I acknowledge the work the committee has been doing on energy policy for the past 15 to 18 months. This is an extremely important matter and the committee can claim to have had foresight at the time it began its work in that energy policy was probably not as critical then as it is now. I commend the committee in this regard.
Ireland shares many energy policy challenges with its European neighbours, including its close neighbours. Increasing dependency on imported fossil fuels, vulnerability to physical interruption and sustained price shocks, of which there has been some evidence, major challenges regarding greenhouse gas emissions and historic under-investment in infrastructure are general problems faced by every country. However, some of Ireland's problems are unique and these include its geographical location, island status, market size, lack of indigenous sources of energy, poor electricity interconnection with neighbouring markets, slow progress in attracting new market players and major difficulties in securing local community support for necessary infrastructural development. We are confronting many of these difficulties. In doing so, I welcome the active participation of stakeholders in providing constructive input into determining the policy responses and decisions we should make.
Energy prices are obviously a huge concern to all consumers. As members are aware, market liberalisation occurred simultaneously, with significant investment in energy networks, along with an upward trend in international energy commodity prices. It also happened at a time when there was no surplus generating capacity in Ireland. This has undoubtedly had a direct impact on business and residential consumers.
The issue of energy cost competitiveness is critical to our international competitiveness and energy is a key enabler of continued GDP growth. The CER is statutorily independent in regulating these costs and needs to be seen to be so if investor confidence is to be maintained. Regulation and competition must deliver efficiencies in regard to all costs, whether infrastructure costs or excess costs from poor plant availability or labour inefficiencies, that come within our control.
I understand that this year the CER focused specifically on those parts of the electricity tariff that are within domestic control. For example, it disallowed €47.3 million in requested ESB power generation payroll costs for the period 2006-07. It also extended the life of the electricity distribution assets from 40 to 45 years and reduced the cost of capital for these networks from 6.5% to 5.63%. These examples, taken together with other measures introduced by the CER, helped to ameliorate the level of price increase this year. However, I am conscious that the overall magnitude of energy price increases continues to be a source of concern generally.
Ireland has a unique level of exposure to gas and oil commodity price movements. In the past year alone, gas and oil costs have increased by 70% and 60%, respectively. There is a strong consensus against nuclear technology and no significant untapped hydro resources exist. Bearing these realities in mind, I have prioritised the development of the single electricity market and placed particular priority on the development of renewable energy technologies to prepare the way for us to move towards a low carbon economy, with reduced dependency on imported fuels. Our challenge is to get the lowest level of price possible in all these circumstances.
When I arrived in the Department, my first priority in the energy area was to provide a clear and comprehensive statement on energy policy. I am happy to inform the committee that we are currently preparing a draft policy paper to be completed in the first half of 2006. The committee's deliberations in this regard will be helpful and will be included in our consideration of that policy document. In deciding to take this route, I was conscious that it was overdue and that progress could help guide institutional design and operation and give confidence to existing and potential new players in respect of future priorities and direction. This paper will have both a medium and long-term focus. By long-term, I mean 2020 and beyond. I accept the need to provide policy guidance to the market, particularly as much of the investment is long-term in nature. Equally, our timeframe must take account of the technology horizon and, therefore, I do not advocate looking too far into the future.
I would like to provide a flavour of the key issues to be addressed, many of which the committee will also seek to deal with. The policy document will set out to establish clearly the precise role for Government in a liberalised market, particularly in respect of areas such as security of supply and fuel diversity. It is not wise to leave decisions on such critical issues solely to the market. I am aware of and share the concerns in terms of getting more new entry into the Irish electricity market. In considering these issues, we will be obliged to examine the appropriate future fuel mix for power generation.
Our increasing dependency on gas is very worrying, which is why, during my tenure, I am prioritising the development of indigenous sources of energy, in particular renewable energy technologies. We need to seriously consider some or all of the following: clean coal technology; LNG; storage for gas and coal; enhanced physical interconnection both North-South and east-west; and significantly broadening our renewable energy base. The strategic development of renewable energy technologies in Ireland will play an important role in addressing future security of supply and fuel diversity. Following an industry consultation and analysis by my Department's renewable energy development group, I recently announced a move to a fixed, feed-in tariff system to support renewable energy technologies. The finalised terms and conditions of this new scheme, known as REFIT, are currently with the Attorney General for legal clearance and will be published as soon as this is completed.
The build rate evidenced in the market in the past 12 months, combined with the measures I am taking, will ensure that Ireland meets its stated 2010 targets for 13.2% of gross electricity consumption from renewable energy. In July, along with my ministerial counterpart in Northern Ireland, Ms Angela Smith MP, I issued a consultation paper on an all-island 2020 vision for renewable energy that seeks views on the development of a joint Republic of Ireland-Northern Ireland strategy for the renewable energy aspects of the all-island energy market, leading up to 2020 and beyond.
Looking beyond 2010, it is important that we achieve a broadening of our renewable energy base into areas such as biomass, including forestry reserves and energy crops, landfill waste and tidal and wave energy. Unfortunately, these areas are currently neither technically nor economically mature. From that perspective, we have recently undertaken a strategic review of energy research, development and demonstration and concluded that current activities need to be better aligned with national energy and economic policies. The strategic direction for energy research will focus on increasing the efficiency of energy use in order to reduce energy demand, bringing forward promising renewable energy technologies and making the national energy infrastructure smarter in order to manage the more dynamic balance between supply and demand. To that end, I am finalising my thoughts on new strategic co-ordination arrangements and I hope to announce the details shortly.
It is clear that facilitating increased wind penetration will require changes in grid design and planning. With this in mind, the terms of reference of an all-island grid study have been developed to provide information on the resource potential for different renewable technologies on the island of Ireland in 2020, the extent to which renewables generation can be accommodated, network development options and the economic implications of the policy options outlined in the study. It is estimated that it will take approximately 18 months to complete the necessary work.
The energy policy paper will also focus on issues surrounding market development. Discussions at last week's Energy Council in Brussels focused heavily on the need for member states to do much more to implement the market opening measures required under the EU's gas and electricity directives. Earlier this year I engaged consultants Deloitte & Touche to carry out an in-depth and strategic review of the institutional arrangements and market structures for Ireland's electricity sector. This task is nearing completion and I hope to receive the final report before Christmas. I am happy to report that the feedback I have received suggests the team chosen has approached the task in a highly professional manner and has had a very open and positive engagement with all stakeholders. Deloitte & Touche's examination will help inform policy choices for appropriate market structures.
The committee will be aware that both regulators have published details of the establishment and design of a single electricity market. This wholesale market will come into operation in mid-2007. While this is a very positive development and is one which enjoys widespread support, it is nonetheless an extremely challenging project to deliver successfully. We need to eventually move away from the intensive regulation that exists at present. I hope the single electricity market will drive the necessary efficiencies in the system to enable costs to fall.
The development of the single electricity market must also address capacity issues. Our capacity margins remain unacceptably tight and, therefore, any new market design must provide the mechanisms to signal, in a timely fashion, the need for new build. Like my predecessors, I attach great importance to all-island energy issues and I continue to take every opportunity to support and promote policy initiatives, such as supporting the development of further North-South interconnection in both gas and electricity.
I also intend that the forthcoming policy paper will place significant emphasis on the need to develop a robust and clear policy on energy efficiency. This policy instrument is the cheapest and most effective means of managing our energy demand and achieving emissions reductions in line with our climate change obligations. It also plays an important role in driving down costs. I intend to bring forward a national energy efficiency campaign. This will be a sustained campaign, targeting all sectors of the economy and aimed at catalysing a sea change in individual attitude and behaviour.
I wish to refer briefly to the transport sector. This has a huge role to play in terms of how we manage future energy demand and our climate change obligations. The policy paper will contain a section devoted to transport issues and we hope to build on the start we have made in terms of raising the profile and usage of biofuels as a policy instrument into the future. Liquid biofuels are an important element of the emerging market for energy from crops, trees and waste products. Biofuels offer a unique opportunity to reduce emissions in the transport sector and also to provide a new and alternative fuel source.
In 2004, my Department secured an amendment to the Finance Act 1999 that provided for the introduction of a scheme for mineral oil tax relief in respect of biofuels. A scheme under the Act was launched in April and eight projects have been awarded excise relief totalling €6 million. This will result in 16 million litres of biofuels being placed on the Irish market. I was very encouraged by the strong interest in the scheme, which clearly underlines the appetite in the market for the development of these facilities. We are closely examining the prospect of further measures to support this emerging sector and I have had discussions with the Minister for Finance about the possible scope for scaling up fiscal support for biofuels in the context of budget 2006.
In terms of security of supply, the Government continues to support enhancing existing interconnection, both North and South and, in particular, with the UK. I expect to hear shortly from the CER on the outcome of its consultants' study into the financial, technical, commercial and procurement aspects of this east-west interconnector project.
This also raises the issue of how infrastructure should be funded in the future. Up to now, both the ESB and BGE have funded network investment, with costs being passed on to the consumer. This obviously contributes to higher prices. The issue warrants a cold hard examination in the context of the new NDP but, at this stage, I am not in a position to say much more about it. Such a development would certainly help manage future price increases.
I thank members for the work already done and I look forward to hearing their views and ideas on how we can put in place the necessary policy instruments to manage the energy challenges facing us.