NCC Statement on Energy Post author By Philip Lane Post date October 6, 2009 You can download the report here. Categories In Economic Performance Tags Irish energy policy, NCC 13 Comments on NCC Statement on Energy ← New Central Bank Bulletin → Fixing the Banking System 13 replies on “NCC Statement on Energy” The NCC has the following three aims: 1. restoring cost competitiveness; 2. improving security of supply; and, 3. moving to a lower carbon economy. These aims are mutually contradictory. Gas is cheap. Peat is secure. Wind is low carbon. This is in between the lines of the NCC report, but they do not confront this head on. The report also fails to mention that competitiveness is driven by labour costs rather than by energy costs. Other than that, this report is remarkably reasonable. Mostly good, worthy stuff – as one would expect. Some errors and the adherence to the established DCENR/CER/ESB/BGE “group-think”, unfortunately, detract quite a bit. 1. The statement (p4) “Significant investment in the transmission and distribution networks is planned over the period to 2025, which will be financed through higher electricity prices.” is simply wrong, but it is amazing how deeply embedded this erroneous notion has become. Investment is financed by some combination of debt and equity and the equity will comprise some combination of retained earnings and equity injections. The investment – and the return on this investment – will be recovered via network tariffs which enter into final prices. Efficient financing of investment will minimise any required increase in future energy prices. Currently, network investment is being financed 25% by debt with the remainder coming from retained earnings and customer capital contributions. There are no direct equity injections so this gloriously inefficient financing of investment means that network tariffs are 20-25% higher than they should be. In addition the CER has been prepared on occasion to award network revenues in excess of this. 2. An excessive focus on electricity allows natural gas to avoid the scrutiny it deserves. Similar investment inefficiency arises for the gas networks with the same impact on network tariffs. And, given the reliance on gas-fired electricity generation, this extra unjustified cost feeds into electricity prices. The surplus revenue BGE generates from its networks allows it to subsidise its foray into the electricity market since there is no financial ring-fencing of the network and supply business units. This penalises all gas consumers to subsidise those, much fewer, electricity consumers who switch to BGE. In addition, this disadvantages other new entrants competiting with the ESB who do not have access to this subsidy. The implications of the imbecilic sequencing of gas supply infrastructure – Scotland to Northern Ireland (SNIP), first Scotland to Ireland interconnector (IC1), second Scotland to Ireland interconnector (IC2), LNG as opposed to SNIP, IC1, LNG, SNIP reinforcement (and IC2 if required) – receive no attention. As Corrib and LNG come on stream IC2 and much of IC1 capacity will be redundant but consumers will continue to pay the full cost as if they were being fully used. 3. Interconnection is viewed primarily in relation to security of supply, rather than competition, and, again with a focus on electricity. It is sad, and a little surprising, that hints of atavistic Anglophobia seem to guide the consideration of future interconnections beyond the current East-West project. The British electricity market is confronting major challenges but these relate more to policy and regulatory commitments to ensure the necessary full recovery of long term investment than to other factors. This challenge is common throughout the EU – and also arises in Ireland. Implicitly assuming that Britain will fail to meet this challenge while all others will meet it seems a bit naive. Limited attention is paid to further market integration of the gas and electricity markets on both islands. The gas markets could be integrated immediately and this would remove the major interconnector cost-plus element (thereby reducing prices) and steps could be taken to integrate the electricity markets since they are already interconnected via Moyle. But, of course, Britain is going to an energy basket case in a few years and we shouldn’t get any closer than we have to. We’d prefer to pay a fortune to connect to France or Scandinavia. 4. There is a passing reference to “constraints arising from the small size of the market” (p14), but consideration is confined to the possible development of hedging instruments and the cost implications of these constraints and the resulting economic organisation of market participants is not explored. All in all, a statement which contains much that is of use, but it unfortunately fails to identify the policy and regulatory failures that add 10 to 20% to Irish electricity and gas prices. Page 29: Transport accounts for 36% of energy used in Ireland.’ ‘(the) transport sector in Ireland is almost completely reliant on oil for energy consumption.’ This is of concern. What does ‘completely reliant’ mean – 100%? If there were a significant and sustained increase in oil price – say to $100/bl – and its possible, then we have a major problem. What proportion of our economic activity would be adversely affected by increased costs for road users? The main concern of the report is on electricity generation. This is fine as far as it goes, but electricity will not deliver the food and fuel to the consumer. It will cook the food and pump the fuel. But you have to move them from depot to point-of-sale. No mention of Export-land Model of fossil fuel depletion and nett exports, and how this will impact on our energy security. No mention of ERoEI – since not all energy sources are the same: get different outputs from different sources. By the way, sustainability mandates a steady, annual declension in total energy use! Lower energy use means lower economic activity! Everyone comfortable with this scenario? Brian P Thanks for the link Philip. I am looking forward to reading this. I thought John Fitzgearld’s sidebar on back page of the Sunday Tribune was a good read last Sunday and hit a lot of key points about Ireland and the need for competitiveness. Very reasonable if not completely bland in some sections. I was expecting some short term blinkered analysis claiming the need to stop investment, but I was pleasantly surprised. @ Richard There is always tension between the three legs of the energy stool. When looking from a purely cost basis, paralysis would be induced when thinking of renewables. The vicissitudes of the oil market make capital investment very hard without government support. Which brings in the other two legs and we ‘internalise the externalities’. The only tool economics allows is the use of a carbon tax. How much in €/ton carbon do we allocate for the potential adverse effects of an oil/natural gas supply shock? How many € for climate change? There’s another factor in that, for wind generation, the price of energy is known for the next 15 years once installed. This price certainty surely yields a premium over the fluctuations of oil/natural gas, how much? There’s evidence in the CER’s Impacts of wind on SEM (http://www.allislandproject.org/GetAttachment.aspx?id=20cff228-2b30-48af-af07-539a3c65523c) that wind does not invoke REFIT when oil (natural gas) is at $100/barrel. Oil today is at $71/bbl, the IEA forecasts an average of $100/bbl out to 2015 in it’s 2008 Outlook with the potential for damaging spikes. I was wondering if you had come across any other break even $/bbl analyses for wind? It’s certainly not the $200 being bandied about in Indo articles such as this (http://www.independent.ie/business/irish/economy-will-pay-high-price-as-esb-turns-to-wind-power-1724033.html). A recommendation that stood out to me was to have the ESB and Bord Gais advise households on energy efficiency and to be incentivised to do so by the CER. I know they have very small scale programmmes at the moment, but do you think that energy companies being increasingly proactive would be a good idea? To my mind that would lessen information asymmetries and in certain cases if they extended capital and levied it on leccy bills, it might increase uptake. “There’s another factor in that, for wind generation, the price of energy is known for the next 15 years once installed.” Well its price is certainly guaranteed…. from the report “Onshore wind in Ireland receives a guaranteed price of €64 per megawatt hour over a 15 year period. In 2008/2009, this did not add to final consumer electricity costs as the wholesale price was higher (due to the high fossil fuel prices) than the guaranteed price at the time. However, in recent months the wholesale price for electricity has declined significantly and the gap between it and the fixed price for wind will have to be paid by the consumer.” Check out this graph…. http://www.eirgrid.com/operations/systemperformancedata/windgeneration/ I think an independent expert look at current energy policy taking into account actual performance of wind, comparing energy costs against our neighbours and reviewing CER policy would be invaluable. Who regulates the regulators? @Garry “I think an independent expert look at current energy policy taking into account actual performance of wind, comparing energy costs against our neighbours and reviewing CER policy would be invaluable. Who regulates the regulators?” I agree, there is a whiff of bubble-era economics about our energy policy. REFIT means that wind power generators can realise guaranteed profits while consumers bear the risk. The scale of the proposed WPG (6000MW +) is a big unhedged bet on the direction of electricity prices. Of course, we know that electricity prices only ever go up … what could go wrong? @Garry I didn’t find the graph particularly alarming. The reduction during the night is beneficial. The fact that the wind wasn’t there for the morning ramp up is only an issue if the forecast said it would be there. Forecasts are reasonably accurate and getting more so. Forecasts will be wrong sometimes, and the wind will occassionally drop dramatically over a relatively short period of time. This does not preclude using wind. At the moment conventional generators drop out in a split second due to a technical fault or whatever and the system handles it. I’m aware the REFIT will be paid out to the projected tune of €63 million this year. The policy of providing guarantees to wind can be thought of as a government hedge on the future price of oil because finance for wind farms is only obtained when revenue is guaranteed. The IEA thinks there is significant risk to the upside. Deutsche Bank just released a report projecting $175/bbl in 2016 (http://blogs.wsj.com/environmentalcapital/2009/10/05/peak-oil-the-end-of-the-oil-age-is-near-deutsche-bank-says/). Merrill Lynch says ‘well over $100 in 2011’ (http://money.cnn.com/news/newsfeeds/siliconalley/green-tech/merrill_oils_shooting_to_100_next_year_2009_10.html). Now obviously these reports are ten to a penny and are nearly always wrong. But on the balance of probabilities oil is going higher, would you not agree? I’m not sure who the independent expert you suggest would be. The CER is currently reviewing its policy, do you not think it is capapble of balanced analysis? @Eamon…. Yes, the forecast needs to work for both inputs and outputs. The there are the issues for having the backbone on hot standby etc. Depends on what the backbone is ad ramp up times etc… I imagine ramp up time for gas is less than for coal/peat etc….and there are emissions costs for warmup vs hot operation… The spirit of Ireland idea is worth investigation as prediction and storage are the key problems when using intermittent power sources. On finance …. the country is small enough that I dont think the argument “the wind is always blowing somewhere holds true”… Also, I suspect that the same could be true if we included the UK with us, which would mean that when we had surplus to export, I expect the price to drop…and if we needed power, the UK would too….which has implications I’m not saying it cannot be done….I expect oil to go higher and Putin to shut the gas pipeline one cold morning…. But we need a new energy backbone to cut our dependency, and policy should reflect that. Doesn’t matter how may turbines we put up, it wont be enough on some days, and if we put up tens of thousands, someone pays for the excess capacity when the wind is blowing…. @Eamon.. No, I don’t believe the CER is capable. Who regulates the regulators? Examining the economic arrangements that might increase energy efficiency, security of supply and reduce carbon emissions is interesting and relevant, but it probably won’t take us very far until the economy-damaging and dysfunctional policy, regulatory and ownership arrangements for electricity and gas are addressed. Let’s say the combined industries receive revenues of €6 billion to supply electricity and gas. Financially ring-fencing the state-owned networks and requiring them to increase borrowing up to between 60-70% of net book assets (this is typical for unbundled, regulated network businesses internationally) would release between €2.5 – 3 billion of State equity into the Government’s coffers. In these straitened times, this is not an amount to be sneezed at. Privatisation of the networks would generate a further €2 – 2.5 billion. Deriving network revenues on the basis of the book values of assets (as presented in the ESB’s Summary Regulatory Accounts) and taking steps to integrate the British and Irish markets could generate annual savings of up to €500 million out of the total €6 billion bill to Irish businesses and households. This is in addition to taxing away the €300 million carbon windfall being captured by the ESB up to 2012. And VAT at 13.5% could be reviewed in the context of a carbon tax. The proceeds to Government cannot but be of benefit and this level of savings would have a significant impact on household budgets, economic activity and the overall level of prices. And half the proceeds and half the savings could be achieved, quite literally, at the stroke of the relevant Minister’s pen. Perhaps citizens are prepared to accept these costs, but I think they should be aware of them. In framing any energy resource policy and its future delivery of Kw/hr and revenue flow, you must consider the energy cost – that is the actual amount of energy you have you to expend to; (a) build-out the generators, (b)maintain them, and (c) replace them as required. You have to try to avoid over reliance on the the financial/accounting mode – its easy to understand, but may be quite misleading. Energy resources are strictly limited. They will become more scarce in time. Its not a question of whether you will be willing and able to pay the money cost of the build, etc. Rather it is, will you be able to access the type of energy you need within the time frame you need it. Tricky problem. Building-out a semi-renewable energy generating resource will certainly require a lot of electricity – but it will also require a lot of liquid transport fuel as well. Hence you will be deducting out the electrical energy you need from your normal domestic and commercial load – which means you need extra energy!!! So you had better attend to this asap. As for liquid transport fuels; I have a bad feeling about their continued availability in the quantities we are currently accustomed to. We’ll see. I also would have some concerns about the amount and availability of material resources required to build-out any new energy generating capacity – whether its wind or water powered. If everyone decides to go the semi-renewable route! Brian P Anyone going to this? What’s Smart About Ireland’s Smart Economy? Panel Discussion – Wednesday, 14 October 2009, 6pm Venue: City Hall, Dame Street, Dublin 2 see RIA website for details/booking. Comments are closed.