Posted on Wednesday 5 March 2014 by Ulster Business
The rising cost of energy has increasingly been in the headlines, with both households and businesses struggling with prices, while there are also concerns over the security of electricity supply in Northern Ireland due to the need for new infrastructure investment.
They are issues that Jenny Pyper, the new CEO of the UR, says will be at the core of the new corporate strategy. She says she wants the UR to be seen as a "best practice" regulator, one that's transparent and accountable, responsive to customer concerns and engaged in robust dialogue with utility companies.
"Effective network regulation is the first of our three key corporate strategy objectives. We want high performing, responsive utilities. We want to see companies that are earning a reasonable rate of return, while investing prudently for the future in networks and the service they're providing. But we want to balance that with the lowest possible price to consumers. That's really why the regulator exists, to provide that balance and to ask the question how much is too much in terms of affordability," she told Ulster Business.
"Competition and markets are our second big area. We want to challenge the markets and make sure they're effective. The third is security of supply and playing our part in delivering Executive's renewables targets," she added.
A career civil servant until now, Pyper is no stranger to energy, having held the post of director of energy policy at DETI between 2004 and 2010. During that time she played a leading role in the development of both the Single Electricity Market and the NI Executive's Strategic Energy Framework.
One of the attractions of the new role, she says, is the Utility Regulator's independence and the fact that the work it does impacts on the social, environmental and economic arenas.
"We exist to protect the interests of consumers, we exist to make a difference. That's what motivates me and my team here," she says. "I think I've come in at a really exciting and a challenging time. You don't come into regulation to be loved. But there's a job to be done, there's an opportunity to make a difference and add real value."
Ms Pyper says that in the first few months of her tenure in the job she has been wearing the regulator's independence lightly, rather than brandishing it, instead focusing on building relationships with stakeholders. No doubt there will be plenty of time for that given the regulator's ongoing dispute with electricity network owner NIE over its price control.
NIE argued that the UR's price control determination, which would have led to lower charges for consumers, was insufficient to enable the company to invest in infrastructure and did not give them a fair return on that investment. Ms Pyper says the referral, which is currently awaiting a ruling from the Competition Commission, illustrates the balancing act the regulator has to perform. Whatever the outcome she says the regulator is ready to "move forward positively."
"It is clear NIE want to move forward and so do we, because there is a lot of work to be done. Our objective is to facilitate investment to allow companies to earn a reasonable rate of return for their shareholders. But the question is how much do we approve without gold plating it. Clearly companies with valuable assets will want as much investment as possible, but it is the consumer that is paying for that," she said.
"We haven't said there isn't a need for investment. We've approved £30m of investment to allow the share of renewable electricity to increase significantly. But we want to see a phased plan that will take us on to the next stage. It should be proportionate and incremental so we aren't landing customers with huge increases in their bills."
The need for infrastructure investment has arisen from the desire to connect more windfarms to the grid in areas where the network is at its weakest but the wind profile is strong. The Executive has largely pinned its hope on wind generation to reach its target of having 40% of all electricity generated from renewable sources by 2020. Ms Pyper says it is a challenging target but points out renewable generation has already risen from 8% in 2009 to 15% today.
"There is a challenging path between now and 40% in 2020 but the pattern of investment has been positive. The investment we've approved should allow renewables penetration to reach about 27%. The question is the upgrading and reinforcing needed to get to 40%," she said.
"While we want to keep prices down we do recognise the responsibility not just for current customers but also future customers. It is not a static picture and we do want to encourage a sustainable and diverse energy supply for Northern Ireland."
SECURITY OF SUPPLY
While renewables may be the future, there are concerns in the short term over security of supply, both from a network and generation perspective. Environmental rules mean that both Ballylumford and Kilroot power stations will have to reduce capacity by the end of 2015. Added to that is the fact that the Moyle Interconnector which imports electricity from Scotland is only running at 50% capacity and requires expensive repairs.
Network operator SONI's recent Generation Adequacy Report suggested supply could be tight in terms of demand and available generation from 2016. Pyper says that gives the regulator time to work with DETI to mitigate the risk.
"We've had good early warning, it is SONI being cautious not sounding alarm bells. Nobody is saying at this stage that we're facing black outs in NI. It is just saying it could be tight because of some plant coming offline, but there are options to deal with it. We're working through to identify what is the most cost effective option," she said.
"We want to make sure we're not gold plating any particular solution for a problem that might not arise. SONI is being prudent and flagging there may be a tightness in 2016, but whether that actually crystallises we're not sure. We're taking steps now to manage it."
Ms Pyper says one key part of the long term solution is the completion of the long delayed North / South Interconnector between Northern Ireland and the Republic which would allow Northern Ireland to better utilise spare generating capacity across the island under the Single Electricity Market arrangement. Having been held up in planning and appeals for several years, the Irish Government has suggested a new application is imminent. But even if that is the case the interconnector is unlikely to be built for several years.
"When we were developing the Single Electricity Market a key factor in our thinking was the prospect of a second interconnector to get economies and efficiencies, to encourage new players to come into the market and stimulate competition, and also to bring security of supply benefits. We're aware and DETI has confirmed that delays in proceeding with that interconnector have led to annual losses of some £7m, particularly because of constraints on trading. That's something that can be improved."
Energy prices have been in the news in Great Britain recently with politicians criticising the big energy companies there for the level of profits they are making while increasing prices to customers.
Pyper says that many of the same problems don't exist here due to Northern Ireland having domestic supply regulation and a different wholesale market. She also notes that while there is concern over underinvestment by power companies in Great Britain, the UR has facilitated over £5bn of utility investment since 2006.
"The sort of thing we've seen politicians like Ed Milliband call for, the idea of a pool market, more regulatory control and greater transparency, that's what we have in the Single Electricity Market. I think it is clear that without the SEM customers in NI would be paying more," she said.
"I'm not complacent about the market we have. Europe has set a challenge in terms of a vision for regional integration and moving towards that is something we're working on with our Irish colleagues. The intention is to have a new market in place by 2016.
"The two regulators, the UR and CER, published a high level design options paper in early February for consultation. That's going to mean changes to the Single Electricity Market. We'll seek to keep as many of the things that are working well in the SEM but also meet the challenging standards Europe has set. In all of this our objective is to ensure we have a good, competitive, transparent market that's delivering the lowest cost for consumers."
While that may be the case, Ms Pyper acknowledges that energy costs are a massive issue not only for consumers but also large commercial users, whose energy costs are higher than counterparts in GB.
"I've talked about transparency around pricing and the work we've done in the last year has allowed us to confirm that for domestic customers and small businesses our prices sit round about mid-range against European benchmarks. Around 98% of our business customers pay the same or less than counterparts in the ROI," she said.
"But I've also talked with some of the big players – the 2% who represent 56% of industrial and commercial consumption by volume – and Invest NI and I know how significant an issue it is for them. We are focused on playing our part on prices and have, for instance, recently commenced a project on network cost allocation. There aren't any simple answers because while there are concerns for those large users there are also significant concerns at domestic level about fuel poverty. It really is a question of whether you rob Peter to pay Paul. There are decisions in there I don't think the Regulator can make in a vacuum. It will involve dialogue with DSD and DETI around policy priorities. We want to present real evidence if changes are going to be made at policy level."
GAS TO THE WEST
Of course the Utility Regulator's role is not all about electricity. The next major development is the launch of the competition for a major programme of physical investment to bring gas to the west of the province. It is a project which will not only make gas more widely available but which will also require a massive amount of construction work.
"It is a major programme with £32m of support from the Executive because they recognise the benefits it will bring in terms of jobs but also in terms of bringing a choice of fuel to customers and businesses west of the Bann. Some of our bigger businesses, particularly in the agri-food sector, are particularly looking forward to having gas because it will offer a cleaner and more affordable form of energy relative to oil," said Pyper.
Since gas came to NI in 1996 there has been over 4000km of pipe laid and over 170,000 customers connected.
At present the gas pipeline goes from Belfast to Derry with a north south link for Newry and mid-Ulster. Gas to the West will go as far as Enniskillen and Derrylin, including towns such as Dunganon, Cookstown, Omagh.
The regulator is also looking at how well companies are enabling switching between suppliers, noting there is now competition in greater Belfast and the 10 towns operated by firmus gas will be completely open by 2015.
"I think it is an exciting project and an opportunity to bring new players into the market, which always stimulates the others. We welcome new market entrants because they can bring innovation and a new market dynamic."