Dáil Éireann debate -
Tuesday, 28 May 1996

Vol. 466 No. 1

Ceisteanna—Questions. Oral Answers. - EU Electricity Market.

Robert Molloy

Question:

19 Mr. Molloy asked the Minister for Transport, Energy and Communications the particular requirements of the Irish electricity sector highlighted by him at the recent EU Energy Council meeting which considered the EU Draft Directive on liberalising the internal electricity market; the decision, if any, that was made in regard to the specific matters raised by him; and the anticipated effect, if any, on Ireland of the decisions made at the Energy Council; and if he will make a statement on the matter. [10886/96]

Seamus Brennan

Question:

20 Mr. S. Brennan asked the Minister for Transport, Energy and Communications the implications, if any, for the ESB in view of the failure of the EU Council of Ministers to prevent up to 40 per cent of the Irish electrical market opening up to foreign competition. [10917/96]

Michael McDowell

Question:

31 Mr. M. McDowell asked the Minister for Transport, Energy and Communications the changes in the EU Draft Directive on Electricity which he will be proposing at the Council meeting to finalise this Directive before the end of the Italian Presidency of the EU in June 1996; and if he will make a statement on the matter. [10863/96]

Batt O'Keeffe

Question:

38 Mr. B. O'Keeffe asked the Minister for Transport, Energy and Communications the difficulties, if any, being faced by the ESB in view of the European Union Energy Directive. [10761/96]

Mr. Lowry

I propose to take Questions Nos. 19, 20, 31 and 38 together.

The revised draft electricity directive circulated by the Commission in February, 1994 provided for a relatively modest degree of liberalisation of the single electricity market. However, since 1994, and particularly with the advent of the three new member states, there has been a considerable shift of opinion among member states in favour of a much greater degree of liberalisation of the market. The compromised proposal by the Italian Presidency discussed at the May 1996 Energy Council reflects this shift. However, a number of member states consider that it does not move sufficiently quickly towards liberalisation whereas only one or two favour a more gradual approach. The precise extent of market opening provided for in the directive will emerge from negotiations at the extraordinary Energy Council of 19-20 June.

At the June Council I will put the Irish position that while we favour a planned approach, the Government has acknowledged there has to be market freedom for large electricity consumers to purchase their electricity from whomever they wish. This will introduce competition for the ESB in this segment of the market for the first time. I will also be very clear that electricity is a vital industry and we should make changes in a planned and prudent manner. While further liberalisation is inevitable, we should review the outcome of a first phase before deciding to move on to the next.

At the May Council I made it clear to my European colleagues that the critical issue for Ireland was a clear commitment to the principle of public service obligations. Agreement has now been reached on this issue. This deals effectively with my primary concern to prevent cherry picking of the larger more lucrative customers and to ensure that the interests of the smaller consumer are fully protected. I have also obtained the necessary provisions to ensure that we can continue to generate electricity from indigenous peat thus assuring the future of Bord na Móna and of more than 2,000 jobs in the midlands.

The draft directive will inevitably have a significant impact on the ESB. If implemented as the text currently stands, the directive would mean a substantial immediate degree of liberalisation of the Irish market with a progressive widening of the number of customers who will be eligible to contract directly with independent power producers. My Department estimates that 25 per cent of the ESB's market would immediately be open to competition if the proposal becomes law.

This will represent a significant opportunity for customers and present a challenge for the ESB. I expect the introduction of significant levels of competition will bring considerable downward pressure on electricity prices. I am confident that the ESB is taking the necessary steps to prepare for the challenges that competition will bring. I see no reason the ESB should not prosper in a new open more liberalised market. I stress, however, that this makes the full implementation of the CCR now more urgent than ever.

Mr. Molloy

What percentage of the Irish market did the Minister envisage would be opened up to competition under the EU Directive when he devised and agreed to the ESB's proposals for the cost and competitiveness review? In view of the size of the market that will now be opened up to outside generators of electricity to sell electricity to our large consumers, does the Minister consider that the cost and competitiveness review might prove insufficient to ensure that the ESB will be capable of meeting the level of competition it will now have to face?

Mr. Lowry

It is difficult to anticipate the outcome of the last Energy Council meeting under the Presidency of the Italians. There is a huge difference between the stance taken by the majority of countries and that taken, for instance, by the Italians, the French and ourselves. I have already said we envisage a 25 per cent opening, but I cannot say that it can be held at that. There is a huge lobby within the European Union at the moment to liberalise the market to an even greater extent. Obviously, we have put forward the Irish position in a vociferous and forceful way. We have a very small system and there are peculiarities which are unique to it. We have put that view forward.

In respect of implementing this change when it arises, as recently as late last week I had a meeting with the chairman and chief executive of the ESB. We have gone through the proposals in detail and have discussed the likely outcome. Arising from those discussions I am quite confident the management of the ESB has the necessary professionalism and skill to ensure that the CCR will put the company in a position to be able to take on whatever degree of competition comes in. As of now, it is envisaged that will be anything between 25 and 40 per cent. The Irish position is that it should be gradual and that we should approach it in a prudent fashion. In the negotiations we will attempt to limit it, as near as possible, to 25 per cent.

Mr. Molloy

The Minister will recall that when the cost and competitiveness review was originally published it was intended to achieve a reduction of 3,000 in the numbers employed in the ESB and savings of £100 million. None of these target figures was achieved. The figure for job savings is estimated now at 2,000 and the saving in annual costs is approximately £60 million. My question has not been answered. When the cost and competitiveness review was being drawn up, what percentage of the electricity market was it envisaged would be opened up to competition? Obviously, from what the Minister has said, 1994 brought about a change in the percentage of the market liable to be opened up to competition. Prior to 1994 the expectation at departmental and ESB level must have been much lower than the current minimum estimate of 25 per cent; it could be as high as 40 per cent. What percentage of the market was expected to be opened up at the time the cost and competitiveness review was being decided upon?

Mr. Lowry

The CCR was not formulated at the time of the opening up of the electricity market. As the Deputy is aware, we engaged in the CCR——

Mr. Molloy

It was to prepare the company for competition.

Mr. Lowry

——arising from the independent consultant's report which established that the cost base of the company was running in the region of £100 million per annum in excess of what it should be. Following prolonged discussions, agreement was reached on the CCR which reduces the cost base by £58 million per annum. When the CCR is fully implemented, the company will be in a position to compete in a competitive environment, which liberalisation of the market will inevitably mean for the ESB. I am satisfied the ESB is fully aware that it is crucial for the company to implement the CCR in full, ensure there is downward pressure on an ongoing basis on its cost base and reduce its overheads.

Mr. Molloy

Will the Minister give an assurance to the House that the ESB will not resort to increasing electricity prices to domestic consumers to compensate for its lack of competitiveness because of its failure to achieve the original targets in the cost and competitiveness review?

Mr. Lowry

Not only can I give that assurance but I have already raised this matter with the company and it has been made clear that under no circumstance will consumers in Ireland be asked to pay for inefficiencies or deficiencies in the company. The overrun on cost base cannot be allowed to be passed on to householders.

Mr. S. Brennan

The Minister may wish to qualify the answer he has just given because I understand the CCR documentation, which the Minister stood over, contains the phrase "necessary rebalancing in prices will take place". Does that mean that if the market opens up and competition is introduced, price increases will transfer from large industry to the ordinary consumer? An evening newspaper yesterday carried the story that we are facing an increase in prices of approximately one-third in the next few years. Perhaps the Minister might rethink the answer he gave to Deputy Molloy based on his commitment to the CCR process of rebalancing the charges. I understand that to mean that the rebalancing will be away from large industry in the competitive area to the consumer because the Minister will have to get the money from somewhere.

Mr. Lowry

The implementation of the CCR package that has been brought forward and agreed is cost effective. It will pay for itself over a four and a half year period and will thereafter result in significant savings to the cost base of the company. I have given a categoric assurance that a situation will not be allowed to develop whereby the CCR plan will be funded by consumers.

Mr. Molloy

Domestic consumers.

Mr. Lowry

In relation to tariffs, we have already agreed a modest price increase over the next three years which contains an element of rebalancing. We have already seen the first measures in respect of rebalancing. It is inevitable that there will be rebalancing in years to come but I cannot anticipate its extent or when it will occur.

Mr. S. Brennan

I thank the Minister for his honesty in admitting that rebalancing has only begun, by way of the 2 per cent or 3 per cent on present prices, and it seems that process will continue.

Mr. Lowry

There is a huge difference between that and 13 per cent.

Mr. S. Brennan

The Minister said the Government acknowledges that large consumers will be able to buy electricity from whom they wish. How does he square the circle? If large consumers can buy from whom they wish, and presuming they buy cheaper imported electricity, if the Minister does not allow any further redundancies in the ESB on a massive scale, it is logical that the ordinary householder will face dramatically increased electricity bills in the next four or five years. There is no other answer to this problem. Bills may increase by one-third.

Mr. Lowry

Absolutely not. That is speculation. We are currently restructuring the electricity industry in Ireland. We are allowing for competition and that inevitably reduces prices for consumers.

Mr. B. O'Keeffe

The restructuring was based on a 13 per cent share of the open market but the Minister has admitted the current figure is 25 per cent and that it could rise to 40 per cent. Will the Minister agree that, having been out-manoeuvred in the EU discussions, he is now placing the ESB in a dilemma? The only effect of, say, a 33 per cent stake on the German market, for instance, would be in relation to heavy industry, but if the market were to open on that basis in Ireland every major industrial and commercial company would be affected by this process. The inevitability is that we will have to increase prices dramatically to the commercial, industrial and domestic consumer.

Mr. Lowry

We have not been out-manoeuvred; we have been outnumbered at EU level. There is a major force within the EU seeking liberalisation of the electricity market. That force is being led by Germany which is seeking a 100 per cent opening up of the market, supported strongly by the Scandinavian countries which are anxious to ensure that the maximum percentage possible is available to open competition. We have clearly stated the Irish position. That position has developed as a result of an in-depth evaluation of our own system. We have put that position very forcefully and we will engage in further discussions to finalise this matter at the Energy Council meeting under the Italian Presidency. I cannot speculate on the outcome of those discussions but there are many pro-liberalisation forces involved.

Mr. Molloy

As part of the CCR proposals an arrangement was entered into whereby the ESB group of unions accepted the proposals in the CCR and the Minister would sanction phases 2 and 3 of the Poolbeg gas-powered station. Has the ESB been told it can proceed with the building of the additional phases of Poolbeg? Has that decision been conveyed formally to the ESB?

Mr. Lowry

The CCR involved a tripartite procedure to which the Government made a contribution. Part of that contribution was a commitment that if the company and its workforce accept the rationalisation, its programme and the necessary structuring, the Government would agree to allow Poolbeg II and III to proceed. As recently as last week I had discussions with the management of the company in that respect. I await further documentation from them. As soon as I am satisfied in respect of the information I have sought we will give them permission to proceed.

Mr. Molloy

Will the Minister agree that this in effect was shutting out competition, that the electricity demand will be well met from the increase in generating capacity which has been approved for Poolbeg, that it diminishes the attractiveness of Ireland as a location for building new power stations and that he has sought to pre-empt and delay the opportunities for large companies to benefit from the terms of this directive when it comes fully into effect?

Is it intended to continue with the ESB as the owner and regulator of the electricity industry? Are there proposals to ensure that the regulation of the electricity industry is at arm's length from the ESB and the Department and that there is fair competition for anybody who sees an opportunity to come in and build a generating station and import electricity through the North when the interconnector with Scotland is achieved?

Mr. Lowry

There is a huge growth in the demand for electricity capacity in this country. The growth this year is expected to be over 5 per cent, more than 200 megawatts per year.

Mr. Molloy

It has been like that every year for the last ten.

Mr. Lowry

This means that Poolbeg II and III are necessary for the ESB to keep up with the demand placed on it.

Mr. Molloy

It could have been provided by private companies.

Mr. Lowry

The legislation in respect of the regulator is almost ready for publication and will cover all the aspects the Deputy mentioned.