Electricity sector in Northern Ireland Contents

3Brexit and the electricity sector

59.On 23 June 2016 the UK electorate voted to leave the European Union. This decision will have significant implications for Northern Ireland across a range of policy areas, including electricity. Given the high degree of interdependence between Northern Ireland and the Republic of Ireland’s electricity sectors—in particular through the Single Electricity Market—the decision to leave the EU has given rise to a number of important considerations in this area for the UK Government and NI Executive.

60.In our First Report of the 2016–17 session we examined the issues we believed were among the most relevant to electors in Northern Ireland when considering how to cast their votes in the EU referendum.60 This included an assessment of the future of Northern Ireland’s participation in the Single Electricity Market. We noted evidence from the Utility Regulator and SONI which suggested leaving the EU was unlikely to undermine the case for a wholesale electricity market on the island, and highlighted that non-membership of the EU had not been an impediment to Russia’s participation in an integrated regional electricity market with Finland and the Baltic States, or prevented Norway’s interconnection with the UK.

61.We concluded that, “We have not received any evidence to suggest that Northern Ireland’s electricity market would be detrimentally affected by a Brexit”.61 This remains the case, but in order for it to be so, the UK Government and its negotiators will need to be conscious of the unique energy arrangements which exist on the island of Ireland and prioritise Northern Ireland’s interests when determining its objectives for the UK’s future energy relationship with the EU.

62.The NI Executive appears to be fully aware of the challenges arising from Brexit for Northern Ireland’s electricity sector. In their letter to the Prime Minister of 10 August 2016, the then First Minister and Deputy First Minister wrote:

[ … ] energy is a key priority, given that there are inherent cost and supply issues in a small, isolated market so we will need to ensure that nothing in the negotiation process undermines this vital aspect of the economy.

63.The Prime Minister responded in October, affirming that she would ensure Northern Ireland’s energy needs will not be side-lined during the negotiations:

I also recognise the unique issues raised by the single electricity market [ … ] to Northern Ireland, and resolving these will be a priority for the Government. We are committed to working with you, with the Irish Government and with the EU to make sure that Northern Ireland continues to have access to an affordable, secure and sustainable supply of energy for business and domestic use.

64.The UK Government’s White Paper on ‘The United Kingdom’s exit from and new partnership with the European Union’, published in February 2017, also confirmed the Government’s commitment to protecting the Single Electricity Market on the island of Ireland:

We are considering all options for the UK’s future relationship with the EU on energy, in particular, to avoid disruption to the all-Ireland single electricity market operating across the island of Ireland, on which both Northern Ireland and Ireland rely for affordable, sustainable and secure electricity supplies.62

65.We welcome the Prime Minister’s acknowledgment of the importance of an affordable, secure and sustainable supply of electricity for Northern Ireland, and that this will be prioritised during the forthcoming negotiations with the European Union. There are, however, a number of issues which will need to be addressed by the UK Government if its commitment is to be realised. We summarise these in the following sections.

Internal Energy Market and the future of the Single Electricity Market

66.The Internal Energy Market was established to harmonise and liberalise the energy market across the EU, Norway, Iceland and Lichtenstein. EU legislation adopted between 1996 and 2009 has sought to address market access, transparency and regulation, consumer protection, supporting interconnection and adequate levels of supply.63 Participation in the Internal Energy Market requires ongoing alignment with the EU rules and regulations which govern it, including the Industrial Emissions Directive, restrictions on state aid, and the EU Emissions Trading Scheme.64

67.Since 2007, Northern Ireland and the Republic of Ireland have operated a Single Electricity Market (SEM), a wholesale market through which electricity is bought and sold on the island of Ireland through a mandatory pool. The SEM has brought considerable benefits to Northern Ireland, joining two small and relatively inefficient systems, to create greater economies of scale, cheaper electricity prices and improved security of supply. The new Integrated Single Electricity Market (I-SEM), due to come into operation in 2018, is expected to build on the success of the SEM, delivering increased levels of competition and transparency, lower prices for consumers, while further aligning the market with EU legislation designed to create a fully liberalised internal electricity market.65

68.Regulators and market participants are operating on the understanding that they will be participating in the I-SEM from 2018 and beyond. However, following the referendum, some believe the future viability of the I-SEM is now less certain, and will be largely determined by the UK Government’s negotiating priorities in its talks with the remaining members of the EU.66

69.As part of the Brexit negotiations, the Government will need to determine the future relationship the UK will have with the Internal Energy Market. It is a separate entity to the Single European Market, so the UK could seek to remain a member and be subject to EU legislation in this respect. Alternatively, it could withdraw entirely, or negotiate a new bilateral relationship. It could also negotiate a special status for Northern Ireland’s energy market, separate to that which will operate in Great Britain.

70.We were told the UK Government’s negotiating strategy could have a significant impact on the future viability of the I-SEM. As an EU Member State, the Republic of Ireland will continue to be subject to Internal Energy Market legislation. There are concerns that, if the UK decides to withdraw from the Internal Energy Market or does not seek for Northern Ireland a special status or derogation, then Northern Ireland and the Republic of Ireland will no longer be able to jointly participate in a single electricity market, as they will be operating under a different set of energy regulations and state aid rules.67

71.Of course, withdrawal from the Internal Energy Market could present opportunities for Northern Ireland. Jenny Pyper, Chief Executive of the Utility Regulator, noted, for example, that the Industrial Emissions Directive requires the imminent closure of one of Northern Ireland’s coal-fired power plants, the life of which could be extended outside the Internal Energy Market.68 Expensive investments to extend the life-span of existing power plants are currently being made on the assumption that those regulations will continue to apply.69 In addition, AES highlighted that Brexit could provide an opportunity to differentiate the UK from the EU market by opening the capacity market to energy storage technologies, incentivising investment in what is proving to be an extremely important emerging technology with significant potential for the UK to become a world leader.70

72.However, the implications of withdrawing from the Internal Energy Market, and therefore potentially the I-SEM, would be significant for Northern Ireland. In a smaller, less efficient electricity market, Northern Ireland would likely see higher electricity costs and diminished security of supply. A more fundamental electricity market restructure could be necessary in such circumstances, potentially requiring greater integration and interconnection with the electricity market in Great Britain, the implementation of which could lead to significant costs for consumers in Northern Ireland. The NI Executive and the Regulator would also likely have less influence as smaller players in a much larger electricity market.

73.There is a clear desire from electricity market stakeholders in Northern Ireland to retain the existing electricity market arrangements on the island of Ireland. Mutual Energy told us, “anyone in the energy industry—I think this goes for the regulator and the system operators and everything—have said that the [internal] energy market across Europe is a good thing. We would want it to continue.”71 Indeed, the Utility Regulator, which is leading in the design of the I-SEM, told us, “there is a real opportunity to make the case that the I-SEM should continue [ … ] we have to make sure that everything possible is done to protect it”.72 SONI said it believed the current market arrangements were appropriate and had brought benefits to customers in Northern Ireland, and that Brexit should not lead to a decision to change that model.73 AES told us there were viable options to allow the I-SEM to continue operating after Brexit, but that these require active consideration by the UK Government during the negotiation process.74

74.Of greatest importance is the need for long-term policy clarity from Government as to its intentions for Northern Ireland’s electricity market. The Article 50 negotiating process is due to overlap with the implementation of the I-SEM in 2018, as well as competitive auctions for the Capacity Remuneration Mechanism, financing of successful projects, and the initial stages of delivery of new and upgraded generation. AES told us the industry cannot afford uncertainty at what is a critical point in the life-cycle of Northern Ireland’s electricity market, and that without clear, long-term policy guidance from the UK Government, private investment in Northern Ireland’s electricity sector would be likely to diminish significantly.75

75.Northern Ireland’s electricity system is highly integrated with that of the Republic of Ireland through the Single Electricity Market (SEM). The UK’s decision to leave the EU potentially challenges the future viability of the SEM and its successor, the Integrated Single Electricity Market (I-SEM), which operate on the basis of mutual membership of the Internal Energy Market and compliance with its rules and regulations.

76.The Government should give particular consideration to how any changes to the UK’s relationship with the Internal Energy Market will affect Northern Ireland. The Government may wish to seek a special status or derogation for Northern Ireland’s electricity sector. Whatever is decided, the Government must provide long-term policy clarity as soon as possible in order to guide private sector investment at what is a critical point for Northern Ireland’s electricity system.

Fuel imports, tariffs and exchange rates

77.Northern Ireland is highly dependent on energy imports. Wind is the only commercially-exploited indigenous resource, with Northern Ireland’s three major power stations—Ballylumford, Coolkeeragh and Kilroot—relying on largely imported gas, coal or oil. AES have said the UK Government will need to consider this in the context of its negotiations with the EU and in trade talks with non-EU countries, to ensure that any tariffs imposed on fuel imports do not significantly affect the cost of electricity for consumers in Northern Ireland.76

78.The fall in the value of the pound is also likely to have an impact on the cost of electricity in Northern Ireland. NIE Networks noted that they expect to borrow in the region of £500 million in the RP6 price control period due to start in 2017, which will be invested and then recovered through customer bills over a 40-year period. They told us that volatility in the debt markets following the referendum was something they would need to bear in mind in the coming period, as additional costs would need to be passed on to consumers. They also noted that much of the equipment and infrastructure they purchase comes from the EU, so highly variable exchange rates and future tariffs would likely lead to cost increases for consumers.77 AES highlighted that the cost of energy storage systems had also increased due to recent movements in the exchange rate, with component parts, such as batteries, imported from South Korea, Japan and the USA now costing more than they did before.78

79.The possibility that tariffs could be imposed on electricity imported and exported between the Republic of Ireland and Northern Ireland was of significant concern to the industry representatives we spoke to. Manufacturing NI told us they were worried by suggestions that tariffs could be imposed through the North–South interconnectors, and that such a levy could be very damaging to industry in Northern Ireland, for whom electricity prices were already uncompetitively high.79 Bombardier also highlighted energy tariffs as a concern, although they noted that their strategy of coming off-grid should mitigate the impact of higher prices for their business.80 We were however told by AES that current plans for the design of the I-SEM would not permit the imposition of tariffs within the market.81

80.The cost of generating electricity and reinforcing Northern Ireland’s energy infrastructure will be affected by exchange rate volatility and any future fuel tariff regime the UK Government agrees with the EU and non-EU countries in forthcoming trade negotiations. When determining its negotiating strategy, the Government will need to reflect on Northern Ireland’s reliance on fuel imports, and the impact higher electricity prices would have on domestic consumers and the competitiveness of the Province’s manufacturing base.

Projects of Common Interest

81.As part of the European Commission’s plan to create a fully integrated EU energy market, 195 infrastructure projects known as Projects of Common Interest (PCIs) were identified across the EU between 2014 and 2016.82 To become a PCI, a project must have a significant impact on the energy markets and market integration of at least two EU countries, increase competition between energy markets, and boost the EU’s energy security by diversifying sources and integrating renewables. Support available to PCIs includes accelerated planning and permit granting, increased visibility to investors and access to financial support from the EU.

82.Of the PCIs currently identified, a number relate to projects based in Northern Ireland.83 These include the proposed North–South Interconnector between Cavan and Tyrone, Gaelectric’s Compressed Air Energy Storage (CAES) Project in Larne—an innovative project that will help to maximise the use of Northern Ireland’s renewable energy infrastructure—as well as a £300 million gas storage project managed by Mutual Energy.84

83.The UK’s decision to leave the EU is likely to have implications for the future of PCI projects in Northern Ireland. While we were pleased to hear in our informal meeting with Gaelectric that the Commission was still committed to the CAES Larne project, having increased the level of its financial support in recent months, the referendum has created uncertainty for the other PCIs. For example, Mutual Energy told us they had no guarantee from the EU that their gas storage project would continue to receive funding from the EU after Brexit, and that the project may not be commercially sustainable without continued support.85

84.Projects of Common Interest (PCIs) in Northern Ireland are likely to be affected by the UK’s decision to leave the European Union. The financial and logistical support provided through the EU’s PCI programme is supporting energy infrastructure projects in Northern Ireland which would otherwise have not been commercially viable.

85.The UK Government should undertake an analysis to identify energy infrastructure projects in Northern Ireland which are beneficiaries of the EU’s PCI programme. Through consultation with affected parties, the Government should establish whether it would be preferable to retain Northern Ireland’s eligibility for PCI funding through continued participation in the European Commission’s scheme, or commit to replicating PCI financial and logistical support through a UK-specific scheme, so that strategically important current and future energy infrastructure projects remain commercially viable. A decision should be made as soon as possible so that businesses investing in PCI projects have the necessary confidence in their commercial viability.

60 1st Report – Northern Ireland and the EU referendum, 2016–17, Northern Ireland Affairs Committee, HC 48

61 Ibid, para 99

62 HM Government, ‘The United Kingdom’s exit from and new partnership with the European Union’, 2 February 2017, para 8.28

63 European Parliament, ‘Internal Energy Market: Factsheet’, September 2016

64 AES UK and Ireland (BDR0019)

65 Single Electricity Market Committee, ‘I-SEM: Overview’

66 AES UK and Ireland (BDR0019)

67 AES UK and Ireland (BDR0019)

68 Q316 (Jenny Pyper, Utility Regulator)

69 Q243 (Carla Tully, AES UK and Ireland)

70 AES (EUE0065, Energy and Climate Change Committee)

71 Q444 (Paddy Larkin, Mutual Energy)

72 Q284 (Jenny Pyper, Utility Regulator)

73 Q376 (Robin McCormick, SONI Ltd)

74 AES UK and Ireland (BDR0019)

75 AES UK and Ireland (BDR0019)

76 AES (EUE0065, Energy and Climate Change Committee)

77 Q464 (Nicholas Tarrant, NIE Networks)

78 AES (EUE0065, Energy and Climate Change Committee)

79 Q559 (Stephen Kelly, Manufacturing NI)

80 Q561 (Cecil McBurney, Bombardier)

81 AES UK and Ireland (BDR0019)

82 European Commission, ‘Projects of Common Interest’, accessed 25 November 2016

83 European Commission, ‘List of Projects of Commons Interest’, accessed 25 November 2016

84 Eirgrid, ‘Project of Common Interest: The North–South 400kV Interconnection Development’; Gaelectric Holdings (ENI0011); and Qq440–441 (Paddy Larkin, Mutual Energy)

85 Q445 (Paddy Larkin, Mutual Energy)

28 April 2017