and the Consumer Council have all asked Firmus Energy how the network can best be extended to improve availability for owner-occupiers. As you said, the critical issue is the upfront costs that are involved in converting from oil to gas.

We have looked on from afar at the Reconnect programme. We have assessed how such a scheme — for example, one that reduced the conversion cost by 50% — could be marketed and implemented. It is unclear where the necessary moneys would come from. However, the amount of cash that is required is not huge. A £1,500 grant would cover more than 50% of the upfront installation costs. The other 50% could be funded through interest-free credit schemes developed by Firmus Energy and/or our installers. Therefore, rather than having to pay a lump sum upfront, customers could make repayments over time.

You also asked how Firmus Energy has managed to keep its prices low. As with any other commodity, the price that you get depends on when you make the purchase. We are glad that we made the price decision, which was based on the known load, that we did in early 2006. We are building up our domestic sector, but you are right in saying that the volume of gas that we use for the domestic market is low compared with what we use for our industrial base.

Firmus Energy decided to purchase gas in advance to ensure that we could generate the right prices for our industrial customers and attract new customers to the network. It was not difficult for us to tag on additional gas for domestic users.

We will continue to examine the market and search for the best prices at which we can buy gas on behalf of our customers. That should limit their exposure to wholesale gas-price increases.

Mr Hamilton:
That was an interesting presentation, and I agree with your substantive points. Jennifer McCann mentioned Firmus Energy’s lack of a domestic market. Given the environmental and cost benefits, with which the Committee understands and agrees, why has the company not targeted that market aggressively? Also, taking the increase in oil prices into consideration, why are you only beginning to target that sector? There seems to be an opportunity to market aggressively in your licence area.

I am not trying to tell you how to run your business, but surely the current price cap, which is a benefit to you, is attractive to new customers? Are you concerned that, when that price cap ends — and considering the rise in wholesale gas prices — you may encounter similar adverse publicity to that experienced by other energy companies, in that you may maintain an artificial price?

Mr Prentice:
We have a different licence for our 12 towns. Our licence was effectively granted under judicial review on the basis that we would develop the network economically and lay pipes to known loads only. Unlike other areas of Northern Ireland where there is an extensive network to which customers can connect, our licence was granted on the basis that we would develop our network. In that respect, we do not lay speculative mains.

From an economic perspective, there is a concern that, if a company markets owner-occupied estates aggressively and lays large amounts of gas main, customers must convert or else that company will be left with an asset that needs to be recovered by all other customers. That will either lead to higher prices in the future, or companies will struggle to recover those assets and will be forced to extend their licence periods. Our focus is different, and our target during our licence period, is to connect only 5% of total domestic owner-occupied customers; our licence targets newbuild and Housing Executive developments. However, we are keen to extend beyond the remit of our licence.

Mr Hamilton:
Surely you want to connect as many homes as possible?

Mr Prentice:
Absolutely.

The Chairperson:
Other companies might want to as well.

Mr Hamilton:
They might want that choice.

Mr Prentice:
We connected our first customer in December 2005, which is not that long ago. Subsequently, we have developed simultaneously a new network in 12 towns in Northern Ireland. Our primary focus in all those towns was to connect the large industrial customers first. Unless we have volume going through our pipes, we will not recover our assets and we will face regulatory difficulties in the future. Therefore, we needed to focus on connecting industrial and commercial users and driving the maximum volume through the pipe.

The ramp up of our profile demonstrates huge growth rates in volume in the first three years of the licence period. As we move into the domestic sector, that growth rate will be fairly incremental between now and the end of that period. Our target is to connect approximately 70,000 domestic customers in our licence area. We are committed to focusing on domestic customers, especially considering that the newbuild sector is inactive. Therefore, it is in our interests to maximise connections off our existing pipe. It is not the case that we have not been interested in the domestic market; it is more that we want to ensure that we generate maximum recovery as early as possible in our development. We will have connected 90% of industrial and commercial customers by the end of 2008, at which point our focus will shift to the domestic market.

Mr Michael Scott (Firmus Energy):
As part of our current price-control process, we have initiated discussions with the regulator about how to approach that sector in the future.

Mr Prentice:
The majority of domestic customers will need to make a £3,000 investment to connect, particularly given current credit-crunch issues. However, many domestic customers will be currently unable to spend that amount of money.

We are trying to be innovative in the way that we help people to pay for those conversions, and some of the options that we mentioned, such as a Reconnect-type scheme for gas, could put more emphasis on, and a lot of oomph into, encouraging connections in the north-west and south-north pipeline towns.

Mr Cree:
That was an interesting presentation, particularly the maps, which are useful for background information. You said that your price was protected because you were able to buy ahead and store gas. Where do you store it, or do you simply prepay for supply?

Mr Prentice:
With regard to buying ahead, all that we did was to take a position on a future gas price. There is no storage. Effectively, it is like going to the bank and booking dollars to be collected in x weeks, but paying that day’s price. We lock in a price and agree to take gas at a future date; therefore, there no storage is required.

Mr Cree:
In the meantime, do you have any problems with traders coming between you and the supplier?

Mr Prentice:
No; once we have locked down prices in the marketplace; they are locked down.

Mr Cree:
Moving on to the question of diminishing supplies on the continental shelf, your chart provides useful forecasts. Do those figures include Ireland, particularly the Corrib gas field, and, considering the level of imports that are going to be necessary, how can supplies be protected over the next 25 years?

Mr Prentice:
Those figures do not include Ireland. The chart refers to the UK-continental shelf — in effect, North Sea production. In our presentation, you will also have noticed the increase in imports — particularly from Norway, which, even now, delivers a fairly sizeable chunk of UK demand — in response to the decline in capacity of the UK continental shelf.

Our colleagues in BGÉ suggest that gas from the Corrib field will be on Ireland by mid-2010. That will constitute quite a sizeable supply, covering about 60% of Ireland’s needs for approximately 12 to 15 years. It is a fairly substantial find, and there are intimations of additional gas reserves slightly further out in the Atlantic.

There is also a question about liquefied-natural-gas storage capabilities in Ireland, and members are probably aware that Paddy Power has been granted planning consent to put a liquefied-natural-gas terminal in the Shannon estuary. That will provide Ireland with the potential to import supplies of liquefied natural gas and regasify them on the island.

There are additional projects, and it is also important to think about some of the other options for storage. In Northern Ireland, there are two clear options. First, the north-west and, particularly, the south-north pipelines are running far from full capacity. Therefore, given the right conditions, there is an opportunity to store gas when it is cheap and introduce it to the system when it is more expensive. We have been working with the regulator for about 18 months to try to get that project moving.

Secondly, our parent company, BGÉ, is looking at a project to explore the salt caverns in the greater Larne area, rather than in Larne harbour. It is waiting for final consent from the Geological Survey of Northern Ireland (GSNI) to proceed with seismic studies to ascertain whether those indigenous salt caverns might be utilised as a gas-storage facility. On the island of Ireland, Larne is unique, and it is probably one of only a handful of sites in the whole of the UK and Ireland that presents such an opportunity. Hopefully, in several months, we will get a bit of traction on that project, and our parent company will be able to evaluate the size of the opportunity that exists.

The Chairperson:
Why did everyone else not lock down prices in the same manner as you?

Mr Prentice:
I am not sure that I can answer that question, Chairman

Dr McDonnell:
Obviously, they are just not as clever as you.

A Member:
They did not wish to tie up their money.

Mr Prentice:
In the early days of our development, we had a unique profile. We had one or two big customers, and we knew exactly how much gas they would burn because we had their historic oil consumption and steam-process figures. Therefore, we pretty much knew how much gas we would need for a period of time.

Industrial and commercial customers are easier to buy for than domestic customers: they do not turn off their factories when it gets warm in the summer. In terms of their heat load, they have a small temperature dependency. In that respect, you have certainty in gas purchasing. We took that certainty and added a little bit on for the domestic market. That is the reason that we were able to do it that way.

A Member:
However, you paid for it. That is the point.

Mr Prentice: 
We bought it upfront and paid for it.

The reality is that it is very difficult to buy gas if you have a big domestic load — I am not trying to do anyone any favours here — because you cannot predict when it will be cold. You have to buy a certain percentage of the gas upfront, take a view on whether it will be a mild or cold winter and estimate how much gas will be needed. If the price spikes, you can get caught out. Predicting gas consumption is a fairly well-established science, but it is not an exact one.

Mr Scott:
It is also true to say that, for two years essentially, we capped our retail price. Then, with gas prices as they were last year, we were able to extend the price cap for a further 12 months. It was not originally a three-year price cap.

The Chairperson:
Seeing you are so good at predicting the future, may I ask what is going to happen now?

[Laughter.]

Mr Prentice:
At the beginning of 2006, our average price was between 45p and 50p. Looking at the forward curve today, that may rise to around 80p. There is about six or seven months before we get to the end of our price cap. We have already bought some gas in advance for a book. We run a completely separate book through our trading team in BGÉ. It has bought some gas for us in advance, so we have locked in some prices. It is open to question whether the current gas price is sustainable. The fundamentals are right: there is sufficient supply, and there is no excessive demand.

The speculation on oil is to do with the issue of where banks are able to make their money at the moment, and they can make money on commodities in a way that they cannot on mortgages and credit. It is uncertain how long the current spike will last. Prices have moved considerably since we first put our price cap in place.

We will be in discussions with the regulator and the Consumer Council from the middle or end of the summer, and we will base our position on how much gas we have bought to date, and how much we need to buy for next year. I am absolutely confident that we will continue to offer a sizeable discount against oil. I cannot predict what the price will be, but we expect there to be at least a 20% differential in price next year and beyond.

The Chairperson:
With respect to factors affecting gas prices, the Committee has been told in previous presentations that, in the UK market, six times as much gas is traded as is consumed, whereas the corresponding figure is only 0∙6 on the Continent. Is that an observation that you recognise? What are the drivers? The Committee was also told that the difference between the two markets is the role of state, or semi-state companies. How does that affect the profile of your company?

Mr Prentice:
I cannot add anything to the statement about how many times gas is traded before it gets to the end consumer.

Firmus Energy is a subsidiary of BGÉ. Because BGÉ is a semi-state organisation, it takes a different view with respect to profit and management of customers. Because we have links to Government, we take more of a social pragmatic view on how best to manage prices charged to customers rather than requiring short-term profits or returns, which may be the case for other leveraged or equity-funded organisations.

We have a trading facility with BGÉ, and it keeps a separate book for Northern Ireland and buys gas on our behalf. We do not trade. Firmus operates a back-to-back policy, so we lock down contract prices at which we sell to industrial and commercial customers.

We do not try to guess or to beat the market. We aim to strike the right price for customers and deliver a greater return and recovery on the assets for our regulator. Regardless of what other traders or organisations do on gas prices, our aim is to get supplies as cheaply as possible, before other speculators enter the market.

The Chairperson:
Will you be able to continue to do that as the gas market develops, and if progress is made towards a single gas market?

Mr Prentice:
On the issue of a single gas market, depending on your point of view we are in the fortunate or unfortunate position, of already being an all-island player. The same may soon be the case for electricity. That is because, as well as being our parent company, BGÉ manages most of the transmission infrastructure on the island of Ireland.

Firmus will support any regulatory changes that are needed to create a single gas market, provided they keep down prices for customers in our licence area. We will not go through with a process that does not deliver value.

There is almost a single market anyway. All electricity suppliers, whether in the North or the South of Ireland, buy from one, central point. The pool for gas is called the national balancing point. Therefore, we all buy out of a pool. Our parent company is very heavily involved, through the Commission for Energy Reform (CER) in the South and the Utility Regulator in the North, in questioning whether a single gas market will deliver a reduction in prices.

The Chairperson:
Will you provide the Committee with exemplar figures for potential public-sector estate conversions that you mentioned earlier?

Mr Prentice:
Absolutely, yes — do you want specific or general information?

The Chairperson:
Obvious ones that Firmus can reach but that are not converting now — you referred to councils and hospitals and said that they would be on your horizon as a way of expanding domestic reach.

I tabled an Assembly question, through the Office of the First Minister and deputy First Minister, on whether there are plans to encourage greater public-sector conversion to natural gas where it is available, given the Programme for Government’s commitments on sustainable energy. However, the issue does not seem to be on anybody’s horizon, except, to some degree, for the Department of Finance and Personnel, which has a role in relation to the pure Civil Service estate.

First, are you aware of any matters in relation to the Civil Service estate? Perhaps that is less of an issue in your market area than it would be in Belfast.

Secondly, we would be grateful for information on the wider public sector. Certainly, the Committee would like to encourage a more proactive effort from that sector, from an environmental and public expenditure point of view, to try to make savings.

Mr Prentice:
There were issues recently around funding that the Southern Education and Library Board expected to receive through the central energy fund. Approximately 20 schools were in line for conversion, but they were informed that no funding was available because the application forms were not completed correctly. The situation is difficult for them, and it is difficult for us. It was suggested that some of the issues related to the lack of a joined-up approach. There have been instances where natural gas is competing directly with renewables in a gas area, and some of those towns are very small. It can be frustrating when there is no joined-up approach and two areas of the Department of Enterprise, Trade and Investment are competing with one another. It raises concerns about how to ensure that the network is economically viable and that it delivers the best possible price for customers.

Dr McDonnell:
I am slightly concerned about the matter. Gas is about 20% cheaper than oil, therefore, people who buy £1,000 of oil a year could save £200 by converting to gas. However, it would cost £3,000 to convert to gas, so they would not see a return for 15 years, but, in 15 years’ time, the gas supply is going to run out. Therefore, is there any benefit to converting to gas, aside from the carbon benefit? Is there an economic benefit?

Mr Prentice:
The figures show that there is a difference of £300 a year between gas and oil. Therefore, it will take approximately 10 years before customers get payback for conversions. We are not suggesting that gas is the final answer, but there is an opportunity to get where we ought to be, given the investment that has been made, to use gas as a springboard towards lower carbon technologies and a lower carbon economy.

With regard to known reserves, we cannot dispute the data regarding the gas that will come from the UK continental shelf. We have provided you with a chart showing known gas reserves. Between 1986 and 2006, known reserves of gas went from 107 trillion cubic metres to 181 trillion cubic metres. Although discussions around peak oil are prevalent, we are not yet at peak gas, but gas reserves are being extracted in more and more quantities. However, there are opportunities in the Corrib field, and there may be additional opportunities in the near Atlantic to bring gas to the island of Ireland.

We are happy to concede that this is not the final solution, but there is 10% to 15% gas penetration in this market versus 80% to 90% gas penetration in the rest of the UK; therefore, surely there is an opportunity to make use of the investment that has been made by UK and Irish Governments and by consumers and organisations, such as Firmus Energy, to displace a chunk of the heavy carbon fuels that are evident in Northern Ireland.

Dr McDonnell:
I have a difficulty with the supplies. The Russians showed us that they can be mercenary when they cut off gas supplies to Ukraine, and I would not want to be dependent on gas from Africa or from South or Central America in 20 years’ time. The point must be made that this is a temporary solution and that there is a fine financial balance.

Many people, including me, converted their homes to gas, only to discover that it costs an arm and a leg. That may make sense to you: but if you begin paying £30 a month for gas, and ends up paying £70 or £80 a month, you begin to think that there is something wrong. People have a bad taste in their mouths. They were promised that gas would be cheap, working, domestic solution — seven, eight or nine years ago. Their worry is that gas prices will rise even further. That is a very stiff climb.

Mr Scott:
You asked about supplies coming in from Russia and elsewhere on the Continent: that has been happening for decades. The slide shows only the fall-off in UK production. As Mark said earlier, BGÉ is looking at opportunities for storage of gas, with a view to shaving off any peaks in the markets as a potential way of addressing some of those imbalances.

Mr Prentice:
To return to your question on prices, I will give the Committee the same answer that we give to the local councils: we cannot guarantee that gas will be a cheap fuel. No fuel, commodity or food supplier can tell you that prices will be low. However, we are committed, and we are convinced that gas will be a cheaper form of fuel for homes and businesses.

With regard to the economics of conversion, gas installations cost one third of the cost of oil installations, and one half to two thirds of the cost of installing renewable-energy systems. I recognise, however, that installing renewable-energy systems may become cheaper over time. In terms of payback, however, and the ability to make the switch to a lower-carbon fuel that will save money, we nail our colours to the mast and declare that gas is the solution for the present. We would not invest in a 30-year licence for a network if we did not believe that that solution would not still be viable in 20 to 30 years’ time.

The Chairperson:
Have you any comments to make on Mr Soros’s observations, made yesterday, on long-term energy prices?

Mr Prentice:
I did not hear Mr Soros’s observations: I assume that he had his crystal ball out and was forecasting the future. Excellent; I look forward to reading that — or perhaps I am pre-empting the content and context of his observations.

The Chairperson:
In that case, I will not give you my garbled shorthand version of what I thought he was saying. Suffice it to say, it seemed to contradict some of what the Committee has been told elsewhere. It will make interesting reading for members.

Mr Prentice:
For financiers, the remedy depends on the flavour of the month. The flavour of the month is commodities and energy. Until financiers are able to make money somewhere else, they will make money where they can. That is the reality of free-market economics.

Mr Scott:
A few years ago, in gas prices, there was a similar trend. There was a lot of trade in commodities at the time and prices spiked when the banks went into the market.

The Chairperson:
Thank you both very much, Mark and Mike.

Mr Prentice:
Thank you very much indeed for the invite.

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