We are pleased to be here on our first time to appear before this committee. Rather than having a long written text we decided to use a slideshow, and we will be quite happy to clarify points, if required, as we go along.
We are working within the confines of Government and EU policy, where there are three competing objectives of security, supply and competitiveness relating to the environment, all pulling in different directions. It is sometimes quite difficult to reconcile all of them. We have various statutory obligations which we must comply with in the financial area with respect to renewables, proportion of competition etc.
One of our duties is to examine ESB's costs every year and determine and approve its application for price increases or decreases. We have set out the price increases for the past few years in the documentation. In 2007, there has been quite a significant increase compared with previous years. There has also been a decrease in gas prices since 1 February.
In making up electricity prices, we consider three or four elements. There is the manufacturing of electricity and its generation, the high-voltage and low-voltage wires, as well as the business of supplying, building and reading meters. The generation component takes up over 70% of the cost, with nearly half of that cost being fuel. The final price of electricity is determined, to a large extent, by the cost of fuel. We rely by more than 90% on imported fuels, with 90% of our gas and all our coal and oil being imported.
Our only local resources are renewables, hydro energy and some peat. For gas, supply would make up nearly two thirds of the final price. We are fully exposed to the European and international markets for fuel. The mix in the last full year of statistics shows a large amount of gas, coal and oil.
How have events unfolded in recent years? The cost of wholesale gas on the international market tripled between September 2003 and September 2006. It is sold in British pence sterling per term, going from 18p to 53p. We all know how the price of oil has changed over the years. The price of coal has not changed so much but it has increased a little. In the past week or so, petrol prices have also increased.
We are exposed to all those prices and a graph in the documentation shows how the price has changed in the gas area up until the third quarter of last year. When we were doing the work for the 2007 tariffs, there was a sharp increase in January 2006. In the winter of 2005, our major concern was ensuring we would be able to get our hands on gas because there were forecasts in Britain that there would be a gas shortage. We had to ensure adequate supplies of gas coming through for households, industry and the power sector. It was a sudden and unexpected jump in 2006.
The prices we set in 2005 took no account of that throughout 2006, so prices were understated in that year as compared with wholesale prices. As we suggest prices once a year, we have a correction factor every year. It has come to people's attention that later in the year, the price of gas on the market in the UK has started to drop, unlike that of oil. It is now back to a price not too different from where it was in 2003. We have taken some account of that.
The Central Statistics Office has recently adjusted the inflation basket and although I have not seen the weightings of oil and gas, the total weighting for the two is around 2% in the basket. Their price would have some impact on inflation and were instrumental in some of the increases in the January figure. That is because the jump happens once a year rather than gradually over the year.
There are a number of principles which we would work with in determining these prices. We must have cost-reflective tariffs, in other words, the charge for electricity in a house is greater than the charge for a very large factory because the cost of supplying electricity and meeting the load put on the system is quite different.
If we decided unilaterally to refuse to allow the ESB and Bord Gáis to recover their legitimate costs, and we spend a long time assessing their costs — up to six months from about early April until we sign off, that would undermine other customers. We cannot just deny a price increase because we have duties to others in the market as well. If we do not give a price increase in one year, we must give it in another, and all types of distortions in the market are created. We must examine all these factors carefully and in doing so, we must comply with legislation stating we cannot discriminate improperly between various parties in the business.
Nearly all the large customers have moved away from the ESB. Almost all large industry is now supplied by independents not under the tariff regime we have struck for the ESB. There are still some remnant customers in that large sector of the market but the ESB only has approximately 30 customers left in that respect. Practically all that sector of the market has moved away from ESB.
We have also indicated that people cannot come back to ESB. We have removed the tariffs from that segment of the market, so it is now fully competitive. This has nothing to do with the tariff-setting regime we have.
What is the outlook for the future? We have commented on international fuel prices, with gas prices in the UK starting to fall from about October onwards. We had established an average price increase for electricity of about 20% but we knocked approximately 7% off that so when the price of electricity increase took effect in January, it was approximately 12.5% rather than 19.5%. We also have a 10% reduction in natural gas prices that took effect on 1 February. There is a winter-summer tariff that is particularly relevant to medium-sized enterprises that are still supplied by the ESB. Winter here is short and there is a higher price for the months of November, December, January and February. On 1 February, small and medium industries experienced a reduction of about 15% in the price of electricity compared with winter rates, depending on the type of load each consumer had. If fuel prices continue to fall throughout the year, we will see further reductions in tariffs.
The process only takes place once a year so there is a sudden jump and problem of lag when prices on the retail market here do not reflect world wholesale prices, whether they are higher or lower.
The Oireachtas has just passed a Bill on the single electricity market, SEM, and this is one of the ways we are trying to increase competition in the market. That Bill on an all-island market will soon be signed into law and will create a larger wholesale market where prices will be determined on a slightly different basis to how they are now.
We published a major paper two weeks ago on how the retail market will work in an all-island context which is intended to drive efficiencies and more competitive prices. Three months ago we negotiated an agreement with the ESB on its disposing of some 1,300 MW of its generation capacity to bring its market share down to 40% by 2010. We have ended tariff regulation for larger customers.
We are in the process of developing a second North-South interconnector to allow more capacity on the lines bringing electricity to markets North and South. We have also developed an east-west interconnector and both should be operational by early 2012. We await the Government's White Paper in the next week or two to see what it proposes in this area.
We must be aware of security of supply of high-quality electricity because this is especially important for industry. Despite price increases, there has been no diminution in growth of demand for electricity. In fact, the peak demand we must plan for this year grew by more than we anticipated. We expected it to rise by about 200 MW and it grew by 250 MW this winter. Even at that level of high demand the system was secure and electricity was supplied to all. The price increase appears to have had no effect.
In the medium term, to ensure this trend continues into the future, we have negotiated an agreement with the ESB whereby we can replace old, less reliable stations with new, cleaner stations. Growth in demand for electricity matches the growth in the economy almost exactly but the peak is growing higher than the average. The winter peak is higher when the economy is going steadily and much of this is driven by the Christmas lights people use that can add 100 MW to demand. Energy efficiency is an important issue, but our primary goal is to ensure there is enough generating capacity in the system.
Huntstown, just north of the airport, is the second station to be built by Viridian and it will be commissioned by September 2007. We have given the ESB and Bord Gáis permission to build stations in the Cork area and we hope and expect they will operational by the end of 2009. The programme of closures will be in effect by then with other stations opening as replacements. Mr. Tutty can talk more on wind energy, but in the meantime, a significant amount of wind energy, 760 MW, is on the system. We have just reopened the process on creating more wind energy and there is a further 1,300 MW ready for receipt of offers in the next six months.
It is all very well creating the electricity but we must ensure it is delivered securely and safely and is of a high quality. Only high tech industries are aware of electricity quality but it is, nonetheless, an important factor. We have approved large investments in the wire and networks business over the last five years continuing until 2010 that come to considerably in excess of €5 billion, which makes this the second largest capital programme after the roads programme. This has all happened quietly and great credit is due to all involved on getting it done so well. Security of supply is vital for industrial development in the country and we have been fortunate that we have had none of the blackouts that have occurred across Europe. Our system is one of the best around.
We have invested large amounts in the gas networks, although there is a greater requirement for electricity. The three power stations I mentioned will see the best part of €900 million of investment, and wind energy also costs about €1 million per megawatt.
Ireland is part of the British gas pricing system and the two interconnectors to the UK are fully open with no congestion. The price of the gas we buy is, effectively, determined in Britain and we must transport it here. Coal and oil are commodities traded around the world and the latter is traded in dollars and we are vulnerable to all of these prices. The corner has been turned on prices as Britain has new infrastructure in place that is a great help. We hope we will do better next time around.
We are trying to ensure the ESB purchases its fuel in the proper way. If it beats the index we set, we share it with the customers annually. We have a fuel price mechanism that tracks prices on world markets more closely and we have held consultations on this mechanism twice. The Irish Business and Employers Confederation, IBEC, on behalf of industry, rejected this idea on a number of occasions when prices were rising because it wanted more security for its members so that they could budget properly for running their businesses. When the price turned, IBEC said it was in favour of the mechanism and we have been working on the idea since. We will publish a paper in the next week or two on how such a mechanism might be applied to the gas business.
We are also considering seasonal time of day tariffs. Electricity is a complicated business and the price in the market varies every half hour. In the winter, stations are used that are not used during the summer. It is expensive to produce electricity at that time so during the winter peak, the price of electricity in the evening is very high. We are considering pricing on a seasonal basis and also on a daily basis. The cost of producing electricity on a summer's night is very low and the price of producing it on a winter's evening is very high.
We are looking at smart metering which involves electronic meters that can measure electricity consumed and can produce more sophisticated tariffs. This is similar to the Minister's Power of One campaign that seeks to have people use their dishwashers and washing machines at 8 p.m. or 9 p.m. when prices are lower and it is cheaper to produce electricity. We will publish a paper on this matter next week. An advantage is that the meters can read in two directions. They can also measure the power output from micro-generation in small windmills that people might want in their houses. We are examining the structure of tariffs to see if we can get people to change their behaviour and consume electricity more efficiently.
We are trying to balance all of these issues and are always conscious of price, quality of supply and continuity of supply. We are walking a narrow path trying to ensure we get this right and are keen to see that the price of electricity reflects real time. Electricity is a real-time business, the wholesale price changes every half hour, yet the tariff we offer the customer changes only once a year so this gives rise to lags, complications and adjustments. We would like to do this on a real-time basis that follows world prices.
