Further Memorandum submitted by the Director
General of Electricity Supply for Northern Ireland
You asked for an explanation of the difference
in the estimation, between NIE and ourselves, of the supply and
generation components of the domestic electricity bill. I apologise
for the delay in responding but it took longer than I anticipated
obtaining all the information we required.
Apart from Transmission and Distribution (T&D)
costs NIE has two blocks of costs to recover from its customersnamely
the revenue for the Supply Business allowed by the Price Control
and secondly the costs of generation. How these costs are allocated
between customers is largely a matter for NIE and is decided each
year when they set tariffs.
Our methodology differed from NIE's in that
the residual for our calculation was generation costs, whereas
in NIE's calculation the residual was the supply margin.
Since the Bulk Supply Tariff on which generation
costs are priced for customers is itself a construct we believe
our approach is on a strictly cost reflective basis the more logical
Our estimate of the breakdown of the average
domestic bill therefore gave the following results:
A 3,300 kw/h average consumption
per annum a unit charge of 9p/KWh and a total bill of £297.
Use of System (UOS) charges of £117
per annum derived from use of system charges to domestic customers.
A cost reflective supply margin of
£17 per annum based on information originally supplied by
NIE to the MMC in 1997.
A residual generation charge of £163.
Our reasoning is supported by information supplied
to us by the Electricity Association about cost allocation in
GB in 1998-99. This gives the following results for a 3,300 kw/h
|| 29 per cent|
|| 4 per cent|
|| 59 per cent|
|Fossil Fuel Levy|| £2.56
|| 1 per cent|
|Supply|| £18.06|| 7 per cent
|Total||£258.00||100 per cent
NIE derived a figure of £9 for its supply margin based
on 3,300 KWh consumption per household. It was and remains Ofreg's
view, however, that a fully cost reflective margin for the Supply
Business based on average allowed price control revenue per unit
is closer to £15 per household.
In practice, however, as the average domestic customerbecause
of larger household sizes and the absence of gas for cookingin
Northern Ireland consumes 3,700 KWh, NIE collects £14 per
average domestic customer ie, enough to allow the Supply Business
to cover its costs.
NIE's approach appears however to result in undercharging
some domestic sector customers and overcharging domestic customers
who consume above average amounts of electricity. As the resulting
cross subsidy is entirely contained within the domestic sector
I have supportedand would continue to supportwhat
NIE is doing because it would have the effect of incentivising
domestic customers to invest in energy efficient appliances and
reducing prices for consumers of below average amounts who are
more likely to be low income households.
But this approach is also manipulative in that it slightly
disguises the extent to which the domestic price divergence with
GB is increasingly caused by high T&D charges rather than
crude generation cost divergence. Although the latter continues
to be an important cause of price divergence its effect is much
more significant in the industrial and commercial sectors than
in the domestic sector. (The next distribution price control in
England and Wales will mean that NIE's T&D charge for the
average domestic customer this time next year will be £115
(in 1999 prices) or almost double the figure in England and Wales
which will be about £67.)
I have now obtained all the information I require from NIE
to publish my Report into the Boxing Day storms. This will, I
hope, be a comprehensive report and will not as I had originally
feared be in two parts. I hope to publish it in the last week
in July and I very much regret that due to the pressure of work
in Ofreg at present it has not yet been possible to finalise this
9 July 1999