I thank the members for inviting us. I wish them the very best in their work in this session. I am joined by: Mr. Will Roche, head of strategy and regulation; Mr. Michael A. O'Sullivan, head of gas transportation; Mr. Michael G. O'Sullivan, chief financial officer; Mr. David Bunworth, head of energy supply; and Mr. Liam O'Riordan, company secretary.
We were asked by the committee to present operational and financial outturns for 2006. However, we are taking the opportunity to talk also about the gas market since 2006, to bring the members up to date in this regard and offer our vision for the future. We will also refer to changes in respect of networks. The committee members are concerned about issues such as the security of gas supply, which we will discuss as the meeting progresses. We will outline Bord Gáis's response to the White Paper and outline its intentions to offer dual fuel offerings to customers, not only in the Republic but also in Northern Ireland. It is already active in this regard.
Bord Gáis was established in 1976 under the Gas Acts. It has 900 direct employees, 788 of whom are permanent. Not many people know there are three employees in the private sector working on behalf of every employee in Bord Gáis. In essence, there are over 2,500 people working in the gas industry every day in the Republic.
We have 2,169 km of transmission pipes and 9,765 km of distribution pipes. These figures are increasing. We have 600,000 customers and sell 37% of all the gas in the Republic, which does not represent a dominant position in terms of the total gas bubble. We have had 8,000 customers in the electricity market over recent years and the market has grown. Our stake represents 8% of the electricity market in the Republic.
We are building a combined cycle gas turbine plant in Whitegate, which is to be commissioned in 2010. It is to be a state-of-the-art plant. We are also investing in renewables in peaking plant and also keeping a very active eye on the requirements pertaining to gas storage with a view to maintaining security of supply.
I will outline the key highlights in 2006. Gas demand increased by 16%, in respect of which figure one should remember that power generation has been the main driver of gas industry growth over the past decade. The number of gas customers exceeded 575,000. We completed the South-North and Mayo-Galway pipelines and replaced 250 km of cast iron mains, particularly in the Dublin area. It was a volatile year for gas input prices, primarily because there were infrastructural shortages in the United Kingdom. The Langeled connection to the Continent was not developed until later in 2006, thus serving as one of the main causes of wholesale price increases in that year. We paid a dividend of €9 million to the Exchequer and we received planning permission from Cork County Council for the Whitegate power plant. We became a partner in the Power of One campaign and are still very active in this regard through Sustainable Energy Ireland. Five towns were connected by firmus energy in Northern Ireland. We operate under the brand name firmus energy in the North.
In 2002, we sold 67% of all gas in the market, while in 2006 the figure was 37%. The figure for 2008 is approximately 33%. Gas utilisation is mainly in power generation and the figure in this regard is 66%. Residential utilisation amounts to approximately 15% and this figure is only growing at a rate of 2% to 3% per annum.
We view the market today as being an all-island market and not just a Republic of Ireland market. There are 3.6 million gross electricity and gas accounts on the island and we currently hold 600,000. We therefore represent 16% of the customer base on the island, bearing in mind that we have a unified electricity market and are to have a unified gas market in 2010.
Eurostat statistics show that Irish gas prices were below the EU average in 2006. UK prices were lower but this is largely because of the penetration of gas in the UK market. The United Kingdom has 20 million customers in a very urban network. We have a very rural network by comparison and therefore our standing charges are higher. On a commodity basis, we buy at the same price from the North Sea.
There were effectively two 10% reductions in the gas price in 2007. In late January 2008 we announced, with the Commission, a freezing of gas prices until late September 2008, at which time they will be up for review. In the context of increasing oil and gas prices, this certainly displays prudence on the part of our trading and procurement team over recent years in terms of buying gas ahead of the market for this year.
In 2006, the differential between gas and oil home heating costs was quite small. Today, in economic terms, the difference is 40%. There has been a decoupling of home heating oil and gas costs. Furthermore, gas consumption produces 30% less carbon dioxide than oil consumption. Therefore, the movement from oil to gas and the movement to new towns is actually beneficial to the environment. A genuine benefit in terms of carbon dioxide emissions accrues by converting oil boilers to gas boilers, or combinations involving solar power, wood pellets and gas, in many new towns and in the context of urban replacement in the main urban centres.
Bord Gáis has grown significantly in recent years. The turnover in 2006 increased by 29%, primarily due to wholesale prices but also due to electricity sales. Our profit before tax in 2006 was €99 million but that does not take into account that there was an exceptional charge of €30 million for reorganisation within the company. Since 2002, our profit before tax has varied between €114 million to approximately €130 million, in underlying terms, bearing in mind the adjustment for the exceptional charge of €30 million in 2006.
Generally speaking, the returns on capital employed in Bord Gáis amount to 7%, which in European utility terms is modest. We would be regarded as having lower quartile returns in this context, yet we have enough funds arising from our operations to pay down our debt. Our gearing levels were maintained at between 48% and 52% over the period in question and we therefore have a quite robust balance sheet allowing us to make further investments in the marketplace.
The trend pertaining to our tangible fixed assets exhibits a quite rapid increase over a five-year period. Some €500 million worth of fixed assets, primarily transmission assets, were put into the ground between 2002 and 2006. This also involved the renewal of the cast iron network. The main beneficiaries of this investment were primarily transmission assets and the renewal of the cast iron network.
Although we had a €500 million investment, we only essentially had a €150 million increase in our net deposition. This is a positive result considering the amount of investments made. At the end of 2007, Bord Gáis was at a 48% gearing level, just less than €1.1 billion in our net deposition. We have not produced these particular results. We have to go through the Department.
We have extended the transmission infrastructure in Northern Ireland, Westmeath and Galway. The pipeline to the west was commissioned in 2002. The second interconnecter, including the Isle of Man link through which we supply the Isle of Man generating authority, was connected in 2002. The north-west pipeline was opened in 2004 and the South-North pipeline in 2006, by the Minister. The Mayo-Galway pipeline was also opened in 2006. We have a pipeline all the way to the Corrib terminal.
Pipelines and reinforcements were needed for two new power plants. The Aghada plant has a 45 MW capacity and is due to be commissioned in 2009. The Whitegate plant is due to be commissioned in 2010.
The Commission for Energy Regulation produced a revised policy on connecting towns to the gas network. It has put down particular criteria on returns in investments in towns. The period for analysis has been moved from 15 years to 25 years, giving greater leeway in bringing more towns on to the network. A significant body of ongoing work is under way with Castlebar, Westport, Ballina, Crossmolina, Claremorris, Knock, Headford, Tuam, Craughwell, Ballyhaunis and Athenry to be added to the network this year. Connection for Ballinrobe, Gort, Loughrea, Monasterevin, Cahir and Cashel will be sent for tender and commissioned over the next 15 months. We are currently examining phase 3 towns in counties Longford, Roscommon, Offaly, north Tipperary, west Limerick, Kerry, west Waterford, east Cork, Wexford, Westmeath, Cavan and Monaghan.
Much work has been done on the distribution network. What helps is industrial placement. For example, Allergen in Westport has signed on as a customer which will support gas provision to the town.
Safety is an absolute priority for Bord Gáis. It should be noted the Commission for Energy Regulation is now responsible for the setting of gas safety standards. We report to the commission on all safety matters. We build and operate to recognised international standards. Heavy investments have been made in resources with a specific safety management team which reports to me.
All cast iron mains will be replaced by the end of 2009. It consists of 400 km, mainly in the Dublin area, which may sound much but it consists only of 2% of the network. We provide additional technical support to many of the outsource agencies involved. For every one person in Bord Gáis, there are three outside contractors.
Safety installation training is provided by Bord Gáis and a system of registered gas installers is managed. Radio and television advertisements, featuring Duncan Stewart, on the dangers of carbon monoxide are broadcast frequently.
Another major issue all utility companies face is when third party construction companies need to dig underground, they inadvertently break into gas pipelines. With the "dial before you dig" campaign our third party damage levels are down by 10%.
We have had a significant reduction in cast iron fractures due to investment. Last year, there were 14 reportable incidents. All were on the other side of the meter — which is out of our control area — where a domestic or industrial user has control over the installation. We go on site when there is an issue.
Our charter states we must attend a leak in an hour. Our average time is actually less than 28 minutes and improving through the use of GPS and modern ICT.
Over 50% of electricity generation is provided for by gas, which will increase to 70% by the end of the decade. The security of gas supply is, therefore, a major issue. We are heavily influenced by the UK-Norwegian supplies over the short to medium term. Over 90% of our gas source comes from that area; less than 10% comes from the Kinsale-Sevenheads-Ballycotton gas fields.
The UK market has diverse sources. It has commissioned a number of liquefied natural gas, LNG, plants with supplies coming from Qatar, Trinidad and Nigeria. There are effective infrastructural connections and arrangements with the UK market with joint emergency procedures agreed with the UK's National Grid, formerly Transco.
Diversity and a real advantage for security of supply would be improved with the discovery of indigenous gas. Existing storage in the south-west Kinsale field stands at 7 billion cu. ft which we use as part of our trading function.
Concerning the Shannon LNG plant, it is important that for any LNG plant located in Ireland there is a commitment on liquefaction somewhere else in the world and a supply train for that gas. We must ensure contracts overseas are available. These are much sought after by China, Brazil, Japan and the US. There is a competitive market for LNG. One solution to it would enhance security of gas supply over the medium term.
We are working with EirGrid on setting an appropriate security of supply standard for gas. We have a five-day capability for continuing supply if an issue were to arise in the UK or Norway infrastructure. While a disruption to a pipeline in Scotland could be fixed in 48 hours, the five-day reserve is in place, assuming power generators can move over to distillate and not use gas for that particular period. In such an event, 66% of the gas supply would be taken off the market. The residential, industrial and SME sector would be fed by stored gas.
The market fully opened in July 2007. We have 15 active shippers in the market. Bord Gáis Energy Supply has a 37% share of the market, so we are not a dominant player. On the island of Ireland, our share would be closer to 25%.
Demand grew at approximately 3.5% per annum between 2002 and 2003 and 2006 and 2007. It is forecasted to grow at a similar level, maybe attenuated by GDP growth, over the next period. Our prediction is for a 2% to 3.5% growth. Changes in 2010 will occur when the Whitegate, Aghada and other new plants come on board.
We have noticed a 2% efficiency drop in a change of gas-use habits. We have an advertisement campaign on turning down home heating appliances by one degree with the Power of One campaign. More education campaigns are needed in this regard and we will have to be to the forefront.
Our network utilisation is not as high as more urbanised markets in Europe. Our focus in Bord Gáis Networks is to increase our throughput by influencing the policy to encourage gas usage rather than other fossil fuels, or gas usage with other renewable or alternative sources. There is a 30% greenhouse gas benefit by using gas rather than oil. We are looking at reducing the cost of operations. Bord Gáis Networks will continue to extend its outsourcing model. Our call centres, response teams and construction are all outsourced. All of that is done by arms-length private tender by our procurement team.
There is a transformation project in place to drive our efficiencies, which is the basis for the staff employee share ownership plan, ESOP, about which members may have read recently. It is a 3.29% ESOP and it is paid out on the basis of efficiencies realised within the company. The regulator sets all the benchmarks in Bord Gáis Networks and also allows efficient costs. It sets the tariff on the network side. We will have a new price control in place over the next five years. Transmission tariffs will be reduced by 11% in real terms and distribution tariffs will be reduced by 1% in real terms. Bord Gáis will have to absorb all the inflation in the future. We will also have to meet those efficiency reductions. Our rate of return has been reduced by the regulator from 5.7% on the assets to 5.2% pre-tax. The standing charges on bills will be reduced along a particular flight path over the next five years and this will reduce bills. They will counter any increases in commodity costs over that time.
We launched a customer charter with the Commission for Energy Regulation on 26 March 2007, which was issued to all our customers in August and September. We pay compensation if we do not meet those standards. It is all about responses to emergencies, service delivery and appointments, gas supply interruption and restoration times, call response and how we deal with complaints as well as the issue of reinstatement of trenches on roads and pathways. We have to keep improving those standards. We are at a level of delivery that compares well with international benchmarks.
We have a developed a code of practice for vulnerable customers and we are particularly conscious of the fuel poor. We work with the Society of St. Vincent de Paul in dealing with such people. There was a great deal of controversy in the UK this week about prepayment metering and the application of very high tariffs by suppliers in the UK to the vulnerable. That policy is not being conducted by any utility in this country and is not conducted by Bord Gáis. Our tariffs are exactly the same for those who use prepayment metering as for those who do not use it. We are meeting all our charter performance levels. Our charter performance will be published every single year and will be in our annual report.
We are increasing our meter readings after we had a number of complaints. In our drive towards efficiency, we took the view that there should be fewer meter readings. However, the problem with that was more estimated bills. We want to ensure we have better customer service and fewer estimated bills. The biggest problem we face is access to meters. Many meters in modern homes are outside the house, but regrettably the old stock of meters are inside houses. Smart metering may help us in this area over the next five years. Our view is that gas should be included as part of a smart metering roll-out and there should be a multi-utility metering approach. We will provide the regulator with a consultation paper on that. The idea of putting in a smart meter for electricity one year and another one for gas the next year does not make much sense. Both should be done at the same time.
There were more than 600,000 domestic users of gas at the start of 2008. All our charges are subject to regulatory approval and the maximum margin we can earn on the commodity is 1% to 2%. It is a regulated return on top of the actual price of gas plus what is allowed for our cost base. The regulator always looks for continual efficiencies and we strive to achieve those. In the context of new competitors coming into the market, it behoves Bord Gáis to be more efficient and to outsource more. We have a sophisticated trading division in Cork and we have been attracting people from England and elsewhere to work there. We have about 30 professional traders who procure all our gas and electricity. We are now moving to a multilingual call centre and through Fexco, we will employ 120 to 140 people in Killorglin, County Kerry. If one calls the network side or the energy supply side of Bord Gáis anytime from Easter, one will be dealing with somebody in County Kerry. We also announced a price freeze until October 2008.
There are three main pillars of the energy White Paper, namely, sustainability of energy, security of supply and competitiveness of energy supply. Bord Gáis is investing in renewable options. We are making offers to invest equity and to provide power purchase agreements for renewable operators. The credit crunch is not helping small-scale or medium-scale wind developers. We have a role to play with our balance sheet to provide credibility to those players and to bring them into the marketplace as quickly as possible.
Natural gas is a bridge to a sustainable future. For every wind plant brought on to the system, we need to look at peaking an electricity plant which will have a variation capability. When the wind does not blow, the peaking plant can come on and when it does blow, the peaking plant comes off. This means that gas will play a modulating role in dealing with the volatility of wind. We are very supportive of that and are providing specific products in the market for players to build peaking plants to support the drive for renewables.
If we did not have natural gas in Ireland, CO2 emissions would cost us €160 million. About 8 million tonnes of CO2 is saved as a result of the use of gas rather than any other fossil fuel. In terms of fossil fuel replacement, moving to gas makes a contribution towards our Kyoto and Bali commitments. We achieve electricity conversion efficiencies of more than 50%, something no other technology achieves. Bord Gáis will offer dual fuel to the island.
The growing gas utilisation must be matched by policy measures on security of supply. We support an explicit security of supply standard for natural gas. A standard may require additional infrastructure which may mean twinning pipelines in Scotland, increased storage off the coasts or onshore storage in Northern Ireland. The more indigenous inputs we have from offshore exploration will mitigate the requirement of such infrastructure. The Corrib, LNG facilities and storage will make important contributions. Mandatory stocking of back-up fuels in gas-fired generation is also important. Therefore, five-day distillate capability in combined cycle power plants is a must in terms of security of power and gas supply.
The regulator continues to drive change and Bord Gáis will meet those regulatory targets. We work off utility benchmarks elsewhere. We do not want to be a laggard as we want to lead in this area. However, we also want to provide high-quality customer service. Ireland should encourage development of regional energy markets, which means the UK and Ireland in the European context. Russia provides 25% of all gas in Europe, which will rise to 50% by 2020 and will increase even further after that. The EU will have to engage with Russia in having appropriate transportation, gas availability and pricing for the European gas and power markets. Our relationships will have to go beyond those with the UK and Norway. We will have to develop relationships with Qatar, Trinidad, Nigeria, Russia and other countries that provide energy through the pipeline.
Bord Gáis is a utility company like any other in Europe. The norm in Europe for utility companies is to offer dual fuel and the advantage of that is it provides economies of scale. The same call centre and the same billing engine are used to offer two bills to the customer instead of one, which creates an economy. The idea of going to the market offering electricity and gas is the right course because it reduces the overall costs of energy provision. To that end, Bord Gáis must make that move into the electricity market because its competitors coming into this market will offer gas and electricity.
Bord Gáis currently supplies 8% of the electricity market and is in construction at Whitegate. We are involved in making offers through renewables and we have offered power purchase agreements. Some 10% of our power currently — of the 8% — comes from wind. Bord Gáis will offer dual fuel to the island on the domestic market and we intend to own or joint venture at least 1,000 MW. As this would represent only 10% of the generation stock on the island in 2010, it is not a dominant position by any means for a State company which is involved either in full ownership or partial ownership. More importantly, Bord Gáis will guarantee a green percentage to our customer base, whether it be domestic, SME or industrial.
I am open to taking any questions committee members may have.
