I welcome Mr. Padraig McManus, CEO, ESB; Mr. Lochlann Quinn, chairman; Mr. Aidan O'Regan, deputy chief executive; and Mr. Bernard Byrne, group financial director. The Joint committee has invited the representatives of the ESB to discuss the overview of ESB and energy prices. While members have absolute privilege, the same privilege does not apply to witnesses appearing before the committee which 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 understand Mr. Quinn will open the discussion.
Overview of ESB and Energy Prices: Discussion with ESB.
Mr. Lochlann Quinn
Committee members are probably aware that several months ago the ESB announced it planned to spend €22 billion on electrical infrastructure, in particular to make maximum use of wind power. We are very conscious of current economic circumstances but in the next decade we intend to meet that level of spending which we believe is in the long-term interests of the country. I will hand over to Mr. McManus who will make the presentation.
Mr. Padraig McManus
I intend to get through my presentation as quickly as I can. The first page shows the basis of any energy policy: security of supply, the environment and competition or price. The challenge is to secure adequate and reliable supplies and manage the environment while keeping the price competitive. We have had to take account of many Government targets and documents. Many targets have been set for various sectors, all of which have been taken account of. The ESB has had a successful 81 years and our legacy has been to provide the infrastructure to sustain economic growth, which continues to be our target. We have always been a responsible corporate citizen. The brand is well known and has earned its reputation for excellence. In the last 30 years ESB International, to oversee the work we have been doing abroad, has been added.
Security of supply is an important issue globally. For Ireland it is broader than the electricity industry, as we will discuss. The lack of indigenous resources and our import dependency are two of the most significant issues that affect us in the electricity sector. The ESB has always pushed for greater interconnection which will be one of the key issues in security of supply. We have always supported it and believe it should happen as fast as possible.
The ESB promotes efficiency and conservation. We are building the infrastructure. As our chairman said, the major part of our strategy for the next ten to 15 years is the building of the infrastructure to support the renewable sector, not only for the ESB but all players.
We have a diversified generation portfolio and are switching from oil. We have an amount of gas fired plant which still emits CO2 at a much lower rate. We are committed, at the end of the life of the Moneypoint plant around 2025, to replacing it with clean coal technology. We all know that such technology is not available, but given the amount of coal available in the world, particularly in the United States, we are very confident it will be developed. Promoting and supporting the use of renewables and indigenous resources generation such as wind, ocean and hydro energy projects which we do will help overall security of supply. Although not considered the favourite among fuels, members will remember that the peat generation industry was developed around the issue of security of supply.
As I said, there are many environmental targets, but the bottom line is that the electricity sector is supposed to be carbon neutral by 2050. Our strategy clearly indicates that we will be carbon neutral by 2035. Given that this is a long way off, we have outlined target dates by which we will meet a certain amount. By 2012 we will have reduced our carbon emissions by 30%. Ireland's total carbon emissions are 70 million tonnes, of which the ESB, at maximum output, emits almost 15 million tonnes. Our target is to have a 30% reduction by 2012, a 50% reduction by 2020 and be carbon neutral by 2035. This is not an impossible target. It is challenging, but we are very confident we will meet it and be well ahead of European requirements. We also believe fully that at the point of use electricity is our cleanest energy source. If we can produce it without emitting CO2 , that is the way we should go.
A chart in the presentation shows the pillars of the ESB's strategic framework to 2020. Renewable business of scale will account for 33% of our portfolio by that time in wind energy, supporting ocean energy and integrated generating business. We have progressed our asset disposal in accordance with the regulatory framework. It is close to closing. We have committed to gas investments, pursuing clean coal technology and district heating as an option. We are also committed to developing the network to take account of the large amount of renewables projected for Ireland in the coming years. We have reduced the cost of our networks year on year. Despite the fact that we have three times the amount of network per customer as the European average, our network charges are comparable with those elsewhere in Europe.
Will Mr. McManus explain that? I do not quite understand.
Mr. Padraig McManus
Given our dispersed population, against the European average we have three times the amount of network per customer.
Some big players such as Scottish and Southern Energy and Endesa are entering the market and buying some of the ESB's assets. They are committed to entering the domestic marketplace, in which we have seen little movement to date, but that will change. We are committed to growing our international business and have recently launched our UK strategy.
Competition and price are the main agenda items. All member states were required to open to competition around 2000. We have Northern Ireland and the South as a single marketplace and the next step is to integrate Britain to have a market on the islands. It is possible to achieve this. It needs interconnection which we have always supported. With adequate interconnection, one would be able to have a levelling of prices between Ireland and the United Kingdom. The presentation shows the target we have set ourselves — that the ESB would be at a figure of 37% of the marketplace. We are committed to getting below a figure of 40% which we will achieve in very short order through the disposal under way. Our commitment is to meet 11% of that part of our portfolio through the use of renewables by 2020.
Most members are probably familiar with the slide on the all-island electricity market. Many generators feed into the pool from which many suppliers buy and ultimately supply to customers. The all-island pool sets the competitive price. The slide showing the average electricity price components demonstrates that 70% of the price is related to the cost of generation. This price is set by competition in the all-island market and based on rules set by the two regulators, which jointly control the pool. Another 24% of the end-user price is related to networks. There has been, in real terms, a 20% reduction in network charges over the period since deregulation. The other 6% is for the supply of electricity. The significant thing about the area of generation, shown as a red block, is that more than 50% of the price of that block is due to fuel.
The next slide gives members information for making comparisons. It shows the mix of fuels that exists across Europe. On the left side we can see the amount of fossil fuels we burn in Ireland in the electricity sector. Other countries have a much greater mix. If we take the two classic examples of France and Sweden, their electricity prices are almost independent of the price of fossil fuels as these are responsible for a very small portion of their overall supply. Italy is in some way comparable to Ireland, although there is much more use of hydroelectricity there. However, in terms of fuel prices, Italy has always been well ahead of Ireland, despite the fact that we are almost totally dependent on imported fuel. Our plans will see the green element of generation increase dramatically over the coming years.
The next slide gives an idea of where fuel prices have gone in recent times. Heavy fuel oil is taken as a benchmark for fuels, although we do not burn a lot of this. It can be seen that we are back to levels similar to those seen in January 2007. For coal, we are back to 2007 levels, and for gas, even though the price has fallen dramatically in recent times, we are still above the 2007 price level. The next slide shows where Ireland lies in terms of the price of electricity for domestic customers. Our 2 million domestic customers pay the European average and have done so right through deregulation. Although Italy has a fuel mix somewhat similar to ours, members can see the difference in price. In the industrial and commercial sector, we know that the price in Ireland is more than 20% above the European average. However, 90% of that electricity is traded in the open competitive sector, so it is a competitive position. There is no set price; people pay whatever price they can get from the independent sector.
I will run through what has happened in terms of price changes in electricity since the summer. In the summer, based on the formula we are required by the regulator to use, the regulator was forecasting a price increase of the order of 40%. We strongly urged that rather than doing that, we should increase the price in two steps, with an initial increase of 17.5%, and that we would review the situation later. At that time we also said, in a situation such as this in which we reach an agreement, that we would contribute €300 million to offset the price of electricity. The regulator had been in discussion with us in this regard, but the proposition on the two-step process and the amount of €300 million was decided and pushed by the ESB. That left a potential increase from the original 40% of about 22.5%. That has now been offset by the contribution of €300 million that we are making. In addition, the regulator's take from the sale of our assets to Endesa comes to about €87 million. That has been used to offset the price, again, giving a further 3% decrease. The fuel price reductions that have taken place since the price determination in the summer have resulted in a further 10% reduction. Thus, what we now see is an average price reduction of 1% from 2009, which proves that the strategy taken by the ESB — in contributing substantially to the reduction in the price increase and in taking the price increase in two steps — has worked to everyone's benefit.
Members can see that the price of electricity is very much driven by fuel. The ESB has contributed €300 million and given €87 million from the sale of our assets to offset the price of electricity. We are not the only company in receipt of credits but we are the only one that is contributing in this way. The 13% we have offset goes to everybody, not just the ESB's customers. That reduction is for all players in the marketplace. It is about time other players started to do what the ESB has done and gave something back to customers in terms of the price of electricity.
The rest is a summary of some of the things we have been doing with customers in terms of working with different agencies to address the difficulties faced by people with regard to electricity prices, including many of the initiatives the ESB has been involved with. We are determined to continue to have a world-class electricity system here and to have one third of our portfolio in renewables by 2020. We believe the major contribution we have made to offset the increases in the price of electricity should be matched by others who are also in receipt of free credits from the Government.
I welcome the representatives. This is a pretty high-powered group from the ESB — the top people are here. I thank them for coming.
I have some general questions and then one or two specific questions about pricing. With regard to price regulation generally in Ireland, does Mr. McManus think that a case should or could be made for the regulator to consider setting a price ceiling rather than an actual price for electricity? This would allow the ESB, potentially, to reduce prices for reasons of competition with its competitors rather than having a price set. I understand why that has not been the case until now because, essentially, prices are being set to protect the ESB's competitors, and the ESB is the price setter. Have we reached a stage at which competition should be allowed to work and potentially drive down prices? Would the ESB have the capacity to reduce prices in that context if a price ceiling was set by the regulator, as opposed to an actual price for electricity?
Mr. McManus mentioned the €300 million contribution made by the ESB; I have raised a number of times the issue of windfall profits resulting from the cost of carbon being factored into electricity pricing now. This applies to a period between now and the end of 2012, when the ESB will need that money in order to pay for carbon credits. Does Mr. McManus have a difficulty with the fact that the ESB has made a decision to give a contribution that is actually slightly above the figure of the windfall profit the ESB is making this year, yet its competitors in electricity generation in Ireland are making no such contribution in terms of windfall profits that are being gained for exactly the same reasons? Could Mr. McManus explain to the committee, for the record, how the contribution works? My understanding is that the regulator cannot accept a price reduction on the basis of windfall profits obtained because of the price of carbon. That is not the way it works. How does the customer get the contribution back? It is presumably not factored into the pricing of electricity but must work in the form of a rebate or something similar. Could Mr. McManus explain in understandable language how that works? I think I know but I would like to have it on the record.
With regard to the ownership of the grid, there is an ongoing political discussion about whether it is appropriate to introduce legislation — which is already prepared — that would take the ownership of the electricity grid out of the ESB balance sheet and put it into a new EirGrid balance sheet. Mr. McManus might outline for the committee how this would affect the company in terms of its investment plans for the future and in the context of its commitment to spend €22 billion over the next two decades. My sense is that this legislation is on ice for the present and is not being brought forward or pushed by the current Minister.
On the issue of interconnection, the delegates might update us as to whether the current east-west interconnector project is proceeding and whether they are aware of other interconnectors financed by the private sector. In my view, smart meters are a no-brainer. They would allow consumers reduce their consumption and be aware of it at different times of day. This would enable the ESB to apply different pricing according to the different times of day. Perhaps the delegates might outline the current position in terms of rolling out smart meters, both in a pilot project and in subsequent development.
My final question concerns price determination for January. In the figures we see here, 10% is given for fuel price reductions. In Northern Ireland they are talking of reducing electricity prices in January. We are talking, at best, of keeping them at the same rate they are now. When will the consumer see the benefits of the dramatic price reductions in oil and gas? I know the raw materials, gas or oil, must be bought five or six months in advance. However, in the figures we were given, 70% of the price of electricity arises from generation, of which 50% comes from the cost of fuel. In other words, approximately 35% of the total cost comes from the price of fuel. Oil is now almost at one third of what it cost in July yet we are awarding a 10% price reduction. The delegates might give some clarity concerning these figures. Will we see a significant price reduction in electricity before next summer, for example? Can we expect that or is there a reason why the collapsed oil price is not being passed on to the consumer?
I welcome the delegation. The issue that led to this meeting was prices but there is a much bigger context and I am grateful that the delegates have taken that approach.
Has the delegation conducted any assessment on how demand is being affected by the economic downturn? Demand has grown very dramatically in recent years. Can the delegates give us any indication of such an assessment?
We continue to have concerns about competitiveness when there is such a severe economic downturn. The costs of electricity and gas are still higher than the EU average. The delegates have explained why this is the case but it is not a great comfort to people in business who are trying to compete internationally and who must pay such costs.
I am curious about the way the ESB buys its basic fuel. Deputy Coveney also referred to this. There is a very long lead time between a reduction in fuel price and what percolates through to the customer. Is it possible to have alternative models to the approach used? Or must the company apply that manner of buying simply as a matter of consistency?
With regard to the renewables targets to which the delegates referred, the Minister recently said he was aiming for a 40% target by 2020. The delegates clearly do not agree that this target is feasible and I have concerns. The all-Ireland grid study claimed that 40% was feasible. However, because other sectors are not reducing their carbon emissions there is now, if anything, an over-reliance on the energy sector to enable Ireland to meet its commitments. The delegates mentioned a 34% target for the ESB by 2020 which is significantly different from 40%. They might comment on that.
Such an achievement is subject to upgrade of the grid and flexible generation plant. I appreciate the Chairman's first statement in respect of the €22 billion investment. That is very welcome. Concerning the upgrade of the grid, we can see there are political problems with regard to the North-South interconnector and interconnection with Britain, in addition to further presumed interconnection. I imagine it is pretty challenging technically. Perhaps they might comment on that.
I have a question about the smart meters. This is no criticism of the delegates but I am very disappointed in the way these were hyped up as being a great new idea. We were promised there would be significant progress by mid 2008 but we have not seen any such progress. Letters went to householders, of whom approximately 36% replied, indicating interest. It does not sound to me as if this is being pushed very hard. I am still not clear what exactly we are discussing. When one asks about smart meters the information one gets is that the company is assessing what is feasible, having regard to human behaviour.
Perhaps the delegates might clarify the exact timeframe involved. I appreciate they cannot always meet their targets but there must be targets. What will be the benefit in terms of saving energy? People have a concern that the ESB would have access to meters in a different way. The present method is somewhat old-fashioned. I wish to know where exactly the benefits lie for the householder and how quickly they will come.
With regard to electric cars, I take it there would be additional demand arising from the Government targets that are now set. The delegates might talk about their preparedness for that.
The delegates mentioned that Moneypoint is to come to an end by 2020, approximately, and that the subsequent option is clean coal. Are they saying that because they cannot say "nuclear"? Mr. McManus has spoken a little about nuclear power in the past. He was certainly so quoted. Perhaps he might tell us if it is the case that he does not feel that nuclear power is an option in the future, or that he does, but he cannot say so and so he says "clean coal" instead.
The delegates can be up-front with us.
Mr. Padraig McManus
The committee must not tell anybody. The Chairman said to me at the opening of the meeting——
What was that?
Mr. Padraig McManus
He said he would not hold it in evidence against me.
The national energy efficiency plan is due to come out by the end of the year. Does that impact in any way on the company's plans for the future?
On the issue of interconnection with mainland Europe, is that the direction in which we must go? Or is it simply the case that once we interconnect with Britain, that is enough because the follow-on interconnectors are there and being developed? Must we have our own separate interconnector?
I welcome the ESB delegation, including the chairman and the chief executive. The chairman is a legend in his own lifetime in industry in Ireland and the ESB is lucky to have a man of his calibre as chairperson. We have come to expect the best of supply and service from the ESB. Its staff are second to none. They are decent, respectable, honest, hardworking, energetic and proud to work for the company. However, when I walk down the street, visit a shop or meet a consumer, the only question which arises is the price of the product. I have encountered this a good deal in recent times. People feel the price of electricity is too high in Ireland. Whether it is true or false, those in industry have told me that according to a Central Bank report the cost of electricity is approximately 34% dearer than in any other EU country. Is this true and, if so, why? Is the electricity price reduction in January 1% or 11%? Some people seem to believe the cost will be reduced by 11%.
I join in welcoming the ESB to the meeting. Given the economic situation, the price of all inputs for industry will be a critical factor, especially in the immediate years ahead. I am unsure if the ESB presentation explains why there is not a greater reduction in the price of electricity because of the significant reduction in oil prices. Will the delegation comment on this?
I note that by 2035 the ESB expects to be carbon neutral. We are highly dependent on fossil fuels. What impact will that changing trend have on the price and the supply of electricity? Most commodity analysts say that the current price of oil is a consequence of low demand, and once economies throughout the world start to improve in two, three, four, five years' time, the prognostications made six months ago to the effect that oil could reach $200 per barrel may be realised. Can the ESB put any mitigating measures in place to ameliorate the effects of such increases for business in general?
I will call Mr. McManus presently. The presentation slide indicating our dependence on fossil fuels and the comparison of our fuel mix with that of other European countries was staggering. I refer to the comments of Deputy McManus on interconnection. Does the ESB foresee a change in the trends indicated in that slide because of increased interconnection to the United Kingdom? Will we become a net exporter of excess capacity, or will we be net importers of electricity in the next ten to 12 years?
Mr. Padraig McManus
I refer to price regulation. As the committee is aware, the idea was that electricity prices would be regulated. The ESB price would be fixed and then competitors could play off that price. That arrangement never sounded fair to the ESB and it was very difficult for me to explain. However, in realistic terms it gave competitors an opportunity to enter the marketplace and that is why it was set in that way. There has been discussion on whether a ceiling is a more appropriate way to regulate prices.
The big players now entering the marketplace should bring about competition in the domestic sector, and this will allow greater flexibility. Approximately 90% of the industrial and commercial sector is open to the marketplace. That is as competitive as the market can be. The next step is to open up the domestic sector. Since regulation began, prices in the domestic sector have been at the European average. Although people may have seen increases, I do not know that much more can be done, given the fuel mix. However, if there is competition in the domestic sector, the same pressures that apply in the industrial and commercial sector will apply there.
There are two possible options for the sector. In an appearance before the committee the regulator discussed the prospect of examining a price cap from which one could work down. Another possible option is the introduction to the marketplace of two big players such as Scottish and Southern Electricity and Endesa. Both are committed to entering the domestic and the industrial and commercial markets and this could possibly have the same impact as a price cap. The ESB wishes to be free of regulation and to be allowed charge whatever we want. We believe that would be a better system. However, the development of regulatory systems necessitates some time to get to that stage. Competition with new big players entering the market and seeking a large share of the domestic sector would probably have a greater impact on prices than attempting to fix a price ceiling and work down from there.
On the emissions trading system, the position is that after 2012 we must all buy whatever is needed. We will not be in receipt of windfall profits. This is an issue throughout Europe. Governments did not realise the credits would be so valuable. In Ireland the value of windfall profits to the electricity sector is somewhat in excess of €200 million, and the ESB is in receipt of slightly more than half of that amount. The value to ESB of carbon credits at present is approximately €110 million per annum. The ESB believes it has returned a good deal more than that through its efficiency and what we have done in other areas. Although other Governments throughout Europe have found it difficult to recall credits having allocated them, we have returned them and we do not see why others in the Irish market should not do the same. The knock-on effect is a reduction in the price of electricity for every customer. We return €300 million to the regulator, which reduces the network charges applicable to everyone. All customers regardless of whether they receive power from ESB receive that reduction. That is the way in which it is passed on. The network charges are set at a rate according to a five year review agreement between the ESB and the regulator. The €300 million and the €87 million that could result in the sale of our assets is subtracted from the network charges. This is how all customers benefit and how it feeds into the price of electricity.
In effect the ESB is subsidising the private sector.
Mr. Lochlann Quinn
I was about to make that point. The State sector is subsidising the private sector.
Yes, except that the money is coming from the consumer as they pay an extra 10% on electricity bills. To be fair to the ESB, it could have made a contribution of €110 million rather than €300 million.
Mr. Padraig McManus
We could have done so.
Would the ESB have a difficulty with the Government setting up a formal system to recoup that money in the coming four or five years?
Mr. Padraig McManus
Our understanding is that this has been reviewed for this year by the Commission on Taxation. The issue of how carbon credits have been allocated and handled is being reviewed by the Commission on Taxation. We await the results of that review. It is not really an issue for us as we have returned the credits.
Regarding grid ownership, the Minister said he would appoint an independent chairman to review the proposition. He further said he would give all interested parties the opportunity to make their views known. My understanding is that he intends to do this in the new year. The agreement put in place, whereby he said he would appoint an independent chairman to take inputs from all parties on this issue, will go ahead. Until that happens the legislation is on ice, pending the outcome of the review by the chairman.
Mr. Lochlann Quinn
The ownership of the grid is hugely irrelevant. It is there, it costs a certain amount to maintain it, a tariff is charged for sending electricity down and from the country's point of view it is an irrelevant issue.
Mr. Padraig McManus
Interconnection is the responsibility of EirGrid. We are not involved in the process and management of that project. We understand it is on target for the first interconnector to be completed by 2012. It is totally an EirGrid project.
Deputy McManus and others asked questions on smart meters. I will answer them together. A committee has been set up by the regulator to manage the implementation of smart metering, and we are a forceful element of it as we will implement it. All other parties are represented on the committee.
We have started a pilot programme to look at how the technology will work, which includes the type of smart meter and telecommunications we will use for it, and to look at customer behaviour. It is fine to install a smart meter, but unless the customer responds to the signals that come one cannot figure out exactly how the best benefits can be obtained from it.
I accept what Deputy McManus said on the hype around the issue of smart meters. We are one of the foremost in the world in pushing this issue and we need to make sure we get the answer right. As a country we will spend approximately €1 billion on the smart metering programme. It is prudent to spend some time on the pilot programme and make sure we get it right.
One of the utilities furthest ahead in smart metering is in California and it has 250 or 300 people working full time. They have not yet produced a time of day bill. We are watching what others are doing but the approach we are taking is prudent.
Mr. Lochlann Quinn
To roll out smart meters in this country will cost €1 billion, which will add to everyone's bill. We must be satisfied that we will save more than €1 billion. It is not clear that can be done and that is why we are doing a pilot programme. A sum of €1 billion is a lot of money in anybody's terms.
The delegation say it wants to get it right. Is there a time schedule for the pilot programme?
Mr. Padraig McManus
We are looking for people to participate in the pilot programme. We expect to have the full pilot scheme operational over the next four to six months. We need to get through two winters for that and I anticipate the pilot will take approximately 18 months. We will then make decisions on how fast we will proceed.
Is it 18 months after six months?
Mr. Padraig McManus
Probably 18 months from now. From the middle of 2010 I expect us to make a decision on the phasing of roll out.
It is still some years away.
Mr. Padraig McManus
Yes.
The sum of €1 billion is a significant amount of money. The figure has been given but the exact nature of the product has not been decided. Is the primary purpose for people to save energy or for people to be able to generate power and feed it back into the system?
Mr. Padraig McManus
Both can be accommodated. Much of the network investment we are making is related to allowing people who engage in micro-generation to feed back into the system. Smart meters will allow that but it is not a significant issue. We already have metering that can do it. One can have more control, the customer can save money by better managment of their electricity usage and can see in real time what is being used and what it costs. The utilities may also be able to do things such as take control of certain elements of the household. That is what some of the American utilities are doing. They are prepared to offer different tariffs but they control the appliances in the house. If they need to switch off various elements of the house they can. The customer can do it themselves or can sign up for a better deal and hand control of various elements in the house to the utility.
This leads to the phenomenon of the electric car. The smart meter thinking needs to tap into the same idea. If someone is plugging in their car for an eight-hour period there should be capacity to charge it at the most beneficial and cheapest time, between midnight and 8 a.m., when there is excess power. I can understand why the roll out of smart metering is a nightmare because technology is constantly changing and improving, and when one thinks something is right something new comes along.
On selling back to the grid via micro-generation, no tariff is currently available. Is it coming down the tracks?
Mr. Padraig McManus
Meetings have taken place over recent weeks in an effort to get that off the ground. We have worked with CER, SEI and other bodies to get an arrangement whereby there can be feedback. A significant amount of work is ongoing and will be presented to the Minister. Hopefully we will see some progress in the near future. It does not have to wait for smart metering as we already have that metering technology available.
Another point was made on electric cars. One significant benefit of changing to electric cars is that we already have the capacity to deal with it because the vast majority of the charging would be done at night where there is a large amount of capacity available. It would create a very competitive marketplace at a time when there is very little usage of electricity. A significant amount of wind energy will be put into the system and that can also be used at night. The electric vehicle is a very positive transport development and it could also add competition to the electricity sector as there would be a large demand at a time when everyone already has available capacity.
A number of questions were asked on price and I will answer them together. When making comparisons with Northern Ireland, it must be borne in mind that the price of electricity there increased by 52%. That has given it capacity to pull back. We did not do that. If we had followed the original plan set out by the regulator to raise prices by 40% we would have had the option to say that perhaps we had gone too far. We pre-empted that by saying we would take it in two steps.
In comparing one with the other one must think that 52% can be reduced to a different number. Our number is 17.5% and is now reduced by 1%.
It is commendable. However, it seems to reflect rather badly on the regulator. The regulator was setting out a significant increase, the delegation was in a position to say it did not need that level of increase and it could be phased. The delegation is not the regulator. The regulator is open to some criticism in respect of that decision.
Mr. Padraig McManus
I am not so sure if that is exactly the case. The regulator sets down a list of rules for every player in the marketplace and ensures the rules are followed. When he set down his rules he agreed to review ESB's pricing. If one followed all the rules strictly, perhaps the regulator should have gone ahead. Times being so different, we put a proposition to him to reconsider. To be fair, we got into the debate and agreed to that as an entity. If the regulator had done what happened in Northern Ireland he would also be talking to us now about reducing prices. The manner in which we managed has pre-empted it.
The second part of that question concerned how quickly, if at all, further decreases could be accommodated. Some time ago we proposed to the regulator that reviews should not be done on a yearly basis but should take account of fluctuations in fuel prices on a more regular basis, such as every quarter. The regulator said he was not opposed to that but would go to consultation. When he consulted all players for comment, the vast majority said they did not want that kind of fluctuation. They wanted to be secure and be able to plan for a year and did not want that type of fluctuation. Based on that consultation the regulator said the price should be fixed on a yearly basis. The price is set for the ESB on a yearly basis. Others can then feed off that price which is fixed for 12 months.
The next review will take place next summer. The system has benefited the customer substantially over the past two years. One can say the price increased and we did not take account of it but that is the system in place. People get certainty for 12 months and that is what the vast majority of customers ask for. To an extent, we are complying with the desire of customers. Prices are fixed for 12 months. ESB sets its price, declares it and others can play off it and reduce their prices if they so wish.
What is the timeline between the ESB purchasing fuel and charging for the power the fuel has produced? Presumably the ESB hedges in terms of the price.
Mr. Padraig McManus
The price of fuel in Ireland is set on the basis of the coming year price and is generally calculated around the summer time. All players take that price and set for a year. The customer has benefited fairly substantially in respect of the price over the past two years where we locked in at a lower price. On this occasion it was different but the balance has been in favour of the customer. One can see from the money we have paid back, through the €300 million, how the customer got the benefit.
Is it a fair comment to say that going forward for next year, based on oil and gas prices at present, we may see another saving or reduction in price?
Mr. Padraig McManus
Yes, if prices stay as they are. The next question from Deputy McManus related——
Before we move off the point, in terms of the comparison between North and South, I accept that the price in Northern Ireland increased far more dramatically than in the South last year. On the actual price heading into January, the business sector north of the Border has advantages in terms of pricing. In terms of energy costs, North and South, how does the actual price compare?
Mr. Padraig McManus
I wish to make one point. The Deputy is aware that the VAT rates are different North and South. Bearing that in mind I ask Mr. Aidan O'Regan to deal with that issue.
Mr. Aidan O’Regan
Currently the price of electricity in the South is lower than in the North. One of the factors influencing price is the cost of sterling. The issue for us is that the price in the domestic market in the South is lower by approximately 6% or 7% than that in the North.
What is the position in the commercial sector?
Mr. Aidan O’Regan
In the commercial sector the price is slightly lower also.
Is that inclusive of taxes and so on?
Mr. Aidan O’Regan
Yes.
For comparison purposes, what is the sterling rate?
Mr. Aidan O’Regan
It is 0.87%.
Mr. Bernard Byrne
It is an all-island market for industrial and commercial purposes. It is a trading market so that there is, effectively, no price differential.
Mr. Lochlann Quinn
It is worth pointing out that the ESB supplies less than 40% of the industrial and commercial market.
I thank the delegation for an interesting and informative presentation. The questions I wish to ask are on a practical level.
Perhaps Mr. McManus would respond to my questions afterwards.
Mr. Padraig McManus
I will get through some of the other questions quickly.
Mr. McManus may finish his replies. I will come back in later.
Mr. Padraig McManus
We forecast an increase in demand for electricity next year of 2%. Through all the travails of the past 81 years there was only one year, 1979, when the demand for electricity reduced. Even through the 1980s demand for electricity has increased. We had forecast an increase of 4% for the current year and we forecast that will halve to about 2%. We forecast approximately 50,000 new connections for next year and 64,000 new connections this year. The committee will be aware there were 107,000 and 95,000 new connections in previous years. The big change in demand arises from the fact that housing schemes and apartment blocks have stopped but the demand for one-off houses has not changed dramatically, although there has been a slight decrease. Based on our best estimates, we forecast an increase in demand for electricity of about 2% for next year.
I have talked about the fuel variation and the difference between domestic and industrial. In regard to renewables, we have about 1,000 MW today. In the coming months we will make offers to people. People will be in possession of offers for connections of up to 6,000 MW. If that level of activity is taken up the target of 40% is achievable. I accept it is a stretching target, but given the interest in the wind sector if that level of connection materialises it is possible to achieve that target.
The Deputy asked about smart meters, electric cars, Moneypoint and nuclear issues. The issue about nuclear for Ireland, bearing in mind that it is illegal, is that we have no plans and are not doing anything in that area.
For now.
Mr. Padraig McManus
The issue for the country is that if the clean coal technology works — there is a great deal of coal in the world — and I believe it will, in the foreseeable future, there is no need for nuclear power for Ireland. If we have the amount of renewables we are forecasting, the clean coal and proper interconnection, the next big demand for us will be what balance will be needed when oil and gas begins to fade in terms of reserves or the price rises so high that we can no longer use it. If nothing else is developed in terms of making electricity by that time, the nuclear question will come back on the agenda for Ireland. In accordance with our current plans that will not be before 2035.
Mr. Lochlann Quinn
Will Mr. McManus be retired by that time?
Mr. Padraig McManus
I think I will.
He will not be the only one.
Mr. Padraig McManus
On the issue of interconnection to other places, if we can get solid interconnection to Britain we will do well and for the next ten to 15 years we will have plenty of electricity. The rest is for the future. The price reduction is 1%, not 11%.
Nobody can say exactly what will be the price of oil. Earlier in the year oil was forecast to cost $200 per barrel. Depending on the market and whether people try to lock in fuel at a much lower rate, it is still a dodgy question, because those who have it are not particularly keen to sell it until the price increases again. That is an issue we will monitor on an ongoing basis.
Mr. Aidan O’Regan
Oil is not a factor in determining the price of electricity.
Mr. Padraig McManus
Oil is only a guide that is generally used as a benchmark. It is mostly gas that impacts than us. The Chairman asked about interconnection. Interconnection works both ways. The importation of electricity allows us to balance the price between Britain and Ireland. Also it allows far more renewables to be developed in Ireland and sold into the much bigger UK market. I hope I have addressed most of the questions in different ways.
On a point of clarification, Mr. Lochlann Quinn said he felt it was irrelevant who owned the grid, I assume he means between the ESB and EirGrid who own the assets or is he saying that privatising the grid is perfectly acceptable to him?
Mr. Lochlann Quinn
They are political choices. The grid is there and it must be maintained. Currently, the ESB maintains it. There is a tariff to all users for the use of, say, a road system. In the national interest one cannot take that away. From a national point of view and from the point of view of legislators, as long as it is controlled by the regulator the ownership issue does not matter to anybody.
As long as it is properly regulated.
Mr. Lochlann Quinn
It is properly regulated. The EirGrid company is independent of the ESB and EirGrid decides what extensions to make. We do it at their request for charges that are agreed between us. It is like a basic utility with a basic return on capital, run by the regulator. The real issue historically with these grids was that people felt that a certain generator owning a grid would not let another generator use the grid. Ours is complete access so ownership, from a national point of view, does not really matter.
Would competitors hold that view?
Mr. Lochlann Quinn
They are not concerned about it.
I thank the delegation for their informative presentation. My questions are from a practical perspective and if the information is not readily available, perhaps the delegation will forward it to us. Mr. McManus said the demand for electricity has increased. Is that both in terms of use and in terms of the number of consumers requiring electricity? I am interested in the practical impact of the cost of electricity. Over recent years is there a noticeable change in patterns of use and in capacity to pay? What is the level of indebtedness of customers and how does the ESB manage that?
Over the past 18 months the ESB has conducted a proactive information campaign for customers. Most bills are now accompanied by an information leaflet. In the submission provided to the committee there is a very nice page on helping customers to manage their bills. It contains some photographs of the different leaflets the company has sent out. Deputy McManus asked earlier about smart metering and the response the ESB has received to the letters. Since it started producing these leaflets and sending them to customers, has the ESB seen any changes in the pattern of use and in how people manage their bills?
I understand the company is in the process of phasing out the cash meters. Is that the case? I have been contacted by several people, particularly people with disabilities, whose only way of managing to pay their bill is through the cash meters. They are frightened that the meters are now being withdrawn. It has been explained to them that the meters will only be made available to people who actually run into debt. If one manages to keep them in credit, they will not be available. However, the only reason they stay in credit is that they have learned how to use the meters to that end.
With regard to the graph showing the price of electricity, I assume that is an annualised figure rather than the price as of today. It is just over $40 a barrel versus $140. The other issue I wish to explore is the extent to which the ESB got its strategy right for forward purchasing when the markets were very volatile. How much did the ESB forward purchase? Did it make a mistake in purchasing too much at a particularly high price? Some people were mentioning $200 a barrel at one stage while others were saying the price rise was a blip and it would come back within a six month period, which turned out to be accurate. When we talk about fossil fuel and the ESB, people tend to think it is burning tanker loads of oil. Deputy McManus suggested the majority of the fuel used is gas. Is there a figure for how much gas is burned between the ESB and Bord Gáis rather than oil?
With regard to Mr. Quinn, usually when glowing terms such as "legend" are used, the person is dead. It is good to see him alive and well and here at this meeting.
I welcome the delegation. The most startling paragraph in the presentation is about our, and the Italians', reliance on fossil fuels. There is a small section on renewable sources of energy. Mr. Quinn spoke about the €22 billion investment that is planned. With regard to our commitment to sustainable green energy processes and the future in that sector, many individuals in County Donegal who are applying for planning permission for windmills are encountering obstacles. The people who are successful in establishing windmills find it difficult to get on the grid. What is the ESB's commitment to facilitate that process?
My second question is for Mr. McManus. Is there a facility to encourage community groups? I am aware it is not his job to help community groups to become sustainable but there is a strain of thinking throughout the western world that we will have to become more focused on the social economy. It is not a return to communism but there is a focus on how community or social groups can become self sufficient by using their own resources to provide energy for their own communities. Is there a commitment from the ESB to facilitate that process? Mr. McManus will probably tell me it is not in his remit but there is an opportunity in that area. Groups are grappling with that idea, even if it is only at the embryonic stage.
Mr. Padraig McManus
I will deal with Senator Corrigan's questions first. The number of consumers has been rising quite rapidly in recent years. There were approximately 64,000 new customers last year, 94,000 in the year before and 107,000 in the year before that. We are forecasting approximately 50,000 next year. That is a surprise to people but it is our forecast. Usage has also been increasing quite dramatically. In the period 1992 to 2002, there was an average demand increase of 5.5% per annum. In some years it was 8% which in the electricity sector is huge.
Is there an increase in individual consumer use?
Mr. Padraig McManus
I will have to get that information for the Senator; I do not have it to hand. I was talking about new customers and the usage related to them and new industries. We are not seeing much change in demand. Customers do not appear to be economising yet. We are not seeing much change in the profile but usage is increasing slightly every year.
Does Mr. McManus have information on how many of those homes are owned by one person? The bill is sent to the home. The ESB had 64,000 new customers. I do not believe there were 64,000 new owners. Some people would have two, three or multiple units. Does Mr. McManus have information on that?
Mr. Lochlann Quinn
One can make a connection but then nobody turns on the electricity. All the apartments sitting empty in Dublin have been connected but there is nobody living in them.
That is my point. While Mr. McManus says there are 64,000 new connections, which surprises him, he does not have information on them. Can he access that information for us to find out how many people have been connected but are not consuming units?
Mr. Padraig McManus
We can get that information for the committee. I cannot answer the question off-hand but we could provide information on the number of units that have very low or minimal usage.
To follow up on Deputy D'Arcy's point, you spoke about more than 50,000 new connections in 2009.
Mr. Padraig McManus
Yes.
That does not tie in with what we are hearing from the construction industry.
Mr. Padraig McManus
That is correct. I will explain the basis for that. In recent years there have been approximately 25,000 individual houses built around the country per annum.
One-off houses?
Mr. Padraig McManus
Yes. We do not anticipate much of a reduction in that. We are forecasting approximately 18,000 of those houses. If one extracts the 18,000 individual homes, the other number is small in terms of the ongoing demand in the commercial and industrial sector. I do not have the full breakdown of the number but I could get it and submit it to the committee.
That would be good.
Mr. Bernard Byrne
It covers all connections and not only residential units.
Mr. Padraig McManus
With regard to Senator Corrigan's question, cash meters are being phased out. We do not mean to cause hardship for individuals and we will look at that. The use of prepayment meters in advance of the smart metering programme is expensive for us and, generally, we only install them where people are experiencing difficulties or where we are reaching an agreement with a customer as to how he or she might deal with his or her bill. We will look at that and we would be more than happy to discuss any cases the Senator might have.
I thank Mr. McManus.
Mr. Padraig McManus
The red sector on the graph relates to the price of fuel and that can change. The vast majority of change is fuelled by gas and even though we all talk about the price of oil, it is only the benchmark, as the price of gas is the most significant factor. I do not know how much gas is burned compared to oil but I could get the figure. It is predominantly gas, with a small amount of oil but I will obtain the information.
Mr. Bernard Byrne
Off the top of my head, approximately 60% of generation is gas and less than 10% is oil.
The prices are linked.
Mr. Aidan O’Regan
Except that gas prices have not reduced proportionate to oil prices.
They did not increase as much as oil.
Mr. Padraig McManus
The increase was steep though.
Mr. Bernard Byrne
The fuel chart showed what happened to gas and, up to recently, it had moved from 20p a therm to more than £1 a therm and, therefore, the gas price increased fivefold. It is still above the 2007 level, which is not the case for oil because there is a physical constraint on gas pipelines. Oil is traded significantly internationally and that physical constraint——
What is the price now?
Mr. Bernard Byrne
It is 54p a therm.
Mr. Padraig McManus
I refer to Deputy McHugh's question. As part of the latest connections offers, we have approximately 1,000 MW of wind power on the system and we will have offers that will accommodate about 6,000 MW. People are still in the queue but a process is run by the regulator which will get certain people through that. We will have offers out in 2009 that will accommodate 6,000 MW of wind. Everything is being done to accommodate as much of that as possible. Part of the ESB's €22 billion strategy is to build a network capable of taking that volume of wind on the system but also to allow for microgeneration to become an increasing factor. Where communities want to get involved in such projects, that could be accommodated in the future.
Is it correct that 8,000 MW of wind is waiting to connect?
Mr. Padraig McManus
No, when we have the offers out for up to 6,000 MW, there will be 4,000 MW in the queue. That process is run by the regulator, not us. When the regulator decides, we are required to get the offers out to people. A total of 6,000 MW will be on the system and people will have offers of connections during 2009. My understanding is another 4,000 MW is in the queue.
With regard to instilling confidence, community groups are seeking to set up their own microgenerators. Construction might begin in 2009 and they could be set up by 2010. Could Mr. McManus give them confidence?
Mr. Padraig McManus
I refer to the practical difficulties. If someone engages in microgeneration, the metering is not a problem because it exists. We do not have to wait on the smart metering programme to do that. There have been many discussions in recent weeks about getting a pilot programme up and running at least where a tariff would be available for people to feed back. That is with the Minister to take a decision.
Many people or co-operatives are planning to invest in planning applications and connections who have no chance of securing connection to the grid at any time in the next five to ten years. If under the Gate 3 process, we grant permission for connection for another 6,000 MW, the next 4,000 MW to 6,000 MW will not be permitted any time soon after that, unless I am totally misreading the position. Many people along the coast, in particular, and those involved in offshore projects, believe connection will not be a problem but it will be a huge problem. The regulator said the determining factor in granting connections for the 6,000 MW is how long people have been in queue, which is totally flawed because the best projects should be given the go ahead. There is a concern that people are investing money and time in projects that have no realistic chance of securing connection. Am I correct?
Mr. Padraig McManus
There are two issues. Everybody thinks their project is the best but there is an economic issue. The total island only has demand for 7,000 MW. It will be a question of whether people can get money to fund all the projects in the offing. We could not take 10,000 MW in wind generation without substantial interconnection to the UK. There is a practical issue about building the network to accommode the amount of wind and there is an economic issue about how much the country can take.
However, it is important we give a signal to people in order that they do not invest large amounts in planning permission for projects that will never happen. Despite the fact we are sending out the message that wind generation is the way forward for Ireland, people in the queue are planning on that basis and people joining now have no realistic chance of securing a connection for the foreseeable future and it is important they are told that.
Mr. Aidan O’Regan
Ultimately the bankers will decide whether the projects are viable.
Will the €22 billion programme require Government investment, which the ESB has not had in the past? Does Mr. McManus reckon that is manageable within the company's resources?
Mr. Lochlann Quinn
We believe we can continue to pay a dividend to the Government for the foreseeable future.
At the current level?
Mr. Lochlann Quinn
At the current percentage of profits. We also believe we can fund this through our retained profits and judicious borrowing without any need to go to the Government.
There was an issue about the Government seeking a larger slice of the ESB's profits.
Mr. Lochlann Quinn
That was in the newspaper but I do not know that we ever heard of it.
I apologise for being late. I have not yet acquired the gift of bilocation. I welcome the ESB delegation and I thank its representatives for their presentation. Every initiative to help customers manage their bills is welcome. Has the ESB made progress on improving communications with customers? Domestic customers experience frustration contacting the company if there is a problem with their bill or their supply. When they make a telephone call, they are asked to press 1, 2, 3 and 4 repeatedly while listening to the strains of "Have I Told You Lately That I Love You", often with one of their children screaming in the background.
I once carried out an exercise. After 27 minutes had passed as I waited on the telephone trying to get through to ESB, I rang the public relations person as I happened to have her mobile number. I asked her to listen to what was coming across the line. She said that was highly unusual but I believe it is a regular occurrence.
I have to comment on the other aspect of ESB customer relations. The organisation operates like a kind of secret club or organisation because it is so difficult to find out contact names or numbers, even for a public representative like myself. I find it extraordinary that when I ring the person in charge of a section in order to respond to a constituent's query, it is like gaining access to or membership of a secret society. The area offices were done away with. These were a great help to local people and I cannot understand why the ESB does not publish a contact list of the personnel responsible for various aspects of the ESB. I find this extremely frustrating and I get a lot of complaints from the general public about the difficulty in contacting the ESB. This happens right across the public sector.
I agree with Deputy Coonan to a certain extent that communications are bad. I can drive out to the office in Enniscorthy and meet the local staff and they usually sort out the problem but it is not that easy for the general public.
The public lighting policy has been a bugbear of mine for quite a number of years. What are the plans to upgrade public lighting and more important, what are the plans to repair lights which are not working? It is a very difficult job to get the lights turned back on. Usually one needs to ring Cork or somewhere and if one does not have the number of the pole in question, it is a waste of time. This is a big issue right across County Wexford and I am sure it is the same across the country. There is a tardiness in having the lights repaired.
The ESB has sold the station at Great Island and it always had a good relationship with the public in that area. However, the local people are of the view that the ESB should not just walk away from the community by selling to an independent company. As a gesture of goodwill, the ESB should make a contribution to the local community, whether that is through the GAA or the local community hall or the general community.
I thank the delegation for the earlier replies. I appreciate the information about the meters and I will come back to it because it is a cause of hardship and a little bit of anxiety.
The main question is how we source energy and the cost of same and how that cost is passed on to the consumer. I am struck by what was said in response to one of my questions. It was stated there was no great change detected in the pattern of use. While we must examine how we can source energy, I find it interesting that apart from the different communication brochures which ESB sends out, a considerable campaign has been run over the past couple of years, at quite some expense, in an effort to encourage people to change their patterns of use of energy. I ask if possible that the ESB forward that information to me. While there has been an increase in the number of consumers and an increase in the demand for electricity I am interested to know how that breaks down across the board per individual consumer. Is there an increase in the individual use of electricity? We would need to consider this as we are spending a lot of money trying to encourage people to change their usage behaviour. It will be a challenge in the future to find sources of energy.
The change.ie campaign is costing more than €20 million. In these times of economic crisis, that is a significant amount of money. If there is not a change in the pattern of usage, one would question the benefit of that campaign and the benefit of spending €20 million on it.
Mr. Padraig McManus
I am disappointed to hear what Deputy Coonan has said. In some cases I may accept that there was a problem and I will tell the committee where the problem originated. As part of the deregulation of the process over the past number of years, we had to separate networks and supply people. The customer did not understand that and quite rightly, the customer could not understand why the ESB, as was the case in the past, could not deal with everything but now because of regulation, networks cannot talk to the customer as they must talk to supply. This caused huge confusion for customers and we accept that. This is what happened in the case of all utilities in the deregulation process. We put huge resources into our contact centres and supplemented them to the extent that today, 86% of calls to ESB are answered within 20 seconds. The regulator set a really stringent target for us that 80% of our calls would be answered within 20 seconds and we are well above that target. I do not believe that people who call the contact centre are experiencing the difficulties they had experienced over the past number of years when we were making that separation. There was also the added issue that we disposed of our retail business, our white goods and brown goods businesses. This meant that people could not walk into a local office and have their questions answered. Even at that stage during deregulation people were told that the local office could not talk to them and that they should use the telephone. I believe we have sorted out the situation now. The statistics for our call centres show that 86% of calls are answered within 20 seconds and we will continue to monitor this.
They may be answered but not to the satisfaction of the customers.
Mr. Padraig McManus
That is something we need to deal with. We are monitoring the situation very carefully. I could provide the committee with the feedback from customers. Obviously there are difficult issues but we will deal with them.
Does the ESB have a customer charter for standards and times for connection?
Mr. Padraig McManus
Yes. We are meeting that customer charter. I can provide details on how this is being monitored.
It should not be the situation that public representatives have a difficulty. If that is a problem, we have in the past provided contact details so that public representatives can make a more rapid query about constituents' problems. We will see how this can be updated so that not only the Deputies and Senators here but all public representatives can have that level of access.
In my experience, if one writes directly to Mr. McManus, the problem is sorted fairly quickly.
Deputy Coonan was very quick to use his county contacts in high office in order to resolve the matter and no better man to do so.
Mr. Padraig McManus
Public lighting is a difficult issue because everyone can see when a light is not working and the issue generates a lot of calls. We have put a huge amount of effort into managing that space. As always there is the difficulty as to whether it is an ESB issue or a council issue and this adds to the confusion. We are trying to resolve those issues with county councils. I will give the committee details of the effort and work that has been done and I will include contact names which public representatives can call in that regard.
One of the benefits of the sale of Great Island to Endesa, the Spanish company, is that we would not have been allowed by regulation and by Government policy, to redevelop it but it is the full intention of the new owner to redevelop it. There will be employment and jobs in the running of the Great Island station and in the building of a new station.
I plead the fifth amendment on the other issue but we are prepared to discuss it at a later stage. Another issue concerned costs and customer behaviour, and whether one can change customer behaviour. The biggest stride we will have to make if we are to achieve the efficiency targets of 20% by 2020 is to change customer behaviour, but that is not easy. We must do all we can. One of the key issues in the success of the roll-out of smart metering is whether we can change customer behaviour. That is why we are putting such effort into it.
I would like to have more information on smart meters. It would be helpful if the delegation could give the committee something in writing on that issue.
Mr. Padraig McManus
We will do so.
I thank Mr. McManus.
On behalf of the committee I thank the delegation for its contribution. If Mr. McManus gives the details to the clerk to the committee he can circulate it to members.
The joint committee adjourned at 11.30 a.m. until 2.30 p.m. on Tuesday, 16 December 2008.