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Northern Ireland Electricity Market Economics Essay

The backbone of the Northern Irish Economy, its electricity market, has undergone huge transformations in the past quarter century, but have these changes been entirely worth it? This report will look at how the market operates, the different processes that occurred as the electricity supply changed hands from public sector to private, comparing the NI market to those further afield, and weighing up the benefits of changes and how the market can be further improved.

Until 1992, all of Northern Ireland’s electricity was generated, supplied and distributed by the one provider, Northern Ireland Electricity (NIE). NIE operated in the public sector, so was therefore state owned. In 1992, under Margaret Thatcher, NIE was floated on the London Stock Exchange and went into private management.

The electricity supply in Northern Ireland is made up from several sources. Three coal-fired power stations exist at Ballylumford (Larne), Kilroot (Carrickfergus) and Coolkeeragh (Londonderry), whilst electricity is also provided from a variety of wind farms across the province. At the mouth Strangford Lough an underwater generator also converts currents from the sea into electricity for the Portaferry and Strangford areas of County Down. On top of that, the Moyle Interconnector in the North East connects the Irish electricity grid with the Scottish grid.

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All these different sources supply electricity into the single electricity market, or SEM, the grid onto which all electricity in the entire island of Ireland is generated. Northern Ireland has three companies that hold a license to transmit electricity from power stations etc. to substations, by which the electricity is then supplied to households and firms. Northern Ireland Electricity holds one of these licenses, as well as the owners of the Moyle Interconnector, Mutual Energy Ltd. The third license is held by the Systems Operator for Northern Ireland, or SONI. As well as holding a transmission license, SONI hold the single market operator’s license for Northern Ireland, allowing them to allocate the electricity supply to where it is demanded, given the difficulties of electricity storage and to accommodate for the constantly fluctuating demand for electricity.

Thanks to privatisation and the emergence of the all-Ireland electricity market, there is now healthy competition for all aspects of the electricity industry, and providers such as Airtricity and Budget Energy have been able to compete alongside Power NI (formerly NIE) to supply electricity to households due to a favourable marketing environment which protect consumers’ interest and provides a better supply of electricity.

Privatisation of NIE will introduce new participants into the power industry and give opportunities to new companies, which consequentially reduces the price of electricity for consumers. Employees and consumers can also obtain shares which allows them to have say in the decision making process of organisations and therefore electricity prices.

One of the main purposes for privatising an economy is to promote competition but as there are only a few electricity providers in Northern Ireland, they tend to obtain some monopoly power therefore firms will often try to maximise their profits, forgoing economic efficiency and consumer welfare for example the monopoly run by NIE which controls the major assets of T&D activities in Northern Ireland. That’s why the utility regulator is put in charge of regulating the monopolistic parts of the market by imposing price controls. One of the main purposes of the regulation of the electricity market is to protect customers’ interests by keeping the costs low for them.

Average annual domestic standard electricity bills for Northern Ireland (1)

Â

Â

Standard credit

Direct debit

Prepayment

Â

Â

Northern Ireland

Northern Ireland

Northern Ireland

Cash terms

Â

Â

Â

Â

Â

1990

261

Â

..

Â

275

Â

1991

Â

283

Â

..

Â

300

Â

1992

Â

302

Â

..

Â

324

Â

1993

Â

312

Â

..

Â

337

Â

1994

Â

325

Â

325

Â

351

Â

1995

Â

346

Â

346

Â

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373

Â

1996

Â

362

Â

362

Â

389

Â

1997

Â

352

Â

352

Â

375

Â

1998

Â

326

Â

317

Â

345

Â

1999

Â

326

Â

317

Â

345

Â

2000

Â

308

Â

299

Â

314

Â

2001

Â

317

Â

307

Â

329

Â

2002

Â

325

Â

315

Â

321

Â

2003

Â

325

Â

315

Â

320

Â

2004

Â

329

Â

319

Â

325

Â

2005

Â

338

Â

325

Â

330

Â

2006

Â

360

Â

346

Â

351

Â

2007(5)

Â

377

Â

363

Â

367

Â

2008

Â

456

Â

438

Â

444

Â

2009

Â

514

Â

495

Â

501

Â

2010

Â

496

Â

477

Â

483

Â

2011

Â

523

Â

504

Â

510

% Change

Â

2007-2011

Â

+38.7

Â

+38.8

Â

+39.0

Â

2010-2011

Â

+5.4

Â

+5.7

Â

+5.6

This table show us that before privatisation in 1992 prices of a customer’s average bill were rising. Then when privatisation happened and regulation was implemented prices continued to rise with around a 40% increase from 2007-2011. This means that regulation in Northern Ireland hasn’t protected customers’ interests, the regulator is meant to do the job of market competition by keeping prices down. The price rises can be explained by a rise in the cost of fuel but part of the problem is due to inefficiency in the regulatory process. Inefficiencies like the absence of proper interaction between the bodies involved when deciding regulatory policy every 5 years, instead it’s more a case of overuse of information requests. Another one would be the lack of proper site visiting to inspect assets whenever decisions are being made. The regulatory process also places an emphasis on keeping costs low to pass on the benefits to customers but this can lead to a lack of will in allowing more spending on investment and research and development which could lead to more efficiency in the market and more benefits to the consumer.

Created from data from

http://www.decc.gov.uk/en/content/cms/statistics/energy_stats/prices/prices.aspx -Quarterly energy prices table- Average annual domestic electricity bills for UK Countries

Building Competitive Markets

The Department of Enterprise, Trade and Investment, the Northern Ireland Authority of Utility Regulation and the European Union have a goal in creating more competition within the electricity market. The main objective is to create a single energy market operating in Northern Ireland and Republic of Ireland. This will allow free trade in goods and services, increased mobility of labour and free movement of capital. In theory this should create more competition and enhance productivity, therefore an increase in supply and a reduction in prices.

Ensuring Security of Supply

The next goal of the SEF is to ensure security of the supply of energy. The DETI believes that ‘a more diverse energy mix is a more secure energy mix, less vulnerable to fluctuations in the availability of any one fuel.’3 Diversifying the range of energy will increase the supply of electricity as there are more substitute goods, such as gas, oil and renewable energy entered into the market. The development of gas storage will be used to increase supply of electricity generation and gas consumption during the winter when demand is high.

Enhancing Sustainability

The DETI believe that enhancing sustainability is a goal, which will help Northern Ireland in reducing prices and demand for energy. They plan to do this by increasing the consumption of renewable energy through increasing the amount of wind farms, increasing the growth of bioenergy and the development of deep geothermal heating. For example Northern Ireland Government plans to devote 10 billion pounds developing green resources before 2020.

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Developing Our Energy Infrastructure

In order for Northern Ireland to fully utilise it’s newly developed renewable electricity resources, the DETI are investing into the electricity grid. Improving the electricity grid will make it able to handle greater capacities of electricity and making energy transfer more efficient. This would lead to lower costs for electricity firms as there will be less energy lost when supplying consumers. The decrease in costs may lead to lower prices therefore more electricity may be demanded and consumed.

3http://www.detini.gov.uk/strategic_energy_framework__sef_2010_-3.pdf

Most notable throughout is a consistent development of electricity being generated from renewable sources, for example generation from wind and water turbines which are more environmentally friendly, these forms result in a diversion away from the traditional sources of energy e.g. gas, oil and coal.

There are various different factors that affect the supply and demand of electricity for instance;

Currency exchange rates

Availability of transmission lines.

The graph above illustrates that the highest level of demand for electricity is during January and December, the most probable explanation for this is our cold winter climate alongside the darker evenings in comparison to summer months.

Countries nearby with harsh weather conditions are likely to import electricity from Northern Ireland (N.I) therefore demand for electricity will increase from time to time. Scotland and Wales are also net exporters of electricity. England imports electricity from both countries and from continental Europe, this is likely to be as a result of their electricity supply being unable to meet demand. The graph above indicates a consistent growth in N.I for exports from the periods 2002 – 2008. However 2009 saw a decline in demand which may be due to countries sourcing cheaper electricity supplies than N.I.

The above pie chart represents electricity consumption in 2010 for Scotland, Wales, Northern Ireland and England. Evident is that England has the highest demand for electricity. Factors which may influence this is England’s larger population, England comprising a large proportion of the secondary sector.

It is imperative that England’s electricity companies are unable to meet the demand required therefore they rely upon exports.

From an analysis of the above illustration, England’s demand for electricity is beyond the others. Northern Ireland demands the smallest quantity of electricity possibly due to a population of only 1,810,900 whereas England consists of a population of 53,013,000, therefore their greater demand for electricity is unsurprising.

Elevated rainfalls in winters 2007, 2008 and 2009 instigated an increase in hydro generation. Evident from the above is that Scotland’s share is significantly larger in comparison to other parts of the UK this is likely to be due to wind generation increasing by over a third subsequently increasing the capacity of Scotland renewables’ share. However Scotland’s renewables’ share declined by 1.8 per cent in 2010 mainly due to the decrease in rainfall.

The “average household electricity bill in N.I during 2010 is estimated at £496 per annum…..this compares with an average bill during 2010 in England and Wales of £431 per annum, and £457 per annum in Scotland for similar customers and annual usage.” [1]

Whilst making comparisons of electricity prices between N.I and Great Britain it is essential to acknowledge the nature and size of the respective markets in addition to the differing operating costs involved.



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