JOINT COMMITTEE ON COMMUNICATIONS, ENERGY AND NATURAL RESOURCES díospóireacht -
Wednesday, 5 Mar 2008

Role and Functions: Discussion with Commission for Energy Regulation.

Chairman

I welcome Mr. Tom Reeves, chairman of the Commission for Energy Regulation, Mr. Michael Tutty, commissioner and Mr. Eugene Coppinger, generation and safety officer. The joint committee has invited the representatives of the CER to the meeting to discuss an overview of the work of the CER and its annual report for 2006.

Before we begin, I draw attention to the fact that while members of the committee have absolute privilege, the same privilege does not apply to witnesses appearing before them and the committee cannot guarantee any level of privilege to witnesses appearing before it. Furthermore, under the salient rulings of the Chair, members should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I invite Mr. Reeves to make his opening remarks.

Mr. Tom Reeves

Thank you, Chairman. We are pleased to be here for our first time before the new committee. We will use one slide to demonstrate the general functions of the Commission for Energy Regulation and then talk about our work programme and the issues facing us. Mr. Michael Tutty will share the presentation with me.

The commission has been around since 1999. We originally started off dealing with electricity. Gas became part of our work in 2002 and now we also have responsibility for safety in both the gas and electricity areas and the promise of new functions on the safety front for the exploration and extraction of petroleum.

We regulate the gas and electricity networks, which are the monopoly parts of the business, and one of our functions is to drive competition in electricity and gas supply and electricity generation. We oversee the retail prices of gas and electricity, primarily for the household and small business sector. Other functions of the commission are to oversee the health and safety area and to report each year to the European Union on security of supply. We also advise the appropriate Ministers on issues as they arise.

We produce a work programme every year and over the past few years we have drawn up for the public a list of the ten key areas we must address. These are set out in our presentation for the information of the committee.

The all-island gas project, which is now being called the common arrangements in gas, is a significant project this year. The issue of renewable energies is always prominent and we have a role in the decision on who gets connected to the grid through the Gate 3 process. Mr. Tutty will discuss that issue.

Smart metering is a topical issue and we have a project going on in that area on which I will provide more detail. We must keep the all-island market functioning and ensure it develops. East-west interconnection and security of supply are two major issues. Each year we must examine the structure of tariffs and decide whether they are fair and correctly priced. In the safety area, we will designate bodies to oversee safety framework processes later this year. We must also look after customer complaints on issues arising with the supply companies and some internal issues to ensure our systems are properly organised.

The single electricity market, SEM, came into being on 1 November 2007, after approximately three years of intensive effort on our part. All the generators, North and South, sell their electricity into this pool and all the suppliers buy their electricity from the pool. It is a single all-island market and there is a single market operator, which is a joint venture between EirGrid in Dublin and SONI, the system operator in Belfast, Northern Ireland. They run the market. There is a price for electricity on the market every day and there is a capacity payment which is meant to help cover the fixed cost of investment. The market is designed to give the correct price signals to investors and to those in the market so that we get efficient dispatch every day and encourage new investment.

One of the issues we had to address was that the ESB is such a large company and is seen to have significant market power. We took some action to reduce its market power through what we call "directed contracts". In other words, we directed the ESB to sell a certain amount of its contracts into the market at prices fixed by the regulators. The ESB has complied fully with this and it has worked very well. We also have a market monitoring unit which monitors all behaviour in the market on a day-to-day basis and this is working satisfactorily.

The market is regulated by an SEM committee, which comprises the Northern regulator, the commission, an independent member and a deputy independent member - both of whom are from Spain. This new arrangement has had only about three meetings, but it is beginning to find its feet and seems to be working well. As part of ensuring the market works, we have plans for a second North-South transmission line to make the two markets act as one.

Energy prices are always topical. The retail price of electricity and gas here are dependent on international prices. In 2006, prices rose significantly. Last year we managed to reduce prices so 2008 prices were reduced. However, since we did that, there has been significant movement in prices on the international market. In the graph attached, committee members can see that gas has increased by over 150%, the price of coal has doubled and oil prices have increased by between 40% to 50%. If these prices continue, we will have to consider some increases for 2009. Carbon is now included in the price and comprises approximately 10% of the price of electricity. If, as I expect, prices keep climbing upwards and climate change obligations become tighter for us, the only way prices will go is upwards.

In order to deal with the ESB's dominance in the market, we reached an agreement with it two years ago and signed a legal document in which it agreed to either sell or close some of its generating assets. That process is in train and indicative bids were received by the end of January. The ESB is currently evaluating the bids and hopes to make a shortlist in the next week or two and have selected a preferred bidder or bidders by the end of the summer. This will reduce ESB's share to approximately 40% on the island and will have an impact on our role and directed contracts. This process is welcome.

Smart metering is at the other end of the scale. Our new electronic meters have smart functions which can record many details in houses. These will help us devise new tariffs which will, we hope, modify people's behaviour. If people's behaviour is not modified to stop or reduce usage during peak hours, the meters may not be the success everyone thinks they will be. Smart meters will also bring an end to the dreaded estimated bills, which cause a plague of complaints. The meters can be controlled remotely, will reduce workloads and have many other benefits. They are quite expensive. The economics of introducing them is not exciting, but we feel they are the way to go. The retrofitting and re-installing to replace existing meters will take some years, but smart meters are the right route to take.

I will now hand over to Mr. Michael Tutty who looks after the renewable area of our business.

Mr. Michael Tutty

The Government has a target of 15% of electricity generation to be from renewables by 2010. As a result of the renewables that have been built or that have been contracted to build, we will certainly meet that target. The target for 2020 is 33% of consumption, for which it is estimated we will need to install approximately 4,600 MW of renewables. That is a challenging target, even though there are enough wind applications to meet it.

The all-island grid study conducted by the two Departments, North and South, and published recently, showed we can technically achieve the 33% target and that the system can take it. The study suggested we could even achieve 42%. However, there is further work required following the study to examine the full financial and market implications of having that level of renewables.

In terms of getting renewable sources connected, members may be aware there was a significant jump in applications to get connected to the grid some years ago. We had to stop then and consider how it should happen. At the time they were being dealt with one after the other as each one was being processed individually. We decided we needed a grouping process in order to deal with them efficiently so that wind farms in a particular area would be linked up together. We went through Gate 1, and Gate 2 is now almost finished in terms of the connection offers. We are dealing with 1,300 MW of renewables in Gate 2. On completion of the Gate 2 process, if all the 1,300 MW are included, we will have reached 2,800 MW of renewables. We are, therefore, significantly on the way towards the 33% target of 4,600 MW.

We issued proposals recently as to how we would deal with Gate 3. We have received many responses and hope to make our decisions on how to deal with Gate 3 and on capacity. As soon as we spoke publicly about Gate 3, there was a surge of applications to build wind farms. Approximately 3,000 MW had been in the pipeline when we started talking about it, but the generation of 8,000 MW from wind farms is now in the pipeline. That would actually bring us to a total amount of renewables that would be about twice the demand in the electricity sector at the moment. I cannot conceive of how we could have that amount of wind on the system. The grid study stopped at 42%, whereas this would be over 100%. We have to see how we can make progress with this and deal with all these applications.

When the Government decided Ireland should have interconnection with the UK, it asked the Commission for Energy Regulation to oversee a competition to build an interconnector to be owned by EirGrid. That work has been progressing nicely. EirGrid is doing most of the work, such as chairing committees and supervising the project. The competition for the design and construction of the interconnector was launched in December. It is expected that the contractors will be decided on by the summer.

The seabed survey that is currently under way will inform the design and construction of the interconnector. The survey was affected by bad weather in December and January, unfortunately. It has not yet been finished because equipment has broken down, etc. The target of connecting the interconnector by the end of 2011 will be met unless there are serious problems with planning, which often tends to be the case. It is also possible that the huge international demand for cables will restrict their availability in this instance. We will know more about the timeline for the delivery of this project when bids have been made to EirGrid. We expect the interconnector to be up and running by the end of 2011.

Mr. Reeves mentioned earlier that having put a single electricity market in place, the Commission for Energy Regulation is now working on the development of common arrangements for gas on the whole island of Ireland. The commission and the Northern Ireland regulator have agreed to establish common arrangements within which all stakeholders can buy, sell, transport, operate, develop and plan the natural gas market on either side of the Border. We recently signed a memorandum of understanding with the Northern Ireland regulator. The key issues we are considering under the common gas arrangements are as follows: a single transmission tariff methodology; a single transmission operational regime and connection policy; a single transmission planning regime; a single approach to security of supply; and a common framework for regulation of the retail markets. We are trying to ensure that gas can flow north, south, east and west through all the pipes on this island without anyone noticing that the Border has been crossed.

The Commission for Energy Regulation has been given responsibility for safety issues in recent years. We are trying to set up the required safety systems now. We are putting in place a framework for the safe operation of the entire Bord Gáis network and the gas undertakings. That will involve obtaining Bord Gáis's safety framework, which will indicate what the company is doing to mitigate the risks which exist and the plans it will follow in case of disaster. We will be able to see whether Bod Gáis is mitigating all the risks and taking all the actions necessary to operate safely.

The commission is required under legislation to establish bodies to supervise gas installers and electrical contractors. While bodies like the Register of Electrical Contractors of Ireland have been monitoring the standards of electrical contractors, there has been no statutory requirement for such work to be done. We are setting up systems - we will run a competition this year, for example - to see who is best placed to do that work. The legislation states that the commission may license one or more supervisory bodies in the electricity sector. We have the option of putting more than one body in place. There are currently two such bodies on the electricity side. The legislation specifically provides that just one body be put in place to supervise gas installers. We hope to designate the new bodies by the end of the year.

The commission is responsible for monitoring safety incidents, such as gas explosions. People have died in domestic incidents of that nature in recent times. We have to investigate such events to ascertain whether lessons can be learned and make recommendations. The Government intends to produce legislation in the near future that will give the commission responsibility for upstream gas safety.

Deputy Simon Coveney

What does Mr. Tutty mean by "upstream gas safety"?

Mr. Michael Tutty

I am referring to offshore exploration and development.

Deputy Simon Coveney

Okay.

Mr. Tom Reeves

We have tried to summarise the issues and challenges the Commission for Energy Regulation will face over the coming year. We will have to decide how we can continue to meet rising demand within the system. We will ensure that people can avail of a competitive and attractive market by regulating it properly. The committee has previously examined the difficulty of constructing large infrastructural projects to meet increased demand. The climate change targets which have been set for the next ten or 15 years represent an overriding challenge in this context. We will have to consider how the electricity sector can address such a challenge.

Chairman

I thank Mr. Reeves and Mr. Tutty.

Deputy Simon Coveney

I thank the delegation for attending. It is helpful for the committee to get a handle on what the Commission for Energy Regulation is doing.

I understand that there is private sector interest in providing an east-west interconnector. Can the representatives of the commission tell us what they know about that? I understand that it is planned to have the private interconnector up and running by the end of 2009. Does the commission think that is possible and realistic? If it does happen, what will be the implications for the interconnector to be managed by EirGrid? What capacity demand is necessary in terms of east-west interconnectors? Will the interconnector being paid for by the State continue to be needed if the private sector has already delivered one - or possibly two, which is what seems to be proposed - interconnectors between Wales and the south east of Ireland? The period of time between when we originally talked about the need for an east-west interconnector and 2011 seems to be extraordinarily long. Like many people, I have been critical of the length of time it is taking to deliver the interconnector. I recognise that the delay is not necessarily the commission's fault.

The introduction last year of the single electricity market was a great success. What does the commission envisage the pricing benefits of the single market to be? Will the single electricity market increase choice for industry and household users? Over the last decade, electricity prices in Ireland have been consistently more expensive than those in mainland Britain, for example. That remains the case. Will the single electricity market have an impact on pricing? I am not necessarily asking whether it will bring prices down, but I would like to know whether Ireland's electricity pricing will be competitive when compared with Britain. In other words, will I be able to assure Irish business people that their counterparts in Manchester are not getting their electricity supply 10% or 15% cheaper than they are? Can the delegation comment on our competitiveness in that regard?

We should be making progress with the smart metering project, which is a good idea. Perhaps the Commission for Energy Regulation can outline how we will meet the cost of €700 million which has been quoted for this project. Will the cost be met by the household and business sectors, in other words, will an extra charge be added on to their bills? Will it be paid for by the taxpayer through Government funding? Will it be funded from borrowings by either the ESB or EirGrid? I understand the ESB unions will not progress the pilot project of installing 25,000 net meters in the ESB networks that is due to start next month.

The Commission for Energy Regulation can come back to me on the question of pricing and whether it makes its recommendations once or twice a year.

The ESB was critical of CER when its request for a price reduction in electricity was not granted by the regulator. I would like to hear CER's side of the argument. The perceived wisdom at the time was that it would be unfair to the ESB's competitors such as Viridian if prices were reduced. Electricity prices came down last year but they could have come down by more, according to some people in the ESB to whom I have spoken.

On the issue of renewables, Fine Gael has been a big supporter of wind energy projects but I struggle to see how we will manage an input of 8,000 MW from wind. Clearly that cannot happen. How do we decide which projects in the pipeline proceed? Will guaranteed pricing contracts be given out? If so, when will they be allocated? Many consortia have applied for planning permission for wind farms on agricultural land, coastal land or offshore, and are spending time and money on what they hope will be functioning wind farms at some stage in the future. The message must go out that all the projects cannot proceed because the national grid cannot accept a potential flow of 8,000 MW at once. Who is advising the Government on the storage of the energy generated by wind farms? I have concerns about what would happen if a significant high pressure weather system affects Ireland and there is no wind. We must have an alternative source of energy and only so much of that can be delivered through an interconnector. I would like to hear the views on energy storage and how CER sees that working?

Chairman

There are a number of questions.

Mr. Tom Reeves

We will share out the questions. My colleague, Mr. Michael Tutty, will deal with the east-west interconnection.

Mr. Michael Tutty

There is a private sector proposal for an interconnector. We have been in contact with them over the past two years and the only application they have put to us is for exemption from third party access to the interconnector when it is built. We published a consultation document on that issue. It will link up with the UK and they have to do the same at the other end. The UK authorities have not published a document on this yet because, as stated, they are still waiting for input from the company involved, Imera Power. The company has not applied for a connection to the grid so it is not in the process of working with EirGrid on where the two interconnectors are coming ashore and what reinforcements will be needed in the system to do that.

Deputy Simon Coveney

Should the company be working with the CER or EirGrid on that?

Mr. Michael Tutty

It should be working with EirGrid on that issue. We will have to give it a licence, which we will be happy to do if it is moving ahead but we are not aware if it has connection agreements at either the UK or our side. It did state it would have one in place by 2009. I cannot see how it is at all possible because even from a planning point ofview, trying to get permission in that timeframe would be almost impossible. We are dealing with this company, Imera Power, and we will have a meeting with it in the near future. The timing is outside our control and it seems to be behind the EirGrid project at this stage even though it started before the EirGrid project.

In terms of the time it is taking for the first interconnector to be built, the Deputy is correct that it is a long time since it was started. The Commission for Energy Regulation recommended to the Government some years ago that we should do this and the Government asked us to look at it being done by the private sector. We took market soundings and found that nobody was willing to do it on a purely merchant basis.

The Government then asked us to look at doing it on a public-private basis. Having spent another considerable period looking at that, we reported that it did seem possible. The Government then decided that it wanted EirGrid to do it. Since the decision was taken that EirGrid should do it, the project has moved ahead very well and is at an advanced stage now because there are connection agreements at both ends, for connecting to the UK grid and for connecting to our grid. Sites have been chosen on our side and the actual landing point is chosen on the UK side. The competition to build it is under way.

I am happy that the EirGrid interconnector is going to be the first one built but we would be happy to see another one built as well. When the Government decided on this interconnector, it identified a capacity of 500 MW and that it would look at further interconnections. The Government White Paper referred to interconnection with France. We do not see this 500 MW as being the end of the line and we see a further interconnector being built. We would not advise bringing 1,000 MW into the one point because it would be too big for our system. We envisaged that the second interconnector would be in a different location.

The amount of energy we need depends on the amount of capacity we build and whether we want to export wind energy and confine people to buy the wind from us. We have not set any figure or stated that 500 MW or 1,000 MW is the correct figure. However, we expect it will be a higher figure than 500 MW if the project moves ahead and it would be good to see private sector investment in it. Unfortunately our studies before the EirGrid decision was taken did not identify anyone who was willing to build on that basis. We are waiting to see what comes from the company involved.

Recently, for the first time, I heard people from the wind industry saying that all of those 8,000 wind farms in the queue could not be built as well as the 2,500 that are being built. It is hard to get agreement on the number that should be on the system. Our Gate 3 process is trying to see how we progress from here. The main criterion is that when people join the queue, those who have been in the queue for the past three years must have precedence over those who joined in the past six months. Some in the wind industry say that many of those in the queue will never build, that it will not be economic. If they do not, the later ones will come in.

One of the key matters we must decide is the level we will deal with in Gate 3. The more we put into Gate 3, the longer it will take to process them and get them up and running. It may be easier to take them in smaller chunks and we are about to make this decision.

There is agreement in the industry with the approach suggested by EirGrid and ESB Networks that we use as a basis the grid development strategy on which EirGrid is working which considers developments to 2025. The number of wind farms we decide on will be fed into the grid development strategy. We will identify when they can be linked up, the reinforcements needed and the timescale involved. It may become complex but it is an interesting development. It is the first time we will have a strategy for developing the grid as far as 2025. The plans published up to now are five year plans, as sought by the legislation, but this considers matters further out.

Those who are in the queue will have precedence over later proposals but there are question marks over whether all will go ahead. Some suggest an auction to see who is really serious but encouraging companies to pay up-front in order to get precedence will help the bigger companies with strong balance sheets and disadvantage the smaller ones. There are many small developers of wind farms.

Storage does not seem to be economic at the moment. Developments are taking place and it may become more economic as time goes on. Pump storage on Turlough Hill is one example of storage. There are two proposals to build new pump storage stations around the country. We have agreed to moving them ahead in advance of the long queue of wind farms because it would help us to accommodate more wind energy on the system. We are waiting to see if these proposals become reality. Battery storage may become economical and feasible in the longer term.

One of the developments in the market is the proposal for generators to build more flexible generating plants. These will be thermal plants but not the base load plant that must be running all the time. They are flexible, mid-merit or peaking plants that are designed to run part of the time and can be ready to come on when the wind is not blowing. We do not see much happening in terms of storage in the short term.

Mr. Tom Reeves

Pump storage is very expensive and trades on the price between the cheap price and the dear price. The economics are not the best at the moment and the differentials are not large enough.

The single electricity market is a wholesale market whereby all generators table bids. There is a computer model that selects the stations to be included. One of its functions is to get this as cheaply as possible. Every half hour, we produce the cheapest price electricity we can, at the wholesale level. That is the power produced and sold on the market. There are 48 prices every day, published one day ahead. We have allowed some large industries, such as customers of the ESB, to buy electricity a day ahead at 48 different prices every day. Approximately 28 companies do this and it is sensible for companies that have a continuous process, and that can switch off or slow down between 5 p.m. and 7 p.m where the price might be €200 to €300 per megawatt hour and run the process at night when the price might be €40 to €50. That has been a significant benefit.

On the basis that we have a proper profile across the day and across the year, we can price the electricity for customers more accurately and give the best price possible. To ensure the ESB did that properly for household customers we obliged them to produce a tariff methodology and a hedging policy, setting out the policy they would use to buy the electricity to ensure they would buy it as cheaply as possible across the year and that the tariffs devised were the best to suit the cost the ESB was facing and to see how the customer might benefit from this in a manner that reflected the market.

We have a transparent market - anyone can look at the website to see tomorrow's prices from 2.30 p.m. today. It is on public display and we know what stations are running and at what time. One of the key issues was transparency because people complained that nobody knew what was going on. Now everybody knows everything. The information is available to anyone who wishes to look at it.

The pricing is right now that we are getting interest in new investment, as referred to by Mr. Michael Tutty. It is priced properly from base load to mid-merit to the peaking plants. People are looking at all parts of the curve. Companies are interested in the household retail sector, such as Scottish and Southern Energy, the company that recently took over Airtricity, as is Bord Gáis and Quinn Group, which will be involved in a few years' time. We expect this to improve and for there to be more competition.

There is a high level of investment required for setting up a system to sell electricity to households. If one can piggyback on an existing system it makes life much easier. The billing, settling and record systems are expensive and the margins are very tight because we have kept the prices tight.

I refer to prices with respect to Britain. There is an interconnector from Northern Ireland to Scotland and there is trade from Ireland. The market is different to ours but it is a balancing market. The buy price is higher there than here so there is some trade across the interconnector. As we develop the market and make it more dynamic, there will be more trade on the interconnector. It is a little rigid at present.

Smart metering is a good idea. We are embarking on a pilot study and we hope the first meters will be installed in July. We must consider if it will work, if we can collect data, process it and send bills to the correct people through interlinking with suppliers. It is also intended to encourage people to manage their loads. If people use these properly they will reduce their electricity bills and we will reduce the investment required in future in power stations. Everybody should be better off. If we did this in the normal manner we would put the cost of this on to the network charges and it would be spread over 40 years. It would be paid for by customers, as they pay for the network, over 40 years. It will not have such an impact on the customer price. We would like to do a deal with the ESB to get it cheaper and we are examining this.

Trade unions were mentioned. Under the legislation, we are banned from having anything to do with industrial relations matters.

Deputy Simon Coveney

It is all right.

Mr. Tom Reeves

Yes. It would be a pity if the matter in question did not go ahead.

On the pricing timetable for the tariffs, this week we published a new timetable on our website. It is an all-island joint effort with our colleagues in Belfast. Now that we have changed the tariff year, electricity and gas tariffs will change on 1 October. This process has more or less commenced. The directed contracts that we oblige the ESB to sell suppliers will be offered for sale starting on 28 April. This process will continue until we publish our draft proposals on 1 August, after which there will be a consultation period of one month or five weeks. Our decision, which we will make on 5 September, will take effect from 1 October. This is the standard plan drawn up with our colleagues in Northern Ireland.

People, the outgoing chairman of the ESB in particular, will always state that prices can be reduced further, but the ESB retail division with which we dealt on pricing would not agree. The prices are public and the input prices are known by everyone. We got a fair and reasonable price for the customer. As we have a hedging and risk abatement policy with the ESB, the price will remain the same for the year. In recent weeks, members will have noticed significant price increases in the UK where the wholesale market is followed more closely. We try to stabilise it so that people need not meet different prices on an ongoing basis.

Deputy Liz McManus

I apologise for being late. I was unavoidably delayed. My first question is a general one. Mr. Reeves discussed structuring the payment of large investments, such as smart metering, over 40 years. Is he concerned about the heavy financial requirements of future development? Smart metering will cost €700 million and the grid development will cost approximately €800 million. These large investments are to be carried by the customer, but the taxpayer pays where other infrastructure is concerned. Presumably, there is a danger of the restriction of development at some point because one cannot load the customer down. Am I misreading how these developments will be paid for?

Mr. Reeves gave the impression that he is quite cautious about whether smart metering will work. Will he comment in this regard? Is it being developed in respect of householders because it is already in operation in the commercial sector?

Regarding renewable energy sources and the considerable potential capacity of wind in particular, the offshore wind sector promised an investment of €4 billion when the Minister announced benefits for it. As the offshore sector is productive and efficient, I would have expected the commission to prioritise it. With all due respect, it does not sound as if the commission is thinking strategically if it is to prioritise those who have been on the list the longest. The commission needs to consider the best option in terms of productive generation and planning, an important issue given the significant development of wind farms across the country. Is a provision dealing with failed wind farms built into the licences granted by the commission? The structures are massive and have a visual impact. What occurs if the company decides to abandon the project as not being worthwhile? Does the commission build in protection and safeguards to ensure the structures are removed? I do not mean to be pessimistic, but this may become an issue given the current level of interest. It seems to have become a fashionable sector for companies to enter.

Will Mr. Reeves comment on the disagreement over the break-up of the ESB and the transferral of its assets to EirGrid? We were promised legislation, but everything has gone quiet since the unions threatened to turn off the lights. Going down that route is not worth it and I do not support the proposal, but what are our guests' opinions? They are the experts and will be able to tell me if I am wrong.

The North-South interconnector has not been mentioned. There is considerable public concern in terms of whether transmission lines will go over or below the ground. The commission may not have a role in this, but will Mr. Reeves comment? Should we have started planning for the interconnector with mainland Europe by now? How far have we got in our planning?

I received an interesting presentation on the proposed combined power and heat plant for County Mayo. It was not mentioned in our guests' submission, but could they comment on the CPH option in general as opposed to the specific plan in question?

Deputy Mattie McGrath

If wind farms are not viable and groups or consortia break up, wind farms might be abandoned. We have been told that, in some countries, they have been abandoned and remain as horrible eyesores on the landscape. I am concerned about the North-South interconnector and related matters. I welcome that an independent study is under way, but the figures quoted in respect of putting the lines underground have been plucked from the sky.

Mr. Tom Reeves

I will take one or two of those questions, but Mr. Tutty looks after most of the areas concerned.

Deputy McManus stated that I am cautious in respect of smart meters. I am, as there is a large amount of money involved and we do not want to spend money unnecessarily.

Deputy Liz McManus

Has the commission estimated the project's total charge?

Mr. Tom Reeves

The project, as organised, is being steered by us - we chair the group and have established the working groups - but it is a pilot study to determine whether it can work. We want it to work and to reduce people's electricity bills by more than the cost of the investment of €250 per meter, which forms part of the test. One element is the technical matter of ensuring the meters work. We have considered a range of different types, including separate displays in kitchens so that people can see what they are doing.

This matter concerns customer behaviour. When the price of petrol increases, people say they will not drive anymore and drive half a mile less for three days before returning to normal. We want to determine whether there is any elasticity and what type of tariff structure is needed if we are to get people to change their behaviour. If we do not get that, this measure will be only half successful. While changing behaviour is an issue in respect of retrofits, the measure is the right course to take where new meters are concerned. We should not install electromechanical meters designed in the 1920s. Rather, we should design new electronic meters that do many other good things for new customers.

However, we are discussing the retrofit. I caution that we should not get carried away and we should see how people behave. Most pay no attention to their electricity bills because they comprise such a small part of their outgoings. If people did not switch on their dishwashers, washing machines and so on between 5 p.m. and 7 p.m., it would make a significant difference.

Chairman

Senator O'Toole needed to attend the Order of Business and asked me to raise a number of questions on his behalf. Would Mr. Reeves consider including the members of the committee in the smart meter pilot scheme?

Deputy Liz McManus

Would he consider including members in it?

Mr. Tom Reeves

I will answer this in two ways and will put on my political hat.

Deputy Liz McManus

It could be embarrassing.

Mr. Tom Reeves

In effect, people who wish to be in this scheme would be biased members of the sample because they have an interest in it. We want to get information on the average customer. People can be included in the scheme but not in the analysis. Thus, members' results would not necessarily be included in the analysis of behaviour. However, quite a number of people have written in and I have given the same answer to the Minister.

Deputy Simon Coveney

Will the commission try to link this project to energy rating in people's houses? Before being sold, every house will be obliged to acquire an energy rating. Were an inspector, or whatever title will be used, to give an energy rating to one's house, it would make sense for such a person to install a new meter while so doing.

Mr. Tom Reeves

No, the meters will be installed by ESB Networks. This is the statutory arrangement and no one else can install them. The answer to the Deputy's question is "No". This matter is entirely separate from the energy rating process for selling one's house. However, the intent is the same, namely, that people will reduce their electricity usage, as well as to improve the environment and the costs involved. Moreover, it allows for--

Deputy Simon Coveney

It will not improve the cost if two people come into one's house, one to provide an energy rating and the other to--

Mr. Tom Reeves

One will only receive the energy rating when selling one's house.

Deputy Simon Coveney

No, by law there will be a requirement on all houses to have an energy rating in time.

Chairman

Someone will be obliged to assess that.

Deputy Simon Coveney

There are 2 million houses.

Mr. Tom Reeves

From our perspective, this will save on meter reading and people coming to one's house every two months to read one's meter.

Deputy Simon Coveney

I accept that.

Mr. Tom Reeves

It will provide accurate and up-to-date bills.

Deputy Liz McManus

Once the pilot scheme has been completed, the simplest thing to do will be to ensure their installation in all new houses.

Mr. Tom Reeves

Yes.

Deputy Liz McManus

Is that the plan?

Mr. Tom Reeves

It certainly is one of the things we should do. However, first we should establish which is the best one. Bids are being sought for the supply of these items and for the supply of the information technology to track it all. The process will begin in July and we are linking in with our colleagues in Northern Ireland, who also are interested in this initiative. Others involved include Sustainable Energy Ireland, Departments and suppliers. Everyone who is interested in this initiative is involved in order that we do it properly and get the right answers. We are approaching this in a comprehensive manner.

Deputy Simon Coveney

Is ESB Networks the only organisation that can install the meters?

Mr. Tom Reeves

Yes, that is the law and it works very well.

Deputy Simon Coveney

Were the commission to make a recommendation that ESB Networks should, for example, certify contractors to do it nationwide, I would have thought that the--

Mr. Tom Reeves

As for the day-to-day installation of these devices, I dare say that ESB Networks will probably go to tender or something similar. However, it is the organisation that will own these meters and no one else will do so. Over the years, we have found the best system for regulating such networks is to have ESB--

Deputy Liz McManus

What if a person has an account with another provider?

Mr. Tom Reeves

That does not matter as the information technology settlement system will sort out all of that. At present, the Deputy could have a contract with any other supplier and would get a bill from that supplier even though the ESB owns the wires and the networks.

Deputy Liz McManus

Very well.

Mr. Tom Reeves

This is what the open market is meant to be. While the industrial customers that have left the ESB might be with Energia or Bord Gáis, the ESB still owns the meters and the wires. Nevertheless, one receives a single bill from Bord Gáis or whoever because the charges for using the wires are settled between the operators and not with the customer.

Deputy Liz McManus

Very good.

Mr. Michael Tutty

I shall take up some of the other issues. I will start with the most difficult one, namely, the North-South interconnector. Given the establishment of the single electricity market, it is no longer an interconnector and will be part of the transmission system. That is the reason we called it the North-South transmission line in our presentation. The commission's role in this matter is simply to approve EirGrid's investment plans. We were happy to approve the building of this line by EirGrid to link us more closely to the North. If EirGrid at some point comes back to us with proposals and costs to put it underground, we will be obliged to consider such proposals and assess whether it is reasonable to do so, particularly if the cost is very high. That would have implications for end users because the cost will eventually be passed on to them.

Given that a study is about to take place, we should await its results before commenting. However, at the last meeting of European regulators, which I attended in Brussels last month, I asked everyone there whether they put such lines underground, given that many of the project's opponents have been suggesting such lines are now being put underground everywhere, including Finland. My Finnish colleagues replied that this certainly was not the case and the others all said the same thing. However, we must wait for the study to be carried out to ascertain the experiences elsewhere and the costs of doing such things. If Ireland decides it is desirable to put such lines underground, the decision should be made in the light of all the implications of so doing. This is not being done elsewhere because of the costs, as well as for operational reasons. Our role is limited in this respect and we are not in the front line. However, if EirGrid comes back to us with a proposal--

Deputy Liz McManus

There are examples of this being done elsewhere in certain countries. One should not state it is not being done elsewhere.

Mr. Michael Tutty

As is the case here, it is being done in cities. It is being done in environmentally protected areas and for short stretches. The line under discussion is an AC, rather than a DC, line. While the interconnectors from England to France or from Ireland to the UK go under the sea and may continue underground for a bit on land, they are a different type of interconnector, as members have already heard at their meetings. It is better not to go into this matter too much today while awaiting the results of that study.

On the agreement on the asset transfer, EirGrid has been set up as an independent operator of the transmission system. The assets are still held by the ESB. From a regulatory point of view, in response to the Green Paper the commission proposed that all the assets, both transmission assets and distribution assets, should be removed from the ESB and put in one company, EirGrid. Purely from a regulatory point of view, this would be more transparent and it would be quite clear there could be no collusion between the monopoly parts of the ESB and its competitive parts.

Deputy Liz McManus

Has the commission received any complaints?

Mr. Michael Tutty

Not many.

Deputy Liz McManus

Has the commission had any complaints?

Mr. Michael Tutty

The wind industry complains from time to time. However, it has not complained much recently although I saw a letter last week that complained more about the commission colluding with the ESB than anything else.

Deputy Liz McManus

That is an honest answer.

Mr. Michael Tutty

We do not consider this to be a major problem in Ireland. It is a bigger problem in countries such as Germany or France. Consequently, while it is not at the top of our list of things that must be done, the commission is of the view that if we are to have a free, open and transparent market, it would be desirable for the networks, which are monopolies, to be separate from the competitors in respect of both generation and supply. The commission is satisfied the systems it has put in place with the ESB have ensured the networks are operating quite independently. The last step of taking them out would ensure not only that they are independent but that they are seen to be independent. We favour this but we are not jumping up and down and insisting it must happen immediately or that it is vital for our market.

Offshore winds are certainly stronger but the cost at present of utilising them as a resource is very high. This is demonstrated by the offshore feed-in tariff announced recently by the Minister of €140 per megawatt, compared with €57, or €61 in index terms, for onshore generation. Whether through ESB bills or taxes, that additional cost has to be met by the consumer at the end of the day. Further to the cost implications of offshore generation, we have a statutory duty to process the applications we receive and we are required to give good reasons where we do not agree to a connection offer. A lot of legal people are getting involved in the wind application system and they will be maintaining a close watch on us. Applicants who have been in the queue for three years might ask why they never received a connection offer when a more recent offshore application receives one. These issues have to be considered.

Deputy Simon Coveney

What is the answer? The Minister has just launched an incentive package for the offshore sector, which is the correct policy in my view, but everybody else in the pipeline will be treated according to the length of time they have waited. Surely, the decision on whether wind turbines are located onshore or offshore should be based on criteria such as efficiency and wind speeds.

Mr. Michael Tutty

If efficiency is the main criterion, onshore turbines are more efficient in terms of overall cost to the system. That is why the Minister has to provide a much bigger subsidy to offshore operators. Output from onshore turbines is approximately 35% and although the output may be higher offshore, the cost will be significantly higher. Undoubtedly there will be a mix of onshore and offshore production, if only because of planning difficulties in respect of onshore applications. Offshore wind farms are somewhat dependent on a super grid linking us with the UK and other countries. If the wind is not blowing off our shores, it will blow somewhere else and we will be able to import electricity, whereas we could export it when the winds are strong here.

Deputy Liz McManus

In that case, a clear strategy should be devised so that people can understand their chances. I do not know whether the commission should be responsible for that strategy but I would think it a requirement in terms of legal protection. It appears that a free-for-all would ensue otherwise.

Mr. Tom Reeves

The feed-in tariffs are ministerial policy. As Mr. Tutty noted, the offshore feed-in tariff is double the onshore tariff. The Deputy will be the first to harangue us about the price of electricity. The issues under discussion only increase the price of electricity. It is a slow and expensive process and issues of equity and non-discrimination also arise. If people have applied for a connection to the scarce resource of the grid, we cannot willy-nilly jump others ahead of them, which is what is being proposed.

Deputy Liz McManus

If a clear strategy is in place, people are less likely to join the queue if they realise they will not be successful. At present, the page appears blank. Everybody joins the queue and the commission reacts by agreeing connections for those who have waited the longest, regardless of whether it is good for the consumer. It is developer rather than consumer led, which is not a good way to proceed.

Mr. Michael Tutty

I had hoped that we would get out of the queue system under Gate 3 once we had 3,000 MW of applications. However, the figure has suddenly increased to 8,000 MW so we will not be able to get out. These applications include several offshore wind farms. Our legislative remit does not allow us to ignore earlier applications for onshore wind just because we might think offshore generation is the future. The legislation makes provision for the Government to give us a direction in that regard but we are required not to discriminate when issuing licences to applicants who want to generate electricity. We have not yet refused anybody but we have kept them in the queue while we try to deal with them on a rational basis. We would not be legally justified under the terms of the legislation we have to implement to decide to give precedence to offshore wind.

Mr. Tom Reeves

We regulate the business and the Minister sets the policy. It is ministerial policy to set various targets and while we may not agree with the targets, people respond to them by applying for authorisation to construct or to connect to the grid. We are charged with processing these applications in a fair and non-discriminatory manner. If the policy is to be changed to allow offshore applications to take precedence, the Minister would have to issue us with a policy direction. By law, the Minister has to consult widely before doing so, which includes seeking the opinion of this committee. That would be a major step for the Minister to take.

Deputy Liz McManus

It might also be a positive step.

Mr. Tom Reeves

It would be very costly.

Deputy Simon Coveney

When will Gate 3 be announced?

Mr. Michael Tutty

We have undergone public consultations on it and I hope to reach conclusions within the next two months.

Deputy Liz McManus

Will Mr. Tutty address the issue of obsolescence of wind turbines?

Mr. Michael Tutty

We have nothing in our licences to deal with that issue. I suggest it is a planning issue rather than one that concerns us. The planning authority grants permission to erect the turbines.

Mr. Eugene Coughlan

The turbines cost up to €2 million per megawatt and are funded by the banks, so if a project runs into trouble it will be bought out.

Deputy Liz McManus

Mr. Coughlan obviously never walked through an abandoned wind farm.

Mr. Eugene Coughlan

We do not have any in this country.

Deputy Liz McManus

That is what I am saying. I have walked through an abandoned wind farm.

Mr. Eugene Coughlan

It probably comprised old turbines. There would be no new ones because of their cost.

Deputy Liz McManus

We have seen in mining areas the result of failures to make proper provision for remediation. It is not possible to achieve 100% success in an area like this.

Mr. Eugene Coughlan

The risk is low. It is the same in respect of a power station.

Deputy Liz McManus

The difference is that when the ESB built power stations, a managed arrangement was in place for closing them down but if a private developer builds a wind farm that for whatever reason is not successful, Mr. Coughlan says it is a matter for the planning authority. Can he discuss it with the planning authorities and the Department of the Environment, Heritage and Local Government or does he think it is an issue at all?

Mr. Tom Reeves

This is the first time it has arisen for us and we will check the story. However, it is not covered by our licences. If somebody goes bust or into liquidation the licence is rescinded but that does not prevent somebody else from taking it up and running the project. If a project is not taken over and falls away, that would be an infrastructural issue for the planning authorities and it is not an issue for us. We have no powers in that area at all.

Deputy Liz McManus

I asked questions about CHP and the connection to mainland Europe.

Mr. Michael Tutty

The Deputy referred to the planning element of the connection to mainland Europe. EirGrid has not submitted a planning application, which it will need for the convertor station at Woodlands, County Meath, but it is working on it. It is also similarly working on planning at the other end. The company has identified the route and the connection points at each end and it is running the competition ahead of getting planning permission to make sure--

Deputy Liz McManus

I referred to a connector to France.

Mr. Michael Tutty

I am sorry. That was mentioned in the Government's White Paper. We have not worked to examine the cost and feasibility of it. Connection to the UK is more feasible, as a line to France would be long. To the extent the UK is connected to France through shorter lines, bringing power from France to the UK would be easier. I have not examined the economics of it. When power is transmitted like that, the same power that leaves France does not arrive in Ireland because it gets mixed up in the grid in the UK. It does not have to be physically transported all the way.

Mr. Eugene Coughlan

We are very much in favour of CHP. Aughinish Alumina is the main CHP plant in the country. It has a huge steam demand, which is the driver for the power plant on the site. The company uses all the steam from the plant and it exports much of the electricity generated to the grid because it does not need it all. That is very efficient plant. The only other large scale plant is proposed for Mayo and it was mentioned by the Deputy. It is in the process of being developed and we have met those involved. We support them. If they can put the project together, we will very much welcome it. They propose to use a mixture of peat and wood chip. They are talking to the IDA and others to see if they can get money to take the steam from them. That will be one of the decisive issues in this project.

Deputy Simon Coveney

Are they seeking significant grant aid?

Mr. Eugene Coughlan

That is a matter for the Minister. If they can put all that together, they will have a viable project and we will be pleased to authorise it.

Deputy Peter Kelly

Is the commission doing a good job?

Mr. Tom Reeves

We hope we are because we approach it in a very professional and diligent manner to keep abreast of all developments and to keep all things going. We might not please everybody all the time but if we did that, we certainly would not be doing a good job.

Deputy Liz McManus

Mr. Reeves could ask us the same question.

Mr. Eugene Coughlan

The commission is like a referee who is never completely popular.

Mr. Tom Reeves

Sometimes we own the ball.

Chairman

I must ask a number of questions on behalf of a Senator who could not be present. Does the commission support the proposal that EirGrid or other bodies be required by law to buy back excess capacity generated by domestic microgenerators, that is, wind, hydro or solar power?

Mr. Tom Reeves

That is permitted but nobody is required to do it. If a person has a small microgenerator in his house, he can offset it against the electricity bought. If it is exported to the grid at night when it is not being used, the electricity would be sold in the market at the wholesale price.

Deputy Simon Coveney

But one's net meter will take account of that.

Mr. Tom Reeves

The net meter will measure in and measure out separately.

Chairman

Grant aid is not available for solar panels. Does the commission favour additional grant aid for other renewable energy generators?

Mr. Tom Reeves

I pass. That is the short answer. As I understand it, the grant aid for solar power is for heating a house or for heating water through solar panels and not for generating electricity. The photoelectric cells are the electric part of this. It is entirely within the Minister's gift.

Mr. Michael Tutty

We are unable to give grants. The grants are provided through Sustainable Energy Ireland rather than the CER.

Chairman

Recent competitiveness reports highlight the high cost of electricity in Ireland. How can it be ensured excess capacity generated over the next few years will be used to drive down domestic prices rather than exported?

Mr. Tom Reeves

None will be exported in the mean term. The market is designed in each half hour to get the cheapest electricity. If stations are a little more expensive, they will not run. There is a constant drive to lower prices.

Deputy Simon Coveney

Will the commission provide the committee with details of the wind energy projects through which it is proposed to generate more than 8,000 MW so that we get a flavour of where the demand for developing wind farms is? What percentage of farms will be on shore and offshore? I am approached by farmers planning to develop wind farms. They ask for advice and they want know how many other people are involved and the size of the market. There is a vacuum in terms of knowledge. Deputies McManus, Kelly, the Chairman and I have a reasonable grasp of wind energy issues but I did not know it was proposed to generate 8,000 MW under Gate 3, on which the CER will make decisions over the next few months. There is confusion and this is serious because people are spending substantial sums on consultants to give them advice on what is viable and the planning process. I know people who have spent more than €100,000 preparing an application but they do not know there are proposals for 8,000 MW ahead of them on the list. Some people have experienced a false dawn and a reality check is needed. The regulator has a role in this regard.

Mr. Michael Tutty

The EirGrid website contains a list of all the wind energy applications. We asked the company to improve on this a year ago to give more information about who are the promoters and our contact details. The general location of projects is indicated on the list. It may not have all the 8,000 MW on it because all the applications only came in recently but it was up to date late last year. That information is in the public domain, although many people may not know where to find it. However, it is publicly available. The people involved in the wind industry know the situation. The figure of 8,000 may not have appeared anywhere previously because it only arose in the past month or two. The website has a list of all applicants. Anyone interested in seeing where they are can see it. The 2020 all-island grid study which was launched by the Minister, with the Deputy in attendance, used the applications already present to build up its models. The pictures in the study show where the main body of wind applications is. Naturally, they are in the south west, the north west and along the west coast.

Mr. Tom Reeves

On behalf of the commission I invite the committee members to spend some time with us, so that we can talk to them about what we do. We would be delighted to see them in Tallaght. We have some very good young people who would be delighted to explain everything and give members all the information they require.

Chairman

I thank Mr. Reeves. We might take him up on his offer and the clerk to the committee will make the necessary arrangements. I thank the three delegates for imparting their knowledge to us. We all leave the meeting a bit wiser and appreciate their attendance. We will be in touch with them again in the future.

The joint committee adjourned at 11.10 a.m. until 9.30 a.m. on Wednesday, 12 March 2008.