Future of Gas Entry Tariff Regime Draft Decision (CER/15/057)

Transcription

1 19 th May 2015 Mr Colm Ó Gormáin Commission for Energy Regulation The Exchange Belgard Square North Tallaght Dublin 24 Dear Colm Re: Future of Gas Entry Tariff Regime Draft Decision (CER/15/057) I am writing on behalf of Aughinish Alumina Limited ( Aughinish ) to express our deepest concerns at the draft decision to increase Irish gas transportation tariffs at a time of increasing gas supply. Natural gas is already a more expensive commodity in Ireland for manufacturing when compared with GB. Aughinish is the largest manufacturing consumer of natural gas in Ireland currently consuming 100% natural gas 363 days per year as base-load. Aughinish operate an energy intensive manufacturing process where energy costs account for about 30% of operating costs. The draft decision of CER as currently presented will add 3.5M (estimate) to our natural gas costs per gas year just for transporting gas. As we export 100% of our products to the very liquid global alumina market, we cannot, unlike other most other Irish large gas consumers, pass this additional cost on to our customers. We commend the CER in presenting a paper attempting to address difficult issues although as we already expressed we have deep concerns regarding the proposed decision as we do not believe the draft decision maintains Ireland s energy competiveness or protects consumer interests. As a consumer, it is very troubling that as a consequence of new gas supplies arriving from Corrib with no significant increase in gas consumption, we are seeing a price increase irrespective of that increased competition in the gas market. The CER s actions in this regard are neither consumer oriented nor promoting effective competition and as such are not in keeping with its obligations under the Gas Market Directive. A recipe to drive manufacturing away from Ireland!

2 We have already been forced to absorb the following increases in Irish gas transportations costs: Nominal 20% increase in network tariffs for 2012/ % capacity charge and 9.9% commodity tariff increase in April 2013 Aughinish is very important contributor to the economy of Ireland and especially Limerick. It has been in operation since 1983, employing 450 plus 250 under long term contract, the majority whom are high skilled craft persons, process operators, professionals and management. Aughinish also operates the third busiest port, by volume, in Ireland. Aughinish is one of the largest users of gas in Ireland, 363 days of the year producing alumina for export to a very competitive world market where we must compete against others with lower energy costs and less regulation. Aughinish remains competitive because we focus on cost reduction, investment and efficient operation such that we are one of the most energy efficient plants in the world. In 2003 Aughinish invested over US$130m in a 160MW, gas-fired high efficiency combined heat and power ( CHP ) plant to meet the power and heat needs of the alumina refinery. In 2010 it converted its calciners to dual fuel (gas and HFO) and in 2014 committed significant further capital investment to install two new gas fired boilers. Aughinish has invested heavily to migrate to natural gas to enable the production of alumina in the most efficient lowest carbon manner possible and in line with best available technology in the industry. Three quarters of the gas consumed at Aughinish is used for useful heat within the metallurgical process, with the balance used for power generation. There are no viable renewable substitutes for natural gas that offer the reliable clean performance required for heat generation in the manufacturing process at Aughinish. In summary, Aughinish has invested in best available technology to reduce energy cost and improve efficiency in its manufacturing. Despite this we are facing significant additional costs due to regulatory and policy decisions. Fundamentally, the approach to tariff setting is flawed as it strives to protect stranded assets and reward the addition of further over-capacity to the direct detriment of consumers. Such over-capacity is further highlighted by other well-known market developments such as the East-West Interconnector and the 2020 targets for energy from renewable resources. In a marketplace with such existing and growing over-capacity and a decision not to strand inefficient assets, the tariff regime is not the appropriate method to incentivise further capacity regardless of the efficiency or other benefits of that further capacity. The Diversity Premium for such over-capacity exposes consumers to additional transportation costs resulting in consumers overpaying for gas supplies and in breach of the CER s duty to consumers.

3 Efficiency Aughinish believe the proposed tariff, which seeks to socialise the cost of inefficient overcapacity, is effectively a blunt tax on gas consumption with no recognition on how efficiently the gas is consumed. The Energy Efficiency Directive (2012/27/EU) lays down rules designed to remove barriers in the energy market and overcome market failures that impede efficiency in the supply and use of energy. This proposed uniform increase in the gas tariff irrespective of how efficiently gas is consumed clearly ignores this EU Directive. SI No.426 of 2014 clearly provides in Section 28(1) Energy Efficiency Incentives, that: In carrying out its functions under the Electricity Market Directive and the Natural Gas Market Directive, the CER shall have regard to energy efficiency in making decisions on the operation of the electricity and natural gas systems. In terms of the efficient use of network resources, the gas transmission pipeline to Aughinish is used to its maximum capacity on a continuous basis. The proposed tariff structure with its focus on rewarding investment in over-capacity by penalising investment in energy efficiency is clearly not in keeping with this requirement and we would ask that the CER to comply with and prioritise its obligations to have proper regard for energy efficiency when formulating its decision on tariffs. Discriminatory Effect Aughinish is uniquely affected by the draft decision due its inability to pass this proposed tariff increase on to its international customers, unlike others whose customers are based in Ireland. The effect of the proposed tariff increase is therefore discriminatory in respect of Aughinish. In addition, the underlying cost of the flexibility that allows booking of short term products is being pushed onto base-load users such as Aughinish who cannot avail of short term products. Aughinish urges the CER to address these issues in its final decision and we suggest that this can be partly resolved by considering the following amendments to the tariff structure to ensure a fairer balance between interests. For the record, we found the CER Draft Decision excessively complicated and as result we are compelled to take much of the financial modelling on trust. We note the concerns of other market participants voiced at the consultation meeting in relation to the financial modelling. We have set out below and in Appendix 1 more detailed response to the questions raised in the paper. 1. Entry Exit Charge Allocation: Aughinish suggest a decrease from the existing tariff apportionment and propose a 20% / 80% Entry Exit allocation. This would reflect: a. The benefit of predictable revenue streams and reduces the uncertainty around portfolio optimisation by shippers and the secondary capacity market sales; b. Recognition of the benefits the electricity industry achieves through a secure gas network by appropriately apportioning costs to marginal plant; and c. Recognises the benefit delivered by the Isle of Man booking long term capacity at Moffat.

4 2. 100%/0% Capacity/Commodity split rewards those customers with the lower load factor - base load and predictable demand users. This would also reapportion the costs to marginal users which benefit from the system spare capacity at Moffat. 3. Socialise the costs associated with gas security, recognising the security of supply benefits such gas security provides to the electricity sector and in particular intermittent renewable generation (e.g. PSO Levy or incorporate it into the design of I-SEM, CRM). 4. Same treatment for all users (i.e. no special case for storage and Inch). If necessary, support for these specific cases can be achieved through other fiscal or socialised measures. 5. Recognition of the EU Energy Efficiency Directive. Aughinish suggest that some form of incentive could apply for efficient consumption of gas, for example exemptions from PSO Levy, from the Diversity Premium for CHP / energy efficient gas consumption technology which continues to achieve those high efficiency standard certified by the CER. Aughinish has raised these concerns with the CER prior to this submission. If the CER require a further meeting or clarification regarding these points, please do not hesitate to contact me. Yours sincerely John Ryan Energy and Engineering Manager

5 Appendix 1 Observation / Comments on Questions raised in the Draft Decision Paper (CER/15/057) Aughinish is an alumina producer in Ireland and a large consumer of gas. We have no expertise in the operation of the gas network and as such our comments in response to the CER questions raised in the paper should be viewed in that context. However, notwithstanding this position we have made comments based on our desire to see a consumer oriented, non-discriminatory and balanced approach to the proposed tariff structure and seek to reduce the Diversity premium. Cl 4.3: Negative Expansion Constant The CER is against the application on basis that it is not positive for stability of tariffs or on entry point differentials. However, equity is also one of the three criteria and it also has an important influence. Should not the cost of equity be excluded to be consistent? Cl.5.10: Expansion Constant summary and proposed decision In essence CER seems to be saying that for other entry points (not Moffat) it wants to include the compression costs of raising from 43.5 bar to 71 bar, even though the Corrib system input pressure is 71 bar (see 5.6, 9). This does not seem logical. Cl.5.13: Annuitisation Factor The compressor cost is based on historic ( ) gas prices rather than forward curve. Also not clear that these cost include any EU ETS charges which may be applicable. The Annuitisation Factor mixes compressor life of 25 years with pipeline life of 50 years therefore the calculation should at least include NPV of compressor 2 at year 26. Cl.6.0, Storage, P43 Aughinish does not support favourable treatment for storage under the gas tariff structure and propose that any favourable treatment on the grounds of security be dealt with through a socialised measure (e.g. PSO Levy.) Applying a new discount to Entry for Storage increases charges for other users with absolute increases at Moffat being detrimental to Aughinish, with little impact from change in differential between Moffat and Corrib.

6 The CER is minded to provide a percentage discount on storage entry (which will increase other entry charges). There should be no change to the current regime of Exit discount or at least minimise change so that storage suffers the same percentage increase overall as other system users. If storage cannot operate without this subsidy then this is a policy matter and not applicable under tariff costing. Cl Matrix Aughinish in its response to the Consultation supported the CWDA methodology with absolute entry charges at Moffat being ~ 742/MWh under Matrix and ~ 649/MWh under CWDA (Scenario 2), with Moffat/Corrib differential lower under Matrix. Cl.11: Issues For Further Comments Proposed Entry Exit Differential: when the number of proposed changes are considered and the ability for shippers and NDM customers to differentiate between entry and exit capacity requirements, to increase the entry split does not seem to have any positive benefit regarding the TSO revenue recovery. The uncertainty around what may happen in the secondary capacity market and portfolio optimisation by shippers suggests that the entry split should be decreased to establish a more predictable revenue stream and certainty that all gas consumers are paying for their use of the system. Aughinish believe that a decrease in the Entry Split should apply from today s position to a level around 20% / 80%. This would reduce the ability for electricity generators to avoid paying a cost reflective charge for using the gas network. If the CER is of the opinion that the electricity market should pay more towards the gas security / gas recovery cost then this could be considered under alternative fiscal means e.g. PSO Levy.

7 Split Capacity / Commodity Aughinish believe a 100% Capacity Split is appropriate and it rewards those customers with the lower load factor e.g. base load and predictable demand users. This would also reapportion the costs to marginal users which benefit from the system spare capacity at Moffat. CER question on treatment of Isle of Man The Isle of Man should not be treated differently from other users at Moffat irrespective of the need to book long term capacity. However, the cost increase should reflect certainty and the benefits provided by predictable revenue streams. The proposal to reduce Entry Split to 25:75 would significantly reduce the Isle of Man tariff level which is an appropriate reward for long term commitment.