CBI ENERGY CONFERENCE 28 January 2009 Douglas McIldoon
When lightening strikes twice3 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 reasonabletests 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/hr1992/93 139.9 136.8 2243 6830 2.001993/94 141.8 145.2 2243 7058 2.061994/95 145.2 143.6 2243 7182 2.001995/96 149.8 150.8 2243 7370 2.051996/97 153.8 141.0 2123 7567 1.861997/98 159.3 142.6 2123 7683 1.86
In 1997/98 the cost of generation net of fuel was 1.86p perkilowatt hour.If NI generators had been sold at GB prices it would havebeen less than 1p.The inflation factor since then is 1.324.Therefore on the overpriced privatisation formula we wouldbe 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 billionEuros 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 priceSMP 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 plantsBut:the SEM’s rationale is to encourage new fossil fuelinvestment.
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 SEMIt is the first step in constructing an energy marketwhich 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 fossilfuel markets and rising cost of carbon.“We will harness the sun and the winds and thesoil to fuel our cars and run our factories.”President Obama: 20 January 2009
Reforming SEMGeneration needs should be identified;Generation should be procured by competitive contracts;Generation which has been fully written down should be givenretaining contracts;Low carbon/renewable generation should be fostered withtailored contracts;Grid based generation planning should be informed by energyefficiency, demand management and on site generation;The “carbon premium” paid to renewables should be reinvestedin 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 policymaking” should face the evidence of the legitimate well informedanger of its citizens.