I thank the joint committee for the opportunity to make this presentation. I apologise on behalf of our chairman, Mr. Douglas McIldoon, who is unable to be here today. I am accompanied by Mr. John Fitzgerald, who is here in his capacity as a member of the Northern Ireland Authority for Energy Regulation.
Members have received copies of the presentation, which I will go through without using the projector. The presentation will focus on the following points: the role and functions of the regulator in Northern Ireland, the development of the gas industry in Northern Ireland, the electricity industry in Northern Ireland and the opening up of the market. I will also talk about the all-island energy market and the authority's role in encouraging energy efficiency and renewables.
The Northern Ireland Authority for Energy Regulation was established in April 2003 under the Northern Ireland Energy Order 2003. Prior to that, Mr. Douglas McIldoon undertook the role of regulator of electricity and gas. Following the establishment of the authority and until September of this year, when his term of office came to an end, Mr. McIldoon was both chairman and chief executive of the authority, Ofreg.
In future, it has been decided to split his office into a part-time chairman and full-time chief executive. Both posts will be advertised and, I hope, filled in the first quarter of 2006. In the meantime, Mr. McIldoon continues as part-time chairman and I am acting head of Ofreg. We continue to be supported by a very able and committed authority. In addition to Mr. Fitzgerald, we have Mr. Peter Lehmann, Ms Joan Whiteside and Mr. John Gilliland. The authority comprises a mixture of people from the business, academic and consumer sectors. Two of the authority's members are from Northern Ireland, one from the Republic of Ireland and one from Britain. The chairman and members are appointed by the Government.
I will now give a brief overview of the authority's objectives. There are two primary objectives. The first is to protect the interests of electricity consumers, where appropriate by promoting competition, which is an important point. The second key objective is to promote the development and maintenance of the natural gas industry. In achieving these objectives the authority must have regard to a number of further considerations. These include the protection of gas consumers, financial soundness of licence holders and the protection of vulnerable consumers as well as protection of the environment. It is rather different from other regulators in that we have a primary duty to develop and promote the natural gas industry with protection of gas consumers as a secondary issue.
I will provide some background data on the gas industry in Northern Ireland and some of the key issues concerning it. It is important to emphasise that it is an immature industry compared to what exists in the South or in Britain. The natural gas industry came late to Northern Ireland. While there had been an old towns' gas industry, which had served Belfast and several other towns, this closed down in the late 1970s. It was not until British Gas completed an interconnector, the Scottish-Northern Ireland pipeline, known as SNIP, that we had the basis for a natural gas industry in Northern Ireland.
SNIP was built in 1996, initially to provide gas to Ballylumford power station. Ballylumford was converted from oil to gas and thereafter we had the opportunity to develop a distribution business. Completion of the SNIP was followed by completion of a transmission line to Belfast and the setting up of a distribution business by Phoenix Gas in 1996. Ten years later, Phoenix has 86,000 customers, with a projected growth to approximately 220,000 by 2016. Compared to the Republic, we have a very small gas industry at present.
In the past couple of years there have been a number of developments involving the development of the industry outside Belfast. First, the gas transmission system has been extended. In February 2002, BGE was awarded a licence to convey gas along two new transmission lines in Northern Ireland. The first of these was to transmit gas to the new Coolkeeragh power station built by ESBI, as well as the towns along that route. The second of these, known as the South-North pipeline, was intended to provide security of supply by connecting with the transmission system in the Republic, as well as extending availability to towns adjacent to the pipeline.
The north-west pipeline to Coolkeeragh was completed in October last year and the south-north pipeline is expected to be completed in October next year. This effectively will complete the gas transmission system in Northern Ireland. The extension of the transmission system has allowed gas to be distributed to towns outside Belfast. Following a competition, BGE was awarded a licence to distribute gas outside Belfast in March this year. Initially, ten towns will receive gas, five off each of the two pipelines.
Turning to market opening and competition, the original Phoenix licence which was granted by DETI envisaged a phased market opening in the I&C sector, with the market fully opening by December 2004. In December 2004, following representations from Phoenix and the authority, DETI decided to delay market opening, except for the largest customers, on the grounds that the small, immature gas market in Northern Ireland would not see lower prices as a result of competition.
Currently, only the larger I&C customers — those consuming over 75,000 therms per annum — are open to competition. Even for them, while some suppliers have sought a supply licence, there has been no effective competition. The main reason for this situation was that until 1 October 2005, Phoenix had a beneficial contract with Centrica, which made it unattractive for other suppliers to enter the market. British Gas owned Phoenix originally. This contract has now ceased and Phoenix is depending on buying at market prices. We expect new suppliers to emerge.
Smaller I&C and domestic customers, those consuming less than 75,000 therms per annum, will be open to competition by July 2007. Currently, DETI is consulting on the best timetable for this with a view to minimising costs and maximising benefits to customers.
BGE, which is involved in distribution outside Belfast, continues to have exclusivity from competition from three to eight years, depending on customer type, before it is subject to supply compliance.
Turning to the electricity side, I will provide a short history of developments in Northern Ireland since privatisation. Following the privatisation of NIE in 1992, Northern Ireland was an isolated energy market and electricity prices were high relative to the rest of the UK. As a result of this isolation and the way the privatisation is being carried out there was no scope for competition, wholesale or retail. The regulator could reduce prices through vigorous regulation of the monopoly transmission and distribution business. In the first five years after privatisation there was modest or little reduction. Since then the transmission and distribution prices have fallen by over 50% in real terms.
In addition there have been two key developments, first, the ending of our isolation. The electricity connector with the Republic was reopened in 1995 and this was followed by the construction of gas and electricity interconnectors with Scotland in 1996, the SNIP and in 2000 the Moyle. Two of our three rather dirty, inefficient plants have been replaced and by April 2005 more than 800 megawatts, 40% of our total capacity of oil and coal plant, had been closed down and replaced with two combined-cycle gas turbines, CCGTs, Ballylumford and Coolkeeragh, now with a combined capacity of 1,000 megawatts.
In line with the EU directive, the electricity market in Northern Ireland was gradually opened to competition. This was greatly facilitated by interconnection and the presence of independent sources of generation — the building of Coolkeeragh power station and the increasing presence of renewables. The process started in 1999 when those in the top 27% of the market by usage were allowed to choose their own energy supplier. This phased implementation continues, and from March 2005 all non-domestic use, accounting for 60% of usage, is effectively open.
Four second-tier suppliers are active in the market, Energia, BGE, Airtricity and ESBIE. We are planning for full market opening by July 2007. In deciding its approach the authority will bear in mind the need for a lowest possible cost approach. This is likely to require an incremental, rather than a "big bang", approach. We are aware of the lessons from the Republic's experience of significant investment in new systems where switching levels are lower or no better than those in Northern Ireland. This refers to the incumbent moving to new suppliers.
In November last year the Department of Enterprise Trade and Investment in Northern Ireland and the Department of Communications Marine and Natural Resources produced an all-island energy market development framework, covering the whole spectrum of electricity, gas, renewables and energy efficiency.
The key development of that work to date has been the creation of an all-island wholesale electricity market. The benefits of such a development are increased competition in a larger market, increased efficiency of dispatch and improved investment conditions. The target date for implementation of the wholesale market is July 2007.
The two regulators are responsible for progressing this. It is on target — the high level design was produced in June 2005 and the detailed rules are on target for February 2006. An additional North-South interconnection is planned which will complement this project. We will not derive the full benefit of the wholesale market until that is complete.
Several issues which need to be tackled lie outside the regulators' control. There is a need for legislation in both jurisdictions. There is also the issue of dominance, which is not entirely within our control. While regulators are considering a regulatory approach to this, a structural approach involving more competing generators would be preferable.
We depend too on the actions of others to ensure that interconnection occurs as planned. Ministers North and South have already given their backing to this, which is important. It is imperative that there is no unnecessary delay in this project.
While the primary responsibility for promotion of energy policies to improve the environment falls to Government, Ofreg has a long tradition of promoting energy efficiency and renewables. This year we have published two papers on this issue: Beyond CCGTS — The Next Carbon Reduction Strategy, and — if the committee will pardon the grammar — Energy Efficiency: the ‘Most Best' Solution. These papers look forward to a post-CCGT world. If we are to meet our environmental targets, we need to lay much greater emphasis on energy efficiency. I commend both papers to the committee.
There are areas in which the authority has acted to benefit environmental policy. One quarter of our domestic customers are prepayment customers who use a keypad system. They buy electricity at a discount below the price paid by standard credit customers. They can access an array of information about their usage through their keypad, which puts them firmly in control and encourages energy efficiency.
They pay the same price per unit throughout the day but a trial by which customers on keypad can access time of day charges is to be made available by the end of this year to all keypad customers. The idea is that a higher price will be charged at peak hours and off-peak charges will be discounted.
This system is sympathetic to low income small users. It also provides incentives for people to invest in energy efficiency measures. Pro-energy efficiency pricing is not enough. There are too many reasons that there has not been investment in energy efficiency. Efficiency must be actively facilitated if the inertia arising from hassle and ignorance are to be overcome. An energy efficiency programme funded by customers began in 1996 and has incrementally grown in scale since then. In the period up to 31 March 2005 customers had spent £12 million and saved £119 million, while at the same time producing carbon dioxide savings of almost 500,000 tonnes. One reason NIE backs this programme is that it is incentivised to outperform the savings target and earn additional profits.
Just as high conventional energy costs improve incentives for energy efficiency, so too do they improve the case for renewables. Last year 25% of public sector electricity was green and 14% of small businesses also bought green energy. Domestic customers can also buy green energy from NIE for no extra cost. Between 2004 and 2005 just under 6% of all the electricity sold in Northern Ireland was green, with two thirds generated in Northern Ireland and one third imported from the Republic. The local market share is growing steadily.
With on-shore wind turbines increasing in numbers the policy emphasis has switched to promoting micro-renewables and large scale schedulable renewables such as biomass.
