Fuelling the Future

Peter Dixon, Group Chairman of Phoenix Energy Holdings

Peter Dixon, Group Chairman of Phoenix Energy Holdings, reflects on the birth of Northern Ireland’s Natural Gas Industry 25 Years ago.

Alot can happen in 25 years. Unheard of in 1996, Phoenix Natural Gas is one of the most successful private company start-ups in Northern Ireland’s history.

Now a household name, almost a third of a million homes and businesses have Phoenix Gas network at their doorstep, stretching from Larne to Newcastle to Lisburn; including all of Greater Belfast. The introduction of natural gas is a real ‘good news story’ for everyone who lives here.

It must be remembered that the task of building the natural gas network and supporting gas industry ranks alongside the introduction of the railways in 1846 and electrification just before the Second World War. Only this time it wasn’t taxpayers and Government that drove, funded and masterminded the task, it was a private company deploying its own capital to do so.

The key to Phoenix’s success was and remains its ability to engage with Government, communities and businesses, and despite its complexity and size, Phoenix remains, at its core, a local company working on behalf of the communities it serves.

Phoenix started with no pipes in the ground, no staff, no customers and no other gas companies to compare to. Back in February 1997, where I pick up the story, we’d built around 70 kilometres of network (today that figure stands at around 4,000 kilometres), we had a dozen (large industrial) customers and about 30 staff; the supporting wider gas industry didn’t exist.

For me, reflecting now, these past decades have flown by. I can still recall stepping off the Liverpool boat at Belfast Docks in February 1997, as if it was yesterday. I’d accepted the job as Phoenix’s Commercial Director in October of 1996, but due to changes in what was then British Gas, I couldn’t take up my new job until the following February. Back then it certainly didn’t feel like the start of something that would change the lives of so many, including my own. It was just another job, a new challenge, a blank canvas compared to where I had come from.

Back then I don’t remember any of the team really thinking about just how daunting the challenge was – it’s probably why many onlookers gave us little hope of success or seeing the challenge through. We never gave any thought to failure: we were just too busy making things happen. We were all relatively young and driven by the challenge and the opportunity, I guess, and despite our business and life experience, we were all a little naive to the scale of the task ahead.

They say that necessity is the mother of invention but in Phoenix’s case that describes how we survived and succeeded. We invented and innovated, often surprised at our own achievements and success; overcoming engineering challenges in ways that set benchmarks and best practices within the sector.

It would be foolish to look back now with rose tinted spectacles and present everything as a faultless evolution – it certainly wasn’t that; on more than one occasion our very existence appeared to teeter on the brink of failure.

Having launched with a fanfare of public relations activity, it soon became clear that the company’s initial business plan and strategy was too simplistic and ultimately detached from the reality of what best served the local marketplace. In a nutshell, the size and speed of the task had been totally underestimated. To establish natural gas as a credible product – and to support the levels of investment needed – targets would have to be accelerated by at least five years.

The original plan was to have a measured construction build over 10-years, allowing the market to create itself alongside the build programme. However, in simple terms, there was a need for the bulk of the network to be constructed in a 5-year period and a radical marketing approach was needed.

Systems had to be fast-tracked to support the accelerated build out; investment had to be made in developing a local gas industry of installers, specifiers, architects, builders, retailers and distributors. Phoenix staffing had to be substantially increased and the investors had to increase the investment recovery period from 20 to 50 years, aligned to the minimum operating life of the asset - a significant shock to those investing in the business.

One of the hardest things in business is to work with unhappy investors. We had to tell our investors that for the project to succeed, they had to: significantly increase up-front investment, accept operating losses in the medium term, and defer recovery of their initial investment for decades. While a difficult message to share, in reality the original plan, which launched the investment unaltered, simply wouldn’t have been in in the best interests of the industry or gas consumers.

This was all a far cry from the company launch just months earlier – it was survival time and we had to get on the ground, sell the product and make things happen.

Phoenix is responsible for building and maintaining the gas pipes which it owns. It is different than any other mature utility in that it had to build its customer base while still building the network that delivered its product. So, if you like - to generate the revenue to pay for everything else - Phoenix’s main challenge was attracting new customers from a variety of sectors willing to adopt a new form of energy, in a place with no experience of natural gas and its benefits.

Accelerating the network build allowed us to get gas to key areas of Greater Belfast, which were likely to be early adopters. Construction was targeted at getting gas to every large user, new build development and Housing Executive property within our reach using a coal-fuelled system.

We had small offices at the time in Clarendon Dock, so we hired the Seaman’s Mission for a few days where we laid out huge maps and plastered walls with flip charts. With key people, we marked up the new build sites, locations of large businesses, property areas earmarked for heating conversion by the Housing Executive, and home-owner areas likely to have older oil boilers. We then drew up a plan based on c.£40m investment per year for the first few years of infrastructure build.

That was it, we’d agreed how to ‘eat the elephant’ in manageable chunks. This highlevel plan proved to be broadly correct but importantly, it created a framework for the build, and within weeks, digging holes and laying pipes, thereafter adapting as experience was gleaned. It also allowed us to tell customers when we expected to get gas to them - this resulted in an invaluable A-to-Z index of ‘gas availability’ which was issued to everyone at Phoenix. It became thicker than a phone book, but was accurate, easy to read and highlighted every area, road and home in Greater Belfast by postcode, street number and the date it was planned to have gas available. Simple but effective - it enabled potential customers to plan for the future and provided our teams with a clear roadmap.

Innovation played a big part in how our engineering team tackled building a new gas system. They weren’t tied to what had been done before and moved from the established lines on which the UK had built gas networks to those used across Europe instead. The Phoenix network is predominately plastic and replacing it due to age will not need considered for generations to come.

Phoenix decided to buy the ‘old towns gas pipelines’ used decades ago, to use as a conduit for its new pipes - this saved digging roads unnecessarily as you could slide new pipes inside the old ones - in some cases for miles.

More innovations followed, after the first few years of building a low-pressure system, design moved to constructing a medium-pressure system. This enabled every pipe, fitting and control to be flexible and smaller, correspondingly less expensive. These two decisions reduced the lifetime cost of constructing and running the network by tens of millions, lowering the cost of distributing gas to customers.

While estimating the economic impact the gas industry has and will have locally is difficult – it’s worth understanding where the impacts have come.

The activity of network construction, converting customers, providing services and having hundreds of millions of pounds of private money into the local economy producing thousands of jobs over the past two decades is evidence alone.

The network, paid for and in the ground for the long term continues adding value to the communities and industry it serves, none more so than its ability to decarbonise by substituting natural gas with alternative renewable gases. It is undisputed that without access to natural gas there are many industries and business that would not have been able to operate in Northern Ireland. Often missed however, is the scale of the local independent gas industry and supply chain that has been created and would simply not exist if natural gas hadn’t arrived and been successful in its initial rollout. It created the foundation for future expansion of the gas network outside of Greater Belfast, such as Gas to the North, West and East, that wouldn’t have been feasible if Phoenix had failed to establish gas as the fuel of choice during the initial stages of development. This along with the health and environmental benefits of displacing coal and oil and the harmful particulates produced is significant.

All in, it is easy to see that the natural gas industry, born locally in the midnineties, has left a long and lasting legacy that will keep giving for decades to come.

What about the gas industry in NI today? With over 300,000 properties connected to natural gas networks locally and new connections growing at a rate of 15,000 per annum, the gas industry provides a bridge to the carbon-zero economy of the future, enabling properties with access to the gas network to convert from oil to gas. When you consider that every home which converts to natural gas reduces its central heating carbon footprint by around 50%; these are substantial savings, unrivalled in terms of immediate action householders can take to significantly lower their carbon emissions.

There are still over 230,000 properties locally that could switch to natural gas today and by doing so would demonstrate a commitment to a low carbon future, knowing that the network they connect to today, is the very same network that will be distributing green renewable solutions to them in the not-too-distant future.

This reflection on the successful role out of the natural gas network should provide confidence that the same gas industry that has delivered changed consumer behaviours, and which has developed a supply chain employing some 2,500 people, is an industry primed and ready, with the skills and experience, to support the journey to becoming carbon neutral.

Locally, our existing energy landscape and indigenous resources leave us well placed to become a world leader in the production of renewable gas solutions.

Our agricultural sector produces significant levels of organic waste which can be harnessed to produce biogas and in turn injected into the existing gas network, without any impact to end user appliances. Innovative companies such as McCulla Ireland are already using this to drive carbon reductions powering vehicles with biogas, produced from repurposed waste. Phoenix are working with relevant stakeholders to ensure that the full potential of this opportunity to produce renewable gas is realised, preparing for initial biomethane injection from 2022.

It’s impossible to consider carbon-zero solutions without embracing Hydrogen. The Department of Economy set out their ambition in recent months, recognising that ‘NI is uniquely positioned to become a leader in the hydrogen economy and secure associated benefits locally’. It is important that industry and policy makers create the conditions for innovative demonstration and trial projects, enabling Northern Ireland to grasp opportunities.

One of the most exciting prospects for Northern Ireland is that renewable gas solutions enable a significant percentage of local heat demand to be provided using the rich indigenous resources that are part of our landscape.

Consumers will ultimately be key enablers of meeting decarbonisation targets and therefore we must ensure that the journey is affordable, minimises disruption and critically, offers energy solutions that deliver security of supply and convenience. The investment that leading gas boiler manufacturers such as Worcester Bosch and Baxi have made in Hydrogen ready boilers is a positive development, and soon the boilers that customers purchase will operate on natural gas today while being ready to embrace Hydrogen alternatives - minimising cost and inconvenience.

Looking ahead, new technology will live alongside established technology, underlining the importance of the current gas industry and the pioneering efforts of Phoenix at the outset.

“Phoenix decided to buy the ‘old towns gas pipelines’ used decades ago, to use as a conduit for its new pipes - this saved digging roads unnecessarily as you could slide new pipes inside the old ones - in some cases for miles.”

INHERITANCE TAX REVIEW

Gillian Johnston

COVID-19 has had a profound effect on the UK economy. The Government’s support for individuals, businesses and public services set out at the 2020 Spending Review and Budget and the 2021 Budget totals £407 billion. This spend will need to be recouped, with inheritance tax (IHT) reforms being only one of several areas the Government is considering with a view to increasing funds in the public purse.

Consequently, there is no better time to undertake a review of your assets in order to minimise your exposure to IHT. IHT has often been called a voluntary tax and there are a number of small changes you can make to reduce any potential future liability.

The Nil Rate Band

The fi rst £325,000 of the value of your estate is covered by the Nil Rate Band, with an additional residence nil rate band of £175,000 applying when the main residence is left to direct descendants. Married or civil partners can therefore leave an estate worth up to £1,000,000 between them, entirely free of IHT.

The residence nil rate band can be claimed in full when the estate is valued between £500,000 and £2m and the property is worth at least £175,000. The relief is tapered once the estate’s value exceeds £2m.

If the main residence at date of death is worth less than £175,000 the amount of the residence nil rate band available will be restricted to the value of the property. However, if the property is worth less as a result of downsizing since 8 July 2015, then an additional relief may be available.

Potentially Exempt Transfers

Gifts to individuals will fall entirely outside of your estate if you survive seven years from the date of the gift, with the value included in your estate reducing after two years from the date of the gift. However, there may be a capital gains tax (CGT) liability resulting from such gifts and we can advise of the interaction between CGT and IHT.

Note that gifts between spouses and civil partners are inheritance tax free and have no capital gains tax implications.

Transfer of shares or business assets

For those individuals considering reducing their involvement, or stepping back entirely, from business it is possible to transfer shares in your personal trading company or the assets used in your business free from Inheritance Tax and Capital Gains Tax.

The gifting of shares or assets to a connected party such as your children or siblings is deemed to take place at market value for capital gains tax purposes. As a result, you may fi nd yourself liable to pay a capital gains tax rate up to 20% of the value of the asset you have gifted without having received anything in return.

In order to avoid an immediate charge to capital gains tax the transferor and transferee should enter into a joint election. This election will holdover any capital gain until a future disposal of the shares or assets, when the gain will become chargeable on the transferee.

For inheritance tax purposes the shares or assets will fall outside the transferor’s estate if the gift was made seven years or more prior to death. The shares or assets may also qualify for up to 100% Business Property Relief from IHT on the transferor’s death if the transferee continues in the same business and has done so for a period of two years.

Agricultural Property

Agricultural property can be passed on free of inheritance tax during your lifetime or on death assuming it meets the qualifying conditions.

Agricultural property that qualifi es for Agricultural Property Relief (APR) is land or pasture that is used to grow crops or to rear animals intensively. Other qualifying activities include trees that are planted and harvested at least every 10 years, the value of the milk quota associated with the land and farm buildings, farm cottages and farmhouses.

To qualify for APR the property must have been owned and occupied for agricultural purposes for at least two years though in some cases for seven years prior to transfer. 100% Agricultural Relief is available if the person who owned the land farmed it themselves, the land was used by someone else on a short-term grazing licence or it was let on a tenancy that began on or after 1 September 1995. In any other case the relief is 50%.

Gifts out of normal expenditure of income

There are allowances for small gifts to be excluded for IHT purposes such as the annual £3,000 exemption, small gifts up to £250 each and gifts on the occasion of a wedding or civil partnership. However, these gifts are quite small and normally do not have much impact on larger estates.

Establishing a regular pattern of gift giving as part of your normal expenditure from income allows these gifts to fall outside your estate for IHT purposes. For example, the giving of £5,000 on the occasion of birthdays and Christmas to each of your children, if established as a regular pattern of giving, could fall outside the estate if there was suffi cient annual income in which to make such gifts. This can be a particularly useful way in which to reduce the value of your estate.

Next Steps

At ASM we understand that, for many, inheritance tax planning is an emotive topic, we can review your current Will and IHT planning with sensitivity and provide clear steps to ensure mitigation of any future IHT liabilities.

We can also liaise with your solicitor, or recommend one to you, to ensure your Will is updated in a tax effi cient manner and would also recommend the implementation of an Enduring Power of Attorney.

Please feel free to contact Gillian Johnston (gillian.johnston@asmbelfast.com) to arrange a meeting to discuss your needs.

ASM

4th Floor Glendinning House 6 Murray Street, Belfast BT1 6DN www.asmaccountants.com brian.tilly@asmbelfast.com