Operating Review - Energy

A dual-fuel, all-island business
that serves over 825,000 customers

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“Bord Gáis Energy is a dual-fuel, all–island business that serves over 825,000 gas, electricity and home services customers with exemplary service at competitive prices. It procures energy efficiently on wholesale markets and invests in energy assets to support its growth objectives in Ireland.”

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Retail

The retail arm of Bord Gáis Energy, selling gas and electricity to all market segments, with related activities including call centre management, billing, sales and marketing. Bord Gáis Energy entered the residential electricity market in Ireland in February 2009. The business now serves 427,000 gas customers and 348,000 electricity customers across residential, small business and industrial sectors. Through its Home Services Team it offers customers a range of products and services to meet their heating needs and help increase the overall energy efficiency of their homes. In 2012, Bord Gais Energy also launched a business energy services offering, in partnership with Siemens, aimed specifically at helping business customers to reduce energy consumption and increase energy efficiency.

firmus energy is Bord Gáis Energy’s subsidiary in Northern Ireland and is responsible for both the development of the natural gas network in 10 key towns and cities across Northern Ireland and the supply of natural gas and electricity to over 48,000 customers across the Province.

Trading

Responsible for the procurement of gas, electricity and carbon; portfolio optimisation; risk management; hedging and trading strategies and market modelling. Gas and electricity are bought on wholesale markets by a dedicated Energy Trading team. Bord Gáis Trading operates in line with best international practice and is benchmarked against the market within a regulatory framework.

Assets

Assets was formed in 2010 by integrating the Investment Team of Bord Gáis Energy with SWS Natural Resources following its acquisition by Bord Gáis in 2009. The Assets role is to operate and develop a balanced portfolio of assets that will help the company meet current and future customer energy requirements. The Assets division has three main areas of focus – the operation and maintenance of its existing assets; the development of new assets; and the investigation and support of emerging energy technologies.

Bord Gáis Energy Performance in 2012

The result for 2012 was an EBITDA of €79.4 million The comparative figure for 2011 was €44.3m. The increase in EBITDA in 2012 from the 2011 outturn, reflects improved performance from the retail business as a result of lower discounting, tariff changes and a continued focus on costs. Assets continued to perform strongly in a difficult market whilst firmus energy delivered significant EBITDA growth year on year with higher gas volumes in Belfast and ten key towns.



Bord Gáis Energy - Retail

Electricity Sector

Following the success of the Big Switch customer acquisition campaign, 2012 was a year of consolidation of our customer base. Increased competitor activity, including significant discounting and advertising activity by Electric Ireland following deregulation, coupled with the current economic environment, reduced our customer numbers to 327,000 residential customers and 21,000 business customers by the end of 2012. In response to competitive pressures, Bord Gáis Energy continues to focus on customer value including an ongoing commitment to offering the lowest standard electricity prices for residential customers. In 2012 Bord Gáis Energy also introduced a range of new competitive offerings to continually improve the value given back to customers, allowing customers to tailor the value offering that best suits their needs and allowing them control in managing their energy costs.

Gas Sector

In the Residential gas market, customer numbers decreased by 10% to 416,000 by the end of 2012. Bord Gáis Energy continues to be regulated in this sector and market share continues to decline in line with targets set by the CER for deregulation. Customer losses were largely driven by increased competitor activity, particularly in relation to significant dual fuel discounting by Electric Ireland and Airtricity.

Following full deregulation of the gas market for business customers on 1st October 2011, customer numbers declined to 11,096 by the end of 2012, an 8% net decrease compared to the previous year. This was driven largely by greater price competition. Lower volume sales in this sector were driven by the continuing economic downturn, as well as energy efficiency measures specifically aimed at reducing volume consumption.

Retail Prices in 2012

With respect to gas and electricity prices, 2012 continued to see changes in wholesale gas and electricity prices and continued market volatility. This resulted in price increases to our gas and electricity customers in October 2012. The increase was a direct result of upward trends in global fossil fuel prices and the impact of a weakening euro versus sterling. Through its purchasing strategy, Bord Gáis Energy endeavours to minimise the impact of volatile wholesale prices on customer tariffs and will review its tariffs on an ongoing basis to ensure that they are cost reflective and delivering value to customers.

Before the residential gas price increase of 8.5% on 1st October 2012, as approved by the CER, Ireland was placed below the EU average in the residential gas sector. Price increases were announced in 2012 in other EU countries due to the increases in international wholesale prices. Therefore the competitive position of Ireland’s gas prices compared to other European prices has not significantly changed. We await Eurostat data for the second half of 2012, due to be published later in 2013, to see how Irish gas prices compare against the adjusted EU average.

Gas Supply Competition

Competition and regulation of the gas market has progressed and changed considerably since market liberalisation in 2007. Competition has become well established with a number of market participants competing in all sectors of the retail gas market. These new entrants have built up their gas portfolios, allowing them to expand and establish sustainable competitive positions across all market sectors. This means that there are a number of competitors holding strong positions in the market, enabling them to compete equally with Bord Gáis Energy.

Specifically with respect to the residential gas market, which remains the only price regulated energy sector, competitors have expanded their positions in the market throughout 2012. This has largely evolved on the back of dual-fuel, gas and electricity, product offerings, which were pioneered by Bord Gáis Energy as part of our entry into the electricity market in 2009. To that extent, Bord Gáis Energy has made representations to the Regulator, the Commission for Energy Regulation, advocating for the deregulation of the residential gas market. Bord Gáis Energy believes that a deregulated residential gas market would allow it to provide more choice to customers in the market and in so doing enhance competition in the market further.

Energy Customer Service

Throughout 2012, Customer Retail Operations continued to ensure that customer focus is central to our best practice service delivery while recognising the continuing serious financial challenges faced by many of our customers. Both internally and externally we have focused on ensuring that internal customer facing staff, and those in our service partners, ensure that any debt management issues faced by our customers are addressed in the most empathetic way possible.

Bord Gáis Energy’s continuing commitment to offering its customers a wider range of options to help manage their accounts included the introduction of Electricity Pay As You Go metering in late 2012. This was accompanied by continued high volumes of Gas Pay As You Go meter installations as well as increased payment plan programmes for customers experiencing financial pressure in 2012.

Other options to enable customers to manage their accounts in a way that suits their individual needs, such as Level Payment Plan and Budget Direct Debit, saw a continued steady demand in 2012. These options allow customers to pay an equal amount off their bill every month thereby helping them to better manage their monthly household budgets. In 2012, Bord Gáis Energy became the first company in Ireland to be accredited by the Irish Institute of Credit Management in their Best Practice Initiative. Our aim is to achieve the “Best in Class” accreditation in 2013.

In 2012 we continued to engage positively with our customers and stakeholders to ensure that those customers who raised issues or complaints were dealt with successfully. Overall customer complaints have dropped by 12% in 2012 from 2011 numbers. This highlights the continued focus on addressing concerns, listening to feedback, and driving continuous improvement.

We continue to measure the effectiveness of our customer service levels through measurement of industry standard metrics. We benchmark these metrics across other industry segments to ensure we are delivering high quality service. We compliment these measurements with regular external customer satisfaction surveys, the results of which benchmark well against other providers.

Sponsorship

2012 was a significant year for the sponsorship portfolio as we consolidated our efforts on sponsorship properties which provide the highest return on investment, in terms of media value attained and nationwide consumer awareness. We continued to grow our sponsorships related to books and reading though our “Readiscover Your Library” campaign, our Bord Gáis Energy Book Club, and the prestigious sponsorship of the Bord Gáis Energy Irish Book Awards. On the sports agenda, we refocused our sponsorship portfolio, renewing our GAA Hurling U21 Championship sponsorship in late 2012 for a further three years and withdrawing from our sponsorship of the Ladies Gaelic Football Association after a number of successful years.

In March 2012, Bord Gáis Energy launched a new customer Rewards Club, aimed at generating customer interest and engagement around our naming rights sponsorship of the Bord Gáis Energy Theatre. The sponsorship has provided us with innovative offers to reward customers through ticket offers for the Theatre, as well as supporting local communities and causes, and is a key contributor to our customer retention strategy. As part of the launch activity, comedian Bill Bailey headlined our charity opening night where we raised €200,000 for the Society of St Vincent de Paul. In the nine months since the launch, we have delivered discounted and presale ticketing offers to top shows such as the Lion King and Oliver, which have proved very popular with our customers throughout 2012.

In May 2012, the Rewards Club was further enhanced through the inclusion of Tesco Clubcard. The offer, which is exclusive to Bord Gáis Energy, allows Rewards Club customers to pay for their energy using Tesco Clubcard vouchers and receive Clubcard points when they pay their energy bill. As at the end of 2012, over 10% of Bord Gáis Energy customers had joined the Bord Gáis Energy Rewards Club.

Energy Services for Homes and Businesses

In 2012, Bord Gáis Energy undertook a review of the Home Energy services business in response to changing consumer demand, driven by recessionary pressures. A revised business model for the delivery of energy services within the residential sector was undertaken in Quarter 4 2012 and a new operating model will be launched in 2013 to reflect the changing needs of our customers. In terms of Business customers, in 2012 Bord Gáis Energy launched the innovative new Business Energy Services in conjunction with Siemens. The new offer will allow Bord Gáis Energy business customers to avail of both energy audits and bespoke energy solutions designed to reduce their overall energy consumption and energy bills. A number of projects are in planning and are scheduled to commence in early 2013.

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Bord Gáis Energy - Trading

Gas, electricity, carbon and other renewable products are traded on wholesale energy markets by a dedicated Energy Trading team which operates 20 hours a day, 365 days a year. Bord Gáis Energy Trading operates in line with best international practice, is benchmarked against the market on a regulatory formula and has been proven to procure energy efficiently.

The Energy Trading Unit also publishes the Bord Gáis Energy Index, which is a price index that tracks developments in the wholesale energy markets across oil, gas, coal and Irish electricity prices. This energy index is published on a monthly basis and provides a useful barometer of wholesale energy market developments and implications for businesses and consumers as a whole.

The Bord Gáis Trading procurement policy has evolved over time and is based on many years of trading experience. With the increasing complexity and volatility of wholesale international energy markets, the company continues to diversify its supply mix and sources of gas and electricity supply.

Gas Supplies

In terms of gas supply, Bord Gáis Trading procures a proportion of its gas supply requirements from the Kinsale Area fields, where it also operates a storage agreement with Kinsale Energy Limited. The storage agreement enables Bord Gáis Trading to inject gas during summer months to help meet peak demand in the winter. There is also a strong reliance on procurement of gas supplies from the UK gas market, where Ireland sources over 93% of its gas requirements. Bord Gáis Trading has a portfolio of gas trading contracts with a variety of gas producers and traders operating in the UK wholesale gas market. The team also utilises gas storage products at facilities in the UK to optimise the management of peak demand and seasonal price volatility.

Bord Gáis Trading has developed and implemented sound hedging and risk management strategies to both mitigate exposure to short-term volatility and to enable Bord Gáis Energy to take advantage of price developments over a longer period.

Wholesale Gas Prices

With over 93% import dependency on gas supplies from the UK, the wholesale price of gas in Ireland is naturally dictated by, and indexed to, the traded price and market developments/influences in the UK gas market. The UK gas market is the largest market in Europe with demand of c. 100bcm per annum. By comparison, Ireland uses c. 5bcm per annum.

The UK itself now operates as a net importer of gas throughout the year, not just during the peak winter months, and is dependent on supplies from Norway, Continental Europe and Liquefied Natural Gas (LNG). While the average UK import dependency stands at c. 57%, the actual dependency on a day varies between c. 35% and 75%, so any changes to import flows can have a significant effect on the market.

Energy Market Developments in 2012

1. Global Crude Oil Prices

2012 was a turbulent year for Brent crude oil prices as anxiety dominated the markets and prices fluctuated significantly. These anxieties translated into a second consecutive year of record Brent crude oil prices. In euro terms, the average annual price broke through the €85 a barrel for the first time ever, bringing up the cost of oil in euro-zone countries [Figure 1].

As illustrated in Figure 2, crude oil prices during 2012 were quite volatile and different price drivers were evident for oil during the four quarters of 2012:

• In Quarter 1 2012, oil prices rose in response to heightened tensions between the West and Iran. Traders feared global oil demand could not be met due to potential supply disruptions from the Middle East and the loss of Iranian oil due to EU and US sanctions.

• During Quarter 2 2012, the continued concerns about the euro and slowing global economic growth weighed on prices, with oil (in euro terms) hitting a low of €74/barrel.

• By Quarter 3 2012, geopolitical tensions re-emerged and pushed prices back up as the civil war in Syria intensified and oil prices rose in turn.

• Quarter 4 2012 was the most stable period for oil prices in 2012, trading between a range of €82-€87/barrel. The key driver appeared to be different signals and projections on world economic growth for 2013.

2. UK Gas Prices

In the UK gas market, spot prices in 2012 generally traded higher than 2011 levels. As can be seen from Figure 3, spot gas prices on the day traded at or above equivalent 2011 levels, with a significant peak occurring in early February 2012 when a period of cold weather across North Western Europe put a strain on the system supplies and its ability to meet rising demand. Prices peaked at c. £1/therm in that period compared to a 2012 year average of just under 60p.

Spot gas prices averaged 59.5 pence per therm in 2012, compared to 56 pence per therm the year before, so there was a 6% increase in spot prices on average, reflecting a general tightening of the UK’s demand-supply balance.

A similar trend was evident on the forward markets. The forward markets are key for hedging purposes, as Bord Gáis purchases gas for future delivery to meet forecast customer requirements. In late 2011, the cost of a calendar year 2012 hedge would have been c. 57 pence per therm. By late 2012, a similar calendar year 2013 hedge would have been c. 63 pence per therm so forward hedging costs increased by c. 11% year on year.

The rise in wholesale gas prices in the UK across spot and forward markets was a major contributor to all major energy suppliers increasing their customer tariffs, and the CER approved an increase to Bord Gáis Energy’s residential tariffs of 8.5% in October 2012.

Many factors influenced wholesale gas prices during 2012, including:
- Geopolitical tensions in the Middle East leading to higher oil prices (particularly in euro terms).
- Declines in UK indigenous supplies and the loss of LNG supplies to higher priced regions in Asia.
- The ongoing debt crisis in Europe.

The list below illustrates some of the key issues that arose during 2012:

1. Crude Oil Prices
As noted above, 2012 was a second consecutive year of record Brent crude oil prices. In euro terms, the average annual price broke through the €85 a barrel for the first time ever, bringing up the cost of oil in euro-zone countries. The volatility in oil markets fed through to other energy commodities. Concerns about continued weakness in the global economy provided protection against the upward price pressures from the escalation in Middle East tensions.

2. Declining UK Indigenous Supplies
UK indigenous supplies (primarily from the North Sea) have generally decreased year on year as many of the gas fields are in operation for many years and production is declining. During 2012, UK indigenous supplies (incorporating some of the flows from Norway) averaged 122mcm versus 129mcm the year before, so a 5% decline was evident year on year.

UK indigenous gas was reduced in March 2012 when a leak was discovered at the Elgin-Franklin gas field, which is situated 240km east of Aberdeen. This led to a loss of 10-15mcm of supplies to the UK and the field is currently undergoing repair work. The field is expected to be back on-line from Quarter 2 2013.

More importantly, the peak rate of UK indigenous gas supplies also dropped considerably. Peak indigenous supplies for the UK during 2011 was 225mcm, but this peak declined to 205mcm during 2012, illustrating that the indigenous supplies within the UK now have less flexibility to cope with higher demand periods. This increases the dependency of the UK on imported gas from continental Europe, Norway and Liquefied Natural Gas (LNG) from further afield.

3.Demand/Weather
In general, UK gas demand in 2012 was weak with demand averaging 235mcm compared to 256mcm in 2011. There was a brief cold weather spell during early February, but in general UK gas demand during 2012 was below “seasonal norms”.
While generally mild weather played a part, the primary contributor to lower demand was a significant drop in gas demand in the gas fired power generation sector (Figure 4).

Lower carbon prices during 2012 contributed to coal fired generation being significantly more cost effective than gas fired generation in the UK, so gas demand in the power generation sector declined significantly. Power station demand averaged 55mcm in 2011, this average fell to 38mcm in 2012, a 30% decrease. This lower demand helped to reduce further upward pressure on prices already created by lower UK indigenous supplies and lower LNG flows.

4.Lower Liquefied Natural Gas (LNG) Deliveries to the UK
During 2011, the UK suffered a reduction in LNG supplies following the tsunami in Japan, after which Japan’s dependency on LNG supplies for power generation increased following the shutdown of nuclear generation.

The general trend of lower LNG supplies to the UK was even more evident during 2012. LNG flows to the grid averaged just 34mcm in 2012, compared to 65mcm during 2011, an almost 50% drop. During 2011, LNG supplies contributed to 25% of supplies, but during 2012, this contribution dropped to 15%. This increased the UK’s vulnerability, especially during times of colder weather and higher gas demand (Figure 5).

The key reason for the drop in LNG supplies to the UK is that the prices achievable in Asian LNG importing regions, such as Japan and South Korea, are significantly higher than the prices achievable for LNG in the UK. While UK gas prices generally traded in the 60 to 70 pence per therm range during 2012, spot LNG cargo deliveries to Asian markets changed hands for over £1 per therm at times and reportedly averaged over 80 pence per therm. With very little additional LNG supplies coming on-stream globally during 2012, the availability of excess LNG to lower priced regions such as the UK decreased.

5. Re-Negotiations on Continental Oil Indexed Contracts
Traditionally, as the UK competes with continental Europe for gas supplies, the UK gas price would typically reference the oil indexed price implied by continental contracts. Otherwise, the UK would fail to attract the relevant gas supplies to meet its own demand. As supplies tighten in the UK, this is an increasingly important factor. During recent years however, the continental long term contracts have generally delivered higher prices than those evident at trading hubs such as the NBP in the UK. For this reason, there has been a significant amount of renegotiation of long term oil indexed contracts between Norway/Russian producers and continental buyers.

The impact of this is that generally the contractual oil indexed price structure is now lower than it was previously, but even with this change, general spot (and forward) prices in the UK remain below continental prices, so the incentive to send gas to the UK remains generally low, particularly in lower priced periods.

6. Lack of Seasonality in Prices
With gas demand typically lower in the summer months than in winter months, it would be expected that prices would be lower in summer months. During 2012 however, spot prices in the UK gas market were relatively flat and averaged 59p/therm for most of the year. A similar trend was evident in 2011, so it appears that alternating levers on demand and supply are ensuring prices remain relatively stable throughout the year and that prices prevailing over summer periods no longer trade at a heavy discount to higher demand periods in the winter.

The lack of seasonality was also evident in forward markets with the premium for winter contracts over summer contracts falling over 2012. This could lead to problems in the years to come as it reduces the signal to develop new UK storage sites to aid system flexibility.

3. Energy Market Outlook

The current outlook for 2013 energy prices would generally be in line with the levels evident in 2012. The key price drivers would be:

o Global economic growth in 2013
o Weather conditions
o Exchange rate movements
o Geopolitical tensions

In crude oil markets, until key global economies illustrate sustained economic growth over a number of quarters, global oil prices are likely to be capped at €97/barrel ($130/barrel) as any sharp rises would lead to inflationary pressures across already weakened economies. But downward pressure on prices could be capped by geopolitical issues or supply responses by OPEC, the oil cartel which produces c. 40% of current oil production but also controls c. 75% of the world’s oil reserves.

A key factor in the Irish context will be the relative moves of the euro and dollar currencies which will influence how much an oil movement will price into the economy. During 2012 the euro weakened versus the dollar and this amplified the rise in the price of oil during that year – a similar risk is evident in the coming year.

In the gas market, the signals for gas fired generation in the UK remain weak for 2013 based on current forward markets. The introduction of a carbon price floor in April 2013 by the UK Government should increase the attractiveness of gas fired generation, but coal fired generation is likely to remain the most cost effective, unless carbon prices rise substantially.

While there are no large gas supplies coming on-stream for the UK during 2013, a number of existing storage facilities are being enhanced along with the introduction of new storage sites, so system flexibility should increase in 2013.

The overall UK gas demand-supply position is likely to remain tight in 2013, with no significant supplies due to come on-stream and the Asian market is expected to continue to out-price the UK for LNG cargoes. There remains uncertainty on the return of nuclear power plants in Japan which could impact LNG deliveries to Europe. Peak demand periods (e.g. cold spells) could prove a significant test for the market and based on 2012 prices, significant jumps in demand could push prices up sharply in tight conditions.

Electricity Supplies

Bord Gáis Energy participates in the Single Electricity Market (SEM), both as a purchaser of electricity to meet its growing customer demand, and as a generator of electricity. In order to offer this growing customer base a long term, competitive offering, it has made significant investments in traditional and renewable power generation, including its highly efficient 445MW gas-fired power station at Whitegate in Co. Cork and its wind generation portfolio.

Given Bord Gáis Energy’s current customer and asset base, in order to ensure an adequate demand versus supply balance, Bord Gáis Trading continued to be an active participant in the Contract for Difference (CfD) Auction rounds which were scheduled throughout 2012 (such CfDs can be viewed as an effective fixed source of power supply). Bord Gáis Trading also imports a proportion of its power supply requirements from the UK through the Moyle Interconnector and more recently via the East-West Interconnector which commenced commercial imports on 21st December 2012. This enables it to diversify its power supplies, and procure competitive supplies from the UK. Further power supplies are secured through offtake agreements with indigenous wind farms, Combined Heat & Power (CHP) units and through a tolling arrangement with a gas-fired power station. Having acquired power from these diverse sources, Bord Gáis Trading mitigates exposure to daily pool prices in the SEM. These diverse and clean sources also enable it to offer its larger electricity customers the opportunity to hedge price risks within the SEM and for Bord Gáis Energy to offer competitive rates for residential customers.

Irish Wholesale Electricity Prices

Irish wholesale electricity prices continue to be significantly influenced by commodity prices, in particular by UK gas prices. In recent years, anywhere between 60-70% of electricity generation volumes in Ireland relates to gas fired power plants mainly using UK Gas. It should also be noted that Irish wholesale electricity prices are also impacted by Carbon prices given that generators are required to incorporate a carbon cost into their bid prices (given current market prices, gas has more of an influence on the overall wholesale electricity price than Carbon).

Figure 6 shows how the 20 day rolling average Irish Wholesale Electricity price evolved over 2012.

Significant changes to the SEM in 2012 included:
• Roll out of Intraday Trading – this modification to the SEM rules provided additional bidding opportunities for generators to get into the market. It was largely driven by the need for the market to comply with European regulations on capacity and congestion management.
• Build out of the East West Interconnector – the East West Interconnector, which has an import/export capacity of 500MW, had a provisional go live date of 1st October 2012. It began operating on a commercial basis in December 2012 at a reduced capacity of 250MW and is being used primarily to import power from the UK to Ireland.

The most salient regulatory issue facing the SEM in the next one to two years is European Integration (i.e. the development of an electricity market model in Ireland which complies with the European Target Model). The roll out date of the target model in Ireland is 2016; the type of model and related rules are currently under consultation between the regulatory authorities and market participants.

Carbon Market

Bord Gáis continues to be an active participant in the European Union Emissions Trading Scheme (EU ETS). The EU ETS is a cap and trade scheme that covers over 11,000 installations across Europe. The scheme, which started in 2005, is currently in its third phase. During the third phase of the market, the combustion sector will not receive any free allowances from the European Commission. While there was a flat cap on emissions during the second phase (2008 to 2012), the cap in phase three (2013 to 2020) will reduce linearly each year at a rate of 1.74%.

After a volatile 2011, EU carbon prices managed to stabilise in 2012, albeit at a lower price (Figure 7). The fundamentals of the market failed to change as the market continued to suffer from a glut of allowances and slowing electricity demand. It was a year that saw lower emissions from industrial units and increasing renewable electricity generation capacity. The market traded on the back of speculation for most of the year before the European Commission finally announced its intention to “backload” the market. As a short-term measure, the European Commission is seeking to postpone the auctioning of 900 million allowances from the years 2013-2015 until 2019-2020. It is expected that the demand for carbon allowances will recover post 2015. This process is termed “backloading”.

“Backloading” is viewed as an interim solution for market reform which could take much longer to implement. The European Commission has outlined six measures that could make the EU ETS more robust and sustainable during turbulent economic times in the future. The six options identified by the Commission are:

1. Increasing the EU’s greenhouse gas emissions reduction target for 2020 from 20% to 30% below 1990 levels;
2. Retiring a certain number of phase three allowances permanently;
3. Revising the 1.74% annual reduction in the number of allowances to make it steeper;
4. Bringing more sectors into the EU ETS, particularly more defensive sectors;
5. Limiting access to international credits (Certified Emission Reduction Units, Emission Reduction Units etc);
6. Introducing discretionary price management mechanisms such as a price management reserve.
There are a number of steps to go through for any of the options to be implemented.

Bord Gáis Assets

The role of the Assets division is to develop and operate a balanced portfolio of assets that will help Bord Gáis Energy to meet current and future customer energy requirements. The division has three main areas of focus: the operation and maintenance of existing assets; the development of new assets; and the investigation and support of emerging energy technologies. Within the Division an Environment, Health and Safety function has been established, whose remit encompasses the wider Energy business.

The operating and development assets provide safe, reliable and competitive energy to our customers, while also contributing to the achievement of national renewable energy targets. Bord Gáis is committed to developing its own source of energy products so that the organisation can manage and control energy costs in an efficient manner that best supports the needs of our customers and the company. This mix of energy assets will enable Bord Gáis Energy to meet the needs of customers with sustainable and competitive electricity offerings.

Environmental, Health and Safety

An Environment, Health and Safety (EHS) department was set up in Bord Gáis Energy during 2011 to establish, develop and enhance the Environment, Health & Safety function within Bord Gáis Energy.

The primary focus of the department is to ensure that all aspects of Bord Gáis Energy operations are conducted in a safe and environmentally responsible manner. To achieve this objective, an integrated EHS Management System for Bord Gáis Energy was established, ensuring the environmental, health and safety risks are identified and managed appropriately. The EHS team provides support across the business, applying best in class practices across all Bord Gáis Energy activities.

To date, the team has completed a full environmental, health and safety review of the business and our contractual partners. A new EHS Policy has been adopted and a new EHS Management System framework implemented. Enhanced systems for the reporting of incidents and the management of risk assessments, audits and EHS legal compliance have also been introduced.

Operations and Maintenance

Whitegate Power Plant

The Whitegate power plant has been in commercial operation since 9th November 2010. Safety continues to be a key focus for management and there were no lost time incidents to report during 2012. The plant has now been accident free since March 2009. GE, who provide operations and maintenance services to Whitegate, are set to achieve ISO 18001 and 14001 rating for the plant in 2013.

The plant has performed extremely well in 2012 and has achieved or exceeded all of its technical targets during the year. Its availability performance continues to be excellent with its forced outage performance comparing very favourably with the industry norm (NERC) for such CCGT units. Day to day operation and maintenance activities are carried out under contract with GE who employ 30 staff on site, while long term plant maintenance is managed under a contractual services agreement, again with GE.

These agreements ensure that operational and technical risks are shared with GE and provide added incentives in terms of meeting safety, environmental and operational targets. The operation and maintenance activity is managed by the Asset Operations staff within Bord Gáis Energy.

Wind Portfolio

With 240 MWs of operating wind capacity, stretching from Cork to Donegal, Bord Gáis has one of the largest renewable energy portfolios in the country. The wind fleet now consists of 132 wind turbines spread across 14 wind farms. This power output complements that from Whitegate to provide a clean, sustainable source of electricity for our customers. The operating assets are remotely monitored to enable the Asset Operations team to maximize the availability and efficiency of each turbine. The state of the art fleet includes wind turbines from world leading manufacturers such as GE, Nordex, Vestas and Enercon. Concentrated focus on the operation of the wind farms in 2012 ensured that overall fleet availability was 1.5% ahead of target.

Business Development

Renewable

Bord Gáis has a significant pipeline of wind development projects. Major progress was made on the consents for these projects in 2012 supporting a build out programme which has 174 MWs of wind projects in construction, 100 MWs to be brought to financial close within 24 months and a further 350 MWs of medium to long term wind development. This build out programme will see Bord Gáis invest up to €400 million over this period, significantly enhancing the asset quality of its balance sheet.

Conventional

With considerable baseload power and renewable wind in its power portfolio, Bord Gáis intends to complement this power with high efficiency, flexible, fast acting Open Cycle Gas Turbine plant (OCGT). To this end, it has a joint venture with Mountside Properties, called Greener Ideas Limited (GIL), to progress OCGT developments. Greener Ideas Limited owns three sites with full planning permission and grid connection agreements that are located in Athlone, Cahir and Kilkenny. GIL appointed Owner Engineers in early 2010, and since then detailed designs and evaluations have been carried out for all three sites.

When these projects are developed, Bord Gáis will have a fast and flexible means of responding to customers’ fluctuating usage requirements and will be a source of major support in stabilizing the high voltage transmission system. Furthermore, efficient OCGT plants will help maximise the amount of wind generation that can be accommodated on the Irish electricity grid. Gas turbine plants of this type offer major carbon savings, compared to less efficient, diesel fuelled flexible plant and, as a consequence, they will support the achievement of the Government’s target in relation to renewables (40% of electricity demand to be met by renewables by 2020). These projects provide Bord Gáis Energy with options to develop gas fired fast response power generation when the market mechanisms are in place to reward this type of service.

New Energy

Bord Gáis invested both capital and resources into specific companies and research reports, demonstrating its commitment to providing support to emerging technologies.

Gas Storage

North East Storage, a consortium between Bord Gáis and Storengy, had been investigating the feasibility of a salt cavern gas storage facility in the Larne area of Northern Ireland. In 2011, one site was chosen for the test drill. Unfortunately, final test results during 2012 confirmed that the site did not meet the requirements for gas storage due to inadequate salt deposits.

Micro CHP

Bord Gáis completed its trial of the six Baxi Ecogen Micro CHP devices in employees’ homes. SEAI deployed Gastec to monitor the performance of the units over the course of a year and at the end of this period they compiled their findings into a report. It concluded that although the units performed very well over the period, in the absence of some form of financial support, the commercial case for installing the devices would remain challenging.

In 2009 Bord Gáis entered an exclusive arrangement with Ceres Power who were developing a fuel cell based micro CHP device. Technical issues arose during field testing of the device in the UK in 2011 which impacted on the programme. In 2012 it became clear that they needed to raise more funds to finance their developments. As a consequence, 51% of the business has been sold to IP Group Limited, a company which specialises in commercialising IP.

VP Power

In 2010 Bord Gáis completed a €1 million investment in VP Power, an Irish company dedicated to the development and utilisation of underground coal gasification as a means of commercially exploiting the known coal resource located in shallow waters in the Kish bank basin off Ireland’s east coast. VP Power has carried out a seismic survey and a drilling programme in the area. Talks with potential partners regarding exploiting the resource are ongoing.

Research & Development Initiatives

In April 2010 the Government (via Enterprise Ireland) announced a commitment of €20 million to the International Energy Research Centre (IERC) at the Tyndall National Research Institute in Cork. Bord Gáis Energy has joined a group of multinational companies, including United Technologies Corporation, Alcatel Lucent and Bilfinger Berger, as a Full Member of the IERC.

The IERC represents an exciting opportunity for Bord Gáis Energy to contribute to the search for some of the solutions to the energy challenges of the future for the benefit of Irish energy users. The centre will act as a conduit to research and develop innovative solutions to real industry issues in the energy sector by leveraging the knowledge base of all the Irish third level institutions including UCC, CIT, UL, UCD, TCD and LIT.

2012 saw a number of milestones for the IERC with the appointment of the first IERC Director and the centre moving into its own dedicated office and research space at Tyndall National Institute in Cork City. A Bord Gáis Energy employee is seconded to the IERC on a fulltime basis to sit on the Industry Steering Board and oversee projects of particular interest to Bord Gáis Energy. To date, five projects have been funded by the IERC to the value of €4.7 million.

One of these projects, which is being undertaken on Home Area Networks, is of particular interest to Bord Gáis Energy. The goal of the project is to develop, demonstrate and deploy an automated home area network infrastructure. Called Authentic, this system will help the home occupant manage and reduce their energy usage as well as controlling other home based systems such as security and entertainment.

Marine Energy Research

Bord Gáis has committed to supporting the development of the Irish Maritime and Energy Resource Cluster (IMERC) and has committed €1.5 million to the development of the Beaufort building. IMERC is an initiative to develop a world leading research and commercial cluster in a new building alongside the National Maritime College in Cork.

 

Northern Ireland

Northern Ireland is an important energy market for Bord Gáis: in 2012, over a fifth of all gas transported by the company was for the Northern Ireland market. The company is also active in both the gas and electricity retail markets.

firmus energy, a subsidiary of Bord Gáis operating in Northern Ireland, won the supply and distribution licences for ten towns along the routes of new transmission pipelines in 2005. It now supplies gas to around 17,000 industrial, commercial and domestic customers in these towns. In addition, firmus energy holds supply licences for both the natural gas market in greater Belfast and electricity across Northern Ireland, and supplies gas and electricity to over 48,000 customers across the Province.

Ten Towns Development

Bord Gáis entered the Northern Ireland market in 2004 with the development of the North-West transmission pipe, followed in 2006 by the South-North transmission pipeline. These pipelines integrate the gas networks, North and South, and enable the operation of an all-island gas market.

firmus energy, a subsidiary of Bord Gáis operating in Northern Ireland, won the supply and distribution licences for ten towns along the routes of these new transmission pipelines in 2005. It now supplies gas to around 17,000 industrial, commercial and domestic customers in these towns and in 2012 added over 4,000 new connections to the 10 Towns network. In addition, firmus energy holds supply licences for both the natural gas market in greater Belfast and electricity across Northern Ireland. As at the end of 2012, firmus energy supplied gas to over 31,000 customers in the competitive greater Belfast gas market and supplied around one third of the gas used by industrial and small businesses in this market.

firmus energy is also continuing to develop the new gas network in its licence areas. At the end of 2012, a total of over 760km of gas mains had been constructed across the five North-West towns of Ballymena, Ballymoney, Coleraine, Limavady and Derry City, and in the five South-North towns, namely Antrim, Craigavon (including Lurgan and Portadown), Banbridge, Newry and Armagh. In 2012, 4,000 new customers were connected to the network including 275 new business customers. During the year, firmus energy also gained approval from the Utility Regulator in Northern Ireland to include a number of new areas for connection to the network, namely Bushmills, Bessbrook and Craigdoo Quarries. Gas was also made available in several new areas which had been approved by NIAUR in 2011, namely Warrenpoint and Ballyclare. Network construction continues to be executed on the basis of known gas loads, such as large industrial users, small commercial enterprises, new build developments and Northern Ireland Housing Executive (NIHE) estates, with owner occupied homes connecting where they are in the vicinity of existing mains.

The firmus energy Conveyance licence provides for a regulatory rate of return of 7.5% (real pre-tax) on network development related capital investment and underwrites this recovery over a thirty-year period.

Following extensive planning in 2012, including the development of a new 10 Towns Network Code, market opening within the large Industrial & Commercial sector took place in October 2012. The SME and domestic sectors are planned for market opening in April 2015 across all the towns.

Competitive Supply Markets

firmus energy has taken advantage of the opening of the natural gas market in greater Belfast, providing competition and contracting with customers in this area since 2007. By the end of 2012, over 31,000 customers in greater Belfast had switched to firmus energy for their gas supply from the incumbent supplier. Currently over 34% of all gas consumed in both the large I/C contract and the SME sectors in greater Belfast is supplied by firmus energy.

The customer acquisition strategy in greater Belfast was based on a two-year discounted deal against Phoenix’s (now Airtricity) gas published tariff and is currently being supported by significant advertising and marketing activity. Gas competition in greater Belfast is now available to both credit and PAYG residential customers.

The award of its electricity supply licence in late 2008 enabled firmus energy to launch dual-fuel energy contracts. It secured its first electricity customers in the industrial/commercial sector shortly thereafter in early 2009 and continues to offer electricity to customers in this sector.