When Eddie Murray first heard about a state-of-the-art system that could extract energy from hot dirty water, it seemed like the answer to his prayers.
As technical director at O’Neills Irish International Sportswear, Ireland’s largest sports and leisurewear manufacturer, Murray had felt he was waging a losing war on utility bills. So he splashed out €250,000 two years ago in the hope that he would recoup the investment in smaller bills over the coming years. His valiant efforts were soon thwarted by soaring energy prices.
“We were trying to bring our gas bill down even when prices weren’t nearly as high as they are now,” he said. “We spent €250,000 putting in a system to extract energy from hot, dirty dye water we were throwing out so it could be used to heat clean water. The savings don’t even cover the 118% increase in our gas bill over the past two years.”
The initiative designed to make the company more competitive has not been helped by what Bord Gais charges it to bring gas into the factory.
The fuel, 90% of it imported, is a vital energy source underpinning the Irish economy. About 47% of electricity in this country is gas-generated, so these gas transmission costs are also affecting electricity prices. Sources say the Electricity Supply Board last week applied for a 20% increase in charges.
It is not just business that suffers. Transmission costs represent up to 30% of a domestic user’s bill.
Murray believes the huge gas price increases of the past few years cannot be pinned solely on surging international energy costs.
“We’ve got to pay a distribution charge of €4,654 a month for the line that runs 70 miles or so from the main pipe past our front door. That’s almost €56,000 a year for a pipe that’s been in place since 1989.”
Leo Grogan, the managing director of Clogrennane Lime, also believes himself to be a powerless victim of a virtual monopoly. His company has plants in Carlow and Drogheda and spends €12.5m a year on gas to fire its kilns.
Grogan has watched gas-transport costs spiral 70% since 2001.
Like Murray he is convinced his company is being penalised by a combination of mismanagement by Bord Gais and a regulator that lacks the power to stand up to a monopoly.
“A plethora of excuses is given as to why the price fluctuates so much on a daily basis — you get as many excuses as you would for a racehorse not performing,” Grogan said of spot prices for gas.
“Bord Gais may not have control over international prices, but it does over transmission costs, which is why I want to know why I am paying far more than similar companies in the UK for gas that starts off costing the same price.”
Many other companies have been asking the same question. Bord Gais cites wafer-thin operating margins and the necessity to make a return on its network as proof that it is giving the best deal it can.
The monopoly gas transporter stands accused of gold-plating its network to extract higher prices from beleaguered customers, who have had more than enough of what they regard as little more than a state-sanctioned rip-off.
Paul Hunt, a former Bord Gais economist, who now operates a London-based energy consultancy, has been in the vanguard of the attack against the state gas operator. He has claimed that Irish domestic users are paying up to €140m a year too much each year for gas and electricity.
“Unit costs of transmission and distribution in Ireland are between two and three times the corresponding unit costs in Britain,” Hunt said.
“The usual reasons advanced [low population density, dispersion of urban settlements, inability to capture economies of scale, the relative newness of the Irish networks] are insufficient to explain these differences.”
Sandra Quinn, a gas analyst with McKinnon & Clarke, an international utilities consultancy, says transmission and distribution costs make up about 16% of a typical commercial gas bill in Ireland, compared to only 7% in the UK.
“We have some clients where transport costs are as severe as 30% or 40% [of the total bill],” she said.
In 2003 the Commission for Energy Regulation set out a mechanism — spanning four years to 2007 — where Bord Gais could make a 5.4% pre-tax return on the value of its assets.
Hunt has effectively accused the state-owned company of overvaluing its assets to ensure an unjustifiable return.
“The asset valuation method applied by the commission considerably overstates the net asset values of the regulated network business,” he said.
The regulator has dismissed Hunt’s criticisms, saying it had examined them but had found no basis for his conclusions.
“The Hunt report was studied in detail by our networks team and they are satisfied his hypothesis has no bearing on gas prices,” the regulator said. “It doesn’t hold.”
Tom Reeves of the CER echoes the Bord Gais argument that much of the valuation of the network comprises new assets such as upgraded pipes and new pipelines as well as the two interconnectors running from Scotland to Co Dublin. It is natural Bord Gais should expect a return on this investment.
“Costs are higher in Ireland because it is a developing market, with a growing network,” it said. “We’re connecting with 35,000 to 40,000 houses every year.”
Margins on the supply of gas to the Irish market, which is roughly the size of Manchester, are razor thin. As a result the commercial market has not exactly been inundated with new entrants over the past few years. Energia, a unit of Viridian, Vayu, a privately owned group, and Flogas, owned by DCC, are the only realistic challengers to Bord Gais. The German company RWE came in for about 18 months, but pulled out last year.
Competition is usually deemed good for business, but the devil is in the detail. Murray moved O’Neills to an independent supplier last October, but he has been confronted with a potential sting in the tail under the heading “imbalance charges”.
“Around the third week of every month we have to nominate how much gas we’re going to use for each and every day of the upcoming month,” he said “We have to take bank holidays, Christmas holidays and the rest into account, so it’s a guesstimate.
“Once or twice I’ve done a good job, but more often than not I’m 20% out. How do I know in the third week in June what we’ll be doing on a specific day at the end of July? “We wouldn’t have that much forward notice. In our game, if an order comes in, you grab it. If I specify that we’re going to use 40,000kW hours on a certain day and only use 30,000, I pay for the 40,000.”
Like most heavy users, Pat Murphy, the purchasing director at Greencore Malt, casts his net far and wide in search of the best energy deals. He currently sources most of the company’s gas in Belgium and the UK, but value ends as soon as it hits the Bord Gais network.
Murphy estimates he pays five times more than competitors in the UK and continental Europe for gas, and most of the difference is down to transmission and distribution costs. The company is by far the largest user of gas in the town.
“We pay between 17c and 18c a therm for transmission and distribution, whereas in the UK and Belgium this is typically about 3.5c a therm,” he said. Murphy is also perplexed at a decision by Bord Gais to buy a plot of land to run the gas pipe into the town.
“The state paid considerable money for the site at the far end of the town and we are now forced to pay an additional 9c a therm for distribution,” he said.
“Had they come to us we would have given them the site. It would have saved us both money.”
Under proposals to liberalise energy markets throughout the European Union by July 2007, in theory companies should be able to look forward to increased competition. Given the track record of recent years, it is a moot point whether this will translate to lower prices unless transmission costs can be tackled.
Murphy believes the key lies in better regulation rather than increased competition for slices of a relatively small pie.
“There is no business I know of other than a monopoly where you are guaranteed a return,” he said. “Bord Gais should be forced to look at its cost base and see how effective it is, because everyone else has to do that. When profits are guaranteed year in year out, you can live with that situation for as long as you want.”
Bumpy ride ahead for gas prices
The bad news for Irish consumers is that when it comes to energy prices, the situation is going to get worse before it gets better. Despite a 70% rise in gas transmission charges since 2001, consumers have been cushioned from the full brunt of soaring wholesale gas prices by the legacy of some Bord Gais contracts dating back several years.
Most of these cheap supply contracts expire this year and will have to be replaced at market prices. Hence, the regulator is likely to sanction a further 40% rise in gas prices from October.
It hasn’t helped that gas prices on the British wholesale market were 10% to 15% higher than on the Continent in the first half of this year, because of supply constraints in the UK.
However, it is not all doom and gloom.
It is hoped this premium will dissipate over the coming years as the UK improves its supply situation.
A new pipeline linking the Ormen Lange Norwegian gas field with Britain opens next year. A second interconnector with continental Europe is also expected to be operational by early 2007, while two facilities at Milford Haven in Wales for imported liquefied natural gas (LNG) are set for expansion.
Close to home, the long-delayed Corrib gas field off the coast of Co Mayo should come on stream over the next few years.
This should provide enough gas to supply an estimated 50% of needs for the next 16 years.
Other companies are exploring for gas, such as Finavera, which is currently working on a site that straddles the border counties of Cavan, Leitrim and Fermanagh.
Arguably, also, it should mean cheaper transport costs for Irish consumers, who will be at the start rather than the end of pipelines that snake from Russia, North Africa and the Middle East.
Meanwhile, a €400m LNG terminal is expected to be operational on the Shannon estuary by 2011. This should allow access to multiple sources of gas, leading to greater competition.
LNG is gas that has been cooled to a very low temperature at which point it becomes a liquid. It is stored and transported in insulated tanks.
