I apologise to Mr. McManus and his officials who have been waiting for some time to meet us but the previous session took longer than anticipated. I welcome Mr. McManus to the committee and draw his attention to the fact that while members of the committee have absolute privilege, the same privilege does not apply to witnesses appearing before it. It is generally accepted that witnesses will have qualified privilege only. Further, members are reminded of the longstanding parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or any official by name in such a way as to make him or her identifiable. To speed up matters the delegation may take it the brief has been read by committee members and we will immediately proceed to questions. Perhaps Mr. McManus will introduce his officials.
Electricity Market: Presentation.
I am accompanied by Mr. John Shine, our director with responsibility for networks, Mr. Michael McNicholas, the director with responsibility for power generation and supply activities, Mr. Tony Donnelly, deputy chief executive, and Mr. Aidan O'Regan, head of regulatory affairs with responsibility for all relations between the ESB and the CER.
I welcome the delegation. I have been out of the Dáil for the last few weeks so I am pleased to have this opportunity to discuss energy. The ESB is the dominant and key player in the consistent and secure provision of energy to the Irish economy, and in many other ways.
I will begin with some questions on competition and on how the ESB views the current market and its position in it. What is the ESB view on the low level of interest by companies in investing in power generation here and what are its views on the promotion of competition in general? I have raised some concerns in the Dáil with regard to the efficiency of existing ESB power generation plants and would like some specific answers in that area. If we examine the graphs measuring efficiency, for example, the downtime of power generation plants, we see an unimpressive trend. Is that explained by the fact the plants are getting older and need capital investment or is it because we are not benchmarking sufficiently in comparison with power generation in other countries to get the maximum from those plants?
The Bill currently being debated in the Dáil will sanction an increased borrowing limit for the ESB from €2 billion, which has been constant for the past 22 years, to €6 billion. What are the ESB's plans for that money? Will the access to that level of borrowing increase the dominance of the ESB in the marketplace, thereby making it more difficult for new entrants to compete? The access to cheap money makes the ESB highly competitive when borrowing. Will the delegation outline to this committee why it needs the extra borrowing capacity?
I know the answers to some of these questions. I accept significant upgrade to the grid is required and that a major project is planned for Moneypoint. I know too that two new peat-power stations are planned. The Minister said in the Dáil last night that he did not envisage the ESB using its full borrowing capacity in the medium term, but that he was sanctioning an increase in the borrowing limit to €6 billion to facilitate ESB needs down the line, perhaps in ten years' time. Can the ESB outline its capital investment plans? Fine Gael supports this legislation and an increased borrowing capacity. It is not unreasonable, however, to ask the reasoning behind what was, presumably, a request that originated in the ESB.
What is the ESB doing in the area of renewable energy and the increasing pressure on Ireland to reduce carbon emissions? Its subsidiary, Hibernian, has had some difficulties in regard to landslides etc., on some sites. Can we have a progress report on the contracts the ESB has under AER 6 and the current position? What is the timescale and when will we see turbines producing power from these sources? On what other projects does the ESB intend embarking?
The ESB, because it is such a dominant player in the market, should lead by example. It is a State company and therefore has a responsibility towards making an impact on the State's obligations on carbon emissions, in particular on its plans to build two new peat power stations. What are the figures on the improved efficiency of peat in the new stations versus the old? I have an idea of the figures involved but would like to have them on the record.
Does the ESB have any plans to replace peat as a fuel? For example, does it plan to mix peat with wood biomass or to use other fuels that could be considered carbon neutral? Unfortunately, peat, although it has served Ireland well, is a particularly dirty and inefficient fuel. Perhaps, over a period of time we could consider phasing out the use of peat and phasing in a fuel such as wood biomass. In doing so we could provide a whole new industry for coppice plantations etc. I will return to further specific questions later after my colleague has contributed.
I have noted most of the questions. I will answer some directly and then ask Mr. McNicholas to address the specifics.
On the matter of new entrants to the market, the ESB has agreed to reduce its generation to 60% of the market and expects to achieve that by 2006. There are a number of reasons as to why there was not a flood of new entrants into the Irish market. A downturn in the business and the Enron episode in the United States led to a lack of interest by people in taking real risk in a marketplace that was insecure in terms of funding. That decision was made not only by companies but also the banks bankrolling these companies.
The Republic of Ireland is a small marketplace and only has approximately 1.7 million customers. Even on an all-island basis, something we would like to see rapidly develop, there are only approximately 2.4 or 2.5 million customers in total. In Europe generally, the economic size of any utility is considered to be approximately 5 million customers. Ireland has some other difficulties in terms of isolation and lack of interconnection, which the Minister has sought to address.
Overall, people were not keen to invest here, with the exception of Viridian, which was already in Dublin, and ourselves. We have been investing in Derry. These factors have combined with the fact that people were looking for contracts in order to invest. The ESB responded to a request from the regulator in that regard in order to get new generators to build and to provide ten year take-off contracts for 550 MW of plant. Those contracts have been put in place and that will see a new generator commissioned by 2006 which will facilitate the ESB's market share dropping to 60% of the market. In terms of getting competition into the field, the ESB has done a lot, in association with the regulator, to ensure this happened. Where people were not prepared to do it on a market risk basis, the contracts were provided.
On competition, there are a number of factors we consider to be essential in terms of developing a properly competitive market here. Competition can not be fit into what is a fairly small market. The factor that would help the overall competitive nature of the market would be to make it bigger and to create an all-island market. That is Government policy but we would like to see it move ahead and do that. Also, in terms of the EU policy of creating regional markets, it is important to build the interconnector to the UK.
In our opinion, creating much larger markets is the issue that will provide the downward trend in respect of the price and competitiveness of electricity. The way to achieve this is to push strongly for an all-island market in the first place but also the integration of the islands by building the interconnector to the UK. We envisage that creating a much bigger marketplace will provide competition.
On the question about power generation and the availability of plants, I will ask Mr. McNicholas to deal with the specifics. The committee will be aware that the ESB has had a very tight situation over the last number of winters in terms of supply and demand for electricity. That has resulted in minimum outages being granted for the ESB for plant which would have allowed only basic maintenance carried out as opposed to doing the full overhaul. We are not complaining about the age of the plant but the maintenance opportunities that have been provided as a result of the very tight situation have been restricted to an extent. Mr. McNicholas will outline the situation in more detail.
In 2000, the ESB debt was approximately €700 million. We envisage that debt will rise to approximately €4 billion in terms of the question asked by the Deputy and the size of the cap being put in place by the Minister. A large volume of that money, €3 billion in the current five-year period up to 2005, is being spent on rebuilding the networks. There will be only one set of networks in Ireland. They are owned, built and operated by ESB but the charges for using them are set by the regulator. It is essential for Ireland to have an infrastructure of networks that can match the development needs of the country because for many years nothing was done in that regard.
It is important to reiterate that the level of growth and demand for electricity in Ireland has been phenomenal. In the period 1992 to 2002, the average increase in demand for electricity was annualised at approximately 5.5% and up to 7% in some years, at a time when the equivalent growth in demand in the UK was around 1%. Another measure of that growth is that last year, the ESB connected approximately 77,000 new customers. We never believed we would ever reach that level. The figure for the previous year was 63,000. Already it seems the figure for this year will top 77,000. In terms of the level of growth taking place and the requirement to have an electricity infrastructure in Ireland that will meet the economic growth in the country and the amount of FDI, foreign direct investment, that is forecast, we believe it is essential for the ESB to continue with the accelerated rate at which it is rebuilding the networks. We took that view two years ago that the ESB needed to accelerate the investment in networks and that is where most of the money is going. It is not only this five-year period, as we intend to continue after that to ensure the network in Ireland is top class. A number of generation projects which the Deputy mentioned will also be funded.
The ESB has a commitment to investment in wind power in the renewable sector. We accept the point and the set targets. Our aspiration is to be a player in the wind market, not to be a dominant player but to have a chunk of that market. Our first target was to reach 200 MW and we are on target to achieve that. I will ask Mr. McNicholas to talk about availability and generation and the questions to do with emissions and wind.
I have a question for Mr. McManus about wind energy. The energy regulator attended this committee recently. As he is aware, a moratorium on wind energy exists at present. The energy regulator indicated that by April of this year he anticipated it would be finalised and there would be a decision regarding the ending of the moratorium. I spoke to the regulator last week and I believe he anticipated a decision by the end of this week and final issues were being settled with the ESB. Wind energy at present comprises about 211 MW in the system and another 828 MW is approved under the current contest. Applications for additional wind energy are stacked up in the queuing system in the ESB amounting to 987 MW. Even without further applications within the planning system by way of local authorities, the ESB has over 2,000 MW in the system. When will somebody decide how finite is wind energy and how much is acceptable as part of the overall electricity market? Applications are being made to local authorities. Expectations are being built up within farming communities who regard it as a very good alternative source investment. Somebody, somewhere has to try and fill in this jigsaw. I made this point recently to some ESB officials attached to the national grid. Deputy Kehoe and I made that point to them. They replied that the ESB had no objections to wind energy, even though the stability of the whole wind energy sector was put into question when the moratorium took place. For those involved in wind energy projects will the ESB state when the moratorium will be lifted? When will those approved people who are queuing in the ESB system be given the imprimatur to proceed?
The moratorium on the wind sector was agreed between the regulator and the national grid element of the ESB which is a ring-fenced entity within the company. The ESB was not directly involved in those discussionsabout when that moratorium would be lifted. The general point is that we are not anywhere near the cap which relates to the amount of wind that could be taken onto an isolated system like Ireland. One of the big issues that is being pushed by the wind sector and on which ESB is delighted to see progress for other reasons, is the building of the interconnector, which would allow far more wind generation capacity to be built because it would allow access into the UK market. The moratorium is an issue between the ring-fenced part of the ESB, over which we have no control, and the regulator.
Do you not talk to the ring-fenced part of the ESB?
Two members of the ESB board are involved in the ring-fenced part.
There is an agreement that the national grid part of the ESB would be established as a separate entity called EirGrid which has not happened yet. That part of the ESB, the ESB national grid, is ring-fenced from the ESB. Two members of the ESB board form a committee. They control the board affairs of the ESB national grid but they are ring-fenced in that regard. I am not involved.
I find it incredible that on the question of the moratorium, the ESB had concerns with regard to the extra wind energy projects coming into the system. I wonder how strong the energy regulator is at this stage. He informed the committee he expected details to be finalised in April of this year. He informed me he is still having discussions with the national grid in order to finalise it. We are being asked questions by people about this moratorium. Mr. McManus mentioned EirGrid and the national grid. Will anyone truthfully say if EirGrid as a concept is stillborn at birth? There appears to be a moratorium regarding ESB transferring to EirGrid, as Mr. McManus is aware. The statutory instrument goes back to 2000. In the European context, it has happened in only one country in Europe, Italy, where a company has separated its owner and operational functions. Italy is now rowing back on that arrangement. It would now appear that Ireland will be the only country doing it. Is there enthusiasm within the ESB for the emergence of EirGrid, which had been anticipated in the statutory instrument in 2000?
From the perspective of the ESB, we are supportive of the establishment of EirGrid and have done nothing to stand in its way. The ESB cannot make it happen and we cannot interfere in the day-to-day operations of the national grid because it is ring-fenced in that way. As the Chairman correctly points out, the statutory instrument went further than required. However, to provide that level of separation a decision was taken to set up EirGrid as a separate entity. I would be very happy to see it happen to avoid being asked questions, as members have done today, about a part of ESB which is still part of ESB but because it is ring-fenced and I do not have authority to act in that area, I cannot answer the question.
I am beginning to think that the ESB national grid should be here at this stage, as I am not getting responses to any of my questions.
Deputy Coveney needs answers on supply and then I will ask my questions.
Mr. Michael McNicholas
I will first deal with the efficiency of plant. The Deputy mentioned that the overall efficiency of ESB's portfolio of plants was particularly low - and it was in 2003. We had an overall efficiency outturn of approximately 77%.
I was more concerned about the trend over a three or four year period when the graph was going the wrong way. This is happening at a time when, as has been pointed out, demand is dramatically increasing and continues to increase, albeit not as dramatically. If the efficiency and output of our plants are decreasing, at some stage those graph lines will cross. What is the ESB doing about that?
Mr. McNicholas
The Deputy is correct. Over the past three years the overall availability of our plant has been decreasing following an increasing trend in the previous eight years. This is down to investment in plant as mentioned by the Deputy. There is a lag time between the investment in plant and the outcome of a lack of investment which ultimately leads to breakdown of components of plant, which if not maintained will lead to poorer availability. What we are seeing is a result of a lack of investment in plant, which is primarily a result of a lack of a window to take out plant to undertake maintenance because of tightening capacity margins, particularly in the past five years.
Our overall scheduled outage window was between 5.5% and 6% for the previous three years, where best industry practice, with availability, high performance and long-term investment in plant, would be considerably more than 7%. Therefore, we have suffered from the lack of availability or a maintenance opportunity. Just as with a car, if plant is left without maintaining it, things start to go wrong and plants start to break down. The only way for us to rectify this is to put sufficient investment and maintenance time into the plant. To do that we need a window of maintenance opportunity. This only emerged last year because the capacity window is beginning to loosen up for us with the peaking capacity we have installed.
When the third and fourth new entrants enter, I hope we will get an opportunity over the next three years to make the level of investment needed in the plant, as we have not had the opportunity in the previous five years. Our focus is on strategic investment and investing in those plants whose performance is below what we require. To do that I have taken a senior manager from my organisation and appointed him as project manager for availability improvement. His remit is to co-ordinate all investments in our portfolio of plant with a view to minimum investment for maximum improvement.
Does the ESB benchmark downtime against similar plants in other parts of Europe?
Mr. McNicholas
Yes. We benchmark not only against plants in Europe but also worldwide. We use various technologies for coal, gas, oil, peat and hydro and the best benchmark is against equivalent technology in equivalent environments. We have 16 production units of which only three are very poor performing and they have led to the overall availability performance dip. A number of our plants operate to best international practice. Three of our gas plants operate to best international practice, as do most of our hydro plants. Moneypoint is within 0.5% of best international practice in the past five years. So only three of 16 plants need to be addressed, primarily the coal plants.
Are they the peat plants?
Mr. McNicholas
No, they are the coal plants. However, the Deputy is correct in that in the last number of years it has been exacerbated. The performance of our peat plants has not been good for ten years and has been particularly bad in the past three years because we did not invest on the basis that they were closing and we are replacing them with two new peat stations.
I welcome the delegation and apologise for our late start. I will set out a context that I believe is important. In forming policy we must take a very long view. My view of the energy market is one of a dramatic and radical revolutionary shift away from our current large fossil fuel-burning electricity generating stations to a future which is 100% renewable involving thousands of generation stations, with thousands of farmers running biomass, windmills providing clean wind energy and small CHP units in houses. This will provide this new revolutionary energy generating system where we have a level demand and thousands of small stations supplying. That outlines the background to some of my questions.
Unlike my colleagues, I oppose the Electricity (Supply) (Amendment) Bill, which is before the Houses of the Oireachtas. While I might not have fully explained this in the short time available last night and in the heat of the Second Stage debate, I do not believe it is appropriate to spend a significant amount, €4 billion, without having a clear indication of policy direction. We must set our long-term vision of where we are going after which I would be happy to invest €4 billion. However, this should not be done in what I see as a policy vacuum.
While this is not a criticism of the ESB officials, the Government has shown a policy vacuum in electricity generation in terms of its plans for the ESB. I am wary about investing money until I know those plans. The ESB has done an excellent job of keeping costs down in the past 20 years without any real direction from the Government. However, those days are now over and we have a liberalised market.
My questions surround the future and the broad structure. The status quo is not ideal. While we have deregulated the market, we have not effectively eliminated market dominance. I am told by those in industry that the ESB effectively sets market price 99.9% of the time. Even if it reduced its dominance and its plants supplied only 60% of the country’s electricity, it would still set the price 99% of the time or as near as makes no difference. There is real concern that a certain amount of market deregulation with no real competition will be the best outcome the consumer can hope for. The present market is not delivering the change I want and a move towards renewables is not happening.
What is the ESB's preferred future ownership structure for its generating business? I believe it has four possible options. It could be privatised as a single unit. It could be privatised into several sub-units comprising approximately six generating stations competing with each other and internationally. It could revert to a centralised system, which makes considerable sense and which worked very effectively for so long but which European directives seem to have stopped. The VIPP process could be extended with genuine tendering for management contracts to run individual plants possibly to the extent that they could market and sell the electricity themselves and take some profits giving us real competition. In this scenario the plants would remain in State ownership possibly as part of the national pension reserve fund with management being independent. The final option is the status quo with the ESB in State ownership, and while trying to expand internationally it would maintain dominance here. The ESB’s paper seems to imply this is its preferred option. Is this the case or does it prefer any of the other options?
I have two questions about the regulator's work. The CER's announcement today seems to imply that the MAE system is being deferred for a number of months to consider concerns about complexity. This sounds like something from "Yes, Minister" a television programme from years ago in which stating that a complex issue would be deferred for consideration by those involved meant that it would not happen. The ESB's paper states that the localised marginal price system, MLP, could cost up to €100 million to implement and is incredibly complex. This now seems to be dead in the water and I would be interested to hear the ESB's views of the preferred mechanism for the regulator to pursue. A pool arrangement and a continuation of the existing arrangements seem to be the two main options in play. For which of these does the ESB believe the regulator will plump? I am not certain about this issue. The regulator appeared before this committee approximately a month ago. This is one of the few areas in which Government policy intervenes. With regard to the concerns about the massive windfall profits from the carbon allocations quota under the European emissions trading system, the regulator says that the Government intends to introduce a claw-back charge whereby that profit will be taken back from companies. I imagine the profits involved will be exceed €100 million, which is a very large figure. If I understood him correctly, the money will be taken back in the form of a network charge. I tried to push him at the committee meeting to outline how exactly that will work but I am not certain of the process. Is it Mr. McManus's understanding that a network charge will be imposed on all electricity suppliers in which case will it constitute a further profit accruing mainly to the ESB or will the State take it all as an increased dividend? Perhaps Mr. McManus can outline what contact the regulator or the Department has had with the ESB on that.
I apologise for asking so many questions, but this is an extremely important and complex area. How would the ESB answer the criticisms of some of its competitors that it does not have separate network and generation companies? The way in which the ESB is arranged means that most of the profits are made through the network area rather than through the generation business. It makes it very difficult for competitors to enter the industry if the ESB has plant which has already depreciated and can operate very tight margins while making significant profits in other aspects of the business which are not open to public competition. How does the ESB answer that criticism?
To go from a very dominant position to 60% of generation in the time period constitutes significant progress in terms of European comparitors. It has been a rapid process even by comparison with the length of time it took to get down to that level of market share in the UK. We have played our part and made sure there were sufficient contracts available for wind production and new market entrants. The ESB cannot help it if a small market does not incentivise people to enter it in large numbers to compete and build. All we can do is work with the regulator to ensure that the targets we set ourselves are achieved. By any standard, reducing our market share to 60% in the period we have represents a significant step.
As I said already, we are limited in terms of what we can do in the Republic of Ireland market. A regional market should be developed, the first step of which involves the development of an all-island market. This action will in itself create a much more competitive marketplace with at least two main competitors as well as privately-owned power stations. This should be followed by an integration of the UK market to build interconnection. While an interconnector already exists from Scotland to Northern Ireland, a second one should be built to create a much larger marketplace. The context which must be borne in mind and which is outlined in the documents I have submitted is that the ESB is a tiny business in terms of European electricity utilities. The ESB is very small compared to the companies on the European mainland which have consolidated to give themselves more power to leverage banks and fuel contracts and to build a hedge between generation and supply. Given this scenario, the best approach would be to create a larger market. The ESB actively supports the development of a regional market which is all-island in the first instance and UK-Ireland in the second.
Does the ESB see itself competing best in that market as a publicly or privately owned company?
The issue of ownership has been raised many times. Fundamentally, it is an issue for the Government rather than for us. The Minister has made a number of comments on the matter and the situation is as he has outlined. The matter was last considered by the ESB about four years ago. Whether ownership is public or private will not affect the company's competitiveness.
How does the ESB answer criticisms that with a 60% market share it continues to have a dominant position and can set prices?
We do not dispute that in any way. The way to address the issue is to create an all-island market and push ahead speedily with the interconnector to establish a much larger market. In an enlarged market, the ESB would represent a very small player.
Deputy Eamon Ryan correctly pointed out that a letter had been issued by the regulator which deferred the implementation of the MAE for a number of months to provide time to consider alternatives. Our head of regulatory affairs, Mr. Aidan O'Regan, will address that matter. A form of centralised pool should constitute the first step even if the MAE is to be implemented in full over a long period of time.
In the context of the issues Deputy Eamon Ryan raised about the Electricity (Supply) (Amendment) Bill, I will ask Mr. John Shine to provide the committee with a brief on the way in which the money is being spent. The vast majority of the money for which we sought the raised borrowing limit is being spent in the network area. We must develop a network which can manage the economic growth Ireland is experiencing. It is important for the committee to understand that process.
Mr. Aidan O’Regan
With the development of an MAE, the regulator was trying to implement a policy direction from the Minister who had requested the development of a trading arrangement to suit Ireland's particular circumstances. The issue most people had with it related to locational marginal pricing which incumbent and new competitors felt introduced a level of complexity and risk into the market. The regulator has made the courageous decision to prevent the grid going ahead with the development of the system. He has considered the issue from the perspective of the development of a model to take into account the development of an all-island market. We will end up with a simple pool arrangement which will provide economic order despatch, ensure that the most efficient generators are brought onto the system in an orderly way, ensure a price for generators coming on stream and for those which are efficient and facilitate the development of an all-island market. This final goal is one on which the regulator is focused.
The regulator developed this market at a time when little co-operation was received from OFREG, which had not come on board. He has taken a brave decision and ultimately a market will be developed which suits Ireland's particular characteristics.
It was intended to be a consultation and implementation process and it has backfired in advance. Players within the industry have said there would be significant cost implications of the approach. I presume one of the main players will be the ESB. Will Mr. O'Regan outline the company's concerns about what was sought?
Mr. O’Regan
We are talking about something which will not necessarily be developed. Our concerns about the trading arrangements centred on the complexity being introduced, the overall cost of the system and whether or not it would achieve its objectives. The first objective of a trading arrangement is to promote competition and incentivise entry. If one introduces risk into the overall trading arrangements, one will create a barrier rather than incentivise entry. Where one talks about significant investment, the cost will ultimately be borne by the customer. As an organisation, the ESB has always tried to put in place a system at minimum cost which delivers a benefit to the customer.
My point is that it is a consultation and implementation process which has delayed the development of the new energy market.
Mr. O’Regan
Yes, but the regulator has spoken of further consultation with all players and I understand he has notified all players to that effect.
My colleague, Mr. Shine, will talk about networks.
Mr. John Shine
Mr. McManus referred to the figure of €3 billion we are spending in the current five-year period. This is a considerable sum by any standards and includes almost €700 million being spent on the transmission system. Many members will be aware from other briefings that we are virtually rebuilding the entire medium voltage network. Although the programme is a major one, it is important to stress that it will not stop at the end of 2005. We still have a significant programme ahead of us which, according to our current projections, will cost in the order of €2.5 billion.
In that context the profitability of networks is very important. I am not being lavished with praise in the ESB for making large profits in networks. The average net profit in network over the five years to 2005 will be approximately €150 million per annum after tax, interest payments and dividends. Clearly, therefore, we are generating cash from internal operations but our capex - capital expenditure - this year, for example, will be approximately €800 million. In terms of the net cash position, we will be net cash negative by €1.3 billion over the five years. All of the money being generated in networks is being reinvested in the networks infrastructure and is driving a significant part of the borrowing programme.
The ESB makes €150 million on its networks. What is its profit on the generation business each year?
Mr. McNicholas
It is about €80 million but it varies because we operate on a regulatory agreement, which is a three-year cycle. For this reason, one must take an average over the three-year period.
Is that a gross figure?
Mr. McNicholas
We should be making profits of €100 million.
What was the figure last year?
Mr. McNicholas
It was approximately €80 million.
Is that before tax?
Mr. McNicholas
Yes.
A vote has been called in the Dáil.
Is it possible for Members to pair to allow the session to continue?
All those present are Opposition Members.
Yes, but I am sure the matter at hand is not one of life or death.
That depends on who is calling the vote. I will make a telephone call.
This would be a great time for the Government to fall as we would have a chance of returning to office.
I have a final question on the windfall tax on the quota in the carbon emissions system.
Mr. McNicholas
Essentially, the emissions trading directive is very new. Although it must come into operation from next year onwards, it has only been defined in the past 12 months. One of the issues to emerge across Europe is that if utilities or any trading sector entity receives free allowances, they should be governed by the principle that they must not make windfall profits as a result.
The problem for the electricity market, in defining a new market structure, is how the market structure will work and how generation can be priced economically to show its proper price, including the cost of carbon, without utilities making windfall profits. The Government has directed the CER to produce a proposal which would essentially recycle any such profits. While the ESB is not clear how this process will work, I understand it will operate on the principle that no generator will be allowed to make windfall profits or incur any costs unfairly. If one is recovering an amount of money from the wholesale prices of electricity for which customers have paid, the customers must be reimbursed. I understand they will be reimbursed through the transmission use of system, TUOS, charge. This does not mean the TUOS charge will increase but that the net increase in wholesale prices as a result of carbon will be reflected in a reduction in the TUOS charges. They will, therefore, net out so that customers will not pay any more.
Who will receive the increase in the TUOS charge?
Mr. McNicholas
It is a decrease. It will be offset.
It will not have a net effect.
Mr. McNicholas
Wholesale suppliers will pay higher wholesale but lower TUOS prices, with a zero net effect.
I welcome the management team and commend it on the achievements of the company. As I stated yesterday in the Dáil, the ESB has to some extent acted as the backbone of the economy throughout the history of the State. We are grateful, as a people, for what it has done during that 80 year period.
I have a general point regarding the manner in which many of my constituents and those of other Members have responded to events on the electricity market since 1992, particularly in the past couple of years. The ESB has increased prices by 29%, cumulatively, and is proposing a further increase of 10%. My colleague, Deputy Eamon Ryan, pointed out that the claw-back under the Kyoto protocol has the potential to further increase prices by 30%. What benefit do we derive from going down the so-called competition route if it results in much dearer electricity?
Mr. McManus stated electricity prices in Ireland are relatively low in the EU table. When I checked this before the Second Stage debate on the Electricity (Supply) (Amendment) Bill, I found that we are moving towards the higher end of the table as regards household electricity prices. This has implications for industry, particularly small business. Are we getting the worst of all possible worlds in that we are massively ratcheting up prices? While I am aware that we had a long hiatus, as far as the ordinary consumer is concerned prices are increasing. We had the announcement the other day, for example, that the 20,000 people with meters who belong to one of the low income categories have not been well looked after by the ESB as regards recent increases. Why do we need such large increases in prices?
As regards the investment programme, allegations have been made that a gold-plated investment is taking place in the gas industry in anticipation of privatisation. Is something similar taking place as regards the ESB? Is it necessary to have the level of gearing, on which the ESB appears to be embarking?
We had the astonishing position last December of the Minister jumping around before media complaining he had not been consulted about a placement the ESB made in New York. I am not sure of the reason a commercial semi-State company with a track record such as that of the ESB should have to go cap in hand to Ministers before engaging in commercial ventures.
My party has a very strong view on the future of the ESB. We are not of like mind with the conservative media or the conservative parties represented in the House because we believe the company should remain fundamentally in State ownership. Regardless of whether EirGrid, a delegation from which the joint committee has met, evolves into being the primary transmission system operator, TSO, for the Republic with less responsibility for the generational side, we believe it should remain part of public infrastructure. Vultures who want to smash up the ESB into different components are circling around the company. We read about them in the financial columns and business press day in and day out. My party is fundamentally opposed to the views of the Competition Authority on this matter. We believe that if it is not broken, one should not fix it.
I note the comments of the delegation on renewables. Does the ESB expect that once we have an all-island market or an interconnector, our position will be similar to Denmark where a small country can supply thousands of megawatts of renewables to a system without endangering its stability? We have been given to understand this is the reason the Danes, Germans and others are so far ahead of us in the area of renewables. Is that the expectation?
Is the ESB gold-plating it for privatisation?
Absolutely not. What the ESB is doing has nothing to do with how the ownership structure will develop. As I said, the future structure of the ESB is an issue for the Government.
The comment was made that from 1986 to the beginning of 2002 there was virtually no increase in the price of electricity, apart from increases of 1% and 2% in 1996 and 1997. The only way the ESB could sustain this was by not investing in the system but during the mid-1990s the demand for electricity began to grow at a dramatic rate. To an extent we were behind the 8-ball in rebuilding the network to match the demand for electricity.
It has often been said competition and deregulation have not helped the price of electricity but that really had nothing to do with it. There was no way the price could go down from the level it was at in the 1990s to the start of 2001. It had to go up for a number of reasons. Investment was needed in the network and also in view of Ireland's position as an island with no interconnection, unlike all other European countries. We obviously want to correct this. With no interconnection, a lot of rural networks at the end of the line in regard to fuel deliveries and high fuel import charges, there was no logic to the ESB being on the bottom rung in regard to the price of electricity in Europe. It was always going to rise. I do not think it mattered what was done in terms of regulation, competition or whatever; that was always going to happen.
Were our competitive energy costs not a factor in the creation of the Celtic tiger? Given the structure of IT companies and the pharmaceutical industry - major consumers of electricity - was it not in our interests to have very low electricity prices? Does Mr. McManus agree that future price rises should take into account the impact on competitiveness?
Competitiveness is the key issue. Supplying the market is critical to the economy. We had to address the issue of the structure of the network which was coming under pressure. It was necessary to invest heavily in it to meet growing demand. In the long term one has to reach an economic price of electricity. The corrections made and the price increases in 2002, 2003 and 2004 amounted to an average of over 20% across the range. There was an expectation that this would correct much of the imbalance between domestic and commercial-industrial use.
Ireland is not immune to what happens in the world electricity market, given that we import 80% of our fuel, the price of which is rocketing. There had been an expectation that the price would be kept close to inflation, taking into account the public service obligations of the ESB but we have to look at the impact of fuel prices on the price of electricity. They represent 30% of the end-user price, about half the price of generation. Big variations in fuel costs have to be taken into account. We have been trying to negotiate with the regulator to whom we have made the point that one should separate fuel prices as nobody can make a profit on fuel. Therefore, if the price went up, we would take this into account and if the price came back down again, as it always has, customers would see the benefit. That is what we would like to see happen. If the volatility surrounding fuel prices was side-lined and the world price went up, it could be managed and if the price came back down again, customers would see the benefit.
In recent history has the price of electricity ever come down when the cost of fuel has decreased? Fuel prices dropped dramatically before they increased again. Was this reflected in the price of electricity? In the past four years there has been a consistent trend regarding energy prices.
One has to bear in mind that from 1986 until 2002 there was no increase. In fact, there was a decrease in 1986. During that period the ESB carried the cost whenever there was a fuel price increase and had to try to get the benefit when it came back down again. We would like to prevent such volatility. The price of electricity remained virtually the same from 1986 to 2002. Looking back, we might say we should not have done this. However, it is easy to say this in retrospect. During that period the volatility in fuel prices was managed by the ESB. While we took hits some years, we gained in others. We would like to see the issue of fuel costs moved to one side and managed separately. That is what we have been trying to negotiate with the regulator.
I tabled a question to the Department about long-term gas prices to which the response was that there would soon be a significant and dramatic increase because the contracts entered into in the early 1990s were coming to an end. The long-term prognosis of Mr. McManus appears to be that prices will come down again. However, the price of oil and gas is going up steadily. Has the ESB not changed its policies to take this into account? Is it looking at moving away from fossil fuel power plants?
There are two issues involved. Looking at the market one finds it difficult to see how the price will come down but we have been in this position before. In the long run, based on past experience, there will be volatility and price will come down. However, I accept the Deputy's point, that looking at the market it is difficult to interpret it in that way, given that the price of coal and gas has doubled. In the long run we expect this will change, that it will not continue on an upward curve.
Most people have switched to gas in order to manage their emission levels. How will the price of gas react to this? Gas supplies largely come from Norway, Russia and Algeria.
The projection is that in ten years time some 90% of gas supplies could come from Siberia and Russia. We are at the tail end of a pipeline. Is it not risky for us to invest in the ESB on a 30 year basis on a bet that Siberia will sell gas to us cheaply?
That is an issue.
If it sells to us at all.
One of the main reasons for proposing the refurbishment of Moneypoint is to cater for fuel diversity. If we were to become overly dependent on gas, at a rate of 80%, we could be at risk. In order to manage that risk we have to do two things - cater for fuel diversity in the system which means retaining the coal burning station in Moneypoint, albeit allowing for retrofit in terms of a gas flue and desulphurisation plant, and also push for interconnection to give us greater security.
Does Mr. McManus think other renewable energy sources - wind, biomass, solar and tidal wave - offer potential as an alternative to Siberian gas supplies?
We are aware of Ireland's great wind energy profile but would need to have bigger markets. The only way we can harvest wind energy is through having a bigger market through interconnection.
What is the position on biomass?
It comes behind wind energy, probably the only significant source of renewable energy in the medium term. Biomass and wave technology, among others, will come on stream in future but at a slower rate.
When will the ESB make a decision on Moneypoint? Reference was made to Siberian gas supplies but we could also be talking about supplies from County Mayo or County Donegal. Is that a factor in the equation?
Gas supplies can come from anywhere. I referred to where supplies currently come from.
On Moneypoint, we have negotiated a best practice agreement with staff. The board will meet tomorrow to consider the business case, following which, subject to board approval, we will make a proposition to the Government.
As someone who lives in County Limerick, I note that approximately 50% of sulphur dioxide emissions in this country finish up in the estuary because of the decision made a long time ago not to put scrubbers in the chimneys. The people of west Limerick would welcome the introduction of environmental standards at Moneypoint. They have been very tolerant of standards that would not be tolerated in many other places. I have been reading about the decision to enter into a best practice agreement with great interest and I am making the point that it is not before time.
The choice is between doing that and using gas. The argument in favour of an adequate fuel mix and "keeping it coal" rather than being over-reliant on gas and to improve efficiency and cleanliness in a dramatic way is winning favour. Is it correct that this will cost approximately €250 million?
Yes, retrofit will cost approximately €250 million.
I find it extraordinary that it is said the technology for biomass is not yet available. There are biomass industries and power generation plants all over Europe which are working efficiently. The technology is available. Unless I am missing something, my research indicates that the change required to use biomass technology in a peat-powered station would be minimal.
We have on this island the best climatic conditions to produce fast growing wood coppice plantations, yet Germany, France and the Scandinavian countries are all doing so, it seems competitively. We are talking about replacing a heavily subsidised peat industry. I am not making an argument against peat because I do not believe we can do away with its use over night. That would be totally unacceptable, both socially and politically, because of the considerable number of jobs involved but it is about time we got real on the argument. We are heavily subsidising the use of peat as a fuel. If we were to use even two thirds of that subsidy, we could comfortably subsidise economically the creation of a wood biomass fuel-powered industry.
While I do not accept that biomass technology is not yet available, I do accept that advances in wave and tidal energy technology will be made over time. With biomass technology it is just a matter of copying what is already available. However, we do not seem to be doing this and I do not know why.
Fine Gael is hugely supportive of interconnection which is a way of promoting competition in the marketplace without having to build new power stations. I know there is a reliance on increased importation but it increases security of supply in case we ever need additional resources.
Is the ESB allowed to tender for the new east-west interconnector between County Wicklow and Wales? If so, is it doing so? The approximate cost of two 500 MW interconnectors is between €200 million and €400 million. The Minister has said many times that if the power generation role of the ESB was privatised, under his stewardship the State would hold onto the grid infrastructure - the pipes and the wires. If this is the rationale, it makes sense to have a more comprehensive extension to the grid linking us to the British. Surely if we own the grid, it makes sense for the State to own the infrastructure linking it to the British grid rather than having it in private control, albeit regulated.
What are Mr. McManus's views on interconnection? Does he believe EirGrid should control the interconnector in order that we have a more seamless link between the British and Irish grids to stimulate further competition? Obviously, EirGrid would have to be absolutely separate from the ESB if that were to happen.
There is a responsibility on the ESB to take account of the fact that industry is hugely concerned about the cost of energy. I have the findings of an IBEC survey, dated last November, outlining the views of its members on this issue. It shows that after insurance, the cost of energy is definitely the top priority when it comes to non-pay issues. It may well have overtaken it as the major concern.
Mr. McNicholas stated that an average over three years was used in calculating profit. Would he not do something similar in regard to pricing? Rather than looking for a price increase that reflects the current extraordinary high oil prices, should he not take account of the fact that they are likely to decrease next year, as they do in the normal cycle of events? The seeking of a significant price increase on the basis of current oil prices will cause considerable hardship, particularly for small businesses.
I will try to answer some of the questions posed and will ask Mr. McNicholas to answer others.
I was asked about the cost of the investment in Moneypoint. The gas flue-desulphurisation retrofit will cost €250 million. If we are to carry it out, we will also need a mid-life refurbishment of the plant in order that it could operate for many more years. Overall expenditure would amount to €360 million. I do not want anyone to be confused about this.
Would capacity be as good as it was in the past as a result of the changes?
No.
I read that in the newspaper.
The only cost estimates with regard to interconnection - they were rough - indicated that a 500 MW interconnector would cost between €200 million and €250 million. However, without a full seabed study, it is difficult to give a precise estimate.
When the Minister announced his plans, he said he did not particularly want the ESB to own the interconnector. I believe there was concern in the marketplace that if the ESB owned it and held a dominant position in generation, as we discussed earlier, it would work to the disadvantage of the overall market in some way or another. The intent is that it would be owned by another organisation.
Is EirGrid sufficiently separated from the ESB to own an interconnector?
EirGrid was set up on the basis that it would operate the system. It will operate the interconnector. Regardless of which organisation owns the interconnector - be it the ESB or a private sector company - it will be operated by EirGrid.
Is the ESB aware that the energy regulator, Mr. Reeves, wrote to the Minister last December to indicate his concerns about EirGrid? One of the conclusions in his report was that the EirGrid model was not working and was in danger of losing credibility. He wanted it to be replaced by an integrated networks model. He said the EirGrid model was making little progress, unlike the transfer scheme, in particular. Furthermore, he stated he had seen no evidence that the deadlock in implementing the EirGrid model was likely to be broken in the near future and that anecdotal evidence suggested the contrary, at least as far as the transfer scheme was concerned. The document sent to the Minister argued that EirGrid was finished and would never get off the ground.
I am aware that the letter was written and that the regulator was frustrated that EirGrid was not up and running. We feel the same frustration. He suggested that something different should be tried to establish EirGrid but the Minister was of the view that a lot of effort had been put into establishing this model and that people should push ahead to get it operating. Everyone involved in the market, including us, is frustrated that it has not happened. Therefore, I am aware that it happened.
Why can it not happen?
It is not an issue for the ESB but for the Department, the board of EirGrid and the chief executive designate to sort out. When it is resolved and a model is set up, the ESB will face the issue of the transfer of staff but that will be the second step.
Is the transfer of staff not the problem? They will not transfer with the same rights to the new company.
That is not an issue because it has not arisen yet - no one has asked them to transfer.
What is the obstacle?
First, a chief executive must be appointed. A chief executive designate has been nominated but the appointment has not been made. From that point everything else will follow. Responsibilities will fall on the ESB in terms of staff transfers but we have not yet reached that stage.
Surely a progressive organisation like the ESB would have a time frame for the management transfer from within the ESB to EirGrid.
We do not have the authority to establish EirGrid. That is a matter between the Department, the board of EirGrid and the chief executive designate.
My frustration with that response is understandable.
We are expressly precluded from dealing with the issue by order of the Minister.
If the section is ring-fenced, it is a separate entity from the ESB. We should not mince our words.
We are precluded from being involved in the management of EirGrid.
Why does the separate entity not move in that direction?
We have not had a White or Green Paper and are waiting for major legislation. We have been fobbed off for two years and should be asking the Minister for Communications, Marine and Natural Resources some of these questions.
We will ask him them.
Mr. McNicholas
We have a renewable energy section within our generation business and our primary focus is on wind energy because there have been major strides forward in technology in the last ten years. We also have a brief to watch developments in both wave power and biomass. We have an investment in the University of Limerick where we encourage the development of wave power technology.
From a biomass perspective, I agree with the Deputy. There is huge potential in Ireland for wood biomass energy which has many advantages over wind energy which is cyclical which can cause problems for the overall generation system, whereas biomass is another fuel like coal, oil or gas but has the benefit of being environmentally friendly as it is carbon neutral.
We have been researching biomass technology in the new peat stations. It is fluidised bed technology designed for the burning of wood biomass. However, it has not taken off in Ireland because we cannot make a wood burning plant work economically largely because of transportation costs of the current stock of wood, the shavings and left over elements of the wood business of Coillte. There are huge transportation costs to get that wood to a plant. Those costs, plus the lack of efficiencies in conversion, mean it does not make good economic sense to do it.
We are looking at changes in farming and the use of arable land in Europe.
Is it not economic as a stand-alone industry without any subsidies or with the present support system for peat?
Mr. McNicholas
It is not economic in its own right. It would need a subsidy and policy decisions to support that subsidy.
If one had a similar subsidy to that for peat, would it be economic?
Mr. McNicholas
We have examined short rotation forestry and what has happened in Europe in the use of arable land. We are looking at the idea of gradually phasing out peat as a fuel and short rotation biomass as a replacement. We have done some preliminary economic studies which, again, show that today it is marginally uncompetitive compared to peat. It is an opportunity for small farmers because it needs a co-operative structure and some form of support to make it work. It is an emerging technology that shows potential. Over time peat will no longer be used as a fuel. We must think long term in energy policy. We cannot look at a ten year horizon but at a 20 to 50 year horizon and think now from a policy perspective of where we are going with this. We agree that it is not economic today and that it needs support structures but short rotation forestry has potential.
Mr. McManus said renewable sources of energy will come on stream but not unless we start to invest in them. In five or ten years they will be economic but other countries are now investing in them in the knowledge that there will be environmental and security of supply benefits. The technology is developing so quickly that wood biomass will be the most economic fuel within five or ten years. Other countries are willing to pay the subsidy now knowing they will build the technology. We have not done this. The ESB has shown a remarkable disinclination to invest in any development of renewable energy sources. Has there been a lack of policy direction from the Government? Why have we lagged so far behind?
The ESB is developing an offshore wind bank at the Kish lighthouse. When will it be up and running? Critics would say the ESB won the AER VI contract but does not even have planning permission. It is not ready to go. It may have been a blocking bid to keep others out of the market.
Given a long-term perspective, if the ESB wanted to develop renewable sources of energy, the investment we are now making in the grid should be made in the west and north-west where there are strong winds rather than chasing existing electricity demand use. We should design the investment around future energy sources which are likely to be renewable. Does the ESB have any say in this? Is it left to this completely separate company?
Will the new plant, with 370 megawatts of capacity, be an open cycle gas plant that will give flexibility in turning it on quickly or has the company considered the introduction of a new pump storage system, similar to Turlough Hill, which would be suitable in backing up energy from renewable sources? How far down the line is the company with this?
The key issue is that of ironing out the peak. What arrangements are in place for accepting large numbers of small-scale CHP producers or small biomass farmers to provide power for the network that will allow the ESB to provide peak capacity? What moves is the ESB making to reduce peak demand using local electronic devices?
At present the major renewable energy source in Ireland is wind. If we compare the system with Germany, it has a massive electricity system with huge scope for including wind energy. It is a much smaller percentage than can be handled on the system, even though we have, as we are all aware, a good wind energy profile.
Is the ESB aware of recent developments in wind turbine technology that help with frequency and voltage on the network? The ESB's own company, Hibernian, has made the case to me that the new turbines we have seen in the last six months to a year will overcome most of the difficulties and that the level could be raised to 2,000 or 3,000 megawatts.
We definitely believe wind technology will improve even more. We are obviously aware of the improvements being made in how the system can be managed. However, one is still restricted by the fact that if the wind does not blow, one will not provide electricity. Unfortunately, in our environment, on the coldest day of the year in the winter the wind does not blow. The situation is similar in Spain which also has a very good wind energy profile where on the hottest day of the year in the summer, with a need for peak capacity, the wind does not blow either. That presents a problem and the smaller the system the more restricted one is. The bigger the system the more one can avail of developments.
The pump storage system at Turlough Hill is obviously the pride and joy of the ESB and has worked remarkably well. It is a very valuable plant. In spite of this, we are not looking for any further plants as they are very expensive to build and certainly would not be economical. If they were built for some other reason, that would be a different issue but we are not looking at the provision of a pump storage system.
I ask Mr. McNicholas to address the Kish project. Mr. Shine can then address the issue of the network structure.
Mr. McNicholas
Under the AER VI scheme, we had a number of projects approved. They include Derrybrien in east Galway where we have had difficulties because of the landslide; Moneypoint; a wind farm beside the coal-fired station in Mountainlodge, County Cavan, and the Kish project. While planning permission and a grid connection have been obtained for the Derrybrien project, the projects at Moneypoint and Mountainlodge have been caught by the grid moratorium and we are awaiting a grid connection offer. Our commitment under the AER VI scheme is that we will deliver projects successfully. As Mr. McManus said, our overall objective is to meet a figure of 200 megawatts by 2005. If we can get around the moratorium, we will achieve this.
What about the Kish project?
Mr. McNicholas
At 35%, we are only a minority shareholder in Kish. There were three partners but one sold out. The other, Saorgus, has the controlling interest. We are working actively with our partners to progress the project and looking at mobilising at the earliest opportunity. However, I must be honest and say it has advanced slower than we would have liked or anticipated.
It is unlikely to be given the contract given the delay.
Mr. McNicholas
It is now very tight for us. We are really trying to see what we can do about this. The reality is that we have had our difficulties.
ESBI seems to have a remarkable track record. We have read in the ESB's journal and other publications about its achievements. Does the ESB still regret the fact that it was not allowed to invest in Poland, given the major contracts it has achieved in Spain, the United Kingdom, America and so on?
The downsizing of the workforce in recent years to a figure of about 7,500 was mentioned. We have been reading recently about what the trade union side has more or less put on the table in regard to the evolution of the company. What does the ESB see as succeeding the PACT agreement, or does it have any particular views? The members of the delegation seem to be saying savings will have to be made in terms of costs and efficiencies in the coming years as we enter a new era. To an outsider, one of the successful aspects of the company seems to be that staff have been remarkably flexible in adapting to the new environment.
On the often asked question about Poland, we really consider that to be history now. Obviously, it did not happen and we have had to move on. There is no doubt that it was a setback at the time as it was a project into which we had put a lot of effort.
The 800 megawatt project in Spain has been a huge success. The plant is under construction, on time and within budget. The support we received from the banks in funding the project which was funded on the basis that there would be no recourse to the ESB demonstrated the confidence that they had in ESB International. That was significant for us.
I am happy to note the acknowledgement that ESB International has done well. We would like to see it continue to develop assets abroad. Some might feel the reduction in our market share has not been achieved fast enough but it is inevitable that the ESB will reduce its market share on an ongoing basis in Ireland. We would like to see these assets replaced overseas.
In other markets the ESB is in the reverse position. It is similar to Viridian and has the necessary experience.
Absolutely.
The ESB states in its document that its strategy is to expand in Europe and elsewhere, one imagines with projects similar to the one in Bilbao. Given its experience in Poland, will this strategy involve having to go to the Minister on each occasion for clearance to invest in major new investment projects? From where does the ESB get strategic direction? Does it now have the freedom to invest some of the €4 billion in development projects overseas, or will it have to seek clearance from the Minister on each occasion?
We need approval from the Department for such investments. What we have learned, on both sides, from the Poland experience is that we should never find ourselves in an end game situation again. With departmental officials, our staff have worked well to flag every development at an early stage. On the Spanish project there was a lot of interaction with departmental officials. That is the model we would like to follow in the future. Yes, we do need approval, in respect of which we have put in place a better structure.
Can we assume that the model set out, the strategy for the development company, is in keeping with Government policy?
In 2002 we set out a five year strategy which we presented to the Government and departmental officials in terms of what the ESB should do, including the acceleration of redevelopment of the networks, the renewal of our generation portfolio and the investments we should make overseas. We are now two years into the strategy which has proved very successful for the ESB and are involved in a process of renewing it for a further two years. To this end we are in discussions with the Department.
Does the borrowing limit of €6 billion apply to ESBI as well as the ESB, or are they separate?
The sum of €6 billion represents total borrowings for the group. We forecast that our borrowings would rise to about €4 billion up to 2008. Therefore, there is plenty of fat in that number.
How much is accounted for by overseas investments?
The plan is that we will always have a Spanish-like project on our books. As the Spanish project is nearing completion, we are looking at developing a similar project near Southampton in England. When the Spanish project is completed, we would like to see ourselves starting construction at Southampton and then moving on to another project. We are investing about €80 million in equity in the project in Spain with the remainder debt funded. There will be no recourse to the ESB.
The ESB is planning to invest over €150 million per year.
The Deputy is probably correct. We are talking about such a project every three to four years.
Is there a partner for the Spanish project or is it exclusive to the ESB?
The project is exclusively owned by the ESB but that does not stop us - we have discussed this with the Department - from taking partners. That is our strategy in the outside market. We would like to spread the risk by looking for partners which know the territory or can provide other benefits for us.
We are incensed that we are being asked to allocate funding of €6 billion when the ESB is in the middle of a strategy review with the Department. Surely that should be finished first and the future structure and strategy decided before we allocate the funding.
It is not an allocation of funding, it is a borrowing limit beyond which the ESB cannot go. It has a five year strategy that was developed in 2002 and debated with the regulator and the Department. The provision is required to allow us flexibility to borrow.
Is there good news on pricing for IBEC, ISME or anybody involved in business who is paying a great deal of money for electricity? Every time the ESB applies to the regulator for a price hike we are told this is the last big hike, that the price will then plateau out but six months down the line oil prices rise which gives another reason for a price hike. People are rightly questioning price increases. While we have to meet the cost of preparing the market for competition and liberalisation, we are not enjoying the benefits because prices keep rising and we still have no increase in choice or an improvement in efficiency. Is it anticipated that prices will reduce in the future and that a responsible approach will be taken to the business sector and households by not hammering them with another significant price hike?
How about slashing household bills next February, as a special present for consumers on the opening of the market?
As a member of the executive of IBEC, I am frequently asked about prices. What we wish to see in the longer term - this is the overall objective - is the establishment of an economic price for electricity. The statistics from EUROSTAT - not the ESB - show that even after the price increases, the cost of electricity to the residential sector is a number of percentage points below the average. This is a very good performance.
We are not alone in increasing prices because of the increase in fuel prices. It is happening across Europe. In the United Kingdom they are discussing with the regulator what is called the rewiring of Britain. It is doing what the ESB is doing in order to stimulate economic development, that is, having a heavy reinvestment in the networks which, in turn, will lead to price increases.
There is no doubt that the EUROSTAT figures show, in terms of published tariffs, that for commercial and industrial businesses the ESB's prices are above the European average but the vast majority of industrial and commercial consumers have a choice. Everybody will have a choice from next year. It is difficult to say what the price is because people get a discount on the published tariffs.
In the long run it is critical for the economy that competitive electricity prices are established. That is what the ESB wants to see also and it has been doing everything possible with the regulator to try to minimise prices. Significant fluctuations such as what has happened with fuel prices which account for 30% of end user prices represent a cost the ESB cannot absorb. That is what it is looking for in terms of price.
As I understand Mr. McManus must attend another meeting at 6.30 p.m., we will now conclude. I acknowledge the presence of a grid representative in the Visitors' Gallery. He has a fair indication of the questions likely to be put to him by the committee on 30 June. I will raise them directly with the representatives from the national grid section.
I thank Mr. McManus and his officials for their comprehensive presentation and acknowledge members' contributions. I regret that we did not have a longer time frame but at least by having the question and answer session Mr. McManus and his team have responded to many of the issues that concern us. I thank him for his responses.
The next meeting will be held on Tuesday, 22 June when the objective will be to consider the motion on the universal postal union. The select committee will also consider the Sea Pollution (Hazardous and Noxious Substances) (Civil Liability and Compensation) Bill 2000.