Section 7 - Demand Sensitivities

A number of demand sensitivities were examined to ascertain what the impacts of changes in demand would be in relation to the total investment, the phasing of investment and the impact on NPVs. The Terms of Reference for this study asked for the following sensitivities to be carried out:

A reduction of 10% in gas demand under the high gas demand scenario, GWB; and

The impact of gas demand being 10% higher and 10% lower than forecast in the CW scenario.

In this section we consider the above sensitivities and others to examine their impacts on the total investment costs for each option and their respective NPVs. The sensitivities which consider a reduction in demand, for whatever reason, allow the possibility of deferring the decision to build new import infrastructure.

The actual analysis of the demand sensitivities was carried out by Sofregaz using their own simulation model for determining supply configurations.

7.1 The Demand Sensitivities

In carrying out the demand sensitivities the baseline case is assumed to be represented by the set of demand scenarios for GWB and CW which assume interruptibility at the Poolbeg Steam plant. Gas demand by the new CCGT at Poolbeg, due to be commissioned at the end of 1999, is assumed to be firm in the baseline scenarios. The corresponding set of supply configurations are UK1, UK2 and UK1-S-N. The demand sensitivities only relate to gas demand in Ireland.

The following chart illustrates the effect on the baseline case of a 10% increase and a 10% decrease in demand under the GWB and CW demand scenarios.

The demand scenarios illustrated range from a peak demand level in 2025 of 35.2 mscm/d to just under 53 mscm/d. The demand profile assuming a reduction of 10% in gas demand under GWB is almost identical to the demand profile assuming a 10% increase in demand under the CW.

The reduction in demand should defer the requirement for additional import infrastructure. It can arise in the power generation or the non-power generation sectors or a combination of the two.

In relation to the baseline case we considered the impact of the following on each of the three supply options listed above:

A reduction of 10% in gas demand under Gas World B (which is almost identical to a 10% increase in demand under the Conventional Wisdom Scenario).

A reduction of 10% in gas demand under Conventional Wisdom.

IFI closed from 1 Jan 2002 under Gas World B.

IFI closed from 1 Jan 2002 under Conventional Wisdom

1. GWB Demand minus 10%:

Total peak demand amounts to x mscmd in 2025 in the lower demand scenario compared with x mscmd under GWB. The requirement for new import infrastructure arises in x under GWB. If demand is 10% lower and assuming that Kinsale gas continues to flow at the same rate, this requirement remains unchanged as the total peak demand in x, at x mscmd, is met by imports of x mscmd, with the balance coming from Kinsale. This import requirement exceeds the maximum capacity of the existing Scotland-Ireland pipeline. Additional interconnector capacity is therefore required, in the absence of further indigenous gas discoveries.

Details of the capital investment costs associated with the supply configuration designed to meet the GWB minus 10% scenario are presented in Table 7.1. The differences between the total investment amounts under GWB for the base case (see Table 3.4) and between the corresponding net present values are shown in brackets.

The following points are noted:

The overall investment cost is x MUS$ lower for UK1 and UK1 – SN and x MUS$ lower for UK2 than in the GWB base case.

The NPVs are 86 MUS$ lower for UK1, 89 MUS$ lower for UK1-SN and 70 MUS$ lower for UK2.

The total capital cost for UK1 is 85 MUS$ lower than in the GWB base case.

The total capital cost for UK2 is 71 MUS$ lower than in the GWB base case, ………….. The total capital cost for UK1-SN is 84 MUS$ lower than in the GWB base case,

Despite the lower demand profile, there is little impact on the phasing of capital expenditure. The annual schedule of investment for each supply option, assuming GWB minus 10%, shows that x% of capital expenditure under UK1 is spent by the end of x compared with x% in the base case. The corresponding proportions are x% for UK1-SN compared with x% in the base case, and x% for UK1 compared with x% in the base case.

Thus the impact of a 10% reduction in demand under GWB has little impact on the phasing of expenditure due to the fact that the requirement for additional import infrastructure remains 2004.

A similar analysis of the impact of a 10% reduction in demand under the CW demand scenario was carried out.

Total peak demand amounts to x mscmd in 2025 in the lower demand scenario compared with x mscmd under CW. The requirement for new import infrastructure arises in x under CW. If demand is 10% lower and assuming that Kinsale gas continues to flow at the same rate, this requirement remains unchanged as the total peak demand in x, at x mscmd, has to be met fully by imports as it is assumed that Kinsale is depleted in x . This import requirement exceeds the maximum capacity of the existing Scotland-Ireland pipeline. Additional interconnector capacity is therefore required in x, in the absence of further indigenous gas discoveries.

Details of the capital investment costs associated with the supply configuration designed to meet the CW minus 10% scenario are presented in Table 7.2. The differences between the total investment amounts under CW for the base case (see Table 3.5) and between the corresponding net present values are shown in brackets.

The differences in total investment cost and in the NPVs are of the same order of magnitude as for the previous GWB minus 10% sensitivity.

The total investment cost is around x MUS$ less for the UK1 and UK2 supply options and x MUS$ less for UK1-SN compared with the CW base case. The corresponding NPVs are around 80 MUS$ less in all three cases.

Given the same requirement for additional import capacity by x as in the CW base case, the phasing of capital expenditure is similar to that in the base case.

 The purpose of this sensitivity is to examine the impact of the absence of IFI on both the timing of the project and the capital cost.

Table 7.4 summarises the impact of IFI out on the total costs and NPVs.

Under GWB the total investment cost falls by x MUSD for UK1, by x MUSD for UK2 and by x MUSD for UK1-SN

These small reductions in the capital cost without IFI can be attributed to the fact that the reinforcement of Dublin-Cork is required anyway, because the gas is now flowing in a southerly direction but also to facilitate existing customers in the Cork area as well as every third CCGT power station, which is assumed to be located in Cork. In GWB the reinforcement is also required to accommodate Moneypoint which is converted to gas between 2005 and 2010.

There is, we would note, no guarantee that powergen companies will choose to locate new gas plants in Cork, and their decisions will be affected by the transportation charging basis.

In the demand scenarios the first power station in Cork is commissioned in 2005 under GWB and in 2006 under CW. In UK1, for example, the vast bulk of the reinforcement expenditure for Dublin-Cork is assumed to be spent in x and x under GWB when IFI is both included and excluded. In the CW scenario, however, the vast bulk of the reinforcement expenditure for Dublin-Cork is assumed to be spent in x and x when IFI is included but is phased in over the period to x when IFI is excluded. This arises because Moneypoint remains on coal and the growth in demand is lower than under GWB.

The IFI sensitivity continued to assume that the Poolbeg Steam plant is interruptible ……………..

The maximum capacity of the existing SIP will peak at x mscm/d by the end of x. Therefore, the import infrastructure is required by …………….. under GWB and by under CW according to the baseline demand scenarios.

Keeping Poolbeg interruptible for an extra year, however, defers the requirement for the import infrastructure until the  in GWB and the under CW, if IFI is no longer operating.