Natural gas: 20 years in the making

image2.jpegPhoenix Natural Gas Chief Executive Michael McKinstry talks to Owen McQuade about the development of the natural gas industry in Northern Ireland over the last 20 years and what the future holds for the energy utility.

Michael McKinstry has been involved with Phoenix Natural Gas (PNG) since the start in 1996 when the utility was first granted its license. “Looking back 20 years, the Northern Ireland of today, despite all its apparent difficulties, is a lot different from back then,” he observes.

 The first IRA ceasefire had just ended; there were bombs in London’s Canary Wharf and in the British Army Headquarters in Lisburn. 1996 was also synonymous with the first Drumcree crisis which brought the province to a virtual standstill. “Perhaps maybe not the best backdrop for a new investor coming into the province from an investment perspective.”

 The economic backdrop was changing fast as well and in addition there had been a significant privatisation programme within the energy sector. This created opportunities for international investors to own and operate infrastructure.

“The context of coming to Northern Ireland for British Gas was an uncertain political outlook and significant change in the economy, particularly in the energy sector,” says McKinstry. “I guess it was a little ironic that although several governments had promised but failed to bring natural gas to Northern Ireland, it was the privatisation of the power stations which was the main driver for the construction of the natural gas pipelines from Great Britain. Once natural gas had arrived this provided the opportunity to make natural gas available to individual homes and businesses throughout Northern Ireland,”

 Whilst Phoenix has gone through a period of ownership by a range of international investors McKinstry stresses the important local dimension to the company. “Phoenix has always operated as a standalone independent company based in Northern Ireland with decision making led by the management team based in Northern Ireland.

The culture and values as well as direction was very much left in control of those who understood the environment in which the business was to operate. I think that this has been a key strength of the business over the years our staff and managers have been instrumental in setting the benchmark for how the gas industry has developed in Northern Ireland and we are very proud of the many achievements that have led to the rapid growth of the business.”

There are many benefits to both homes and businesses from regulation and one of the key benefits was that the Phoenix Licence made gas available to 90 per cent of the properties in the Greater Belfast area. This meant that development was never going to be based on purely cherry picking the most attractive sectors such as large users, and 20 years on the target has already been surpassed. “We will be 20 years in business next year with gas available to 318,000 properties and by the end of next year and will have connected 200,000 homes and businesses to the network. Another way to look at this is that from a standing start Phoenix has achieved a 63 per cent penetration which surpassed the business plan target of 60 per cent,” reflects McKinstry.

 The start-up of Phoenix Natural Gas was much more than the build out of the network. It was starting a new industry entirely from scratch: “I am pleased to say that the quality of the people working in the natural gas industry today are world class and this has been recognised by a range of external bodies. In terms of external validation, PNG has won the Big Tick award for Corporate Social Responsibility (CSR) from Business in the Community. It has also won Network Operator of the Year from the Society of British Gas Industries and has won the Sword of Honour for Health and Safety from the British Safety Council.

 “Developing the industry was not just putting pipes in the ground but also meeting customers’ needs. This meant encouraging the local indigenous industry to invest in establishing natural gas technologies, equipment and infrastructure to meet the needs of the rapidly expanding customer base.” This partnership approach would appear to have been a smart move as 20 years later, the Northern Ireland Natural Gas Association (NINGA) has over 300 companies represented and it continues to grow as the industry continues to develop.

In addition to the network investment there has been significant on-going investment in the conversion of heating systems in homes and businesses and process equipment in industry, which runs at around £30-£50 million each year. One of the most successful aspects of the development of natural gas has been the development of high efficiency boilers and controls and equipment. This is reflected in the fact that the average domestic consumer in Northern Ireland uses around 25 per cent less gas than in Great Britain.

 McKinstry highlights the environmental benefits of the switch from coal and oil to natural gas. These environmental benefits were part of the early education programme and as a result of the change to natural gas, over the past 20 years the air quality in Greater Belfast has improved substantially.

 The development of the gas network in Greater Belfast included the purchase of the old towns gas network and this together with the use of modern construction techniques such as non-dig technologies has meant that the network has been delivered with minimum disruption in a very cost efficient manner.

 Looking back over the last 20 years, McKinstry sees an industry and fuel that “meets the needs perfectly of modern lifestyles and has been a great boost to the local economy. Not least, around 3,000 new jobs that have been created in the construction and installation of natural gas in Northern Ireland.”

 Mission

As the company approaches the 20 year mark, the main focus for the Phoenix business this year is its price control review undertaken by the Utility Regulator. “Like all regulated businesses we have to explain and justify what we do in terms of developing and maintaining our network, and then the regulator will grant us the appropriate allowances to enable us to recover the costs associated with these activities,” explains McKinstry.

PNG is in the process of submitting its latest price control. The price control period is for six years running from January 2017 to the end of 2022 and comes after a series of shorter reviews. The determination will be in the second half of 2016. One added complexity for this review will be for the first time the weighted average cost of capital will be up for review. The cost of capital had been embedded in PNG’s licence, reflecting the nature of the business and therefore is now subject to review for the first time at the end of 2016. The other determinant is PNG’s cost base and whilst there ought to be a greater degree of familiarity with these cost lines, having been through two reviews already in the last five years, McKinstry appreciates that the company needs to make their case. There has been some change to the price control process over recent years, with best practice being introduced from Great Britain such as cost reporting templates and stakeholder engagement in support of submission process and “whilst adding a lot more complexity it should mean fewer surprises in the review process.”

 Regulatory stability is very important for rating agencies and investors as ultimately, it leads to lowest possible cost of capital which ultimately means it’s good for customers as well, according to McKinstry: “We went through a rather more turbulent period back in 2012 with the referral to what is now the Competition & Markets Authority. However, whilst it is better not to have to seek arbitration too often, at least it highlighted to the markets there is a means of dealing with disputes if necessary.”

Looking at the bigger picture, he continues: “Our mission is to be recognised for excellence as a world-leading energy utility across all aspects of our business.” He sees benchmarking as being central to achieving world-class status and in particular external validation, such as employing the new ISO55001 standard which assesses how the company goes about its maintenance function.

“Anyone in the industry looking for a benchmark can come to Northern Ireland and see a world-class energy utility. That means fit for purpose, efficiently developed and delivering to customers’ requirements. You need to evidence that to be the case and highlight why you are good at what you do.”

“One of the strengths of our business and the culture of the people within it is that we are constantly striving to do things better, including looking to be innovative, identify new more efficient ways of constructing and operating the network and making better use of new technology,” he adds.

“We also accept that we are a key part of the community we operate in and therefore CSR is a key part of our business. We need to be seen as a vital part of the community and to have a good reputation as a business. It’s not about PR but about doing the right things, such supporting local children in need through our Energy for Children Charitable Trust, mentoring and supporting local businesses or in supporting our own staff in the development of their career or living a healthier lifestyle.

 Future

Extending the theme of the energy utility business having a long-term focus, McKinstry says that by recovering the costs over the next 40 years, existing and future customers will be able to share in the benefits of the fuel. Despite much of the network having already been developed PNG expects to continue to connect a further 8,000 new customers each year into the future. Looking at the development of the wider industry, he says that “it is great to see the industry expand to the North West and North South corridor by firmus and to see gas extend into the west of the province.”

PNG continues to examine opportunities to expand its own licence area and has been looking to bring natural gas to Downpatrick and Newcastle. The company is actively engaged with the Utility Regulator and the Department of Enterprise, Trade and Investment to make this a reality. “It is about sharing the benefits of natural gas enjoyed by those in the Greater Belfast area with those across a larger geographic area,” observes McKinstry.

Looking to the immediate future he sees the Price Control as the priority for the next 12 months, “which is essential to deliver the level of service we have provided to date.”

“We have shown we are capable of developing networks and connecting customers, particularly in the privately owned residential sector. We will continue to develop the network within our licence area and look for opportunities further afield including East Down,” he concludes.

Profile: Michael McKinstry

Michael was born and bred near Ballyclare, County Antrim. He trained as an accountant with GEC at Larne and then spent some time in the textile sector working for Ulster Weavers: “I really enjoyed my time there; they are one of the few remaining linen manufacturers in existence.” He then joined Ballylumford power station just after privatisation. After a period involved in the development of a new Finance function within the privatised utility, he joined Premier Energy Supply (which later became Phoenix Natural Gas) in the six months prior to getting its license. He had been the company’s finance director for 18 years before becoming CEO last year. In his 20 years with the company “there has been a lot of change, including ownership, from a joint venture with three owners, to a fully owned PLC, to being bought by a private equity company and now owned by an infrastructure fund.”

 Interests outside work include sport (being a former rugby player); he is a keen runner having completed a few marathons. Michael now runs, cycles and plays golf “to clear the head and try and stay healthy.”

 

 

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