This will be the first of our News and Views blogs looking at regulatory or policy changes to the energy market in Ireland. Some of these issues might seem complex on the surface, but they typically distil down into who, how and why should people pay for certain things. For each of these blogs, I’ll try to simplify concepts and remove or explain industry jargon.
This blog looks at a recent Commission for Energy Regulation (CER) paper which proposes a couple of changes to how companies purchase gas transmission capacity for their customers. Those purchases of gas capacity pay for the overall transmission network, transmission being the major pipelines that transport big volumes of gas from one location to another. Here is an illustration of the UK system up to the point of distribution from an old SSE annual report, which gives a pretty good overview of how gas gets around.
If you think about paying for a typical gas transmission system, most of the cost lies in paying for big pipes that have already been built; some would go toward new capital expenditure that would either extend the network or to replace bits that have been depreciated over time. Then a small proportion goes toward the operating costs, the running costs of the business and the variable costs associated with transmission – mainly compression and a bit of maintenance. So the split is probably about 90-93% ‘fixed’ costs and 7-10% ‘variable’ costs in economist speak.
This poses a bit of an issue for the customers of a transmission system: if you were running a big factory or a power station, you’d rather be paying your contribution when/if you were running and producing your product/electricity, rather than paying all the time for something you need occasionally. Usually, economic regulators deal with this by splitting out payment into ‘commodity’ and ‘capacity’ – you pay; say 40% of the cost of the network when you are consuming gas, and 60% of the cost is essentially fixed based on the capacity you expect you’ll need.
In Ireland the split is 90% capacity, 10% commodity – more cost reflective, but more of an issue for a customer who could be using lots of gas one day, and very little on another day – they could be paying the same network charges as someone who is running all the time. Customers have addressed this situation by transferring paid for capacity from where it is not needed to where it is needed.
Say your pharmaceutical factory receives a big order for a medicine for production in 4 month’s time. This will mean your production and gas consumption will double for 2 months. Rather than paying for double capacity for the full 6 months, you’d rather purchase spare capacity from other people who might be in a similar situation, so your supplier helps you out and looks for customers who have bought capacity but don’t need it in those two months. This is then transferred over to you. You get to pay for capacity when you need it, and the customer who has capacity they don’t need gets a bit of money back. The supplier that arranged the transfer takes a small fee for matching the two customers up. The transfer is a win for our pharmaceutical factory, which will remain competitive, a win for the person who’d overbought capacity and a win for the supplier who matched the two up.
Unfortunately, the CER is also facing a situation where the network owner (Bord Gáis Networks) is under-recovering on the revenues required to pay for the transmission system. My next blog will look at the ‘solutions’ they’ve designed and what they’ll mean for the slightly worried employees at our pharmaceutical factory.