Letter from the Clerk of the Committee
to the Northern Ireland Office and the Response of the Director-General
of Electricity Supply for Northern Ireland
I note from the recent Departmental Report that
the Director General of Electricity Supply has been set a performance
target of reducing the average cost per household of electricity
to consumers in Northern Ireland to £253 per annum by 2002.
I should be grateful to receive, as soon as possible, some clarification
of this target, as set out below:
When was the target set; by whom;
and how was the figure of £253 determined?
Whether the figure of £253 is
a cash figure, a figure expressed in March 1999 price terms, or
a figure based in any other price terms?
What assumptions, if any, have been
made about the relative contributions to achieving this objective
from reductions in generation costs, transmission and distribution
costs and supply costs respectively?
Whether this objective is intended
to be met in advance of, or as a result of, the April 2002 revision
of the NIE price control.
28 April 1999
RESPONSE OF THE DIRECTOR GENERAL OF ELECTRICITY
SUPPLY FOR NORTHERN IRELAND FOR CHRISTMAS AND NEW YEAR HOLIDAY
I am responding to the Northern Ireland Affairs
Committee questions concerning the performance target of reducing
the average cost per household of electricity to consumers in
Northern Ireland to £253 per annum by 2002. In order to clarify
this target I will answer the questions in turn in the order in
which they were contained in the letter:
I set the target in September 1998
in my capacity as Director General. The figure of £253 net
of VAT was a target set for the annual domestic electricity bill
in Northern Ireland at 2002 and was based on the average annual
bill charged to the average GB customer on the standard domestic
electricity tariff in 1998-99.
The target was therefore in 1998-99
I chose the GB average bill as a
target as I felt a reduction in the NI domestic bill to this level
could be largely achieved through the renegotiation of the electricity
generation contracts at the two main power stations (Kilroot and
Ballylumford) as these two power stations would be contracted
to the franchise market. Currently, a reduction of around £60
would be required to bring the NI and GB domestic bills into line.
This year the NI bill is £297. The proposals on the table
at the moment from the generators for restructuring their contracts,
and my consultant's modelling of these, suggest that there may
be a reduction of up to £27 available from generation contract
renegotiation. At the time of setting the target I also expected
a further reduction of £6 per annum in the domestic bill
from the implementation of my original NIE price control for its
Transmission and Distribution Business, which was at the time
the subject of an appeal by NIE in the courts. I have lost this
appeal and the MMC price control is now in force. My calculation
also assumed that the Government would use the £40 million
available to reduce electricity prices to buy down the generator
contracts. While industrial customers would be the main beneficiary,
there would be a benefit to domestic customers of about 1 per
cent, or £3, per annum.
My assumption therefore would be
that the main contribution to achieving this target would and
still will, come from renegotiation of the generator contracts.
I do not expect any further contribution to achieving this target
to come from reductions in transmission, distribution or supply
costs. I therefore intended that this target should be largely
achieved and met in advance of the April 2002 revision of the
NIE price control. In my view, the contribution of the 2002 price
control will be to close the T&D gap which will then exist
because of the 2000 Distribution price control in England and
Wales. I do not regard the figure I have set for reductions in
generation costs as particularly ambitious. The detailed calculation
is set out in the annex.
NI average domestic customer's bill in 1999-2000
is estimated to be £297 for the average consumption of 3300
This bill is made up of:
The average cost of generation is therefore 4.9p.
In real terms T&D charges fall by 2 per cent per annum
and Supply by 2 per cent.
The target of £253 therefore is arrived at as follows:
|--||£ 7||T&D 2% real reduction for 3 years
|--||£ 1||Supply 2% real reduction for 3 years
|--||£ 3||Benefit of £40m
|--||£ 6||Assumed benefit of DGES price control
|--||£ 27||Reduction of 0.82p in generator costs or 18%
The bill would be thus
The 1998-99 GB bill was
The achievable lower cost of generation in the NI figure
is because in 1998-99 the GB domestic customer did not receive
the lowest possible cost generation.
7 May 1999