Developing the natural gas industry

Phoenix Natural Gas hosted a round table discussion on the development of the natural gas industry in Northern Ireland and the opportunities and challenges in bringing gas to the west.

What are your impressions of the natural gas market?

David Dobbin

Whilst we’ve seen Phoenix and others develop the gas market, we started late compared to other parts of the British Isles and Europe and our gas industry is only emerging from the start up phase with the overall market penetration still relatively low. We have to recognise also that our situation as a small, low population density region on the periphery of Northern Europe makes it more challenging to get an economic return from developing a gas market. There is an element of gas infrastructure in the west requiring public subvention to ensure an economic return but there will be a huge business and social return from this subvention.

Gas offers significant benefits to us and we need to reduce our huge dependence on coal and oil.

In the west of the province, in particular, we’ve relied heavily on heavy fuel oil. There are significant environmental and efficiency benefits from switching to gas but the challenge really is to catch up with the rest of the British Isles and Europe.

Aodhan O’Donnell

From the consumer’s point of view, the natural gas market is maturing. It’s bringing a range of benefits both to domestic and business consumers. Where some of the areas have become more mature, competition has been introduced and choice has been provided to consumers, which provides a good opportunity for the market to develop. The benefits are much more than cost and removing the reliance on home heating oil. Safeguards and protections are in place with a regulated price and there are also opportunities for consumers to switch. We engage quite a lot with the supply companies and there’s quite a positive view from consumers about the engagement that they have with those companies. When consumers make the switch to gas, they’re actually very, very satisfied with the process.

All of our research indicates that people like the convenience, payment methods, access, security of price and reduced volatility. Overall, the consumer is warming much more to gas, there is much more interest in conversion and that spreads the cost across more consumers.

Allen Creedy

The energy market in the rest of the UK is pretty dysfunctional as shown by the current investigation by the Competition and Markets Authority. Our perspective is: “How can we avoid those problems in Northern Ireland?”

We are looking forward to the extension of the gas network because that will overcome competitive disadvantage for many businesses. That is perhaps the biggest advance for small businesses and micro-businesses. The dependence on heavy fuel oil is a disadvantage to many start-ups.

We’ve got a far-sighted view on energy policy and gas is only one of the solutions for meeting our energy needs. One of our great concerns is the competitive disadvantage of UK businesses in terms of our overall energy costs. As we roll out the gas, we want to know how we can incentivise businesses to use less energy and change the way in which energy is viewed by businesses.

Glyn Roberts

Choice is the key word. In recent years, with big hikes in electricity prices, retailers increasingly want to think outside the box and switch when gas is available in those areas. Up to 70 per cent of small businesses and independent retailers would switch.

In a broader context, independent retailers are being squeezed in two ways: firstly they had to absorb a 14 per cent increase in electricity costs and still be competitive, and then consumers obviously have to pay the same increase and it means that they have less disposable income to spend. We have the lowest disposable income in the UK and that still is a big challenge.

Rolling out to the west is key but I think you’re seeing less loyalty there from a lot of our members to their energy companies. If there’s a saving to be had – even though it could be quite a small saving – they would take it because we’re still a long way off from seeing a real, locked-in, sustainable recovery.

Peter Dixon

Natural gas has been available in Great Britain for 50 years and in Northern Ireland it has been effectively around for about 18 years. In Great Britain, 85 per cent of the population – including industry and commerce – use natural gas. In Northern Ireland, 25 per cent of the population has access to natural gas and 75 per cent does not.

Those who have access to natural gas have been able to receive its social, environmental and economic benefits – mainly in the Greater Belfast area. In Greater Belfast, gas is now available to 93 per cent of the population and is being used by almost 63 per cent. Gas has been able to secure, keep and attract industry and business here over time. I’ve no doubt that the perception when taking gas to the west will be no different. Over the next 10-20 years, we’ve got to extend that perception to other parts of Northern Ireland and really there should be no reason why 75-80 per cent of Northern Ireland shouldn’t have access to natural gas.

Allen Creedy

We did a survey of our members – both in Northern Ireland and Great Britain – about price sensitivity and business resilience to energy price changes. We showed them the graphs of the predicted increase in gas and electricity prices and the dramatic response was that 8 per cent of our members would actually close their business in the next two to three years, particularly those relying on heating oil. There is an opportunity for gas to step in there – providing it’s cheaper – and actually meet a dramatic need for businesses to stay alive.

Glyn Roberts

There has been a sea change in views about energy efficiency. It’s not about just ticking a box to show that you’re pushing a sustainability agenda. It is actually the only real way that our members will save money. We’ve led the way by working with the Carbon Trust and Invest Northern Ireland to highlight new technology around refrigeration – the most expensive cost for many of our members – and energy efficient lagging.

Some thought also needs to be given to how we incentivise investment in green tech and energy efficiency. We’ve put on record our idea of green rates. If a business invests in that technology – and gas is a part of that – then they should get help with their rates.

What are the social, economic and environmental benefits of using natural gas?

Aodhan O’Donnell

Firstly, there is the benefit in terms of energy efficiency. This is now not just seen as a soft option but as a real business case and it doesn’t always have to be about costly infrastructure, as there are no cost and low cost options. There is not always the awareness of natural gas with the public. Sometimes it is more by chance with people moving into a house that already has gas installed. Gas is a regulated fuel and with the pre-payment card, they can budget better.

There are also benefits in terms of convenience and the environment. There are always issues around the cost of conversion (which is around £2,000 to £3,000) and there is support available for fuel-poor households. The average saving between oil and gas is around £450-500 per year for a typical household using gas compared to oil. The gas industry has a huge role to play in terms of fuel poverty, where the cost of fuel is the biggest factor and then by helping people to convert to gas, it will have an impact on fuel poverty levels.

David Dobbin

I have converted a number of our local operations to gas and just over a year ago I converted my home to gas and have already recouped the cost to do this. Dale Farm has seven manufacturing plants in Northern Ireland and we are the fifth largest energy user in the province. We converted both our Ballymena and Cullybackey plants to gas and we are looking forward to converting our Cookstown plant to gas when it comes to the west.

At the moment on a cost per kilowatt hour basis, oil is close to twice the cost of gas – especially when you take into account the fact that gas boilers are normally much more efficient than oil and the fact that the net carbon tax position is lower with gas. At our Cookstown plant, we are going to save £1 million a year in energy costs by converting to gas. In the food sector, in the Dungannon/Cookstown area alone, the main energy users will save around £20 million each year by moving from heavy fuel oil to gas. This will result in a massive improvement in competiveness. Dale Farm is competing on a global stage where all of our key competitors have cheaper energy largely from gas. We therefore cannot be competitive globally without gas – full stop.

Our Cookstown plant currently employs 200 people and we are currently looking at an investment that would bring that up to 300 people. We will not proceed with this investment if gas does not come to the west. The other energy issue for Northern Ireland businesses is the high electricity cost. Although our electricity costs for consumers are competitive, the costs for businesses are the second highest in Europe and they are 30 per cent higher than our counterparts in Great Britain. Gas will allow us to put a combined heat and power plant into our plant in the west. That CHP plant will save us another £1 million per year at Cookstown. So we are going to get a double benefit from gas. The reality is that our profitability – and the ability to compete – hinges mainly on the availability of gas.

Peter Dixon

People need to first know what the benefits of natural gas actually are. Over the past 18 years, it has been the sole responsibility of Phoenix Natural Gas – there have been companies with more limited licences – to promote natural gas to the whole population and to the wider economy. It wasn’t government’s responsibility, nor was it the regulator’s, and it is only recently that government has started embracing natural gas. It has been our role to educate and encourage people to use natural gas. The cost that we are allowed to do that is 0.02 per cent of the cost of the network. It has now been assessed that after 18 years and 60 per cent of the population of Greater Belfast on natural gas, that we no longer need to do that and those costs cannot be recovered from 2017.

Therefore, no-one is going to be doing any programme to tell people the benefits of natural gas. The remaining 20 to 30 per cent of people in Belfast no longer understand the benefits of natural gas. There is a benefit to have the utility networks used to the maximum as this will spread the network costs over a wider base. Government needs to continue this education process to get more people to use gas – and that doesn’t have to be Phoenix – but there is a benefit to everyone as we have already spent nearly £500 million building this infrastructure and it doesn’t make sense to have only 60 per cent of the population using it whereas in Great Britain, it is used by 85 per cent of the population.

If you are going to build an infrastructure you need to get as many people using it as possible – you need to sweat that asset and that will be a big challenge.

How important is infrastructure investment in the Northern Ireland economy?

David Dobbin

The impact that infrastructure can have, not just on the competitiveness of business but on lifestyle and the quality of life, is generally under-estimated. We need to build Northern Ireland as a great place to live, to work, to visit and to invest in. All those things require a world class and competitive business infrastructure including broadband, energy, roads, ports and airports – they all have a vital role to play. For gas, the network is the fundamental investment needed to bring this cleaner and cheaper fuel to people and businesses.

Allen Creedy

We are currently working on a number of initiatives with Ofgem and Westminster that may be of relevance to Northern Ireland. We are trying to encourage Ofgem to liberalise the private networks market.

Companies producing their own power from CHP should be able to supply adjacent businesses via a private network. This would reinforce the local grid and incentivise local businesses to invest in CHP.

Secondly, we are looking for enhanced capital allowances for investments in power generation by businesses and for energy efficiency. In the final initiative, Ofgem is in year two of an innovative approach to require all gas companies to demonstrate how they are improving their stakeholder engagement.

Ofgem is incentivising all the gas companies with increased returns to improve their customer education and engagement, and this model could be used in Northern Ireland for customer education.

Glyn Roberts

On the infrastructure to the west, my worry is that we will get corporation tax and increased FDI, and that it will come only to the Greater Belfast area. I am very worried about the scale of a lot of the towns in the west of the province – they badly need FDI to boost the economy in those areas. Gas is a key part of a wider cocktail of infrastructure investment that is needed in the west. It is crucial that we get balanced economic development right across the whole region – and that is something the Programme for Government recognises. That is why we support gas to the west. We need balanced development.

How can Northern Ireland make the most of developing the gas network? And how can the supply chain opportunities be developed?

Aodhan O’Donnell

Gas infrastructure is a good example of the mutual dependence of the consumer and business sides. In extending the network, you need the large volume users and that in turn supports the domestic side. Often there is a view that if you work in a consumer’s interest, you are putting a burden or more cost onto business. That is not the case in this instance, where there is a joint benefit to domestic and large business customers.

I agree with Peter, awareness is crucial. It is not enough to build the pipes and they will come – that will not happen. For example, in the electricity market, 96 per cent know they can switch but only 20 per cent have switched supplier. There needs to be much more thinking put into how to change consumer behaviour and to look at what support is needed.

Peter Dixon

The Government in Great Britain has realised that you have to look at the benefits of any infrastructure investment. For example, HS2 – whether you support it or not – is a massive infrastructure project. It will have a huge impact on where it is going to. The Government has looked at the impact on the North of England in terms of FDI, the wider public, industry and business and asked: “How do we make the most of this investment?”

Rolling back 18 years to when gas first arrived in Greater Belfast, this was a massive investment but government, foreign direct investors, domestic consumers and businesses didn’t understand what it meant for them. So we said to SMEs, invest in this industry, make your living from it, employ people and we will continue investing. Now there are over 4,000 people and 400 businesses involved in making a living from the natural gas industry. They have all invested their own money and there has been no public money. Together we have developed a natural gas industry from scratch.

With this next tranche of gas infrastructure investment – gas to the west and the redevelopment of the 10 towns – we need to stand back and look at how we can develop the supply chain in the west and how do we get the benefits for customers. That is going to be the big challenge.

If you were to pick one issue to deliver success, what would it be?

Peter Dixon

Education. And the role of government in educating and encouraging people and making sure that the different groups which benefit – whether foreign direct investors, government agencies, consumers or local business – fully understand the opportunity that’s coming. Whoever wins this contract will get their money back but that doesn’t mean that the cash flow will be generated downstream. Government needs to have a strategic view on how we maximise the commercial, social and environmental benefits.

Glyn Roberts

The political will has to be there if we’re serious about balanced economic development across the region of Northern Ireland. Timeframes need to be set if we are going to see this become a reality, and we have to put our money where our mouth is if we’re serious about the infrastructure of the west of Northern Ireland.

Allen Creedy

It needs to be rolled out in a way that is integrated with the economic incentives for business. Businesses need to understand the competitive advantage that it will give them and they need to be supported in that investment – whether by tax incentives, enhanced capital allowances, training the staff they need, or the business opportunities that it presents. There are not only benefits for businesses benefitting from a cheaper and alternative gas supply. There aren’t any gas installers out there at all at the moment. It’s a matter of having a holistic approach to the potential benefits of gas, particularly to the west.

Aodhan O’Donnell

The framework is there and the secondary stage is maximising the level of uptake. In some of these areas, there is going to be very high dependence on oil and up to 60-70 per cent of people in fuel poverty. It’s absolutely essential that the right incentives and processes are put in place to let people know that they can convert to natural gas and help them through that process, banking the learning from 20 years of the industry in Northern Ireland already. The pay-off is well worth it.

David Dobbin

My understanding is that we’re still seeking state aid approval from Brussels for government subvention and without that, the gas network would not proceed. I’ll be urging government to get closure on the state aid approval. Assuming that we don’t fall at the final hurdle, it’s making sure that we have full take-up of the network. With the clear problems we have in electricity generation, both in cost and capacity, CHP capacity can be switched on relatively quickly and take some large parts of industrial demand out of the grid.

Government also need to lead by switching public sector facilities into gas and to find a way to work with the private sector to come up with a scheme to spread the cost of boiler conversion etc. over future utility bills (as for energy saving schemes) especially for low income households who need the benefits of gas but may not be able to afford to switch. We need another wave of money put into the boiler scrappage scheme – not only will this encourage conversion to gas but it will also deliver energy efficiencies.

If every public authority took up gas as a starting point (e.g. for all hospitals and leisure centres), that would immediately create a good bit of demand and help to stimulate local infrastructure and gas contractor start-ups because they’re only going to come online when demand for them develops in the region.

The Participants

Peter Dixon

Peter is Group CEO of Phoenix Energy Holdings and has been a Director of Phoenix Natural Gas and Phoenix Holdings since 2000. A Belfast Harbour Commissioner, his other directorships include the South Belfast Economic Forum, the Energy for Children Trust and Winston Churchill Memorial Trust. Peter is a Fellow of the Institute of Energy, a Companion of the Institute Gas Engineers and Patron of the Energy and Utility Skills Council.

Allen Creedy

Allen brings more than 30 years of experience in the political, environmental, planning, financial and energy sectors to his post as Environment, Water and Energy Chair for the Federation of Small Businesses. Allen works to ensure that small firms get a fair deal in the regulated markets and from policy-makers and regulators. He aims to help protect small businesses from price increases while ensuring that they benefit from the move to a low carbon economy.

Dr David Dobbin CBE

Dr David Dobbin has extensive international experience in the food and drink and packaging sectors and is currently Group Chief Executive of Dale Farm, Northern Ireland’s largest dairy business. He is Chairman of the Northern Ireland Food and Drink Association, Chairman of the Ulster Rugby Management Committee, and a past Chairman of the Strategic Investment Board.

Aodhan O’Donnell

Aodhan is interim Chief Executive at the Northern Ireland Consumer Council. He leads the organisation in representing and supporting consumers across a range of markets with their complaints in relation to energy, transport and water, and providing tools and resources to educate consumers on their rights and responsibilities. He was previously the Consumer Council’s Director of Policy.

Glyn Roberts

Glyn was appointed Chief Executive of the Northern Ireland Independent Retail Trade Association (NIIRTA) in January 2008. He was previously Head of Press and Parliamentary Affairs with the Federation of Small Businesses in Northern Ireland, Public Affairs Director with Weber Shandwick, Head of Communications for the Ulster Cancer Foundation and manager of a community work programme.