Business

Monday 11 December 2017

Cheaper gas could be in the pipeline if rules are changed

The Celtic Tiger died five years ago. The economic crisis hurts. The end of the pain is not in sight. So, you would think the Government would do everything it could to keep prices low. For energy prices, you would be wrong.

Natural gas is an important fuel for heating homes and cooking. It is also used to generate electricity.

The gas used in this country comes via two pipelines: Bord Gais Eireann (BGE) owns and operates both of our interconnectors.

BGE cannot abuse its market power because the Commission for Energy Regulation (CER) regulates the price. Each year, total costs are divided by the volume of gas transported. BGE is allowed a modest profit.

This simple rule was fine when there was one source of gas only. That will change. Eventually, the gas from Corrib will be brought onshore. There are advanced plans to build a Liquified Natural Gas (LNG) terminal in Kerry.

With LNG, Ireland would no longer depend on the European market, where gas is expensive. Gas is cheap in North America because of an abundant supply of shale gas. As gas transport is pricey, it would be cheaper still to exploit our shale reserves.

The costs of interconnection with Britain are largely fixed. If another source of gas captures a small part of the market, BGE will spread its costs over a smaller volume.

That is, BGE would raise its price. The competition would thus capture a large share of the market, and be able to raise its price at the same time. BGE would be forced to raise its price again.

The CER anticipated this and has changed the price regulation. The CER should be praised.

It is not often that a government agency locks the barn door before the horse bolts. However, the new regulations are not good for consumers.

In the future, the right to transport gas over the interconnectors will be auctioned. There is overcapacity now -- and probably in the future -- so the highest bid will not be very high.

Therefore, there will be a reserve price. And if BGE still makes a loss, a levy will be imposed on all importers and producers of gas. This levy will then be passed on to consumers.

This arrangement guarantees the profits of BGE. It drives up the price of gas and electricity. And because it hurts would-be importers and producers of natural gas, competition is hampered and prices go up again.

Stalled

Indeed, the Shannon LNG project was stalled earlier this week, primarily because of the new price rules. The CER, in effect, shielded BGE from competition at the expense of anybody who buys gas or electricity.

BGE is largely State-owned, but a minority share is owned by employees, who will directly benefit from the new CER regulation.

The Exchequer could benefit too, but our State-owned companies have a poor track record of paying dividends. Instead, profits are diverted to the vanity projects of managers and politicians.

It would therefore be better if BGE gradually writes down the capital invested in the gas interconnectors and competes in the market on the basis of its variable costs only. Gas and electricity would be cheaper.

The new pricing rules are not yet set in stone. It will be a few years before households will pay more for their gas and electricity.

People will complain bitterly to Pat Kenny and #gasprice will trend on Twitter. But then it will be too late to change the rules. The CER should reconsider now.

Indo Business

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