JOINT COMMITTEE ON COMMUNICATIONS, MARINE AND NATURAL RESOURCES debate

Energy Policy Review: Presentations.

Chairman

I welcome Professor Shimon Awerbuch, senior fellow of the SPRU energy group, University of Sussex, United Kingdom, and visiting fellow at the Tyndall Centre for Climate Change Research. He is a financial economist and specialises in utility regulation, energy and the economics of innovation and new technology. Before joining the SPRU, he served as senior adviser on energy economics, finance and technology at the International Energy Agency in Paris. His current research on consulting activity focuses on portfolio approaches for enhancing energy security and valuing renewables and conventional technologies. He also has extensive experience in electric utility restructuring and transmission pricing and organisation, as well as valuation and investment analysis. He has worked with utilities in the area of cost measurement for new process technology investment and advised energy ministries, Fortune 500 firms and NGOs in Europe, Asia, Latin America and the United States. He has testified before the US Federal Energy Regulatory Commission and numerous state regulatory bodies. He has published nearly 75 papers and conducted 150 seminars and invited presentations. He will make a short presentation, following which there will be a question and answer session.

I draw attention to the fact that while members of the committee 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. 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 thank Professor Awerbuch for travelling all the way from the United Kindgom today. I understand he made an excellent presentation in Edinburgh recently at which colleagues of ours were present to hear him. They were delighted to have a number of peripheral meetings with him to hear his views. We are very grateful that he could come to assist us today with the programme on which we have embarked to examine Ireland's energy requirements for the next 20 to 50 years.

Professor Shimon Awerbuch

I thank the Chairman very much. It is a privilege to be here and I am grateful to have been invited, technical difficulties notwithstanding. We will do things the old-fashioned way and work off paper. I do not know if I remember how to do this, but I will certainly give it a try.

The second slide in the circulated material is a promotion for my employers, SPRU, one of the oldest and largest institutions for the study of science-policy research. I am a member of the SPRU energy group which focuses on climate change transitions, low carbon energy systems and so forth.

There are three or four basic ideas I would like to leave the committee with. If one uses textbook cost models of the kind investors use to evaluate projects, one finds that gas generation is more expensive than generation with renewables, which implies the direct opposite of the numbers typically quoted. The opposite case is based on engineering rather than finance cost estimates. Even if one thinks generation with renewables costs more than fossil fuel generation, when one adds renewables to a fossil fuel portfolio, one finds they reduce generating costs. While that seems like a magical scenario, it is standard finance theory which one can look up in any textbook and discover how a more expensive investment helps and diversifies a portfolio. Renewables help mitigate what has become known as the oil GDP problem, that is, oil prices spike because the oil market is volatile. Spikes and volatility hurt macro-economic activity in oil consuming countries and the mitigation of the oil GDP effect is a substantial benefit worth billions of euro. All new technologies, including but not limited to wind energy and other renewables, require changes in accounting, infrastructure and underlying systems. We cannot expect, therefore, to take renewables such as wind energy and shoehorn them into an existing electricity production and delivery system which was invented for central station, fossil fuel based generation. System changes will be required to fully exploit and accommodate what are referred to as "intermittent renewables". I will now consider each of these ideas in order.

I begin with the idea of risk and the way in which finance models produce a very different answer from engineering cost models. Market risk affects all expectations and values and is not a consideration one adds after one has made an estimate. Estimates of generating costs must reflect market risk. On gas generation, it is like buying into a variable cost mortgage, in respect of which interest rates can change, except the scenario is worse. A mortgage usually is capped but there is no cap on where gas prices can go. People inherently understand that if they take out a variable rate mortgage, their payments will increase and decrease in line with the rate of inflation. Their payments will go up and down with inflation. People also need to understand that this is one of the risky aspects of generating energy with fossil fuels. That idea is becoming more prevalent, which is very nice.

The second part of my slide refers to engineering kilowatt hour cost estimates. These are the estimates we receive from the IEA in Paris, the US Energy Information Administration, the DTI in London and so on. Most national and international agencies use traditional engineering models to develop kilowatt hour generating costs. These estimates have no economic significance or interpretation. They just represent an engineering exercise. I have been arguing that these numbers should not have any weight in terms of policy making because they are just a set of engineering numbers. Instead, we should rely on more contemporary, finance-oriented models to develop price and risk estimates. The models used by these agencies were invented at approximately the same time as the Model T Ford and they have been discarded in many industries. On page 2 of the slide, I state that talking about kilowatt hour costs without also talking about risk is like watching a movie with the sound turned off. Half the story is missed. When people claim that a certain technology costs so much, while another technology costs a different amount, they should also include the risk of the technologies. Gas has a price but it also has a risk. Renewables have a different price and they carry a lot less risk. Their costs are generally fixed.

May I entertain questions during my presentation?

Chairman

I am allowing this session to continue until 1 p.m. and I hope the professor will then accept our hospitality and have lunch with us. We can have an informal discussion over lunch. I would like the professor to continue for another ten minutes and then we can take questions. We had the benefit of this presentation last night and members have had an opportunity to read it as well. I am sure that they will have a number of questions for the professor.

Professor Awerbuch

Page 3 of the presentation deals with how we get a set of meaningful generating cost estimates. We do this by inviting a number of investors to submit 20-year, firm price bids using gas, wind or whatever. That will tell us what the market's estimate is of the risk adjusted costs of generating with gas, wind and other technologies. All of these other estimates on the slide are really not relevant. They are just a set of engineering estimates.

The next slide simply shows that many existing estimates project gas prices and do not adjust for risk. When risk adjustments are made, as this graphic shows, we find that gas generally costs twice as much as most of the agencies claim and that wind costs less. The graphic on page 4 shows the results provided by a whole set of technologies when finance-oriented, risk adjusted procedures are used. The gas combined cycle is approximately 3 cent per kilowatt hour. These figures are from the IEA and are approximately three years old. My risk adjusted estimate is twice as high or more. The fossil technology cost estimates are much higher when risk is reflected.

Cost estimates for individual technologies may not, however, be all that important. Even though a more reliable estimate is provided when risk adjustments are made, the whole approach of valuing one technology at a time does not make much sense in what is a very dynamic and uncertain world. In this world, where risk dominates, energy planners and policy makers must take their cue from risk professionals. Who are these professionals? They are investors who buy and sell risk every day of their lives. How do investors deal with risk? Do they put all their money in one stock or ask their stockbrokers for a 30-year forecast for IBM or GM, although no-one would buy GM anymore? Nobody would do that because nobody can tell what will happen in the future. Investors, therefore, deal with this problem by buying portfolios of stocks in which they mix risky, high yielding securities with low yielding securities. If investors did what energy planners want them to do, they would never buy a government obligation because these only yield 3%, making them the most expensive investment available.

This is how we need to think about our energy strategies. We need to think of them in terms of portfolios that are balanced, efficient and optimised, which is the only way to move forward. Stand-alone procedures, generally called least cost procedures, are still an approach in Ireland. I refer, for example, the CER still calculates the cost — it is a type of least cost approach — of new entrants. Such procedures should have less weight and we should focus on portfolios and strategies. In doing this, one must ask whether gas is cheaper than renewables. I suggest it does not matter that much, in the same way it does not matter to financial investors that a US Treasury bill or a government obligation costs more than a high flying risky stock because they buy both. The question with regard to renewables is not "if" but "how much". The optimal portfolio shares adjust themselves as prices change over time.

The next slide demonstrates the basic portfolio ideas in respect of which people pay a great deal of money to learn at investment seminars. The slide shows two technologies for which the costs listed are purely illustrative. Technology A is a high cost, low risk technology, such as wind. Technology B is a lower cost, higher risk technology. Many people intuitively think that when technologies A and B are mixed at a proportion of half A, half B, the resulting cost and risk will be located on the dotted line shown on the slide. This is wrong. When some of the risky technology is rolled in, one gets to the type of portfolio demonstrated at J on the slide. Portfolio J has less risk than A or B. Therefore, although one is adding a riskier technology B to technology A, one tends to reduce risk and cost.

This is the entire secret of the portfolio approach. It is basic textbook finance that when one puts technologies or stocks together, the prices or returns of which do not move together, one gets a portfolio effect or synergy. The portfolio has less risk than either of the two investments or technologies by themselves, which demonstrates the synergistic effect of portfolio theory.

What does this mean in terms of generation portfolio? The graph before the committee shows expected generating cost on the Y axis and risk on the bottom line. If one begins with a fossil generating portfolio and adds renewables, and one believes renewables cost more — in other words, if one is relying on standard engineering cost models — the cost of the portfolio will rise. However, the other relevant factor is risk. If the portfolio can be rejigged and brought back to its original risk point, one will find, without exception, that the resulting risk is lower. The standard portfolio theory comes right out of the textbook. This is how the magic works and how wind may be added, even if it is believed to be more expensive, and how one ends up with a portfolio that is lower cost and lower risk.

If the committee is still with me — and I hope that it is — we will move to page 7. We will focus on the slide on the left, which shows this result for a study we recently carried out in the UK. I will comment on the important aspects. The orange bullet says DTI 2010 mix. That is DTI's projected technology mix to the year 2010. It has a cost of 3p and a risk of somewhere in the region of 8%. The question is whether that mix may be improved upon. The pink line is the location of what we call "efficient mixes", that is, all the optimum mixes. There are no solutions below the pink line, so this represents the solutions that have the minimum cost at every given level of risk.

There are infinite solutions on the pink line but I will refer to just two.. One is straight to the left of the DTI mix. That is portfolio N. It has the same generating cost, three pence, as the DTI mix. However, its risk is approximately half. Right below the DTI mix is mix S. This has the same risk as the DTI mix but its cost is approximately 20% less. Both of those portfolios are superior, in an economic sense. One has the same cost but less risk, the other has the same risk but less cost. Both are superior.

Now we will examine the mixes. If members look in the box, they will see the details for each of these portfolios. The DTI, it says here, has 5% wind but that was an error. The DTI mix contains 11% wind. Now mix N, which has half as much risk and costs the same, contains three times as much wind, or 34%. Mix S, which has the same risk but lower cost, contains approximately 50% or half as much again more wind. It has 16% wind, looking at the very bottom line. One can see the other technology shares have all been shifted around. The portfolio optimisation routine looks for the lowest cost mix at every given level of risk.

The point I want to emphasise for the committee is that most of the standard projected portfolio mixes can be improved upon because the projections consider only cost and not risk. When DTI makes these projections, it looks only at cost, not at risk, and then it looks at the cost interactions — the fact that certain costs such as gas and coal move together and that costs of generating with wind are totally independent and not correlated. The fact that wind is not correlated helps to versify the portfolio. The versified portfolio in finance, as everyone knows, produces better results. It lowers risk and enhances return or lowers costs.

We will move on to page 8. I will talk to some extent about renewable energy and the grid and then spend some time on the oil GDP effect. We will not spend too much time on the renewable energy question because only 25 minutes remain left to talk about the grid. I want to leave the committee with the idea that the problems now being experienced in integrating new technologies are not really new. On the page in question is a picture of a bicycle taken in the 1870s. It is too small for the committee to see but the woman on the bicycle is sitting side-saddle. That was the technological solution of the age because women — due to the clothes they wore, the various social mores of the period, etc. — could not ride on bicycles. Figuring out a way for women to ride side-saddle was the technological problem of the age. We tend to visualise new technologies in terms of how old technology worked. Women used to ride horses side-saddle and consequently it was felt they should also ride bicycles side-saddle. Computers, when originally developed, and Bessemer steel, when originally invented, were regarded as replacements for the technologies previously used.

My work suggests wind energy technology is different from old technologies, just as all new technologies are different. It should not be made to compete on a commodity or kilowatt hour basis with gas because that is not what it is meant to do. Therefore, current methods for integrating wind energy into the mix are based on a philosophy of the kind that suggested women should only ride side-saddle. We need to change the protocols for the system and the manner in which it operates but that is another story and perhaps we should not deal with it in too much depth except to say future networks will need to be market-driven, decentralised and informated.

This presents a very different model from that which pertains today, which model views the network as a transportation system for moving electrons. When there is distributed generation everywhere, the transportation role of the network becomes very outmoded. It has pretty much come to the end of its days. The network needs to be viewed as a market enabler. Therefore, in a deregulated, liberalised electricity market the network operates like the stock market in that it enables buyers and sellers to come together.

A properly conceived network and incentivised network operator will help to promote network diversity, create open markets, afford buyers, be they householders or industries, with access to competitive electricity markets, and reduce costs. There is much evidence which shows that electricity markets throughout Europe suffer from a concentration of power. The market keeps prices artificially high. This is certainly true in many of the Benelux countries, including the Netherlands, and perhaps in Ireland.

Future networks must enable reconceptualised just-in-time, mass-customised electricity generation. This demonstrates a different way of conceiving the electricity production business. We are working with Carbon Trust to develop a live demonstration in which a large hotel chain in the United Kingdom will take raw, unfirmed wind power. When the wind is blowing, it will take the power and manage its variability. This totally bypasses the need for system backup reserve requirements and renders insignificant all the arguments and discussions in this regard. There are different protocols and ways of dealing with wind power that need to be explored because we cannot make wind technology look like a gas turbine. It is not, yet everyone compares the two.

Deputy Eamon Ryan

Perhaps in answering some of my questions Professor Awerbuch will use some of the information in his remaining slides. I acknowledge it is difficult for him to make his presentation without the necessary technology.

Professor Awerbuch has made the point that a financial gain is to be derived from having a mix. I was interested in looking at his figures pertaining to England, which indicate wind energy has a 34% share in the mix. This is remarkably high and much higher than the level in Ireland. How does the professor address the issue of capacity backup, irrespective of the carbon and financial cost, given the variability associated with wind generation and the need to have backup fossil fuel stations to cover in the event of outages? How does that fit into this portfolio mix? Can the professor reach 34% of the mix taking that into account?

It seems that the nuclear debate has come full circle in the UK and that, if we read between the lines, the Prime Minister is absolutely pro-nuclear at this stage. I was interested in looking at the costs outlined in the presentation. I take the professor's point that we must get away from the obsession with cent per kilowatt hour in any particular supply. There is a graph on page 4 of the presentation that shows different costs of energy. The risk adjusted estimate of nuclear energy was relatively small compared to gas, which surprised me. In his later paper, the nuclear mix represents 16% of the variable mix. Is that because Government policy in the UK was not to replace its nuclear stations? Will the figure change if that policy changes?

Professor Awerbuch

Deputy Durkan

I thank Professor Awerbuch for his presentation. What is the ideal combination of energy sources? When we talk about security of supply, we refer to renewables and wind energy but what else should these be combined with? Is the ideal combination wind and oil, wind and gas, wind and coal, or wind and nuclear energy, as suggested elsewhere? I presume wind and nuclear energy are the ultimate in terms of continuity of supply and the elimination of carbon emissions. I am not a supporter of nuclear energy — neither is this country — but it is important that we establish what we are talking about.

With regard to risk, there are economic and financial risks but also political risks which, unfortunately, must be faced. What is Professor Awerbuch's evaluation of the political risks for a government or administration in the event of a sharp drop in supply or increase in demand, with supply not able to meet demand? In what area does the greatest risk lie, given that we have not reached a point where we can store electricity supplies, although I hope we will do so in the future?

I have spent one year working on this portfolio. I note that consumers, industrial and domestic, have been forgotten. Much theory has been developed and important and worthwhile work done in terms of research and development but, ultimately, the consumer seems to be paying for this. Industrial consumers in this country are paying a huge price for energy, which is seriously detrimental to the economy in terms of competition. Deregulation which was supposed to be beneficial to the consumer has not had this effect to date.

Wars were fought over energy sources. The energy sector, by virtue of the need to protect investors, seems to have a mind of its own in terms of price acceleration. For example, in the United States the price of oil has increased by $2 or $3 in the past 24 hours for some minor reason such as that the temperature dropped a couple of degrees. So long as the private investor has control, will it not always be the case that when the investor feels a shiver, his or her bank account will get a little warmer?

Professor Awerbuch

The Deputy asks provocative questions. To take his final question, in many instances it is convenient to place the blame on investors. In this case, in particular, there has been some very good work done by such bodies as Resources for the Future in the United States, the findings of which suggest quite clearly that investors and energy speculators help rather than harm markets. That is true in other markets too.

The issue is one of supply and demand. The former is somewhat arbitrary and may be motivated by politics or ideas we do not fully understand. When the weather gets cold, energy buyers get very nervous that they will not have enough and the price spikes very quickly. There was panic in London two weeks ago when temperatures dropped, since people were afraid that they would not have enough gas. That is one of the reasons gas prices went so high. This is driven by our having increasingly thin margins between available capacity and growing demand. It used to be the case that there was a larger margin, but I suspect that what is happening is that there is not as much oil in the ground and it is harder and more expensive to reach. We are not replacing it quickly enough. These factors are making the spikes even more substantial than before.

The issue previously concerned deregulation, on which some good questions were asked. Deregulation will not help unless there is competition. Deregulating will not achieve anything unless there is a competitive market. If one does not have five or six players, one has not done anything. I come from the United States, but the idea seems to be very popular in Europe. Air traffic control has been deregulated, but it is still a monopoly. It acts like a government in that one passes through its territory and pays a tax.

Deputy Durkan

To test that theory, let us consider air traffic costs. Deregulation has benefited the consumer very directly and markedly.

Professor Awerbuch

I was speaking of air traffic control rather than airline deregulation.

Deputy Durkan

They have become more competitive. However, in the area of energy, for some unknown reason, the consumer has lost out. Deregulation, despite its being supposed to encourage competition, has not done so. We are told we must increase prices to encourage competition, but that is a contradiction.

Professor Awerbuch

My belief, having watched this issue both in the United States and here, is that privatisation in many European countries was not conducted with sufficient forethought to ensure there were enough competitive players in the market. That was certainly the case in California, where there is a great deal of evidence that market power is hurting consumers. There is also plenty of such evidence in Europe. One must have five or six players of more or less equal size and even that is probably not quite enough. That is why I believe decentralised energy supplies from wind and other sources and new players can help mitigate market power. That is an important role. Wind energy developers and operators of other renewable energy forms contribute to the system by mitigating that power.

The Deputy is right that deregulation helped in telephony and with airlines, but it has not helped here. The system operator is the logical candidate when it comes to helping open markets, but to get it to do this, one must pay that entity in order that it earns a profit when it increases access regarding both supply and demand, competitiveness and diversity. That is how I would pay and set up my network operator. We have dealt with this matter in several papers, including a book that we wrote in 1999 discussing such issues. I put my money on the system operator.

Deputy F. O’Malley

Since one size does not really fit all in deregulation and EU directives, perhaps the professor might state whether he believes we in Ireland have much chance of getting the regulations changed. That way a deregulated market as required by the European Union need not apply in Ireland. This is a small, isolated market that might not currently feed into the wider European one.

I wanted to finish on the question of the costs of generating wind energy on shore and off. The latter depends on the work we are doing. We have just concluded some work for Scotland, the results of which will be released on 17 January. We compiled a fairly detailed set of costs there for onshore and offshore winds. In other studies it depends on the purpose. In respect of onshore wind, we typically make assumptions that are consistent with whatever country is involved.

Deputy F. O’Malley

In Professor Awerbuch's diagram——

Professor Awerbuch

That diagram shows DTI's cost estimate. I used their numbers. However they do it, those are their numbers.

Chairman

We will take a final question and then break for lunch, with the agreement of the committee.

Deputy F. O’Malley

What about my question on the networks?

Professor Awerbuch

The Deputy asked how we can make the network operate as a market enabler.

We have 50 minutes for this session because the Minister is appearing at 3 p.m. We have had the benefit of reading Mr. Hunt's document. Perhaps he would give us an overview for ten minutes and then we will take questions from the spokespersons. There are a number of members who are attending other committee meetings at present and they have sent their apologies. Some of the members will be joining us shortly.

Mr. Paul Hunt

I am pleased to have this opportunity to address the committee. As the Chairman stated, I am sure members have had an opportunity to read the paper I submitted. I propose, in line with what the Chairman has recommended, to summarise the key points of that paper, highlighting the policy issues that should be of concern and interest to the committee.

By way of introduction, I am an independent energy sector consultant. I have been based in England for the past 16 years but I retain my Irish citizenship. It is difficult because every time I open my mouth, I reveal from where I come.

Chairman

Is Mr. Hunt from Cork?

Mr. Hunt

Yes.

I want to make clear that I am not being retained by any party with interests in the energy sector in Ireland. I am raising these issues because I believe that in the public interest they need to be addressed and highlighted. My principal objective is to highlight the conflict I see between the rhetoric and the practice of Government energy policy and the damage this is causing and to outline some possible solutions. The policy rhetoric recommends competition and regulation as the most effective means of benefiting consumers but the practice imposes additional costs on electricity and gas consumers to protect an outdated financial, corporate and organisational structure for the electricity and gas industries.

I wish to make two important points. The paper I submitted should not be seen as an attack on the staff of the ESB or Bord Gáis or their levels of pay or terms of employment. As far as I am aware, the operating expenditures of these organisations, including their labour costs, are comparable with those of their counterparts in many other countries. My focus is primarily on the structure and financing of these organisations.

The second point is that I do not want this presentation to be seen as being biased in favour of or against any political party. There is a clear policy choice that needs to be addressed by all Members of the Houses of the Oireachtas. The key choice is between, on one hand, modern efficient gas and electricity industries that provide increasing benefits to consumers and, on the other, the continued support of the ESB and Bord Gáis, in a costly manner, as what I describe as "national champions". From an international perspective, national champions are either mutating into dinosaurs or emerging as restructured, strategically-focused businesses, either in energy supply or, in the area of infrastructure, in providing water pipes, gas pipes, electricity cables or whatever. This is the choice that Irish policy makers should confront. Do they want these modern efficient industries or do they want to protect these national champions?

The dinosaurs that remain belong to another age. I accept that Irish consumers, both gas and electricity, might be quite happy to pay a dinosaur protection levy — that is what they are paying at present in the context of gas and electricity prices — but they are entitled to know how much it is costing them so that they can make an informed decision. Regardless of the choice that will ultimately be made by the Irish people, it is important to examine the damaging impact of this policy conflict and the background to it so that we can begin to consider sensible solutions.

As the committee will be aware, the ESB and Bord Gáis were established or developed as vertically integrated semi-State businesses and, until recently, they have served the Irish people well. That approach to developing the vertically integrated industry structure corresponded to the model that was predominant in the past century. In the past 20 years, that model has been undergoing significant reform in most developed economies and the objective is to restructure those industries, both gas and electricity, to generate greater efficiencies and to allow these efficiencies to be passed back to consumers in the form of either lower prices or better and more innovative service offers.

In the same period, a similar phenomenon occurred at the European level. The European Commission, in looking at the energy industry, particularly gas and electricity, at a Union-wide level, recognised that the vertically integrated structure and the monopoly concessions of the large national industries were imposing much higher prices on consumers than should have been the case and that Europe, as an industrial entity, was losing international competitiveness. Major efforts were initiated in the 1990s to promote greater reform, liberalising the market and removing these monopoly concessions. The focus was initially on the founder members of the European Union — Germany, France, Italy and the Benelux countries — but, in order to progress the reform package, it had to be developed and applied to all member states. The Directorate General for Transport and Energy, which is known as DG TREN, has been the principal driver of these reforms. Primary legislation was enacted at European level in 1996 and 1998 and repealed and revised legislation was enacted in 2003. Legislation has been enacted in Ireland to transpose most of this primary European legislation into Irish law.

While this legislation was being enacted at the European level in the 1990s, Irish consumers were experiencing artificially low gas and electricity prices. Both the ESB and Bord Gáis implemented price freezes. This, of course, was popular with consumers and it also allowed the companies to exercise effective discipline on labour costs but, because there is a particular constraint on the ESB in terms of the way it finances its activities, where borrowings can only be 50% of total net assets, the low revenue that was coming from these low prices meant that the company was starved of the funds required to finance investment. In contrast with the European circumstances, where all the effort in terms of market liberalisation and the introduction of competition and regulation was to reduce prices, the requirement in Ireland was to increase prices. In order to be compliant with the European legislation, there was a requirement to introduce competition, market opening and a regulatory body, whereas in all other developed economies these processes had been used to reduce prices and create benefits for consumers. We required an Irish solution to an Irish problem.

That solution was to establish what would become the Commission for Energy Regulation, CER, which was granted almost unfettered control over prices, revenues and tariffs for the electricity industry, and subsequently for the gas industry. In this way, the Government was able to delegate the politically distasteful task of sanctioning price increases to the commission. This might have worked, effectively and sensibly, if the commission was not constricted and restrained, both in terms of the policy choices that were imposed on it and if its price setting procedures were subject to sufficient scrutiny and review. However, neither condition was satisfied. In the policy area, the actions of successive Governments placed considerable strains and pressure on the CER. Successive Governments approved the low price policy that starved the ESB of the revenue to finance investment. They failed to remove the constraints on the ESB's ability to finance its activities in a more efficient manner and they also failed to behave as a prudent owner on behalf of the Irish people by investing directly in the business.

The CER was in a bind. It had to find quickly a means of increasing the ESB's network revenues to very high levels and to put a regulatory gloss on it. The Department had previously developed — I have demonstrated this — a flawed asset valuation method to derive gas transmission tariffs for Bord Gáis and these generated excessively high transmission tariffs.

It did not pose a major problem at the time because Bord Gáis was not passing on the high tariffs to all consumers. However, it was convenient for the Commission for Energy Regulation to apply that method to generate very high revenue for the ESB up to the level it convinced the commission it required.

On scrutiny and review, the regulated businesses, primarily the ESB and Bord Gáis, have access to an appeals mechanism while consumers have no recourse to such a mechanism to review or scrutinise any decision made by the regulator. Many other countries have statutorily empowered bodies to protect the interests of consumers. Some even have specific statutory bodies that protect the interests of electricity and gas consumers. Ireland has an interim consumer agency without full statutory powers.

The regulatory consultation process is a sham. Typically, when the commission issues a decision on revenues or prices, it allows one month for interested parties to make submissions. It then summarises the submissions and declares that, because it has considered all the issues fully, it will ignore any that are critical of its decision. This lack of scrutiny allowed the commission to employ a deeply flawed model of asset valuation to derive excessively high network tariffs for the ESB and to subsequently apply this to the gas networks of Bord Gáis. I estimate that the current overcharging is in the region of €120 million to €140 million per year, which is the result of policy constraints and lack of scrutiny and review.

Chairman

As these are charges being laid against the Commission for Energy Regulation, I advise Mr. Hunt that it is in receipt of his document. It was asked for a response to that document on 16 November. We received a verbal response from Mr. Tutty who was asked to consider the document in its entirety and respond to the committee as a matter of urgency. I wish to place on the record that the Commission for Energy Regulation has failed to respond to the committee — a committee of the Houses — in this regard. I take grave exception, and I am sure the members agree, to a committee of the Houses being treated in such a fashion. The commission has had three weeks to prepare. It is a large organisation and it should have responded to the committee as a matter of urgency.

With the committee's permission, I am instructing the clerk to make contact with the commission and to have the response sent here immediately. If we do not get an adequate response, the committee will have to make provision to investigate the matter and ask the three commissioners to come before it again in regard to this matte. We will also be obliged to consider what other powers we need to investigate the nature of the complaints Mr. Hunt has made.

Mr. Hunt

I recognise that these are serious assertions. The commission has had an opportunity for over a year to respond to the charges I made. It has not responded. To the extent that it has responded, it has misrepresented and distorted the case I made.

I am keen to make one or two comments because I am sure members of the committee are keen to raise important points. As regards the ESB and Bord Gáis in this context, like all large commercial organisations, they are motivated by the pursuit of power, profit and prestige. They will, of course, deny this. They will say that they are governed by legislation, that most of their profits are controlled by the Commission for Energy Regulation and that they are entitled to respect for a job well done. However, there is a significant gulf between the public image these companies seek to convey and project and the underlying reality. Increasing numbers of people are becoming aware of this wide and expanding gulf between the image and the reality.

Governments of every stripe have failed to tackle the ESB in an effective manner. It has grown immensely powerful and Bord Gáis is perfectly happy to sail along on its slipstream. Whenever the Government gives an indication that it intends to restructure the ESB, the management growls, the unions bark and the Government retreats. This begs the question as to who is actually making energy policy in this area. Regardless of who it fears, the Government has responsibility in that regard. When it became clear in 1996 that the first EU electricity directive would be enacted, the Government of the day knew the ESB would have to be significantly restructured. Almost ten years have elapsed and I am not sure where the review called for by the Minister stands in terms of a final report that will be available for publication. I understand that what is being considered is a fairly limited review of the restructure of the ESB to force it to sell off stations in order to reduce its market dominance. The terms of reference of the review excluded any consideration of the Commission for Energy Regulation. It was somewhat similar to putting on a performance of "Hamlet" without the prince.

There is sufficient evidence — from that ten-year catalogue of failure to tackle the company — that the ESB and, to a lesser extent, Bord Gáis are exercising power without sufficient accountability. They are certainly extracting profits they have not earned and are using their power and profits to boost their prestige. Like all modern societies, Ireland applies principles, processes and practices to determine the award of power, profits and prestige. Ireland is a democracy. The Irish people and their public representatives should decide who exercises power and how that power should be exercised.

Ireland has a market-based economy. The highest profit should go to those who provide in the most efficient way the goods and services people require. This is a civilised and cultured society. The prestige should be accorded to those in every area of activity who do remarkable things and who lift the human spirit. Somehow these principles, processes and practices do not appear to apply to the ESB or Bord Gáis. Their behaviour is undemocratic, economically damaging and offensive. This is why the Government and the Houses of the Oireachtas should consider major changes to both the structure and ownership of the ESB and Bord Gáis and to the gas and electricity market arrangements on these two islands.

If consumers are to benefit from competition and regulation, the Government needs to take three steps as a matter of urgency. First, it must create separate companies for the network businesses and supply businesses. These are two distinctly different types of business. Network ownership is low-risk, regulated and has minimal contact with final consumers. Generation, trading and supply, whether of gas or electricity, is high-risk, competitive and, at the retail end, must be customer-focused. Second, there is a very strong argument for privatising the networks. Due to the over-valuation that has been permitted by the Commission for Energy Regulation, a proper market valuation would result in prices decreasing immediately. There would be no loss of policy or regulatory control. The policy and regulatory structure is perfectly adequate to deal with privatised arrangements. It may need to be boosted in some instances to ensure that only competent, committed long-term investors would have an opportunity to invest in the system. The Government would be within its rights to ensure that was the case.

If the networks were privatised, finance would be released for other, more pressing infrastructure investment. Another important point is that it would get the Commission for Energy Regulation off its asset valuation hook. It cannot change the asset valuation as it stands because it will destroy its regulatory credibility. The networks could be sold in lots to minimise the concentration of ownership.

We laid this report before the regulator, Mr. Tutty, and I now quote his response. It states:

We do not agree with the thesis put forward by Mr. Hunt that the assets have been overvalued for both ESB and Bord Gáis. The same arguments apply in both cases. Mr. Hunt argues that under the previous system of historic costs, they were recovering money in order to counteract depreciation, etc. When we introduced indexed historic costs, we ultimately allowed them to recover the same revenues a second time.

It proceeds to try to answer the questions raised by Mr. Hunt in the document he submitted to the joint committee, the Minister and to the party spokespersons. In the absence of a detailed response from the Commission for Energy Regulation, the joint committee is in a difficult position and will revisit this matter.

Mr. Hunt may wish to make an observation or need some time to consider the response from the CER. We will share the information supplied in the response from the Commission for Energy Regulation.

Deputy F. O’Malley

Mr. Hunt was interrupted before he could tell the committee what should happen to the supply to the ESB. It should be worth hearing.

Chairman

By whom?

Deputy F. O’Malley

Deputy Broughan.

Chairman

Mr. Hunt makes serious allegations in his document and the joint committee were keen to hear the response of the Commission for Energy Regulation, so that members would be able to put questions to him. However we did not get its response, and I apologise to members for that.

Mr. Hunt

I seek the guidance of the Chair. I would like to give a simple response.

Chairman

Always follow the Chair.

Mr. Hunt

From a cursory examination of the response from commissioner Tutty, it does not seem to elaborate any further on the response, which was published by the commission at the beginning of September, when it made a statement on the report I submitted.

In my view, we should wait for the response to the Chairman's request for the CER to respond in a more constructive manner.

Chairman

If a response from the CER is not forthcoming, I beg the indulgence of the committee to have its representatives brought before us as a matter of urgency.

Deputy Durkan

I have commented publicly on this issue both before and after Mr. Hunt's comments. I believe there are considerable grounds for assuming Mr. Hunt has a basis for this case. As I said, the price of electricity is extraordinarily high. While Mr. Hunt did not necessarily say so, we have extraordinarily high electricity prices in Ireland. This makes life very difficult for people who are obliged to compete. I recently visited an industrial complex that depends heavily on gas and electricity, both of which are priced far in excess of products in the countries in which competitors are based. That is a significant inducement for companies to move away from this economy altogether. I have never understood why the regulator should herald a necessity to increase energy prices by, as on one occasion, as much as 60%, which has the effect that when the rise comes and it is not quite that high, the ground has already been prepared, as it was for St. John, and there is a certain acceptance of the hike. If it is not quite as high as the regulator forecast, people consider themselves to be very lucky.

Undoubtedly, deregulation has not worked and the regulator has failed. We are in the worst possible circumstances now because the regulator is not a politician, is not responsible to the House and is not in the business of providing the service directly. I feel sorry for the regulator in the sense that he would need to be a politician to do the job properly. I would like to hear views on the functionality of regulation as it operates. We have more regulators now than they had in Texas after the US civil war.

I cannot be sure about the ownership of infrastructure but I have come to the conclusion, rightly or wrongly, that in respect of certain utility services, the State must have some interest or control. Access to the grid is difficult and precarious for alternative energy producers. It is expensive and fraught with delays and procrastination. As with Eircom, which went from the State to private sector, the process has failed. Everything we want to access quickly is available slowly and emphasis is now on investors, speculators and the need to provide a worthwhile dividend to encourage further investment. If the ESB and alternative energy generators do not look after consumers, however, the consumer base will disappear.

While I agree that the North-South energy flow is useful, it will not solve all our problems. To provide significant levels of energy from alternative sources, we require an interconnector to the Continent — directly rather than through a third party. While I have no problem with separation of the networks and generation, infrastructure should be in public or semi-State ownership at least. I note the production of a plan for a tunnel to the UK in recent days, which, I hope, is not just another election promise like many such proposals that float around when an election is in the offing. As an island nation, we must be careful about how we handle a scenario in which someone develops the notion of establishing independent access to the Continent rather than through a third party such as Irish Ferries.

While I am in favour of privatisation, we must ensure that there is competition between the private and public sectors and that both sides are in a position to engage in it. If they are not capable of competing with each other in transport, electricity generation or the supply of gas, we must be aware of it. Why should we punish the consumer to encourage competition? We are increasing prices to the consumer to make it possible to gain the headroom competitors want to get into the business. That is a peculiar way of proceeding. Cynics say that we have increased prices to encourage competition and make it more viable for more investors to enter the market. At what stage will the benefits accrue to the consumer? I refer again in that context to the earlier analogy I drew in respect of the airlines. I note the point about a combined gas and electricity generating company, which is not a bad idea. The regulator has failed in placing too great an emphasis on the need to encourage investors and not enough on the need to produce something the consumer can see as a benefit of deregulation, which was the original intention.

Mr. Hunt

I am confident of the case I have made on overpricing and the overvaluation of assets. If the CER was confident of its position, it could have completely eliminated any questions as soon as I raised this issue last year.

Deputy Broughan

On that point, which is at the core of Mr. Hunt's report, the maths and economics seemed to make sense. Given Mr. Hunt's acknowledgement that energy and electricity was underpriced historically in the 1990s, could the CER not make the case that there was a need for a process of catching up, particularly as the gas and electricity transmission networks were being renewed? While they may have been gold-plated as people have said in respect of Bord Gáis, there was real catching up to do in investment. Could it not be argued that there are historic reasons for allowing increases at this time?

Mr. Hunt

I agree with the Deputy. I made it clear in my presentation and paper that there was a requirement to raise the tariffs for the gas and electricity networks. My key point is that those tariffs were raised too high through the mechanism employed by the commission and they have fed into final prices to gas and electricity consumers. I return to the point I made to Deputy Durkan. If the commission was confident of its position, it could have produced its advisers and consultants, especially as it had access to the best consultants in regulatory and financial economics. It has a significant budget that would allow it to acquire such expertise. If the consultants, whom I respect and would have expected to produce the arguments, had come forward, I would have walked away. I have not walked away because the analysis I carried out convinced me, while the commission has been unable to put forward any solid argument to demolish or rebut my findings.

While I agree with Deputy Durkan that regulation has not worked effectively, I beg to disagree that consumers are being treated badly in contrast to investors. The investors in question are the State and its semi-State companies. It is part of my argument that there is a fundamental conflict between State ownership and the setting of a policy that runs counter to notions of competition and regulation. It is for this reason that I propose the privatisation of the networks to encourage long-term, efficient investment in the industry in such a way as to reduce prices quickly and lastingly for final consumers. I also agree that there is a requirement for further interconnection, which brings me to the final point I intended to make in my initial presentation.

The Irish and all-Ireland markets are simply too small to generate the kind of competition required to create the efficiencies. This needs to be examined on the two islands because a two-island solution is required. It could be said that it is a north-west Europe issue in terms of gas.

I agree with Mr. Hunt in his view of the island market, if such comes into being. Is it not the corollary that we need a national champion? My party and I believe in public ownership of the ESB as an instrument of public policy. I salute the ESB for its achievements in the past 80 years; it has been the model semi-State body. Low electricity prices in the 1990s were not the fault of the ESB. The Estimates published last week show that the Government proposes to claw back €80 million of a dividend, which will come in the form of high prices for the public. Mr. Hunt's proposal to privatise networks is extraordinary and I wonder how it would be put into practice.

It is clear that the ESB and Bord Gáis, in particular, need to respond to the concerns of the public. I refer to the ESB's response to issues such as renewable energy and diversification by means of a decentralised network. Could this not be more easily achieved by the ESB remaining as a central instrument of public policy?

Chairman

I ask Mr. Hunt to respond to those questions. We will then conclude with Deputy Eamon Ryan's questions.

Mr. Hunt

In answer to Deputy Fiona O'Malley's question, as the Chairman has indicated, we should wait to read the response from the CER. On the possibility of Ireland being regarded as an exception, I made the case that it was in an exceptional position as gas and electricity markets regulation were being progressed throughout Europe. It would be very difficult at European level to establish a case that would hold water for Ireland to be exempted from the requirement to comply with the current directives. Ireland has been quite compliant, to put it bluntly, in meeting the requirements of those directives.

In terms of the regulation of the networks, the tariffs should be coming down now and regulation should be applied to enforce efficiencies and to reduce costs. The mechanism should be in place to adequately fund those activities. The structure and financing of the ESB and Bord Gáis is fundamentally a policy issue. The simple example for financing networks is that for a €100 million investment, most private network operators would borrow €70 million. They would raise €30 million from retained earnings or the owner would invest. In the case of the ESB, €50 million is raised in borrowings and €50 million comes from retained earnings. The only way the ESB can generate those earnings is by having higher prices for consumers. The latter are paying for investments that will benefit their successors in 40 years' time. Efficient financing would occur if the State invested as well. That is part of my argument for privatisation. If the State is a serious owner of these businesses on behalf of the Irish people, it should also invest in a going, regulated market. The State has not been a prudent owner of these businesses because it has put the regulator in a position to increase prices to the consumers so that it can avoid making investments. In my opinion, that does not make economic sense.

One of the arguments I make for privatisation is that it lets the regulator off the hook in terms of its asset valuation. The regulator cannot claim that it got it wrong and that it can change the numbers because its credibility would disappear, particularly in respect of an issue as important as tariffs and prices. Privatisation gets the regulator off the hook. There are probably other mechanisms and I am not focused on all the options that may be available. It is for policy makers and the regulator to look more closely at how the problem might be solved. I have a certain amount of sympathy for the regulator, who has made efforts on ESB network tariffs for the next five years, extended the depreciation period and tweaked the analysis somewhat. The regulator discovered that there was double booking of assets at the ESB. I refer here to instances where assets that had been replaced were left on the books. As a confession by a regulator, that amazed me. There has been some tinkering done in order to reduce tariffs for ESB networks. However, it is difficult to envisage the ESB changing the situation or responding to the errors made.

There are issues surrounding the review of regulation. Ultimately, there must be policy control of the regulatory arrangements. The Houses of the Oireachtas should consider introducing more effective scrutiny and review. In most other jurisdictions, there is some review mechanism where decisions can be appealed. It is currently in favour of the regulated businesses and consumers have no protection. The committee should have an opportunity to talk to the Minister on the energy policy review that is currently being conducted.

I accept that I might be perceived as having a naive faith in markets. I am an economist with experience over the past 20 years in examining the deregulation of markets and where they have gone wrong. I also accept that they have gone seriously wrong in certain jurisdictions. It inevitably goes wrong when there is a serious conflict between policy and regulation. We previously heard about the situation in California, where consumer prices were regulated but where wholesale prices for bulk supply of electricity fluctuated to a great extent. Those fluctuations were not passed through to the final consumers and there were constraints in planning regulations. In the gas industry in North America, restrictions on planning requirements for importing LNG have resulted in a shortage of LNG supply and this has driven up prices in the short term in the US.

A policy review is important to ensure that it provides the appropriate framework for regulation to work effectively. I accept the points about privatisation. These represent a well established political position that is defensible. Given the behaviour of the State in its management of these semi-State bodies and in light of the inefficiencies that have resulted from the placing of constraints on regulation, it is now time for a properly regulated private sector to have an opportunity to invest in these business. I have been led to believe that there is a considerable amount of investment and pension funds available. These are probably flowing into the construction and property markets and creating bubbles therein. It would make much more sense to have some of that private sector investment channelled into network industries in Ireland.

Yes. The standard policy of any business that has not been sufficiently separated is to transfer as many costs as possible into the regulated side of the business and argue strongly that the regulator should protect that income or recover those costs, thus allowing as few costs as possible to accrue in the competitive part of the business.

I am trying to understand what is going on. It is ultimately the role of the regulator to explain fully the approach that has been taken. The office of the regulator is not forthcoming because it does not accept that it is overvaluing the assets and providing the ESB with excess revenue.

Chairman

We are extremely grateful to Mr. Hunt for travelling from the United Kingdom to make a presentation to the committee. We found his presentation very informative and it will give us food for thought. We await the response of the regulator to the issues Mr. Hunt raised, including his personal views on how energy policy should be developed in Ireland. I also thank Professor Awerbuch for attending.

Sitting suspended at 3.13 p.m. and resumed at 3.16 p.m.

Chairman

I welcome the Minister for Communications, Marine and Natural Resources, Deputy Noel Dempsey. As he is aware, this committee has been engaged in a comprehensive review of energy policy for over 18 months. It commenced its work on 10 March 2004, at which time it was addressed by the Minister's predecessor, Deputy Dermot Ahern, on his priorities for Irish energy policy. Today we are closing the circuit as we hear the current Minister's views on the subject. The committee intends to publish its report in the next six to eight weeks, perhaps after Christmas. We hope it will be laid before the Houses of the Oireachtas and will be of assistance to the Minister and his officials in framing the Department's energy policy. We will hear a short presentation from the Minister, after which members may pose questions.

I draw attention to the fact that while members of the committee have absolute privilege, the same privilege does not apply to witnesses. The committee cannot guarantee any level of privilege to witnesses appearing before it. Further, under the salient rulings of the Chair, members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or identifiable.

Minister for Communications, Marine and Natural Resources (Deputy N. Dempsey)

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.

Deputy Durkan

I thank the Minister for his address to the committee. I welcome the proposals on developing and expanding the alternative energy option in his policy. He must have read the policy published by Fine Gael because many of the recommendations in it are incorporated in his address. We encourage him to continue in that direction.

Chairman

We may end up having an all-party energy policy that will be acceptable to successive Governments in the future. That is what the committee feels.

Deputy Durkan

As the Minister is aware, the danger is that, because of the volatility of the energy market, it could be a dangerous position to hold.

Several issues have been raised at this committee in the past that were mentioned again today. One such issue concerns the benefit or otherwise of deregulation. This has not materialised as far as the industrial sector or the domestic consumer is concerned. I had the temerity to visit an institution in the Minister's constituency. I crossed the boundaries bravely and sallied forth to visit an institution that was a large user of both electricity and gas. The Minister has also visited said institution. He is well aware of the implications of high energy prices for the industrial sector and the knock-on effect to the economy. He is also aware of the possibility of companies relocating to more benign environments, the danger of which increases each day.

Deregulation has not worked. Why is that the case? Is it because the regulator is caught in a bind between the Minister and the service providers? What is the problem? Is it likely that it will work in the future? Why has it worked so well throughout the rest of Europe in energy and other areas, but not here? We seem to be caught in an artificial bind between a rock and a hard place.

The Minister mentioned interconnection and the committee would agree with him in that regard because that is what it has been suggesting. There is no sense in talking about continuity of supply, unless there is adequate provision in terms of interconnectors, both North-South and east-west. While the general belief is that a greater degree of reliability can be achieved through the North-South interconnector, unless we have access to a wider market with which we can exchange, buy and sell energy, we have a problem. Will the Minister comment on that?

With regard to the dominant position of the ESB, there have been countless complaints about the difficulty of gaining access to the national grid. Several groups appeared before this committee in the past six months complaining about the difficulty in doing so. I understand that the ESB, as the dominant service provider, would naturally be reluctant to relinquish too much control. However, if deregulation is to work, we must take the best option. I tend to agree with what the Minister has suggested regarding control of the grid. The public sector should have some control over it. Otherwise, it could be taken in a direction over which we would have no control. Separation between supply and the grid is important because current access to the grid does not encourage alternative energy supply. Will the Minister comment on this?

Is the Minister going to publish the Deloitte & Touche report on energy? Will it be published soon or will the Minister wait until the rest of us have produced our energy policies? Will the report be incorporated in his policy? Why has it not been published yet? Publication now might be of more benefit to the area of alternative energy.

Deputy Broughan

Will it be published on Christmas Eve?

Deputy Durkan

Will it be published on the day after Christmas when people are at a low ebb?

I note what the Minister said with regard to the margin between maximum supply and maximum load. What is the position regarding the proposal for Aghada? Will it come on stream, has it got the go ahead and how will it operate?

With regard to the value of the distribution assets and the extension from 40 to 45 years the Minister put on the life of the ESB's distribution assets, I presume this also applies to gas. If so, I agree with that and see nothing wrong with it. It should be relatively easy to work out the lifespan, so an extension of five years is not much. If the Minister extended it for a further five years, it might make an impact on the reduction in so far as the overall valuation of the infrastructure is concerned and it would benefit the consumer.

The Fine Gael policy incorporates a proposal on landfill waste similar to that put forward by the Minister. However, I cannot understand how local authorities have a series of waste water treatment plants that emit appalling levels of methane gas. If this could be bottled and sold, perhaps it could be put to some use. One new plant in Dublin Bay, commissioned only a few years ago, has been giving off such a stink that the whole country is talking about it. There are also one or two similar plants in my constituency. The energy requirements of the country could be met in part by some of the gases escaping from these plants.

Sufficient research and resources have not been invested in developing alternative energy supplies. The research and development area needs some driving force that will focus on the particular matters, along the lines suggested in the Fine Gael policy document, whereby a centre of excellence may be established that can include Sustainable Energy Ireland and the institutions such as UCC and the Institute of Technology, Dundalk, as well as various others that have a genuine reason for focusing on alternatives. I could go on but I will leave it at that for the moment.

Chairman

We cannot delay if we are to exercise our democratic right at 4.30 p.m. I understand the Minister is taking that particular question in the Dáil at that time, so we will have to finish by then. I ask members to please be brief in their statements and to ask questions.

Deputy Eamon Ryan has to go to the House to ask another question and must leave in a moment. Would members object if he asked his question now?

Deputy Eamon Ryan

Members will see me on the screen shortly because I must ask a question of the Minister for Enterprise, Trade and Employment in the House. If I do not hear the response of the Minister for Communications, Marine and Natural Resources, Deputy Noel Dempsey, I will check it on the record.

As the Minister will be aware, the Green Party recently brought a Danish parliamentarian to Ireland. The individual in question gave evidence as regards the co-operative or partnership approach that is followed in Denmark. Our work programme is to be decided next week. What might be the Minister's response if the committee can arrive at some type of consensus and wants to try something similar as regards innovative ideas, in ways that might percolate in to some of the work done in the White Paper and the other documents to which he referred? In the event, we can hopefully pursue matters in more detail.

The Minister indicated that we were prescient in recognising the importance of this energy policy. I recall, approximately two years ago, raising the issue of the security supply of oil and the concept of "peak oil". As regards the latter, I stated that the world will approach this peak sooner than the International Atomic Energy Authority, IAEA, believes. This concept is where global oil production will peak and then start to decline. It is interesting that a recent report to the US Government strongly urges that countries should prepare for such a future event at least two decades in advance in order to be ready for the significant and dramatic changes that are implied.

Does the Department still accept the IAEA line to the effect that matters are all right until around 2030, even though the agency is now indicating that it is no longer certain as regards that timeframe? Will the Department consider participating in any research in this regard? Forfás is doing some work in this area but will the Department do so as part of its energy policy? Does the Minister believe we need to react to these trends now?

In that regard, how does the Minister influence his colleagues? I notice that the Minister for the Environment, Heritage and Local Government, Deputy Roche seems to be more pro-airline, as regards climate change, than Mr. Michael O'Leary. It appears Deputy Roche was gung-ho as regards continuing with emissions. Likewise, I have never heard the Minister for Transport, Deputy Cullen, speak about the need for us to reduce our use of oil in transport. That is a fundamental energy issue, as are building regulations. We tend to concentrate so much on electricity generation. We do not think of heat and transport, which are the two other great planks of energy usage. How will the Minister, Deputy Noel Dempsey, influence these two Departments and, of course, the Department of Finance? Perhaps a co-operative approach that includes outside interested parties might help the Minister in that regard and assist those Departments — if I may put it kindly — to see the future that lies ahead.

Deputy N. Dempsey

As regards Deputy Durkan's questions, it is unfair to say that deregulation has not had any effect. However, there is no doubt that it has not had a major impact. I agree with the Deputy in that regard. There are a number of reasons for this, some of which I indicated in my opening statement. Deregulation must be seen in the context of the Irish market, which is very small by comparison with most of the European markets. Its size is disproportionate to those of other countries. I will not dwell on matters such as lack of connection or the fact that we are in a stand-alone situation and that, as the Deputy stated, there is very little competition in evidence. It would, however, be wrong to accept that matters should change overnight just because we said we would liberalise the market and have done so. A process of market opening is involved. The market is now fully open and we have to look at ways and means to ensure that there is competition within it.

I do not know where the Deputy gets these quaint notions. I have more to do with my time. I am quite happy with the Advantica report.

Chairman

The report of our deliberations, which we intend to publish, will not be ready until late February. We will be pleased if we can add value to the process and to the policy the Minister is developing.

Deputy F. O’Malley

I welcome the representatives whose presentations were interesting. Professor Shimon Awerbuch indicated that the financial models many policy makers used previously have been erroneous and, therefore, unreliable. It is a problem which the Minister may or may not have encountered. He made the interesting point that when one puts renewables into a country's supply basket, the price decreases. That is something I believe. When the representative of the CER came before us, he did not appear to believe it. The history of the difficulties with wind, renewables and the CER is well documented and we do not need to go into it here. I would be interested to know if the Minister believes that renewables will reduce prices.

I am sure the Minister is familiar with Mr. Hunt's report on why Irish consumers are paying too much for electricity and gas. He made the point about the CER and how the financial costings are a problem. He also made a point about the conflict between the rhetoric and the practise of Government policy. While I accept that Government policy is being finalised, I hope both will be in concert.

I am sure the Minister will agree that the separation of EirGrid from the ESB is vital to competition. Is he confident that how it will take place is sufficient? I am worried that other independent operators trying to get into the Irish market do not have faith in it. As policy formulators, we must provide confidence and security so that they will feel there is separation between the grid and the generating capacity. Does the Minister think they should be separate? I think we will be merely messing about if we do not separate them completely. I urge the Minister to do the latter. During our deliberations in recent months, we have heard time and time again, including from Bord na Móna, that companies cannot get connected to the grid.

Bord na Móna has three turbines that it cannot have connected to the grid, which is just one example of the way competition is totally stifled. We have seen evidence of fossil generators which have skipped the queue. It may be stated that this is the responsibility of the CER. Members are accountable but we have a difficulty if the CER asserts that it is the responsibility of the Minister and if he indicates that it is the responsibility of the commission. It is necessary to clarify the areas of responsibility. The role of the committee is to obtain answers and have the issue clarified.

I tabled a parliamentary question on this subject and, in his reply, the Minister indicated that there was no need to review the functions of the CER. However, he alluded to the fact that deregulation has not been a tremendous success. The regulatory environment must play a part. I do not know if it is too late to include the CER in the Minister's review but I think it needs to be examined. AER 6 has failed and lead-in times for supplies are in excess of one year. However, the Department stated categorically that it is not interested in extending the time limits available, even though those involved had to deal with the moratorium. Would the Minister consider reversing that policy in the light of the security of supply and in the interests of long-term planning?

Does the Minister accept that the rates relating to the REFIT scheme are lower than the best new entrant prices for wind and that wind energy, through the PSO, is effectively subsidising the ESB?

I wish to make a point in respect of the single electricity market. The latter will not deal with competition and it will dilute the dominance of the ESB in a bigger market. The single electricity market will not facilitate true competition. Does the Minister believe that we should be connected to energy facilities in the UK and Europe? I do not know what ambitions the Minister has for the use of wind energy but the possibilities are certainly significant and we should be considering whether we can sell on such energy.

I do not expect the Minister to comment on what might be contained in the budget. Does he agree, however, that although the amendment to the 2004 Act is positive, by limiting what people could apply for we have not created the opportunity for the market to develop? Would it be in the long-term interests of dealing with emissions from the transport sector if we were to allow free rein, for a particular period, of excise free biofuel production? During my visits to biofuel producers, they raise the question of being allowed to provide as much of their products as possible. If this happened, the economies of scale would be much better, prices would come down and people would make the type of decisions at the forecourt that we want them to make. Once the market and the habits have been established, we would then be in a position to impose excise on it. We would not have to use fiscal measures to change practice. Does the Minister agree that it should be open and that the amount should not be limited?

Chairman

In light of the time constraints, we will bank the Deputy's questions.

Deputy Broughan

Is it not a remarkable failure of Government that the Minister is bringing forward a major policy statement towards the end of the of its term in office? This is in contrast to the position in the UK, where the Government published a fundamental policy statement in 2003 and has now brought forward another because conditions are changing so fast. Has the Minister been lethargic about this matter? I understand that he has three reviews under way but there seems to be no urgency in addressing these matters.

The Minister stated that the gas market is open. Is that the case? The Minister was due to make an announcement in the autumn but I do not recall that happening. There are competitors in the midlands but I do not remember an announcement being made.

On energy pricing, have the dramatic price increases of almost 50% for electricity in the lifetime of the Government been the result of the Minister's failure to design a regulation system that would have delivered more competitive markets? It is the poor who suffer. When the Minister mentioned the realities, he did not refer to energy poverty. Perhaps the Government will take steps to bring about changes. Is it not true that those on the lowest incomes suffer most severely because they pay the same price for electricity as the top cohort in society? Has the Minister failed to have this issue addressed by the Commission for Energy Regulation?

Should the CER have a role in the pricing of oil? Given recent increases in oil prices on the world energy markets, most of us feel that we are being ripped off at the pumps. I totally disagree with Deputy Fiona O'Malley. When one examines Irish markets, the reality is that there is grotesque gouging by companies. That is certainly the case as regards oil companies. Is it not time that the regulator should regulate all energy, not just electricity and gas?

Does the Minister agree that Mr. Paul Hunt is correct in his analysis of the recent increases in electricity and gas prices? Has the regulator failed to address significant elements of the asset costing by the ESB? What will happen in respect of marginal generators and the way in which it is alleged that they effectively determine market price in respect of the generation of electricity?

The Minister stated that it is not wise to leave decisions on critical issues solely to the market. I agree with him — and the Financial Times of Thursday, 1 December agreed with both of us — that the magic of markets will not solely determine secure and sustainable energy supplies. What impact will the Corrib gas pipeline have on our energy supplies? The Minister states that our increasing dependency on gas, particularly that which is imported, is very worrying. What will be the likely impact of the Corrib gas field? Has he any concerns about windfall profits that are made by generating companies which sell on the contracts they win and make huge profits? I refer here, for example, to the contract for a new generator at Tynagh.

My colleague raised the issue of AER and so on. In fiscal terms, will any further incentives be introduced in respect of wind energy? As regards the 2010 target, will wind energy enable us to effectively meet our commitment in respect of renewables? Will that commitment depend solely on wind energy?

Does the Minister have any views on the decentralisation of networks and the debacle relating to the grid code and the fact that difficulties in this area took so long to unravel? Is it the case that on one of those nice, calm November days, only 6 MW of energy was generated by wind? Will that be a serious problem if there is a failure to bring forward other renewable sources such as biomass?

The Minister was correct to stress the single electricity market. I commend him for the work he has done. I asked the Northern Ireland regulator if the implication of the single market is that we will eventually have a single regulator for the island and the up to 8,000 MW of electricity we generate. What is the Minister's view?

The Minister is taking responsibility for biofuels. At Deputy Eamon Ryan's very interesting climate forum, which the Green Party organised last night in the Mansion House, a speaker indicated that we use 150,000 litres of oil per second. He said that oil supplies may peak as early as 2008. If that is the case, is Deputy Fiona O'Malley not correct in stating that the Government must bring forward much more proactive, immediate measures to increase the use of biofuels?

Deputy F. O’Malley

Deputy Broughan interpreted my request for a review of the regulator as a request for its abolition. That is not the case. The word "review" does not mean abolition, it means to examine the workings of something.

Deputy N. Dempsey

Deputy Fiona O'Malley said that a single electricity market would, on its own, fulfil competition requirements and referred to the need for an interconnector to Europe. Deputy Broughan asked if we are moving in the direction of having a single regulator. While it is too early to say if there will be a single regulator, the initial stages of co-operation have required a significant process of co-ordination and synchronisation by the regulators on both parts of the island. It is possible that there will be a single regulator at some point in the future. I dealt with the notion of an interconnector from Europe earlier and stated that it is also essential to provide an east-west interconnector to provide real competition.

The Deputies asked the same question about biofuels in different ways. While I cannot say what will or will not be in the budget, it is no great secret that I did not consider the Finance Act 2004 provision which removed excise on biofuels to be extensive. The significant response we received to the provision was very encouraging and, as I reiterated earlier, I have been speaking to the Minister for Finance about it. The matter is in his hands at this stage.

AER 6 projects are extended, on a case-by-case basis, where developers show that the cause of a delay is outside their control. We make every effort to assist them in such circumstances. The question of best new entrant involves only a theoretical price. No one is moving at that price at present. REFIT prices are based on the provision of a reasonable return to developers who have a choice as to whether they wish to be involved. The prices are generally fair, as was the response we received to consultation. There were a number of issues that people wanted us to consider further and we have done so. While everybody would, if possible, like to obtain more money, there was no great level of dissatisfaction in the industry at the price level we put forward. We must strike a balance which is cognisant of the fact that the consumer pay, while also encouraging new entrants to the market.

The theory that renewables will reduce prices is based on the assumption that the best new entrant is the average price, which is not the case. We outsourced the figures on that to SCI, which assigned a special team to determine the best possible price to encourage investors. Connection to the grid is a matter for the CER. While there have been delays in the past, the level of complaints is reducing as more and more providers are gaining access. The major problem involves navigating the planning process, which can delay connections.

Deputy Broughan's comment that the term of office of the Government is nearly over is more wishful thinking. He said that we are only now bringing forward policy documents. However, that is not true. The current policy document pulls many other such documents together and, in some cases, updates policies. There have been several energy policy documents in recent years, including a sustainable energy green document, the all-island energy market consultation document, an energy research and development document, an energy 2020 document, the Deloitte & Touche review and a number of papers on the renewable energy sector. All of these will be brought together within one policy document that will be useful for everybody.

I acknowledge Deputy Broughan's point about fuel poverty, which is a serious issue that affects one in five people. I will certainly keep the matter to the fore in the context of any policy document that comes forward. I referred earlier to a sustained energy efficiency campaign within which we can consider and address the problems of people suffering from fuel poverty by reducing the cost to them to help provide them with a more comfortable and sustainable lifestyle.

I apologise.

Chairman

I apologise for interrupting the Minister. Did he lose his train of thought?

Deputy N. Dempsey

Senator Finucane

The Minister was quite right when he stated that liberalisation and deregulation of the market have not made much difference. It has made no difference to domestic consumers. The committee recently met group of industrialists who are high energy users and who were extremely critical of the cost of electricity and its long-term impact on their industries.

The Senator should give the proceedings a chance.

I had many questions to ask but I will not pose them today. Members look forward to re-engaging with the Minister, working to support the Oireachtas and adding value to the energy process. I will, due to fact that Deputies' presence is required in the Chamber, defer our consideration of correspondence until the next meeting.

The joint committee adjourned at 4.40 p.m. sine die.

JOINT COMMITTEE ON COMMUNICATIONS, MARINE AND NATURAL RESOURCES debate - Tuesday, 6 Dec 2005

Energy Policy Review: Presentations.

Professor Shimon Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Professor Awerbuch

Mr. Paul Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

Mr. Hunt

JOINT COMMITTEE ON COMMUNICATIONS, MARINE AND NATURAL RESOURCES debate -
Tuesday, 6 Dec 2005