Confidence crises

The fallout of Phoenix gas threatened price rise

Andrea Heaney of National Energy Association Northern Ireland analyses the implications of the recent reprieve from a 20% increase in Phoenix gas prices and argues for a more regulated industry and the search for alternatives to ward off an increase in fuel poverty.

Whilst the dust appears to have  settled, publicly at least, on  the Phoenix Natural Gas price hike announced in March this year, NEA NI is keeping a watchful eye on the situation, and considering the implications and lessons for Northern Ireland as a whole. While customers have won a reprieve (and there is no telling if this is temporary or long-term) from a 20% price hike, the issue is far from settled. Phoenix still has to come to an agreement with Centrica over the price it pays for gas and finalise a regulatory regime with the Northern Ireland Authority for Energy Regulation (known as OFREG) which might promise the potential of price stability for up to 40 years. At time of writing, there is speculation that OFREG and Phoenix are close to completing a deal on a long-term licence and some negotiations have occurred with Centrica.

Price stability is key both in budgeting terms for fuel poor and low income gas consumers, as well as in providing confidence in an expanding natural gas industry in Northern Ireland.

n The proposed price increase closes the gap between the cost of gas heating compared with other fuels (including off-peak electric heating), thereby decreasing the return on investment to consumers who convert, restricting growth of the gas market.

n Price instability is likely to put potential customers off, since this has been recognised as a major concern for oil consumers, who are the major potential customer base for the growing gas market; consumers need some guarantee that this will not happen again.

n Gas customers who can afford to may convert to another fuel (chiefly oil) at the earliest opportunity, sooner, rather than later, if they perceive large enough savings. This would leave low income and fuel poor consumers, many of whom had gas installed under the Warm Homes Scheme and NIHE’s heating replacement schemes, to bear all the additional cost (along with small businesses), thereby increasing the cost per kWh. With a small number of low income and fuel poor customers, a stagnant market and rising gas prices, the natural gas industry in Northern Ireland becomes less viable.

The circumstances of the increase received considerable debate in local media, as more and more issues came to light. In fact, the Chairman of the NI Regulatory Authority, Douglas McIldoon, carried out a swift investigation in the days following the price increase announcement on behalf of the Minister, Ian Pearson, and it is worth considering the content of this investigation, which concluded: ‘through Phoenix’s man-agement of the situation and the reaction this provoked, this episode is causing disproportionate damage to the industry and thus to Northern Ireland’s economic, social and environmental development.’

This report answered many questions surrounding the issue but many important questions remain unanswered, primarily about Phoenix’s handling of the situation, including its eleventh hour decision to increase prices by 20% rather than the mooted 10% which, according to McIldoon’s report: ‘represents more than an attempt by Phoenix to cover their future exposure... Phoenix will, over the next six months, recover double the amount by which its exposure will increase during this period. Given that Centrica have not established their entitlement to increase their price, let alone received any money in respect of a possible increase, Phoenix’s actions might be regarded as excessive.’

The proposed price increase would bring fuel poverty to around 6,000 extra homes in the gas licence area, to add to the 203,000 households across Northern Ireland already facing debt, disconnection and/or cold homes. In that context we must question the actions of both Centrica and Phoenix and their commitment to eradicating fuel poverty, particularly Phoenix’s intentions regarding the Fuel Poverty Strategy for Northern Ireland due to be published in the near future by the Department for Social Development. McIldoon concluded that Phoenix appears to have been driven by ‘the requirements of its financial backers’.
Phoenix’s handling of the situation and lack of regard for customers and stakeholders who, until now, have supported Phoenix and the expansion of the industry, ‘begs questions about the fitness of entrusting the task of developing the Northern Ireland gas industry to a company of this sort.’

The gaping hole in regulation that means Northern Ireland’s gas supply is not subject to regulation until it enters the Scotland to Northern Ireland pipeline also needs to be addressed so that customers are not exposed to a similar situation in the future. If we are determined to expand the natural gas industry, and natural gas is still a good product, then maybe we need to look again at the vulnerability of that supply.

This was supported by McIldoon’s conclusion that: ‘The events of the last few weeks show that much more powerful levers are required to ensure that licence holders in the natural gas industry do operate in the public interest.’
Whilst the scale and impact of the increase was significant, many outside Belfast either quietly breathed a sigh of relief, or on the other hand, wondered whether the same issues might arise in the Bord Gais Eireann (BGE) gas expansion project, which is pushing a pipeline through to the north-west at present. It is important to point out that the Centrica-Phoenix contract is unique to both parties, and BGE will have its own arrangements and supply contracts.

However, if natural gas prices are to rise substantially (and bear in mind when oil prices rise, gas prices rise), maybe we should be more seriously considering indigenous energy sources - renewables - instead of investing in an infrastructure that will eventually see us up to 70% reliant on natural gas from far flung corners of the world for warmth and electricity for our homes and businesses.
More importantly, the lesson of an essential commodity, sold within a regulated framework to a customer base which is largely low income and vulnerable, should not be missed. Could a similar crisis occur in the context of water supply, perhaps to fund much needed investment in water infra-structure? Who knows, but for NEA NI this crisis has been an important illustration of the importance in the detail of the scope of regulation and resultant contracts, licenses and deals. Water campaigners, beware!

© Law Centre (NI) July 2004