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SEM Chart of the Week

2019

NI electricity prices are rising – All you knead to know

Ruth Young
Ruth Young

Last week two of the largest electricity suppliers in Northern Ireland, Electric Ireland and SSE Airtricity, announced they are raising electricity prices for domestic customers by 8% and 6.9% respectively from 01 October 2019. These increases come days after the announcement from Northern Ireland’s largest supplier, Power NI, that they were also implementing an increase of 6.1% for domestic customers. The price increases across the 3 businesses will impact 88.9% of domestic connections.

Having compared the NI bill to the GB one two weeks ago, in this edition of SEM Chart of the Week, we investigate the contributing factors for the NI price increases.

Showstopper

As the dominant electricity supplier, Power NI are subject to price controls set out by the Utility Regulator (UR) in consultation with the Consumer Council and Department for the Economy. This determines the maximum price domestic customers of Power NI will pay for their electricity and the margin of profit that Power NI can make from their domestic customers.

In July, a review, carried out by the UR, of the tariff and contributing market conditions determined it was appropriate to set a new standard domestic tariff of 17.85p/kWh (ex VAT) for Power NI customers, representing a 6.1% increase from the previous year. The announcement had a domino effect within the supply market.

Technical challenge

Electricity prices for domestic customers are made up of four main costs, wholesale, network, policy and supplier. In Northern Ireland, the wholesale costs (fuel and market costs) represent the largest element, making up more than half of the bill for domestic customers. Network costs, the cost of transporting the electricity, represent a further ~ 30%. The remaining ~10%, is supply costs, the operating costs and margin of the individual supply companies.

Wholesale costs – Suppliers need to purchase electricity from energy markets for the end consumer. Usually, they purchase a large proportion of their electricity at a fixed price in the forward market as part of a hedging strategy, refining their position as it moves closer to real time. In SEM arrangements the supplier can purchase energy in a number of market time frames with varying degrees of price volatility. For Power NI, the UR approve the hedging strategy and price forecasts and will factor over/under recovery of revenues into the subsequent tariff period.

Network costs – made up of a number of charges such as;

  • Levies – e.g. System Support Service (SSS) charge, a charge per kWh for each unit delivered through the Transmission System;
  • Use of System charges (UoS) – costs of transmission and distribution of electricity through the NIE Ltd network;

Policy charge – NI Renewables Obligation (NIRO) costs – A charge to support investment in renewable energy in Northern Ireland

Supplier charge – refers to the operating costs of the supply companies e.g. salaries, IT systems, premises rent, profit margin (2.2% of forecast turnover) and pass through costs such as licence fees.

Signature Bake

The chart shows the breakdown of the average annual domestic bill for Power NI customers over the last five years, based on an average annual consumption of 3,200 kWh on the standard domestic tariff. The biggest varying factor between years is the wholesale cost, but an increase in UoS is also apparent.

So, what is driving the increase in the wholesale costs? Well, although wholesale prices have been dropping over the past 3 months, the winter of 18/19 proved to be a tricky time for Power NI. A culmination of demand forecast error, price volatility due to a sharp rise in gas prices, low wind output against seasonal norm and unplanned generation outages resulted in an under recovery of revenues.

Looking forward, a rise in carbon costs from £10/tonne to £24/tonne, is expected to offset, in part, the downward movement in global gas prices.

What else? The Imperfections charge, the mechanism to recover the cost of managing generation dispatch and constraints on the transmission system, also forms part of the overall wholesale cost and has increased substantially due to under recovery last year and the recalibration of the coming year. The TSOs have recently forecast an increase in Imperfections revenue of 53% for 2019/20 against last year citing new market arrangements and the increase of intermittent generation on the system as the cause, suggesting that this charge could increasingly impact customer bills.

And the UoS charges? A similar story is playing out for the Distribution Use of System (DUoS) costs which have increased due to substantial under recovery last year, RPI increase in the network owner, NIEN, allowance for DUoS charges and a fall in overall demand due to increase of PV panels and other energy efficiency measures.

The majority of price drivers are common across all suppliers so other participants in the market may soon join Power NI, Electric Ireland and SSE Airtricity in announcing tariff increases.

Whilst these announcements are disappointing for domestic customers, it would appear the rationale given for the latest price rise in Northern Ireland does stack up with changing costs in the sector and despite this increase, the standard domestic electricity tariff in Northern Ireland continues to be lower than the average in both GB and Ireland.

We will be covering the retail market in more detail as part our Introducing energy markets in Northern Ireland training course on the 16 October in Belfast. Please contact training@cornwall-insight.com for details.

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