Gormanston, Tarbert and regulation

The Examiner has a story on the proposed LNG terminal at Tarbert in the Shannon estuary. This is a privately funded project and a welcome stimulus for North Kerry. As long as the developers play within the rules, public policy analysts should have no opinion on such matters. But as the gas market is so heavily regulated, private actors affect the public good. The LNG terminal would, for instance, improve the security of supply, which is very valuable.

Minister Rabbitte argues that Shannon LNG would increase the price of gas. This is absurd at first sight. Increased competition should reduce the price. The minister is right, though. To see why, we need to consider the gas interconnector from Scotland that lands in Gormanston in Co Meath, or rather the way in which its price is regulated: The annual cost of the pipe is distributed over the gas it carries.

The interconnector is a competitor’s wet dream. If you capture a small part of the gas market, the interconnector will increase its price — because its annual cost is distributed over a smaller volume. You can then increase your price to just below that of the interconnector and gain yet more market share. And the interconnector will raise its price again.

The solution surely is to change the regulation of the interconnector rather than to block the LNG terminal. The current regulation, which may date back to the days of Minister Woods or Fahey, is a neat example of something that makes sense in the short run only.

Note the separation of powers. Minister Rabbitte is the executive branch of government and an influential part of the legislative, he appoints and controls the budget of the regulator, and he is the trustee for the shareholders (us) of the dominant company in the market.

26 thoughts on “Gormanston, Tarbert and regulation”

  1. re:
    “The annual cost of the pipe is distributed over the gas it carries.”

    As the interconnector was to ensure continuity of gas supply, the annual cost should have distributed by means of a levy on all gas supplied.

    Which genius came up with a pricing formula that could be manipulated by market participants on a weekly basis? How much does he or she get paid?
    Is there anything in this country that we get even half right?

  2. How do we end up in these situations?
    People are always saying that this politician or that minister is very intelligent (Varadkar and Mc Dowell (“intelectual giant” was the phrase I think) take a bow) IF this is so why do they do and say so many stupid things?
    Are we the only country that allows a situation where competition in a market increases the price?
    For to get cheaper electricity we had to increase the price!! A child wouldn’t come up with these things

  3. @Joseph
    This rule has been in place a long time. We need someone with a long memory to answer your question. My guess is that Michael Woods was the responsible minister.

  4. Just curious, how else to you get the annual cost of the pipe paid?

    Surely it must cost some amount of money each year to inspect, maintain and operate an interconnector and the system it feeds. Charging based on use seems sensible. Isn’t that what’s being done now? What is the alternative?

  5. @Kevin,
    I presume there is also a charge to service the capital cost of installing the thing.

    Perhaps Richard might like to enlighten us as to who would be on the hook for covering the capital cost of the interconnector if LNG importers drove it out of business. If the State is not directly on the hook, it might be better to let market forces take their course.

  6. What is the alternative?

    If we take the view that the interconnector is essential to our energy supply, then you should probably levy the cost of interconnector over all gas supply.

  7. Given the contribution that the LNG terminal will make to Irish energy security, perhaps we should also levy its costs over all gas supply, if we are going to do it for the interconnector.

  8. Interesting example about how a misguided policy can create all the wrong incentives for the market. Indeed, why didn’t the authorities notice that before? Were they manipulated by an interest group that wanted exactly this outcome? This is a bit too convenient to be an accident, or not?

  9. Given the contribution that the LNG terminal will make to Irish energy security, perhaps we should also levy its costs over all gas supply, if we are going to do it for the interconnector.

    The interconnector on any given year can fufill all our gas needs.

    The LNG terminal cannot.

    One is essential. One is desirable.

  10. Can anyone explain how the 50 million euros fixed charge for the interconnector should be paid for? That 50 million euros is a fixed yearly charge for the maintenance of the interconnector and has to be paid even if only 10% of its volume is used. If the interconnector went bankrupt and there was no interconnector would Shannon LNG then charge a “fair” price or a “monopoly” price to the consumers? I suppose Ireland is unique in that it is at the end of the pipeline and the gas only comes in to Ireland and does not go out of it which would tend to support the argument that the Interconnector is a strategic national asset which must be maintained. Shell will also have to contribute under the new proposals but their supply will only be good for 6 or 7 years from Corrib and then suffer a steep decline after that. Or do people think that Shell should also be exempt and therefore let the Irish gas consumer foot the bill again. I thought Bertinomics was dead. Long live Bertinomics.

  11. The Corrib gas field and some more LNG capacity could make the interconnector not just inessential but redundant.

  12. Security of gas supply is a public good. We should work out our collective willingness to pay, put a levy on all gas users, and use the proceeds to reward all those who provide security (proportional to their contribution).

    Note that the interconnector provides security of supply even when it is not used. It also keeps a check on predatory pricing by Shannon LNG and Corrib.

    We should not let the interconnector fall into disrepair, so. We should change its pricing regime.

  13. Hi Richard,

    By “We should not let the interconnector fall into disrepair, so. We should change its pricing regime” do you mean that Shannon LNG and Shell should be charged the tariff as is the pricing regime change proposed, or should not be charged the tariff as is the existing pricing regime?

  14. Of course, the cost of keeping the interconnector in good repair will be far less than the cost of continuing to pay for the cost of building the thing.

  15. Sorry Richard,

    I am a little slow. What does “as they benefit” mean? All consumers, even if they are not using gas from the interconnector would benefit surely. Could you give a straighter answer for slow people like me to the question I asked above please which is:

    By “We should not let the interconnector fall into disrepair, so. We should change its pricing regime” do you mean that Shannon LNG and Shell should be charged the tariff as is the pricing regime change proposed, or should not be charged the tariff as is the existing pricing regime?

  16. Not wanting to incite people i believe this is the kind of thing The Dork was on about (I am going out on a limb here because I have not a clue what the Dork is on about 90% of the time) but he seemed to be saying that projects like this or trains etc. (heavy capital expenditure projects) should not be looked on as current expenditure but rather as giant capital batteries that will give back their stored capital over time.
    i have no idea if they can be looked at like this but maybe you can enlighten me.

  17. @shaun
    “I have not a clue what the Dork is on about 90% of the time”
    At last somebody who understands 10% of the Dork’s pronouncements!

  18. @Shaun
    Sure at least 10 % of the time I am not sure what I am talking about so I find peoples criticisms fair sometimes.
    Recently I talked about how the Royal Navy spent 25% of HM Tax Revenue in 1914 – and back then it really was the tax receipts.
    Now people might rightly say this was a waste of money and it could have been spent on something else but it had certain dramatic side effects outside its primary colonial mission – particullary in technological , wage and skill levels in the commercial economy…. creating a positive feedback loop.
    The only non military endeavour on anything like this scale in recent times was the French civilian Nuclear programme during the 70s & 80s which ironically was a bank led non democratic thingy which is unusual now as the Anglo world prefers to do a kind of synthetic Oceanic exploitation / rundown game but they no longer have a technological capital base from which to build anything on.
    There is now tens of thousands of highly skilled well payed operatives in France which have a certain amount of redundency from the outside energy world – (importing uranium from Canada is not a big geopoltical risk) – what this means is that France does not import much coal and to a lesser extent gas and pay for this via a export drive much like how Germany operates now.
    Which is why Germany is so vulnerable – you see during depressions it is better to be slight trade defecit rather then trade surplus – the empire despite strike problems with the RN managed to close itself off from the rest of the planet during the 30s
    Ireland is not only exposed to oil & Gas fluctuations via its energy strategy but also its export oriented economic policey is exposed to the same dynamic – which means there is a very thin membrane between Ireland and the rest of the world and therefore negative feedback loops will magnify disturbances.

    PS people may laugh at my Tunnel dreams but the Commission via the Marco Polo fund are doing something small but significant.
    Another freight train is on a weekly trip via the Channel tunnel – this time bringing Veg to London via Southern Spain.

    http://www.rail.co/…/europorte-channel-runs-new-european-service-from-s...

    Also a video of the Polish / UK train
    http://www.youtube.com/watch?v=OooIxFg9xqQ
    They will be sorry before this is all over that they did not just keep building more tunnels with the same highly skilled crew but it was a COMMERCIAL OPERATION back then – making profits on utilties is madness , its a depletion game.

    This freight endeavour could not happen unless the infrastructure was already present.
    That tunnel has perhaps a 100 year + life , sure debt on the first 10 years may make a negative return but if debt free money was produced to build basic infrastructure whats the problem ?
    Its a Utility stupid ………………

  19. @John A
    The people who benefit should pay for security — that is, those who use gas to heat their house, and those who use electricity to blog.

    The money thus collected should be used to reward those who provide capacity — that is, the interconnector, the LNG terminal, and Corrib.

  20. @Tol
    You need to print money via CB high powered money before you can tax it ,its called defecit spending and if spent wisely will not increase real inflation i.e. peoples buying power & not the flawed CB metric which depends on wage deflation to sustain this absurity.
    This extreme austerity we are living through just leads to a slow depreciation of assets and lack of efficient utilisation of existing resourses so as to protect the tower of credit money depending on a smaller & smaller capital base to sustain itself.

    20 /30 years ago Europe started to munch on its toes , now its eating its vital internal organs so as to satisfy this wild credit hunger.

  21. @Richard
    Thanks Richard,
    I understand your logic now but just wonder what paying for the security of supply of three different sources would do to the consumer price of gas as opposed to the current one source since the costs of each will have a large fixed-cost element? Does that not amount to consumer/state-aid towards the new sources which would exacerbate the costs to the consumer from already supporting the interconnector? It seems the logic has not been thought through yet and that we are in a catch-22 situation.

  22. Regarding the benefits or otherwise of multiple sources of supply, my impression is that the BGE group of businesses is prone to generating excess profits and rewarding its staff excessively.

    It may be that there is so much fat available to be cut from BGE that greater competition can do more to drive prices down than an inefficiently utilised interconnector can do to drive them up.

  23. Richard, in your ESRI paper on the cost of natural gas shortages in Ireland you predict and quantify a large risk mitigation with more installed wind. However, in a previous article, you said there is no analysis beyond “hand waving” to support this position. Has your position on the PSO levy also changed?

  24. @Tol
    Did you read the excellent energy in Ireland paper 1990 to 2010 by SEAI ?

    What struck me was the Flow charts for 2010 with the role of Gas in particular
    Energy flow Gas inputs : 4,704KTOE
    Flow of energy for electricity inputs GAS :3,024KTOE
    Total electricity transformation / transmission loss : 2,445KTOE !!

    The use of large scale Gas for electricity generation is a criminal waste of resourses even if it is a much more efficient then other thermal sourses (coal / peat) it is too valuable to be wasted on electricity generation.
    With the new electricity inter connector operational we should have a 2 reactors doing this work with the Jet engines otherwise known as Gas fired power stations only used on a large scale when the Nukes are shut down for repair.
    Although I think its too late for that now – Britain is the priority, but anyhow the gas efficiency is false economics that justifies high profits for utilties

    A truely disastrous energy policey.
    And as for Transport / oil………………………..

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