Session B deals with oversight of the Commission for Energy Regulation. The joint committee has a statutory role in the oversight of a number of regulatory bodies and the committee intends to meet each regulator under its aegis on an annual basis. The committee is also developing a model for engagement with regulators and this will have ex post, current year and ex ante elements. This is our first engagement with the Commission for Energy Regulation, CER, and I welcome Dr. Paul McGowan, chairperson; Mr. Garrett Blaney, commissioner; and Ms Laura Brien, director of energy markets and smart metering.
Oversight of Commission for Energy Regulation: Discussion
Dr. Paul McGowan
I will make a short opening statement. Given that this in the context of the commission's accountability to the Oireachtas, it is probably worthwhile to have a very brief recap of who we are and what we do, as well as what we achieved over the years, setting out publications, etc. that are produced which could assist the committee with our accountability to the Oireachtas.
We are now Ireland's independent energy and water regulator. We were established in 1999 and our core function is to protect customers, whether from an economic perspective in terms of charges and customer protection measures, or from the safety perspective, which literally protects lives and property. We have broad functions across economic safety and customer protection in energy, and in 2013 we became the economic regulator for the water and wastewater sector in Ireland. Our mission is to regulate water, energy and energy safety in the public interest. Our functions are encapsulated in our strategic goals and they are simply to ensure that energy and gas are supplied safely, the lights stay on and the gas continues to flow, with a reliable supply of clean water and an efficient treatment of wastewater. Prices should be fair and reasonable and regulation should be best international practice.
To give a sense of the sorts of areas we have tackled over the years, an important element is security of supply. In particular, there have been huge levels of investment overseen by us in the gas and particularly the electricity networks, delivering reliability and accounting for growth in the economy. Separately, there is the development of competitive markets and other instruments to ensure we have adequate generation on the system to ensure the lights can stay on. We have also introduced competition in the electricity and gas retail markets to the extent that they are now fully deregulated. We have introduced a single wholesale competitive electricity market on the island of Ireland and we jointly regulate that with our sister regulator, the utility regulator in Northern Ireland, and an independent member. We have also established a safety framework both in respect of the safety of upstream oil and gas activities in Ireland and downstream gas in Ireland. We also oversee the registered gas installer and registered electrical contractor schemes.
We have established the water framework under which we have completed two price controls and we have challenged Irish Water to deliver a 20% reduction in operating expenditure over four years. An important feature of what we do is also the customer handbook, which is essentially the minimum standards that suppliers must reach when engaging consumers. If they fail to reach those standards, we also operate a dispute resolution function that ensures customers have somewhere to go if they cannot reach a satisfactory settlement with their supplier. Through our networks price controls, we drive efficiencies in both the gas and electricity sectors ensuring that while meeting the needs in terms of network infrastructure investment, we also drive performance improvement. For example, one of the key metrics we measure relates to minutes lost, which is the amount of time people have no electricity when they turn on a light. There has been a sustained reduction in that over the years with the level of investments and improvements overseen by us.
We are also very active on the international front. We are active members of four key international institutions. These are the Agency for the Co-operation of Energy Regulators and the Council of European Energy Regulators on the energy and economic side; WAREG, which is a newly established water regulatory forum across Europe; and the EU Offshore Authorities Group, a key safety forum in Europe. We are founding members for some of those institutions. With regard to our own operations it is probably worth pointing out we are compliant with all public sector requirements in terms of payscales and so forth. Everything we do is ultimately subject to sanction by the Department of Finance via our own Department.
It might be worth giving a flavour of the sample of outputs we produce that would assist the committee in its oversight of the CER. It includes our annual report and accounts which we submit and are tabled before the Oireachtas. We have a customer care annual report that outlines the types and range of complaints we deal with throughout the year, along with the types of queries we get as an energy regulator. We also have quarterly retail market monitoring reports and an annual substantive report on the functioning of the retail market. We produce specialist analyses from time to time, and this year we produced a specific analysis of the state of retail competition in the energy markets. Finally, we produce a safety annual report. Our annual report covers both water and energy as we report to Ministers in respect of our functions.
With regard to future strategies, it is worth pointing out there are a few elements we see as key in the foreseeable future.
There is going to be an increasing focus on our part on the role of properly structured incentives to ensure that under network price controls network companies deliver a win-win situation for themselves and for customers. A good example of that is GNI, Gas Networks Ireland, and how it will grow demand on a gas network which will benefit the consumer without spending too much money which would ultimately fall on the consumer. We are trying to design incentive mechanisms to ensure we get the most out of that asset.
We are also looking at a new integrated single electricity market in conjunction with the North. This will go live early next year and then there will be a serious amount of work bedding that in, as was our experience with the introduction of the first single electricity market.
We are launching a new HR, human resources, strategy. As a regulator, one of our key resources is our staff. Staff development and retention is a key issue for us into the future. We envisage we will be producing our new energy and water strategy statements to apply from 2019 onwards because our current strategic plan applies to the end of 2018. We foresee we will be doing a substantial amount of work in 2018 on ensuring those statements will be in place from 2019 onwards.
There is currently an OECD review of the commission, focusing on governance, accountability and the regulatory process, compared to our peers in Europe and elsewhere. Its report will be formally published in November with recommendations. From that point on, we will be looking at its recommendations, trying to take them on board in our new strategy statement. We also feel there will be opportunity to engage further with the committee on this.
Do the Commission for Energy Regulation, CER, and the Department of Communications, Climate Action and the Environment have an oversight agreement in place? When is the commission’s 2016 annual report due to be published? Have the Department and the commission agreed key performance indicators which can be used to measure its performance?
I thank the CER members for staying on so long this evening.
Will the commission give a timescale for the roll-out of the integrated single electricity market? Rolling it out is more important for the North because its supply is a bit more precarious than ours. It is also important for having a stronger market with a stronger grid for dealing with fluctuations. For example, much wind-generated energy will be coming on to the grid and we need more capacity to absorb that.
On the cost of electricity, how did we compare with the average European price ten or 15 years ago? Now, we have the third highest electricity costs, with only Germany and Denmark ahead of us. Despite the fact there is a regulator in place, there is a perception CER has not been effective in overseeing the market. There is significant frustration around that. Is the public service obligation, PSO, due to increase?
My secretary keeps changing from one electricity supplier to another. He has changed around three times in six years. However, I have never changed my electricity supplier simply because of my secretary’s experience. The packages are complicated but are short term. I also have not changed because I feel there is no benefit to it. I have heard from feedback and media discussions that people feel there is no value in changing energy supplier. The mantra is shop around and that is okay if one is buying bread. However, if one is getting into a contract for a bill every two months, one needs to see some continuity in benefit. I would like to see a gain over a long period that is easily explained. There should be no-frills and cut the bullshit. It should be straight up.
I am going to make some general comments on the nature of the regulatory function. The key output of our meeting this evening is to engage ourselves in this OECD review process of CER.
The first point to make is that the OECD is in a certain state of chassis itself. It should be slow in telling any country what to do when one of its leading members, the American Government, is now a pariah when it comes to energy and climate policy. The first thing we should consider is what we will do with the OECD. Who wants to be in with an American Government which is defying science and acting in a rogue state way? We should be looking at the possibility of connecting with the Chinese or Indian Governments. The Chinese Administration has taken some initiatives in its energy policy, such as its silk road initiative, with grid plans and ambition for decarbonisation and developing renewables. We could learn much more from these than from the OECD.
The American Government’s role in the OECD is now in question because of its climate policy. The first question we should ask of any OECD review of us is what it is doing about advising other countries when one of its own leading members is outside the Pale in energy policy.
A really interesting question is how one manages a regulatory function in a Brexit-affected world. As seems to be the case from yesterday’s negotiations, it looks like a hard Brexit with Britain outside the customs union and the Single Market. It will also be outside of European Court of Justice rulings. That will be traumatic for our energy policy because it will tear up the whole market and co-operative mechanisms. We are in a crisis situation if that happens because we have moved towards a single electricity market, as well as having significant interconnection and gas security issues with the UK. What will Britain’s role be in the Agency for the Co-operation of Energy Regulators, ACER? These are the issues and everything else in ordinary time has to be put to one side.
If we were dealing in ordinary time without America being a rogue state and Britain tearing up regulatory rulebooks, we have benefited tremendously from the EU regulatory system. I do not believe we would have introduced this complex market regulatory system ourselves. It came from European directives over several decades. By and large, we have been quite good at regulation. From my experience as a former Minister and a Member, we have an independent, capable and professional regulatory system. While it is not the best in class, we are up there with European countries in telecommunications and energy policy. I would like to hear anybody argue differently. While there are failings in our system, by and large, we have a capable independent administrative system, including our regulators.
I cite as evidence the work we do. It is very sporadic, haphazard and it is far from perfect - one could look at the event just two hours previous to this of discussing electric vehicles which was a bit of a bun fight with 50 people in the room - but that is the way we do things. We hear different stakeholders and different views. It is our connection, however, with the regulator that is slightly strange and does not follow the normal rules. I speak from my experience of more than ten years in the Oireachtas. We follow what the public interest is and the public stories at the time, which are varied. Six or seven years ago the price of electricity was the key issue at the time. It strays into areas such as the grid and the difficulties in building the grid and wind power infrastructure due to public opposition. How would Dr. McGowan and the CER explain to anyone in the OECD the situation in Ireland regarding water charges? How could Dr. McGowan assess the Commission for Energy Regulation's performance in terms of setting a proper charging system for water when we all know it was the political system and the political dynamics that dominated and which are very hard to explain?
If this meeting is to discuss Oireachtas oversight, there is a game changer, not just because of the US Government changes or Brexit, and that it is a wider change in the European Union. The days are over for the 1990s obsession with the market knows best approach. The market has a role and we need enterprise, but we are now in an environment where the State will take a stronger role. Ultimately, we need to meet the climate objectives to make such a radical change. The market cannot do it on its own and we cannot rely on market mechanisms. We must get the State with its regulatory, administrative and political systems to take some risks and to make some bets and investments that the market never would. If I was to change the system, I would look at where we are today with the lack of advancement and investment, smart metering, electric vehicles, offshore energy, solar power and demand management mechanisms. We have the real potential to be brilliant at this. In some instances, we are very good. We are very good at integrating renewable power. We are fairly good at energy efficiency in certain areas. We are not, however, grasping the goal which is a massive leap towards the low-carbon future. The regulator has a key role in that but it should not necessarily be just an obsession with market arrangements. I do not believe in the old trialogue of security and economic value and the environment. The environment must come first because it is a physics parameter that cannot be ignored. The other two aspects of competition and security of supply can be met in a range of different ways but we cannot ignore the physics of climate change anymore. The regulator and the administrative system need to start taking a few more risks and bets and not worry about failing. If it fails the political system would carry the can. We need to make the same sorts of leaps made when the State was founded such as the development of hydropower and others. We need to make that scale of jump. While the regulator has a role it is not on the old market-knows-best regulatory system, where the income will deliver it, which is no longer credible.
I thank Deputy Ryan. I know there is a lot there and I will let Dr. McGowan come in on that.
Dr. Paul McGowan
I will spread the replies around among my colleagues. I will start by answering a few of the specific questions. With regard to the oversight agreement, it is currently compliant with the code of practice as of 2009. We are currently working with the Department on the new code of practice for governance of State bodies to reach compliance by the end of this year. We have just come to the end of a gap analysis. We will then be in discussions with the Department as to what, if any, form of oversight agreement we would need. That will be clarified later this year. Our aim is that by the third quarter we will have identified and hopefully have everything in place in terms of compliance. We will then carry out our own internal audit to make sure we are fully compliant with the new code of practice by year end. It is my understanding that the Department is now talking to all the sectoral regulators to ensure they have a level of consistency around the form and content of oversight agreements should they be needed.
On the concept of comply or explain, it is fair to say that the code of practice on the governance of State bodies assumes there is a board and a chief executive and that it is almost a commercial semi-State organisation in some ways. We are obviously not like that and there are some areas where we are not in compliance, but can easily explain why not. We are largely complaint with the code of practice, but we have yet to conclude our gap analysis. Part of that will be working with the Department to ensure we have the appropriate oversight agreement, in whatever form it may be required.
Our 2016 annual report is currently in preparation and in the next week or two we will be looking at our accounts. The body of the report on what we have undertaken during the year is currently in preparation and it will be the third quarter of this year before we will publish that report. This is being realistic in the context of where we are in the development of that report.
As part of our annual work planning, which we submit to the Department, we seek to establish a set of key performance indicators, KPIs, based on what we hope to achieve in the year, by which we can be judged. One of the key outputs that may be of benefit to the committee is our annual work planning cycle, which itself is based on our strategic plan. We set ourselves a series of goals around work we want to achieve such as advancing the all-island single electricity market, initiating some new piece of policy implementation based on new legislation or a review of an existing piece of work. The goals may include elements of business as usual such as running a complaints service for consumers where we try to set realistic KPIs.
Reference was made to Brexit. Ms Brien will cover some of the questions on electricity prices and the single electricity market as raised by Deputy Stanley.
Ms Laura Brien
I will respond to the question on timescale for the revision to the single electricity market rules. Our target for the new rules to be in place is May 2018. As Dr. McGowan explained, we have a single electricity market today. It has been up and running since 2007. We are revising the rules to make them compliant with the broader pan-European electricity market. The revised rules should be in place in May 2018, which is the target.
On the costs and prices of electricity, we rely on a very good report produced by the Sustainable Energy Authority of Ireland on the comparison of residential and commercial electricity prices in Ireland relative to our European peers. It is coming out with a new metric that looks at a weighted average price across a range of consumption values. The level of consumption in Ireland is different from other countries. When we look at that average, our prices have been at or below the EU area average for the last couple of six month periods. Denmark and Germany are outliers, but when we average across all the countries within the eurozone area, Ireland is at the average level. We are not necessarily an outlier but we recognise that we have some underlying costs that tend to make us that much more expensive. We have a very geographically dispersed population. This means that for each customer we end up having to build more distribution lines and this leads to the delivery of electricity within Ireland being more expensive than in more densely populated countries such as The Netherlands or France. Ireland is not really out of line in that respect.
The members asked about switching and the duration of deals. Obviously, the commercial offerings of suppliers are based on their own ideas of what they think is best for their companies. Most of them tend to have a large initial discount for a 12-month period and the price then reverts to a more standard tariff after that. Not all companies have adopted that pricing strategy. Some companies have adopted a different pricing strategy of a smaller discount over three years. There is some variety out there. The Commission for Energy Regulation supports switching as one of the ways that customers can get the benefits of competition. By shopping around, switching is straightforward, fast and free. A customer who is a dual fuel home customer could save €200 to €300 per year, even today, by switching to a different supplier for that initial 12-month discount period.
While we do not promote anyone in particular we accredit price comparison websites. There are two price comparison websites that are accredited by the CER and we always encourage people to go to those and put in a consumption level or an average consumption. The websites then display the level of competitive offers that are available.
The issue around the public service obligation was also raised. Obviously, the CER does not set the level of renewable supports that the PSO levy goes to fund. We act on behalf of the Department to calculate the level of the levy every year. In recent weeks we have come out with a proposed decision with regard to the levy that would apply for the 2017-18 period. As was pointed out, because of the increased levels of renewables on the system, the levy will be supporting approximately 500 MW more wind generation in the coming year compared to the previous year. The overall level of the levy that we have gone with to the proposed consultation is higher than last year.
How much higher?
Ms Laura Brien
It is a little over €100 million higher. The levy for the year is approximately €496 million at our current estimate. Once we have gone through our consultation process we need to update some of the underlying data.
Can the CER clarify a point on the bills for a householder or business? We are looking at approximately a 25% increase in the PSO. Is that correct?
Ms Laura Brien
Yes, although it is a little more on the residential side. What we have gone out with is an estimate of a €2.30 increase per month approximately that would apply for the PSO levy on a household bill starting in October of this year. The numbers are not at the tip of my tongue for commercial and large industrials users but it is approximately a €2.30 increase on the residential side.
How can the CER calculate what the net reduction in general prices may have been because of the marginal cost of renewables? Can some matching-off be done in terms of the net consequences or cost to the consumer?
Ms Laura Brien
That is not possible on a one-for-one basis. I think it is rather difficult to calculate the counterfactual with respect to what the wholesale prices would have been. However, we are generally seeing that the increased level of renewables on the system has led to a reduction in the use of fossil fuels. This applies primarily to gas because the renewables are replacing gas. Wholesale prices during the past three years have been lower than in the past. It is a combination of increased renewables and a reduction in natural gas prices, which is the fuel that sets the price on the margin. It is not really easy or possible to do a one-for-one basis, but we recognise that benefits are coming through in lower wholesale prices.
Mr. Garrett Blaney
At a European level we have done an assessment of the cost of renewable support across all the various regulators. Based on the prices Ireland has paid historically for renewables, we have one of the four lowest across Europe. These are significant extra costs for consumers but when we compare them to those overseen by our German or Danish colleagues we can see there have been very expensive renewables subsidised throughout Europe. The cost of renewable subsidy or equipment has significantly reduced. There is an opportunity but it is obviously a matter for the Department to seek to try to get as much value for money in renewable supports. We have been working closely with the Department to advise on the new strategy. We are trying to help the Department in the development of that.
I will now come to the issue of Brexit. We are trying to share as much knowledge and information that we are picking up in our discussions with our colleagues in Northern Ireland and at European level. However, it is a matter for Government when it comes to where the negotiation strategy sits. We have some concern about the single electricity market. We see it as valuable to consumers here and in Northern Ireland. As the regulators, we will do what we can to try to support the continuation of the project. We have considerable investment in the integrated single electricity market project, which will be delivered next year. We have a strong commitment, inasmuch as we can as regulators, but we are subject to the negotiations that are happening between the UK and the rest of the European Union. We are available and we have worked closely with the Department of Communications, Climate Action and Environment and the Department of the Taoiseach and anyone else who needs information. That is all we can do at this stage. Unfortunately, where the Brexit negotiations go is out of our hands.
Dr. Paul McGowan
I would like to conclude on two points. I wish to pick up on what Mr. Blaney said about Brexit. It is fair to say that I-SEM and the maintenance of I-SEM is high up the political agenda on the part of the UK Government and on the part of the Irish Government.
Reference was made to the OECD review. There is a network of economic regulators under which that review is being carried out. Basically, they got a tried and tested model. In fairness to the OECD, the model has been developed along the lines of how the International Energy Agency might carry out a country review. It is very much a peer review. Next week, those involved are bringing people from Mexico, Italy and Great Britain over. These are people who have extensive experience of being reviewed and running regulatory agencies. We have found this to be a useful exercise in terms of casting a light not on the decisions we make but on the means by which we are governed and by which we run our regulatory process. One point that is particularly relevant to today's interaction is how we are accountable to the Oireachtas. This is very much a conversation that the CER, as an organisation, is happy to continue with the committee in future.
We very much welcome that. Thank you for coming here for the two long sessions. The committee proposes to publish the opening statements and any submissions received relating to the meeting. Is that agreed? Agreed.
The joint committee went into private session at 8.35 p.m. and adjourned at 8.45 p.m. until 5 p.m. on Tuesday, 4 July 2017.