CBI ENERGY CONFERENCE
28 January 2009
Douglas McIldoon

When lightening strikes twice
3 questions:
• 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?

A service or a commodity?
The key questions
• who doubts that electricity is essential?
• whose interests determine policy – customers
or producers?
• when did you hear a politician not claim that
consumer interests were paramount?

The official consensus view
• consumers come first;
• electricity should be produced at least cost;
• reliance on fossil fuels must be reduced

So we are agreed on what we want!
It follows that we can agree what are reasonable
tests by which to judge our electricity market, ie;
• 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
Actual
Availability Units Sent Pence
RPI Payments Capacity Out per
(Oct) £m (nominal) MW GWh 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.
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.
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.

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.

Why the increase in fuel costs?
• in a monopoly system customers pay blended fuel price;
• 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!
‘b’ infra-marginal
rent
‘a’ Fuel price
SMP
Time of Day
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;
There is a case for not being in SEM;
But the worst of all is -
being in SEM and taking no policy responsibility for it!

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.
The potential to protect ourselves from volatile fossil
fuel markets and rising cost of carbon.
“We will harness the sun and the winds and the
soil to fuel our cars and run our factories.”
President Obama: 20 January 2009

Reforming SEM
Generation needs should be identified;
Generation should be procured by competitive contracts;
Generation which has been fully written down should be given
retaining contracts;
Low carbon/renewable generation should be fostered with
tailored contracts;
Grid based generation planning should be informed by energy
efficiency, demand management and on site generation;
The “carbon premium” paid to renewables should be reinvested
in the system.

Why do we need to reform SEM?
• energy costs may fall while the recession lasts;
• medium term fossil fuel prices will rise;
• prey attracts predators and we are the prey.
• to reduce our electricity costs below GB’s.

Conclusion
- Present energy policy is riddled with contradictions;
- Anger is justified - Northern Ireland’s energy consumers
have been abused by Government ineptitude now for 15 years;
- We are on course for at least another 15 years of excess
electricity costs.
Perhaps a Government which believes in “evidence based policy
making” should face the evidence of the legitimate well informed
anger of its citizens.