Bogtec (continued)

The recently signed Memorandum of Understanding between Ireland and the UK on wind power has led to excited talk of tens of thousands of new jobs and billions in tax revenue and expert earnings. How realistic is that?

The Memorandum itself is silent on the implications of the deal. Pat Rabbitte and Ed Davey agreed to negotiate a treaty under the Renewables Directive. There are targets for renewables for all Member States of the European Union. Some countries will easily meet these targets, but most won’t. Under the Renewables Directive, Member States with a renewables surplus can sell this to the highest bidder or to an exclusive buyer.

Ireland may have more wind power than it needs. Ministers Rabbitte and Davey intend to enter into an exclusive agreement. This is obviously attractive to the UK. It is not obvious why Ireland would want this, rather than let the Brits compete against the French and the Poles. The first contours of the plan emerged shortly after the UK offered soft loans to bail-out Ireland’s public debt.

The UK cannot meet its renewables obligations. It cannot ignore these targets because the coalition is fragile enough and relations with Brussels already tense. Great Britain has plenty of wind, but people have effectively used the planning system to stop the erection of new wind turbines. So, the plan is to build turbines across the Irish Sea and transmit the power via a dedicated grid to England and Wales.

The Midlands are the leading candidate to build these new turbines. The plan is therefore known as Bogtec, after a similar plan involved the Sahara called Desertec. New wind capacity may amount to 5,000 MW. The current installed capacity is 1,700 MW.

Long distance power transmission is expensive. The East-West Interconnector cost 600 million euro. It has a capacity of 500 MW. Similar interconnectors elsewhere cost 200-300 million euro. Assuming that the Brits will not pay for gold-plating, the bill for the undersea cables alone would be 2-3 billion euro.

The delayed new North-South Interconnector will have a capacity of 400 MW. People are already up in arms against the planned pylons. Transmission from the Midlands to the sea will need 12 times as many pylons.

The potential benefits of Bogtec for Ireland are unclear. The more optimistic estimates aim to impress voters and politicians. Wind power does not generate a lot of employment. Estimates often ignore the jobs lost in thermal power generation, and the jobs destroyed by dearer electricity and higher taxes. There certainly are jobs in “sandwiches and concrete” as Pat Rabbitte put it. The more attractive jobs, however, are in manufacturing and in designing new turbines. There is overcapacity in wind turbine manufacturing, so companies would hesitate to build a new plant in Dublin Port – even if Ireland would suddenly discover its talent for mechanical engineering.

Export earnings depend on the selling price. The REFIT tariff in England and Wales is 25 c/KWh for small suppliers. The retail price of electricity is only 18 c/KWh, the wholesale price 6 c/KWh. If Irish wind farmers are paid the wholesale price minus the cost of transmission (2 c/KWh), revenue will be around €0.5 billion per year. Higher revenues will be at the mercy of the generosity of British subsidies.

If manufacturing jobs are in Denmark and revenues low, the government will not see much tax revenue. No royalties are paid on wind. Bogtec does not appear to be a great deal for Ireland.

Wind farms have real costs. They can spoil the landscape, affect wildlife, and disturb people living nearby. Do the benefits outweigh the costs?

There is not much information on Bogtec. The government has yet to publish an impact assessment, but it protests only meekly against the fantastical claims put forward by companies hoping for subsidies. Evidence is not the strongest point in Ireland’s energy policy. Paul Hunt has shown that energy policy in Ireland is run for the benefit of the state-owned energy companies and their workers, Minister Rabbitte disagreed. Mr Hunt’s analysis is based on data. Mr Rabbitte promised data, but has yet to deliver.

People that could be affected by the new turbines fear that planning regulations will not protect them. Indeed, Bogtec exploits the difference in planning between England and Ireland. The UN has ruled that Ireland’s National Renewable Energy Action Plan violates international planning standards. The High Court has agreed to hear this case in March.

Bogtec is a good deal for Britain.* Is it a good deal for Ireland too? We need to know before we proceed. Why is an exclusive deal with the UK better than selling to the highest bidder?  Is Bogtec related to the bail-out? Will the Irish government or state-owned companies invest money in Bogtec? What is the expected rate of return? What if UK subsidies are less generous? Will planning properly protect households? In the past, the Irish government repeated sleepwalked into a bad deal. It is time to kick that habit.

* Well, it is a good deal for Britain given the corner it has painted itself into. Without political constraints, the best solution would be to ditch the Large Combustion Directive and replace coal with gas over a 15 year period or so.

Bogtec

Yesterday, Pat Rabbitte and Ed Davey signed a Memorandum of Understanding. The MoU is crafted in terms of the Renewables Directive, which allows EU Member States to pool their targets. Essentially, the MoU gives the UK an exclusive claim on any excess (wrt target) renewables that Ireland may have. A monopsony is good for the buyer, but less attractive to the seller. Either the Irish government has little faith in the emergence of a market for renewable obligations, or perhaps Ireland felt it needed to do the UK a favour, for instance in return for the bailout.

The MoU does not specify any project, but there is an expectation (see here and here) of large wind farms in the Irish midlands, transmitted to England and Wales via a dedicated grid.

This is intriguing. Midland winds are not particularly favourable, and definitely cannot compete with the winds of England and Wales once the costs of long distance transmission, including an undersea cable, are accounted for. This project only makes sense when you consider the difficulties in building wind turbines in the England and Wales. Ireland’s comparative advantage is the weakness of its planning regulations.

There have been some exaggerated claims about the benefits for Ireland. Few jobs would be created here. There is no reason to assume that wind turbine manufacturers would set up shop in Ireland. Even the more lucrative parts of construction may well be done by specialist teams flown in from abroad.

Export earnings depend on the price. In England and Wales, feed-in tariffs are about 25 c/KWh for small, domestic suppliers. It is unlikely that large, foreign suppliers will be offered similarly generous conditions.

Profits are likely to be taxed in Ireland, but need not benefit Irish shareholders. There are no royalties on wind (and EU competition law prevents the introduction of royalties on wind-for-export only).

The wind power companies would need to lease land, but as the name of Bord na Mona is often dropped, this may be at a concessionary rate.

From an English perspective, this agreement makes sense in a narrow way. The choice is between yet another conflict with Brussels (if the renewables target would be ditched — the sensible thing to do), a reform of planning regulations, or a deal with the Irish.

From an Irish perspective, it is hard to find anything to commend this plan.

Energy could be so much cheaper

Gas interconnection

The Celtic Tiger died five years ago. The economic crisis hurts. The end of the pain is not in sight. So you would think that the government would do everything it can to keep prices low. For energy prices, you would be wrong.

Natural gas is an important fuel for heating homes and cooking. It is also used to generate electricity. The gas used in Ireland comes via two pipelines. Bord Gais Eireann (BGE) owns and operates both interconnectors. BGE cannot abuse its market power because the Commission for Energy Regulation (CER) regulates the price. Each year, total costs are divided by the volume of gas transported. BGE is allowed a modest profit.

This simple rule was fine when there was one source of gas only. That will change. Eventually, the gas from Corrib will be brought onshore. There are advanced plans to build an Liquefied Natural Gas (LNG) terminal in Kerry. With LNG, Ireland would no longer depend on the European market, where gas is dear. Gas is cheap in North America because of the abundant shale gas. As gas transport is expensive, it would be cheaper still to exploit the Irish shale reserves.

The costs of interconnection with Great Britain are largely fixed. If another source of gas captures a small part of the market, BGE will spread its costs over a smaller volume. That is, BGE would raise its price. The competition would thus capture a large share of market, and be able to raise its price at the same time. BGE would be forced to raise its price again.

The CER anticipated this and has changed the price regulation. The CER should be praised. It is not often that a government agency locks the door before the horse bolts. However, the new regulations are not good for consumers.

In the future, the right to transport gas over the interconnectors will be auctioned. There is overcapacity now and probably in the future, so the highest bid will not be very high. Therefore, there will be a reserve price. And if BGE still makes a loss, a levy will be imposed on all importers and producers of gas. This levy will be passed on to consumers.

This arrangement guarantees the profits of BGE. It drives up the price of gas and electricity. And because it hurts would-be importers and producers of natural gas, competition is hampered and prices go up again.

Indeed, the Shannon LNG project was stalled earlier this week, primarily because of the new price rules. The CER in effect shielded BGE from competition at the expense of anyone who buys gas or electricity.

BGE is largely state-owned, but a minority share is owned by employees, who will directly benefit from the new CER regulation. The exchequer could benefit too, but state-owned companies in Ireland have a poor track record of paying dividends. Instead, profits are diverted to vanity projects of managers and politicians.

It would therefore be better if BGE gradually writes down the capital invested in the gas interconnectors, and compete in the market on the basis of its variable costs only. Gas and electricity would be cheaper.

The new pricing rules are not yet set in stone. It will be a few years before households will pay more for their gas and electricity. People will complain bitterly to Pat Kenny and #gasprice will trend on Twitter. But then it will be too late to change the rules. The CER should reconsider now.

Atlantic oil

After a long absence, oil exploration companies returned to Irish waters. There is oil in the Atlantic. Now that experience is growing with the ultra-deep oil off Brazil and Angola, there is increasing confidence that the oil in the Irish Atlantic too may be commercially exploited – although the water is colder and choppier.

This is good news. Oil exploitation brings well-paid jobs and welcome royalties. It is early days though.

Some commentators and politicians have jumped to the conclusion that there is an immense richness under the Irish seabed that is being plundered by foreigners, and have called for punitive taxes.

Fact is, a few companies are exploring for oil. They are losing money at the moment, and it will be ten years or more before they would see a return on this investment, if any. There are plenty of other oil provinces that look just as promising as Ireland. Shell’s troubles in Mayo are well known in the international oil industry, and the story of Shannon LNG is making the rounds. Talk of high taxes, even nationalization, may well scare off the next round of would-be investors in Irish oil. The goose will be slaughtered before it has laid its first egg, perhaps golden.

Wind for England

England has a problem. Power plants are aging, and no one is willing to invest in new ones. The European Commission has imposed stringent targets for renewable electricity. The plan is now to build a great many wind turbines in the Irish midlands, and transmit the power to England.

The wind blows harder in Ireland than in England, but this does not justify the extra cost of long distance transmission. Rather, locals effectively use the English planning regulations to block new wind turbines.

Transmission will be over a dedicated grid. EirGrid would not have to invest even more than it already does, and English wind would not be eligible for the generous subsidies on Irish wind.

So what does Ireland get out of this? Some construction jobs, fewer maintenance jobs, and more wind turbines to look at. It seems that England struck the better bargain.

Wind power should pay royalties, just like oil and gas pay royalties. England would contribute money to the Irish exchequer if they still want to go ahead.

Royalties would make wind power more expensive in Ireland too, another reason to switch to cheaper gas for power generation.

Paul Hunt had excellent comments on an earlier version.

An edited version (part 2, 3) appeared in the Independent. Without byline online but on paper there is apparently a picture and a wrong email address.

UPDATE: John Mullins, CEO of BGE, disagrees.

Exporting electricity

UPDATE2 Over on Twitter, Antoin argues that the plan as interpreted by me would violate EirGrid’s statutory monopoly.

Minister Rabbite yesterday announced plans to export wind power to Great Britain. This is a result of the energy summit organized shortly after the last elections. It now appears ready for public discourse.

The plan is simple. Build a load of wind turbines in the Midlands, where the relative lack of wind is made good by the relative lack of tourists and nature reserves, on land owned by Bord na Mona and Coillte. Build dedicated transmission lines to Great Britain. (The Spirits of Ireland hope that there will be pumped storage as well.)

The plan makes half sense from an English perspective. It is hard to get planning permission for onshore wind turbines in Great Britain. Onshore in Ireland plus transmission is cheaper than offshore in British waters. On the other hand, the plan is driven by the EU renewables target, which is pretty tough on the UK. With Germany abandoning its green energy plans (following earlier such decisions by Portugal and Spain) and with Theresa May wishing to ban Greeks from the UK, it is not immediately clear why the UK obeys the EU with regard to renewables.

It is not clear what is in it for Ireland: English-owned turbines generating power for England, transported over English-owned transmission lines. Dedicated transmission means that there are no benefits for Ireland in terms of supply security or price arbitrage. If the new transmission would be integrated into the Irish grid, Irish regulations would apply — and subsidies too, so that you Irish would sponsor my electricity bill. Ireland does not have royalties on wind power or transmission (and if it would, the same royalties should be levied on Irish turbines and power lines). That leaves some jobs in construction, fewer in maintenance, and 12.5% of whatever profits are left in Ireland for taxation.

It may well be that this plan is a quid pro quo for the UK contribution to the bailout of Ireland.

I am not convinced that the plan will go ahead. The English power market is in turmoil, and the companies may not be interested in an Irish adventure. Recall that the UK government also confidently announced that private companies would build new nuclear power. Well, they did not. The comparative advantage of Ireland in this case is the relatively lax planning regulations. Pat Swords may have put an end to that. But even the current planning regime can be used to block to an English adventure with no Irish spoils.

It is early days for this project still. It is worrying that the minister seems to think that more state intervention is required, and that the state still has money to waste. UPDATE: Paul Hunt points out that it is indeed the Government’s plan to intervene and subsidize: See the new energy strategy.

More academic thoughts on interconnection are here.

Gas interconnection

In December, I blogged about the peculiar pricing rules for the gas interconnector with Scotland. (The current rules would grant substantial market power to importers of LNG.

The CER has been aware of this for a while, and has now published a draft decision. The proposal boils down to the following elements:

  1. The interconnector will be moved, legally, from offshore to onshore. It remains to be seen that this would satisfy the European Commission, which is not happy either about the current regime.
  2. Interconnector capacity will be auctioned.
  3. There is a reserve price for the auction.
  4. The reserve price is the long-run marginal cost.
  5. If the auction do not cover the costs of the pipe-formerly-known-as-the-interconnector, the difference will be split over ALL gas suppliers.

Shannon LNG is understandably cross. They publicly fume about point 5, which will impose a cost on them that rises as they are more successful, but privately they must have hoped that the rules would not change. While I have argued that the rules should change, the current proposal can easily be spun as the regulator protecting a state-owned company from a private competitor.

Point 4 is worrying too. In the decision document, the CER goes back and forth between OPEX for the reserve price and OPEX+CAPEX. In the end, they opt for OPEX+CAPEX. Essentially, they propose to perpetually reward Bord Gais for what increasingly looks like a bad investment decision in the past.

Nothing has been set in stone yet. Let us hope that the CER will reconsider.