I move: "That the Bill be now read a Second Time."
The Gas (Amendment) Bill, 2000, deals with four different issues. It provides for a scheme which will be implemented on an independent basis by the commission for electricity regulation to allocate scarce capacity in the natural gas network to prospective power producers to ensure that the electricity requirements of the State in the coming years can be met; it provides for the enlargement of the functions of Bord Gáis Éireann to allow it to engage in non-gas related activities; it provides for an amendment to the existing Gas Acts to increase the borrowing powers of BGE from £350 million to £550 million; and it provides for amendments to the Gas Acts, as amended, to introduce the same consent requirements for all people wishing to build natural gas pipelines. In this respect it will give private pipeline developers the same powers to access and compulsorily purchase rights over land as those currently enjoyed by BGE for the purpose of building pipelines.
Before outlining the detailed provisions of the Bill, I will give the House a brief account of recent developments of the natural gas industry in Ireland.
Until now the natural gas industry has been synonymous with BGE. The industry is relatively young. Prior to the discovery of natural gas in the Kinsale Head field off the south coast in the early 1970s, a number of gas companies existed in a small number of towns and cities around the State. Natural gas, however, was not very important in overall terms in meeting Ireland's energy requirements. Since its establishment in 1976, BGE has achieved significant progress in developing the natural gas industry in Ireland. It now supplies natural gas to more than 300,000 homes and has more than 10,000 industrial and commercial customers. At the end of 1998, natural gas was meeting 23% of our total primary energy requirements. BGE now operates in a highly competitive energy market and must fight for market share against other fuels such as oil and electricity.
Natural gas has played an increasingly important role in electricity generation in recent years. Last year more than 30% of electricity generating capacity in the State was fuelled by natural gas. This reflects trends at European level and even globally. Natural gas is now the fuel of choice for power generation. The development of combined-cycle gas technology has contributed significantly to increases in efficiency in power generation. In addition, natural gas has considerable environmental advantages compared to other fossil fuels. Gas combustion emits less CO2 than oil or solid fuels and, therefore, has an important contribution to make in helping Ireland and other countries to meet international obligations in relation to climate change mitigation.
The natural gas industry is undergoing a significant period of change at present, not only at national level but at European level. The EU gas directive was adopted by the European Parliament and Council in 1998. This followed the adoption in 1996 of the EU electricity directive. The gas directive provides for the introduction of competition into the industry in the form of third party access to natural gas networks throughout the EU. The directive requires gas market opening to be introduced on a phased basis over ten years. However, already we are seeing evidence of a greater urgency about the pace of market opening. The European Council, at its summit in Lisbon, asked the EU Commission to bring forward proposals for full opening of the energy markets by 2004. The Council will review progress at its summit next spring.
Ireland is already in compliance with, and greatly exceeds, the market opening requirements of the EU directive. The Energy (Miscellaneous) Provisions Act, 1995, provided a legal framework for third party access by large gas consumers to the BGE network. Under this Act, customers consuming in excess of nine million therms of natural gas per annum at a single site may now buy their gas from suppliers other than BGE and have it transported through BGE's network on their behalf to their premises. This means that more than 75% of Ireland's market is opened. A number of large companies are currently sourcing some of their gas from outside the State and importing it through the interconnector.
The 1995 Act also provides for the giving of ministerial directives to BGE relating to the transmission and pricing aspects of third party access. I issued two directives dealing with transmission and pricing in draft form in 1998 for pub lic comment. On the basis of the responses received to that public consultation and of significant developments in the market, including the possible commercial development of gas off the west coast and interest by private developers in building gas pipelines, I decided last year that a fundamental review of pricing for third party access to the BGE network should be undertaken.
This review is well under way and in the past year a significant level of consultation has been carried out with all interested parties. In order to obtain an independent view of suitable tariff options, I engaged economic consultants, the Brattle Group, to examine all the inputs from the public consultation and to propose a suitable tariff structure for the Irish gas network. My aim is to have a tariff that will promote the development of competition in the supply of natural gas, including the development of new indigenous sources of supply, and provide appropriate economic signals in relation to the establishment of new pipeline infrastructure. The Brattle Group in turn consulted all interested parties and presented its interim findings at a public forum last month. The consultants are due to present their final report to my Department shortly. I expect to be in a position to make a final decision on this issue very soon.
As I outlined earlier, there are four issues being dealt with in the Bill. The main issue, providing for a scheme to allocate scarce capacity in the natural gas network, is a very pressing matter and I would like to outline to the House the background to this issue.
At present, existing indigenous reserves of natural gas in Kinsale are declining. The interconnector with Scotland is nearing full capacity ten years sooner than had been anticipated due to faster than expected growth in demand. This growth in demand, which is a function of our economic success, is being boosted by the opening of the electricity market. It is too soon at this stage to know which of the possible options for new gas supply infrastructure will come to fruition. I will return to these options.
This is a highly dynamic and intricate set of circumstances, which I would like to explain in more detail to the House. Our existing indigenous reserves of natural gas in the Kinsale Head and Ballycotton fields are declining and are expected to be depleted in four to six years depending on the rate of depletion. In 1999 up to 70% of our natural gas requirements were imported through the Scotland-Ireland interconnector. Against this background, my Department and BGE commenced a major study in 1997 on future natural gas infrastructural requirements. This study, the Gas 2025 study, was completed last year and, with a number of other reports on the gas sector, is available on my Department's website. It made a number of recommendations regarding future gas supply options and considered that the optimal solution would be to construct a second natural gas interconnector with the UK parallel to the existing interconnector with Scotland.
My Department then commissioned DKM Economic Consultants to undertake an economic assessment of the future gas supply options recommended by the Gas 2025 study. The DKM report recommended that we wait and see the outcome of the exploration of the Corrib gas field off the west coast before deciding on future gas supply infrastructure. On the basis of studies carried by my Department and BGE on forecasts of final demand for natural gas, it is expected that the capacity in the natural gas network will be sufficient to meet final demand until 2004, although larger than expected increases in demand would reduce this period. I understand that the position regarding the development of the Corrib field will be more clear later this year and that the Corrib partners, Enterprise Oil, Statoil and Marathon, will then make a decision on whether to proceed with the commercial development of the field.
There are also other parties interested in building gas supply pipes, one from Belfast and one from the west coast of Britain. I will revert to the issue of pipeline construction later when I deal with amendments in the Bill to ensure compliance with the non-discrimination requirements of the EU directive in relation to the construction of pipelines.
For a variety of reasons, there is for the time being some uncertainty about who will build the additional infrastructure needed to meet the supply requirements of the Irish market. In any event, if one or other of the private developers is not committed to building the necessary infrastructure by the end of the year at the very latest, I will approve the building of a second interconnector by BGE. This will allow sufficient time for new supply infrastructure to be in place to meet anticipated demand.
I want to deal with developments in the newly opened electricity market which are impacting on the gas market. In anticipation of the opening of the electricity market to competition in February this year, a number of companies wishing to enter the market approached BGE last year to book capacity in the network to carry gas to fuel their proposed power plants. The applications for capacity received by BGE exceed, to a significant extent, the capacity that will be available in the network in the medium term.
In addition, studies on electricity generation capacity requirements to 2006, carried out by the ESB in March this year at the request of the Commission for Electricity Regulation, indicate that, on the basis of forecasts for future electricity demand, an increase in power production capacity of 600 megawatts will be necessary by winter 2004. In order to ensure that the electricity needs of the State can be met over the next few years, I decided that available capacity in the natural gas network would be reserved specifically for the purpose of fuelling up to 800 megawatts of new gas fired power stations. While this will meet the electricity needs of the country, it is insufficient to satisfy the demands of all the prospective power producers who applied to BGE for network capacity. Consequently, I decided that a scheme for the advance selection of power producers to whom network capacity would be allocated was necessary and that the allocation scheme should have particular regard to the need to ensure that new power plants were commissioned as soon as possible. Having regard to the provisions of the EU gas and electricity directives, the Attorney General advised that any allocation scheme devised should be put on a statutory footing.
I want to clarify why it is necessary for gas capacity to be allocated now rather than when new capacity becomes available for purchasing. Certainty about gas capacity is necessary in order for large-scale power projects to commit investment. There is a 24 month lead-in time from the commitment of investment to the production of electricity. This means that a delay in the allocation of gas capacity until there is certainty about new supply infrastructure could lead to electricity problems in about two years' time. My Department has consulted widely with interested parties on the process to be employed in allocating capacity to prospective power producers. A discussion paper was issued by my Department in October 1999 and the options considered in that paper for allocating capacity included: an auction, a lottery, an allocation process based on an ex-ante evaluation of "first-to-market", and process based on an ex-ante evaluation of electricity price competitiveness.
An overall consensus did not emerge from the public consultation but the most popular option was a process based on a "first-to-market" principle. I decided that the best interests of electricity consumers would be served by allocating capacity on this basis and my Department published a policy statement to this effect in December 1999. Both the discussion paper and the policy paper are available on my Department's website.
A further issue which I also considered was the question of who would be responsible for conducting the allocation scheme. BGE normally allocates capacity as part of its transportation business. However, as BGE has declared its intention of entering the electricity market, it obviously would not be desirable to have a situation where it would be responsible for allocating capacity to potential competitors. To prevent any possible suggestion of discrimination, I decided that responsibility for allocating capacity to prospective power producers should be taken out of BGE's hands. I am not suggesting BGE would have behaved improperly in allocating the capacity but the potential for conflict of interest arising and the need for transparency in the process were sufficient grounds for the allocation process to be conducted on an independent basis.
I decided that the allocation scheme should be conducted by the Commission for Electricity Regulation for a number of reasons. It is an independent body charged with promoting the development of competition in the electricity sector and protecting the interests of electricity consumers. The experience it has gained since its establishment will be valuable in the process of allocating capacity in the gas network because of the synergies that exist between the two industries.
I will detail the provisions of the Bill. Section 1 is a standard provision where the relevant terms used in the Bill are defined. Sections 2 to 16 are the relevant sections relating to the capacity allocation scheme and the conduct of that scheme by the Commission for Electricity Regulation. Section 2 empowers the Minister, after consultation with the Commission for Electricity Regulation, to make regulations authorising the commission to allocate a specific amount of natural gas capacity in any one year, to the power producers who will be selected by the commission under the scheme provided for in the Bill and any regulations made under the Bill when enacted.
Sections 3 to 5 set out the details of the procedure to be provided for in regulations which will be employed by the commission to select power producers to whom capacity will be made available. Essentially this procedure entails the power producers making an application for capacity in the network. The commission will then rank these applications, in order of precedence, on the basis of the estimated commissioning dates for the proposed power plants. The commission may make alterations in the ranking of applications to preclude the selection of an applicant where, in the opinion of the commission, the selection of that applicant would adversely affect the promotion of competition in the electricity market. If a power producer is selected and then forfeits its rights, the commission may then assign these rights to the power producer or producers ranked next in order of precedence. Alternatively, the commission may decide to begin the selection procedure again.
Section 6 provides that the commission shall determine and publish the criteria to which it proposes to have regard in deciding the date on which it estimates a proposed power station will be commissioned. These criteria must be published by the commission at least one month before the selection is made.
Section 7 gives the commission the power to require BGE or the ESB to provide certain information to it for the purpose of selecting power producers to whom capacity will be made available or for the performance of any of its functions. This section also obliges BGE and the ESB to comply with any request for information made by the commission within a time frame specified by it.
Section 8 enables the commission to give directions to BGE regarding the use and management of the natural gas network, where it considers that it is necessary to do so to ensure that the capacity rights of the power producers who are selected under this scheme are protected.
Section 9 prohibits BGE from entering into contracts with any power producer, other than those who are selected under this scheme, before 30 September 2004 unless they are renewing an existing contract. The section also empowers the Minister to make an order repealing this prohibition on BGE entering into contracts with other power producers if the Minister is of the opinion that there has been, or is expected to be, an increase in the total capacity of the natural gas network.
Section 10 imposes an obligation on BGE to make capacity in the natural gas network available to the power producers selected by the commission under the scheme provided for in the Bill when enacted or under regulations. The section sets out in detail the procedures to be followed in the contractual negotiations between BGE and the selected power producers and the time limits to apply to each part of the process. It also contains a dispute settlement mechanism and allows the commission to alter the time limits if it deems it proper and specifies the new time limit in writing. The section also sets out certain terms and conditions, both statutory and non-statutory, that may be included in the contracts between BGE and the selected power producers. The section does not preclude BGE from rescinding contracts in specific circumstances and, where the power producers forfeit their rights to the capacity it obliges BGE to terminate the contract.
Section 11 provides that regulations to be made under the Bill, when enacted, may include provisions for bonds and levies. A requirement may be imposed on the power producers selected by the commission to effect a bond providing for the payment to the Minister of a specific amount which is calculated on the basis of the generating capacity of their proposed power plant if the plant is not capable of sending out electricity to the transmission or distribution system on its estimated commissioning date.
Regulations may also provide for the imposition of a levy on selected power producers to defray the costs incurred by the commission in carrying out the selection procedure and to recoup funds expended by the Minister to facilitate the commission in preparing to carry out its functions under this Bill or the regulations. Regulations may include incidental, supplementary and consequential provisions as appear to the Minister to be necessary or expedient.
Sections 12 and 13 contain amendments to sections 11 and 12 of the Electricity Regulation Act, 1999. This will provide for the appointment by the commission of authorised officers to assist it in carrying out the selection process provided for in this Bill and for the obtaining of search warrants where it considers it necessary.
Section 14 amends section 13 of the Electricity Regulation Act, 1999, and provides for a prohibition on unauthorised disclosure of information obtained by the Commission in the performance of its functions under this Bill.
Section 15 contains an amendment of section 32 of the Electricity Regulation Act, 1999. The effect of section 15 is that any decision made by the commission under this Bill when enacted or regulations made under this Bill can only be challenged by way of judicial review proceedings. It precludes any person from questioning the validity of such decisions save by way of judicial review initiated within two months of the date on which the decision to be reviewed is given. Provision is made for the courts, in specified circumstances, to vary this time limit.
Section 16 provides for the indemnification of the commission by the Minister out of moneys to be provided by the Oireachtas in relation to the performance of its functions under this Bill or regulations made under the Bill.
Sections 17 and 18 relate specifically to BGE. Section 17 allows BGE, with the approval of the Minister given with the consent of the Minister for Finance, to engage in any business activity that it considers advantageous, whether or not it is related to the production, transmission or distribution of energy. This amplifies the existing functions of BGE which are limited to the energy sector.
Section 18 provides for the amendment of section 23 of the Gas Act, 1976, to increase the borrowing powers of the board from £350 million to £550 million. Sections 19 and 20 amend sections of the Gas Act, 1976, concerning access to and acquisition of land by BGE for the purpose of constructing and operating natural gas pipelines. BGE owns and operates the natural gas network. If it wishes to construct a pipeline, it must apply to me for consent to do so under the provisions of the Gas Act, 1976. There is no legislative prohibition on private developers building or operating a pipeline. The 1976 Act, as amended, requires that private developers give previous and reasonable notice to me of their intention to construct a pipeline, accompanied by an environmental impact statement, and I am permitted to require the pipeline to be constructed in accordance with certain environmental, safety and efficiency criteria.
This means that, in effect, there are different legislative requirements for BGE and private developers wishing to build pipelines. This is contrary to the provisions of the EU gas directive. To date, no one other than BGE has constructed a pipeline. However, in the past year a number of private developers have informed me of proposals to build pipelines both within and to the State. The effect of section 19 is that everybody who wishes to construct a pipeline will have to obtain my consent. This consent may be subject to conditions I may impose in relation to the pipeline.
The current legislative provisions governing the construction of pipelines place BGE in a more favourable position than private developers in that it has rights to access and acquire land for this purpose. The EU gas directive, which entered into force in August 1998, prevents any form of discrimination between natural gas undertakings and requires that there be a level playing pitch for BGE and private developers.
Section 20 extends the rights enjoyed by BGE regarding access to and acquisition of land to persons who have notified or have obtained the Minister's consent under section 40 of the Act. The enjoyment of these rights is extended subject to the same obligations to pay compensation that apply to BGE. The combined effect of sections 19 and 20 is to place private operators and BGE in the same position.
The remaining sections contain provisions that are standard in legislation. Section 21 provides for the laying of regulations or orders under this Bill, when enacted, before each House of the Oireachtas. Section 22 provides that the expenses incurred by the Minister in the administration of the Bill shall be paid out of moneys provided by the Oireachtas to such an extent as may be sanctioned by the Minister for Finance. Section 23 also contains standard provisions relating to the Short Title of the Bill and provision for collective citation etc. of the Acts amended by it.
I and my Department have received a number of comments on the Bill from interested parties. I will take these into consideration and I envisage bringing forward some amendments on Committee Stage aimed at clarifying certain elements and enhancing the practical aspects of the Bill. I look forward to the contributions of Members and I commend the Bill to the House.