Joint Committee on Environment and Climate Action debate -
Tuesday, 18 Apr 2023

Pre-Legislative Scrutiny of the General Scheme of the Energy (Windfall Gains in the Energy Sector) Bill 2023

An Cathaoirleach

I received apologies from Deputy Whitmore.

The purpose of this morning's meeting is to undertake pre-legislative scrutiny of the general scheme of the Energy (Windfall Gains in the Energy Sector) Bill 2023. The meeting today will be split into two sessions: the first from 11 a.m. to 12.30 p.m. with the representative from the European Commission; and the second from 12.30 p.m. until 2 p.m. with officials from the Department of the Environment, Climate and Communications.

On behalf of the committee, I welcome Ms Catharina Sikow-Magny, who is the director of the green transition and energy systems. I presume Ms Sikow-Magny is joining us from her office in Brussels and I welcome her this morning.

Before we begin, I will read out the note on privilege. I remind our guests of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. If their statements are potentially defamatory in respect of an identifiable person or entity, I will direct them to discontinue their remarks, and it is imperative they comply with any such direction.

For our witness today who is attending remotely from Brussels, there are limitations to parliamentary privilege as she is not on the Leinster House complex.

As such, she may not benefit from the same level of immunity from legal proceedings as a witness physically present on the campus does.

Members of the committee are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I remind those members joining us online that they are allowed to participate in the meeting only if they are physically located in the Leinster House complex, so I ask that they confirm that they are in the complex before making their contributions.

I go now to Ms Sikow-Magny for her opening statement.

Ms Catharina Sikow-Magny

I am very pleased and honoured to be here with members at this hearing. I will provide some background to our proposal, on which the discussion will then be based. The Commission has been closely following, ever since 2021, the situation of prices in the energy market, the electricity market in particular, and we quickly saw that the situation was leading to difficulties for our households and companies. The Commission therefore took rapid action on many fronts, and I will briefly cover them all because all together they form a package within which each individual element then fits.

First of all, our main concern in making these many proposals was to ensure that we would not see different and unco-ordinated national measures that could negatively affect security of supply in neighbouring countries or undermine the good functioning of the Internal Market. Therefore, we started providing measures for member states to consider from autumn 2021. In October we proposed an energy prices toolbox, which provided guidance to member states as to how they could tackle the sharply increasing energy prices and protect their consumers and companies. Later, in May 2022, which was then already a few months after Russia had attacked Ukraine and cut off gas to many member states, we proposed the REPowerEU plan, which considered how we might phase out and then cope without Russian gas in our energy mix and in electricity production. In order to ensure co-ordinated action by member states, the Commission proposed a number of emergency measures on various aspects, which I will now go through briefly.

To alleviate energy prices last winter and to ensure energy supply without triggering increased use of gas, which we were lacking, especially in continental Europe, the revised gas storage regulation, together with the gas demand reduction regulation, was adopted in record time in July 2022. As a result, we reached our objective and successfully reduced gas consumption by 15% last winter. We are on track this spring for the gas storage filling obligations. These measures contributed also to the electricity price situation by ensuring less pressure there. In September of last year, however, the Commission proposed emergency measures to reduce electricity demand and to mitigate high electricity prices with a cap on market revenues from inframarginal technologies that were, including in the situation we had last winter, earning extraordinary revenues that had not been part of their business cases when deciding to invest in these inframarginal technologies. In addition, we included in that proposal or law a solidarity contribution on excess profits from the oil, gas, coal and refinery sectors, which had also benefited from the extraordinarily high prices in the fossil fuel sectors. The regulation requires the redistribution of the revenues of these two elements. The first one was to final consumers to make sure that those who pay the high prices get compensated for them, while the latter, in addition to providing support to consumers, especially vulnerable ones, could also be used on demand reduction measures or investments in phasing out fossil gas from Russia. This proposal was rapidly adopted so entered into force in October of last year. In addition, there was a requirement for member states to reduce electricity demand by 10% overall and by 5% for peak demand, this with the objective not only of reducing demand for and consumption of gas, which we were lacking, but also of cutting demand at peak times, which would also bring prices down considerably for electricity consumers.

In addition to these measures, we know that the permanent way of coping in the situation would be to have more renewables in the energy mix. Therefore, we have also proposed, as a crisis measure and later taken up in the renewables directive, measures to speed up permissions considerably in order that investors can have their investments rapidly implemented and, complementarily, measures to facilitate the state aid treatment through a temporary prices framework adopted in 2022 in order that member states can provide rapid relief to struggling companies and to help accelerate the roll-out of renewable energy. All these measures that have been taken in the course of the past 12 to 18 months have the same impact, the same objective, that is, to allow our member states to cope without Russian gas and to cope with the situation where gas prices are very high and then having an impact on electricity prices as well, in the crisis term, so temporarily, but also in a more structural way through more renewables in the mix.

The last point I will make, if the Cathaoirleach will allow me, is about the proposal we made in March to review or to revise the electricity market design, whereby we have brought some of the elements of the temporary crisis measures into a structural proposal, including, for instance, relying more on long-term prices through long-term contracts and better hedging tools for forward markets. That would reduce volatility in any future crisis, whereby we also then make it possible for member states to regulate retail prices in a well-defined crisis situation, therefore helping consumers, be they households or companies or SMEs, to cope with future price situations. Also in that proposal is what we learned from member states' practice in the crisis, a possibility for transmission system operators to, if desired, purchase demand response or consumption, lowering consumption, if the situation gets to very high prices, through a big saving tool.

These are the structural measures that are currently in negotiation between the European Parliament and the Council. We hope they will be rapidly adopted, ideally in order that we would have them implemented before next winter, in case they are needed.

I look forward to answering any questions members may have.

An Cathaoirleach

I thank Ms Sikow-Magny for her opening statement. I call members to ask questions.

Deputy Darren O'Rourke

Have price caps and windfall or solidarity taxes been provided for since October 2021 and have a number of member states moved in that regard? If that is the case, why has there been a delay in the EU moving as a whole?

What is the reason for the difference in approach to the temporary solidarity contribution versus the cap on market revenue? We are particularly conscious in this State that the cap on market revenue applies for a far more limited period. I would argue that we have missed a very significant period, for example, last September, where renewables companies made exorbitant revenues. Is there an opportunity for retrospective application of the cap on market revenues? I note countries such as Belgium seem to be applying it as a tax and running it back to last June while France is taking the same approach and running it back to last July. Is there a process for member states to seek an extension, prospectively or retrospectively, for the application of these measures? Can they go beyond the end of June or prior to the beginning of December?

Ms Catharina Sikow-Magny

Why did we make our proposal after 2021 when prices were already being seen to increase, especially after Asia caught up after the Covid lockdown? In 2021, we were still in a situation where the Russian attack on Ukraine was not foreseen in most member states, where gas was flowing normally from Russia and we were not in a crisis. We were perhaps approaching a difficult situation but one considered to be a normal economic situation after the Covid lockdown moving into more demand for liquefied natural gas, LNG, and gas, which then had an impact on prices on the EU side and on electricity.

I think the Deputy was referring to a measure in place in the Iberian peninsula where there is a support scheme whereby there is a levy on electricity consumers that is then used to lower the price of gas that goes to electricity production. We obviously studied that one as well as any other idea that came from any member state. Applying a measure such as that in the Iberian peninsula, which is relatively isolated from the rest of the Continent because of lack of infrastructure interconnection capacity, across the EU would have led to a considerable increase in gas demand. I remind the committee that, after the Russian attack on Ukraine, we were short of gas so it would have created a very difficult situation in terms of supply.

If the EU as a whole subsidised the price of gas in a similar way, we would have seen a lot of gas flowing to countries neighbouring the EU at subsidised prices so it would have been very costly to the EU overall. This is why we spent time analysing and assessing different schemes to find a scheme that would work best for the entire EU with the aim of having an impact on consumer prices and having the certainty that we would not create a surge of demand for gas that we did not have at the time.

On the question of retrospective application, the application of the regulation can only be from the date it entered into force, which was October 2022. As the Deputy rightly mentioned, those member states that do apply measures before that time apply taxation measures. They do not apply the regulation as it is. Taxation is a member state competence and member states may indeed decide on taxation themselves. If we were to propose taxation measures alongside the regulation that is now in place, we would need to look carefully at how they work together for the measure to work properly.

Regarding a possible extension of the regulation, the Commission is requested under the regulation to report by the end of the month on how it has worked and whether we propose to extend it. We will report a bit later than the end of this month. I would say we would report by mid-May at the latest simply because the input data we needed to receive from member states did not arrive on time by the end of January. That report is being finalised and we will report very rapidly to member states on our proposed way forward. Unfortunately, I obviously cannot tell the Deputy more than that because we are still in internal discussion and the decision-making process, but the report will be on the table of the Council around mid-May when member states can and will discuss it.

Deputy Bríd Smith

One thing jumps out at me regarding not just the EU situation but the global situation on energy and the profiteering that has taken place. It is clear the profiteering started before the war in Ukraine. Profit margins in some fossil fuel industries increased by 64%. The money from this price gouging must be taken and given back to people who are suffering, because we see people suffering as a direct result of how the market has worked, particularly the anomaly whereby aspects of the market like wind energy and nuclear energy can gain a huge amount of profit on the back of the competition for fossil fuels.

That said, they are all making vast profits. I would like to ask the director about what she is calling the solidarity contribution. We call it a windfall profit tax. Would she agree that this should be expanded to include other companies in other sectors like tech, pharmaceuticals and agrifood that engaged in massive profiteering during the pandemic and since? There has been massive inflation in these sectors and the companies involved should also be paying a return on their windfall profits to society.

There is a crazy situation that the market has thrown up, an anomaly whereby nuclear, wind and solar energy companies that have incurred absolutely no extra costs are profiteering massively because of the way the market structure is set up. Would the director agree that deregulation and the privatised nature of the energy sector has led to this massive price gouging? We can see 20 years on that deregulation has been a major mistake. I would like to hear the EU's opinion on that. I know Ms Sikow-Magny is not going say the EU made a huge mistake there and is going to rectify it immediately. Perhaps she could give us some critique on why the deregulation of the market has led us to where we are and how we may be seeing some countries trying to return to controlling the energy market.

I have a technical question on the proposal. Why is it seeking only a 75% tax on the excess profits? Why not 100%? They are vastly excessive, over and above what was being made. I also want to ask about the losses that can and cannot be taken into account when calculating what is called the temporary solidarity contribution. The description in the heads of the Bill states that losses outside the period 2018 to 2023 cannot be carried forward or back, group relief will not be included, and capital expenditure in the period 2018 to 2023 will not be deductible. However, it goes on to suggest that losses and capital expenditure for the years 2018 to 2021, inclusive, will be taken into account. Can the director clarify the position? Will the structure allow losses to be taken into account for the previous years, 2018 to 2021 in particular, before these windfall profits were being made? I could be reading it wrong but for us there seems to be a contradiction in terms of the heads of the Bill.

I emphasise that I would like to hear the director's opinion on the deregulated nature of the market across the EU.

Ms Catharina Sikow-Magny

We certainly agree that the revenues collected by means of either of the measures should go back to help those who are suffering as a result of the high prices, be it households or certain companies, in particular SMEs and vulnerable households.

On the question of the solidarity contribution and its application to the sectors we have mentioned in the law, namely the fossil sectors, we have proposed a law which is addressing the problem at the root these high prices stem from within the energy sector. They stem from fossils, particularly gas, which then also had impact on coal and oil and subsequently on electricity. Given the exceptional situation the measure is addressing, we did not propose and have not considered expanding it to other sectors like pharma and the ones the Deputy mentioned. We have to keep in mind that this is a solidarity contribution in a very exceptional situation that is coming from the energy sector and from the fossil fuel part of that sector, stemming also from the Russian war in Ukraine. If a member state wants to apply a different taxation policy, taxation being a national competence, it is obviously something that a member state may wish to consider in line with the general rules that may be applicable there.

On the question of the level of the excess profit and the figure of 75%, this is not an exact science in determining the excess revenues that those companies received. That is why we also have the different rules on the average of the past five years, how we propose to take into account possible losses during those years. This is not an exact science in the sense that we would go into every detail and every year of a company's books. The figure of 75% also gives the benefit of the doubt to the companies that we are not over-recovering the extra profits they made during 2022 or 2023.

On the electricity markets, renewables and nuclear, our market is based very much on the short-term markets, day-ahead market and intraday markets. It has actually worked quite well during the crisis and worked even better before the crisis. Here I would want to give some examples. The high prices do not only reflect production costs, although production costs obviously were very high for gas-produced electricity. The high prices also reflect scarcity in the market. In the course of 2022, we lost a big part of our gas supply, a large proportion of which is used for electricity production, creating significant scarcity. In addition, half of French nuclear reactors were in maintenance and were not producing as usual. The year was extremely dry in the Iberian peninsula and in the very north, so the hydro power that normally one can rely on was not coming on-stream, meaning we had significant scarcities in the electricity sector as well. Yet the market worked. There was electricity everywhere in the EU despite these difficulties. France, which in the past has been one of the important exporting countries, became an importing country. Had the high prices not been there as an indicator that France needed to import electricity, we could have had a situation of not having electricity all the time as we had this winter. The market has worked well in providing electricity to where it is needed from where it is produced. However, and this is something we have taken up in the electricity market design proposal that was tabled a month ago, this short-term market, the day-ahead and intraday markets, needs to be complemented by longer-term price signals. This is where we have also looked at member state practices. Member states in the Nordic markets, for instance, have 80% even in some of them in long-term markets where electricity is sold ahead for three years or even longer on a stable price.

This is what we have proposed in the electricity market design, to bring these long-term price signals to the whole EU, through these public private purchase agreements between private operators. So for those that produce and those that consume electricity, a Government backed contract for difference but also determining a strike price and if the market price goes above it, then that would be returned to consumers. There would also be a better possibility to protect one's price through hedging. We also propose to have these hedging markets, which today are liquid only in the Nordic market and in Germany. We also propose to make these Europe wide so that companies can have their price protected whether they sell or buy electricity, and not only companies but households through their suppliers.

We would say that the market has worked well. It has ensured a secure supply and the best prices even if they were very high in a situation of extreme scarcity like last winter. Indeed, we need to create a long-term price signal. In addition, there are measures whereby we also require member states to better protect consumers by, for instance, making sure that consumers can have access to longer-term fixed-price contracts not only dynamic contracts. That would mean consumers would have a choice according to their consumption and risk perception. In every member state there shall also be a supplier of last resort in case suppliers leave the market. Again, in a crisis situation, member states would be allowed to regulate retail prices, if prices become extremely high and consumers cannot afford to pay.

On the Deputy's questions on the losses and capital expenditure, I will need to come back to her separately as I will need to dig into the details. I apologise for that.

Deputy Bríd Smith

I thank Ms Sikow-Magny. It is an important details because, to me, it looks like companies may be able to offset paying the solidarity tax against losses, even though it states that companies should not be able to do so. I believe that the Heads of the Bill are contradictory. I think the definition of a market working is very limited because it works in terms of supply but at the same time probably millions of people suffered under the strain of very heavy energy prices while profits went through the roof. To me, all of that means that the market is not working.

Senator Timmy Dooley

I thank Ms Sikow-Magny for her contribution. In terms of where the market is at, we understand that the wholesale price of gas is at a pre-war level and yet consumers and businesses here pay significantly higher prices for electricity. To some extent, electricity suppliers make the argument that they had hedged their positions but my understanding is that a lot of that is washed through now. Would Ms Sikow-Magny like to comment on that?

The proposals regarding the Common Agricultural Policy, CAP, that are due to be implemented in Ireland make a differentiation between technologies, so wind and solar are to be capped at €120 per MWh and yet pump storage and hydro are to be capped separately at €180 per MWh. They are all renewables. Both pump storage and hydro are already supported. It is my understanding that they are already supported through the capacity element of the market. Obviously solar and wind do not get support. Does Ms Sikow-Magny have a view on the way in which we are implementing, or propose to implement, this directive in terms of not making it technology neutral?

Ms Catharina Sikow-Magny

The situation with the gas market is much better than it was last winter and prices are returning to normal. Obviously that should be reflected in the electricity market whereby electricity is produced by gas. In order to judge the price of electricity and what is happening there, one would need to know whether there are scarcities in the electricity market. For example, as I referred to in my earlier reply, half of French nuclear reactors are an important scarcity element that, independently of the gas price, would have considerably increased electricity prices. Scarcity is something one would need to consider.

On the question of hedging, we have addressed the matter in the proposed design of the electricity market. Today, depending on the market, hedging may be possible for one year but very often there is not enough liquidity so, in practice, it will not be possible to have hedging for two years, three years or longer. This is what our new proposal addresses. We are making sure one can hedge up to three years at least. The demand seems to be up to three years, so we are looking into that.

As the Senator mentioned, one would need to look at the situation in Ireland. Was gas purchased before the market price reduced? What are the liabilities for those who bought it and use it for electricity? Are there inherent electricity scarcity issues that could lead to higher prices in electricity? How does the hedging market works and is short term and not long term enough for the demand?

On the revenue cap for the technologies, our initial proposal had only the one number of €180 per MWh for all the inframarginal technologies. In the discussions with member states and the Council, the decision then was to allow member states, according to their assessment of need, to have a technology-specific approach and thus a lower cap than €180 per MWh. Therefore, we believe member states are best placed to assess what is best for their production mix and future investments. It is then about how to incentivise them and what works best in the context of the markets of the member states.

Our proposal focuses on the inframarginal technologies. For instance with for hydro, it concerns free flowing rivers. If hydro power can involve the pumping of water so that it can be used whenever one decides to use it, then that production is not inframarginal but becomes marginal. The same can possibly apply to certain storages. One would need to be very careful with the incentives for getting marginal technologies to the market. One would not want these not to produce when prices are very high but would want them to produce when prices are high in order to reduce prices.

Senator Timmy Dooley

On the price caps that will be imposed in respect of certain technologies, particularly that relating to onshore wind, when smaller community groups are producing this type of energy, is there any capacity within the regulation that would allow the cap to be set at a higher level for such community-owned facilities? I understand this is the case in the UK, but, for obvious reasons, that country is obviously not subject to the regulation. Is there any capacity to allow for community-owned wind farms to be treated somewhat differently from those larger entities that are part of the much bigger conglomerates which are already benefiting from economies of scale and capacity payments through other sides of their business?

Ms Catharina Sikow-Magny

In the regulation, we do not differentiate the type of wind generation along these lines. A question for Ireland to consider might be if the community-owned wind parks are on the market or are they producing energy for the self-consumption of the communities that own them. I say this be because if it is a case of self-consumption-----

Senator Timmy Dooley

No, they are effectively price takers in the context of the grid.

Ms Catharina Sikow-Magny

Okay. In principle, then, if their price is above the set limit, €125 if I understood this aspect correctly, then normally they are subject to the-----

Senator Timmy Dooley

Does the member state have flexibility to differentiate between community-owned electricity generators and larger conglomerates?

Ms Catharina Sikow-Magny

I do not recall that possibility being explicitly in the regulation. It is generic in the sense that it is meant to cover all situations in the EU as a whole.

Senator Timmy Dooley

Okay

Ms Catharina Sikow-Magny

If, however, there is a very good justification and it is possible to show that the fixed costs of investment can be covered by a differentiated approach, then I would think the Commission would not create problems in that respect.

Senator Timmy Dooley

I thank Ms Sikow-Magny very much.

An Cathaoirleach

Were there some other questions or did Ms Sikow-Magny answer them all?

Senator Timmy Dooley

The director got all of them. I thank her very much.

An Cathaoirleach

I call Deputy Bruton.

Deputy Richard Bruton

I thank the director for her presentation and insight into the way the market works. I would be interested to know if there is a schedule of what the other member states are applying in respect of the solidarity rate of 75%. This can vary between member states. I also refer to the rates that are applied under the price cap for renewables.

We are all very focused on the transition to net zero in the long term. Has the EU experienced any nervousness about sanctioning increases in gas supply and subsidies for fuel use? Many academics in the field say we should be avoiding instituting any new fossil fuel capacity and subsidies that could be construed as supporting fossil fuel consumption. How were those types of longer-term issues factored into the short-term decisions that had to be made?

Turning to the move away from marginal cost pricing in the market as the dominant daily way of setting prices in favour of setting longer-term contracts, are many member states locked into contracts that do not allow for things like clawbacks by states when prices rise? Contracts for difference seem to be envisaged, but what happens if existing contracts do not include such clauses? Will a problem be created in this regard concerning locking in supernormal profits? Equally, will this new approach change the way in which auctions for new renewable capacity are set? Do we need new rules for auctions? We have these every so many months to bring in new capacity. Do we need to be considering something new in this regard?

Regarding the role played by prices, the director said high prices were needed to clear the market without interruption during the last winter, which is acknowledged, but how much of that was undertaken by simply restraining demand and not allowing people to use energy because the price was so high? Alternatively, was a great deal of new capacity brought into the market to substitute for the gas that was lost? The capacity of solar, other renewables and even nuclear energy sources is pretty finite. It is not possible to respond with that capacity in the space of six months to scarcity in the market. I would like to understand how this market clearing worked during the last winter. Was it undertaken solely through restraint or was there a lot of innovation in how the demand for electricity supply was met?

Ms Catharina Sikow-Magny

I thank the Deputy for the questions. We have received from most member states - I think we are only missing two - reports on how they have implemented the regulation. Regarding the revenue gap demand reduction and retail prices, we will report around mid-May, as I mentioned. For the solidarity contribution, the reporting time will obviously be later. We have received from member states their indication regarding how they intend to implement that part of the proposal. As we are bound by the tax year, however, the reporting in that regard will follow later. This also explains the difference in terms of the application of the two measures.

I wish to highlight that what I call the €180-per-megawatt-hour cap for short, acknowledging that member states have implemented it somewhat differently and used different technologies, has not been applicable since a few days after its application. This is good news because electricity prices have turned downwards and in many places are approaching the prewar prices. I heard, though, what an earlier member mentioned about the situation in Ireland.

When we took these measures in the crisis situation we did indeed keep in mind the longer term and the need to decarbonise. This is why I also briefly referred to the other proposals the Commission made, including, for example, REPowerEU, which puts a strong emphasis on getting renewables in place rapidly. I refer to rapid investment in this regard and the provisions we proposed for permitting to speed up investment in renewables, energy efficiency measures and the rest. Those are the permanent solutions to lacking Russian gas supplies in the first place, and then clearly moving more rapidly towards net zero overall.

The energy and climate policy has several objectives, however, and one of them is clearly the decarbonisation aspect to which I just referred. Another important objective, though, is having a secure supply and ensuring we have electricity and heating at all times. This aspect had to be taken into account too. The third element is affordability and trying to bring electricity to the market at the lowest cost, given the circumstances.

The Deputy asked about the move away from marginal cost pricing. Marginal cost pricing will remain in the short-term market. That is in the day-ahead and intra-day markets, which are the last moments to make sure supply matches demand and we are not suddenly lacking electricity. That is where the price signal is extremely important. If there is not enough wind, for example, we then get alternative sources, be they from production or demand response, into play. The long-term price signal and the long-term contracts are an important and necessary complement for these short-term markets. They give price stability and predictability.

We made a proposal to make the two-way contract for difference an obligation for member states when public support is needed for renewables. I reiterate that there are a lot of renewables currently implemented without public support and that will obviously remain an important source of investments. However, when public support is needed, we obligate member states to go for a two-way contract for difference, and the reason for that is very simple, as Deputy Bruton said. However, this is not the current practice in all member states. We still see situations whereby there is a premium on top of the market price and it is clear what this meant for prices at the peak of the crisis. If member states have signed up to support schemes with renewable producers, those contracts obviously need to be complied with. They are contracts and retroactivity in renewable contracts, for instance, is forbidden by the renewables directive. There is indeed a possibility that some member states will be locked in to contracts that were made in the past.

On the question of auctions, the contract for difference we then promote must be based on commercial ways, where an auction is the best way to organise it. The rules for auctions will remain, except for the contract type, for describing how the two-way contract for difference is to be implemented and how producers are expected to respond to that. With the two-way contract, to determine the strike price, member states may also wish to have a price corridor to keep a little bit of price risk for the producer.

On the role of the price in the context of high prices, we have to keep in mind that, with electricity, the price varies, depending on the market, every half an hour. It depends on the supply and on when the sun sets, for example, with solar power. The price varies a lot depending on supply and demand. Demand also varies a lot during the day. The answer to how the market cleared comes from many sources. In the highest peaks, there was demand reduction. Sometimes it was demand reduction by householders who decided they would switch off their heating for a while, for example. There was also demand reduction by companies. In many member states, big consumers of electricity have contracts whereby they reduce their demand if the market situation requires that and, typically, member states slightly lower prices overall as a compensation for this flexibility. However, demand reduction overall was less than would have been expected. The figures we have seen from member states, which will be included in our report around mid-May, show reductions of between 5% and 10%. Many member states are in the order of 7%. Whether it is demand reduction because of the very high price or demand reduction by companies which have contracts under which they offer flexibility, it varies from member state to member state so it is difficult for us to say exactly what is going on. At the same time, there has also been capacity coming on to the market. We have strategic reserves in member states, which means there is capacity there if things go wrong. This was brought on to the market because of the high prices and the crisis situation. Thus, in terms of capacity, strategic reserves played a role in some member states.

Many renewables came on stream and many households also speeded up considerably their installation of solar panels and heat pumps. There was more supply thanks to the speeding up of investments that many would have delayed or not made at all. This is especially true of households. The number of solar panels and heat pumps installed increased dramatically during the crisis, which allowed consumers and households to benefit from lower prices. Many different ways of addressing the high prices have been in play in all member states.

Senator Alice-Mary Higgins

I thank the director for her presentation and for the discussion thus far. We are in the process of examining the approach Ireland takes to implementing these measures. The director said that the Commission has had indications from member states of the approaches they intend to take and it would be very useful to get a sense of the approach that others are taking.

Deputy Smith highlighted a very pressing issue and it would be good to get a written response on it, namely, what capital gets written off and excluded. We want to make sure this is an effective contributory measure. Will the director comment on the implementation of this measure because that gives us a comparator with other countries? How normal is it in other countries to have royalties and effective tax, for example? Ireland has had an effective tax rate for fossil fuel companies of about 0%. We have quotes from some of the major companies that will be affected, like Vermilion Energy and others, that they do not expect to pay taxes for the foreseeable future. That was said back in 2017 and was based on extraordinarily generous measures that allowed them to write off very substantial profits as losses. In the case of Ireland, some of these companies have not been paying tax for many years. How normal is it to have fossil fuel companies paying 0% tax and 0% royalties, in advance of this new solidarity contribution measure being introduced? That is going to be very important in terms of the decisions we take on exactly how we bring it forward.

Again, because it is a solidarity contribution, we want to ensure something substantial is contributed.

I will move to the other part of that, which is that, as I understand it, the EU measure calls for targeted distributive measures. Will Ms Sikow-Magny comment on some of the approaches countries are taking in terms of the targeting of the revenue that is raised? I know it is for households and companies, but given it is framed as an emergency measure and there is a solidarity contribution, are measures being taken by countries to ensure it is for companies that have need of it and not, for example, large companies that have increased their profits during recent years or during the crisis? We know there are companies whose profits have gone up, and not just fossil fuel companies because, for example, some other sectors had increases in profits during Covid. In terms of that targeting measure which is recommended by the directive, Ms Sikow-Magny might outline her thoughts on how that is approached.

I am particularly looking at households. It struck me that in Ms Sikow-Magny's last response on demand reduction, households were being pushed into demand reduction because of the high prices, whereas it seems companies were being paid to reduce demand, so there is even an unfair treatment and measure in that regard. One of the things we are looking at in Ireland, which we need to look at, is the question that we might need demand response measures that are mandatory as well as demand reduction as a market in itself. That would include more concrete measures so we can ensure that when there is an urgent need for demand reduction, it is not primarily falling on households who may, in fact, be taking risks with their health. Perhaps Ms Sikow-Magny would comment on that targeting piece.

I have two other questions that are slightly wider. First, we know a case is being taken against the solidarity contribution by Exxon Mobil, and I believe Vermilion is also part of that case. In regard to those issues, Ms Sikow-Magny probably cannot comment in much detail on a legal case that is under way. However, it speaks to the wider issue, which is that, last February, the European Commission recommended there would be an EU exit from the Energy Charter Treaty to ensure we are not continuing to have this kind of vulnerability. The articles I have read quote the point that it is clearly incompatible with our climate goals, but we are now also seeing the danger of the Energy Charter Treaty in terms of both our climate goals and our collective EU social cohesion goals that are being reflected here in terms of good energy policy in general. At a time when the Commission is taking a more active role and coming up with new active approaches to the energy market, how important is it that both the Commission and the countries are able to come forward with policies without the chilling effect or lock-in effect of the Energy Charter Treaty?

I have two final points.

An Cathaoirleach

I am sorry, Senator. We are way over time.

Senator Alice-Mary Higgins

I will be very brief. I do not think there will be a second round of questions. Given the human rights and other implications are why we are pulling away from Russian gas, and rightly so, there is a concern around the memorandum of understanding, MoU, that was signed with Israel and Egypt, which did not make clear that would not include gas from the occupied territories. I point to the importance of that. Will Ms Sikow-Magny comment on the approach the Commission is going to take in terms of the fossil fuel non-proliferation treaty which the Parliament has supported?

An Cathaoirleach

There are a lot of questions there and I want to give our guest time to answer. I also want to give Senator Boylan a chance to come in before we finish at 12.30 p.m. I call Ms Sikow-Magny.

Ms Catharina Sikow-Magny

Many thanks for the questions. Member states have taken different approaches when implementing the regulation, and it would take too much time to go through those examples now. Some of the measures are still being implemented, especially the part on the solidarity contribution, which is still being implemented in many member states because of the tax year there. Therefore, we do not necessarily have the information on those to hand at this point. I am happy to come back with a written response on the capital questions, so I will leave that for later.

On the question of the solidarity contribution and the situation in member states on the effective tax, my first comment is that part of the regulation will not apply to all member states because not all member states have such activities in their territory, so it is already geographically rather limited in terms of application. One of the reasons it was proposed as a solidarity contribution and not as a taxation measure is to make sure that, in this exceptional situation where prices were higher and profits were extraordinarily high, member states could claw back these not normal but extraordinary profits and help consumers with those revenues. That is why we did not propose it as a taxation measure, because it would have interfered in a very complex manner with member states’ schemes as they are currently in place.

I may need to clarify a point on households versus companies. I am sorry; I may have been cutting corners a bit in that regard. Obviously, where companies already have contracts whereby they offer collective flexibility to the market, thereby reducing their consumption when needed because of the scarcity situation in the market, these are contracts that have already existed for many years and sometimes decades. They are typically big, energy-intensive companies that can ramp up and ramp down their production when required to do so. All of the rest, and that is the large majority of companies and households, do not yet have this possibility. We expect that possibility to be offered also in future to all households through the suppliers in the market design proposal, through the big saving product, and possibly for the flexibility products through demand response and storage. In addition to households, many companies, especially the smaller ones, were faced with high prices in the market. That is why we have put a lot of emphasis that the benefit of the two measures - the revenue cap measure and the revenues therefrom and the solidarity measure and the revenues therefrom - should go to households and especially to small and medium-size companies that do not yet have this possibility to offer flexibility to the market.

On the question of the Energy Charter Treaty, it is a little beyond the topic of today, but we have certainly already seen many member states that have withdrawn from the treaty, and the Commission is also doing that for the EU. That concerns the question of the content of the charter. Our main aim initially was to reform the Energy Community Treaty and that would have been our preferred option, but as that was not forthcoming as rapidly as we wanted, other decisions have been taken on that front.

On the Senator’s last question, it is not for me to comment on that today. Sorry for that.

Senator Alice-Mary Higgins

There was a question on the MoU.

An Cathaoirleach

If there is a few minutes later, I will bring the Senator back in. I call Senator Boylan.

Senator Lynn Boylan

I thank Ms Sikow-Magny. Many of the questions have been answered, so I might just ask her to tease out some of the issues.

Ms Sikow-Magny mentioned a revenue cap on wind projects. What will be the mechanism for auditing that? Will the energy owners have to report back to EU member states? Will there be any sanctions if they do not report? How exactly will that work?

In her opening statement, Ms Sikow-Magny mentioned demand reduction. The EU had a 15% demand reduction target and she does not want any scheme to have a negative impact in respect of demand for gas. Does she have concerns that Ireland signed up for 15% voluntary reduction in gas demand but actually came no where close to reaching that – I think it was 0.3%? Does she have concerns about how we are implementing that agreement to reduce our overall demand on gas?

Ms Catharina Sikow-Magny

I thank the Senator for her questions. On the implementation and monitoring of the revenue cap, that is something we consider is best placed for member states. The aim of the measure is to provide the member state with revenues that it can then use to support its consumers. Therefore, we will not, from the Commission perspective, get into monitoring what has taken place in member states. That is the member state’s responsibility and the possibility is given to it to help its consumers in the difficult situation that we saw last winter.

On the gas demand reduction target, we are certainly looking at each member state and its specific situation and whether there is no possibility for a member state to reduce gas consumption. On the other hand, if a member state has access to gas, because that is also one element where not every member state had access to the gas it normally consumed, this will be taken into account. If the gas consumption is essential in Ireland to be able to produce the electricity and heating that its consumers and businesses need, I am sure that we will take that into account when looking at how member states are complying with the measure. It will be looking at each member state and its specific situation, and taking that into account.

Senator Lynn Boylan

To follow up on that, one of our big concerns is the increasing number of data centres that are applying for gas connections and that they will be islanded data centres. That is what is leading to the main increase in gas demand – it is new customers, so to speak, coming on. We have agreed to this 15% gas demand reduction but we are actually going in the opposite direction.

Ms Catharina Sikow-Magny

I see. It is something to be looked into in the future as well.

Senator Alice-Mary Higgins

Ms Sikow-Magny said she cannot comment on the non-proliferation treaty now. I refer to the memorandum of understanding, MoU, with Israel and Egypt and the concern that it was one of the first such MoUs that did not specifically exclude the risk of gas from occupied territories. We should be consistent because all of this is starting from the principle that the Russian invasion and occupation of Ukraine means that we are not taking Russian gas. In that context, I raise the importance of following through and being consistent on the human rights principles.

On the taxonomy, we have seen how volatile gas is. Is there any regret or potential to revise the question of including gas within the EU taxonomy, given that the EU is clear now we need actual renewable investment to be prioritised? There is a danger of the two-way signal mechanism, for example, potentially applied to gas producers as well so that we are locking in a commitment on pricing to gas producers for the longer term when it is an area we need to move away from.

Ms Catharina Sikow-Magny

On the MoU, I must admit that I would need to look into the details of that. It is not in my area of responsibility. I apologise for that on the non-proliferation. I could come back on that after speaking with my colleagues.

On looking into gas, that is an element that we need to keep in mind. That is also why, in a proposal we made - I think 18 months ago - on hydrogen and decarbonising gases, we limit the possibility for member states to sign long-term contracts in gas in terms of their duration. Therefore, this is foreseen there. In order to be-----

Senator Alice-Mary Higgins

It is in 2029 though. Am I right?

Ms Catharina Sikow-Magny

Yes, the Senator is right.

Senator Alice-Mary Higgins

So it is just one year before we are magically going to exit. It just seems a little long of a-----

Ms Catharina Sikow-Magny

Yes. The long-term contract is one element. However, I refer to all the proposals and agreements that we now have in speeding up the uptake of renewables. Now we have a renewable target at the EU level agreed a couple of weeks ago by the Council and the European Parliament at 42.5% by 2030. We then have binding targets also for using renewable fuels and renewable hydrogen in industry etc. All these measures are combined with the permitting facilitation and streamlining. We make sure that we will have renewables coming in on stream much faster than we had foreseen a couple of years ago still. I think this will naturally push out gas from the mix. On top of it, the electricity market design, with the measures that I briefly touched upon, will facilitate the uptake of renewable and decarbonised sources. We will also make sure that the necessary complement to renewables, which are increasingly volatile – if we think of solar and wind, they are volatile – we will have the flexibility and storage in place, which, again, must be decarbonised. All these measures put together will contribute to speeding up the uptake of clean sources of energy, which than can then phase out on a permanent basis not only Russian gas, but other fossils as well.

An Cathaoirleach

We are almost up to 12.30 p.m. now, and it is 1.30 p.m. over there. We are at the end of the first part of the session and no other members are indicating, so we are in good time. I thank Ms Sikow-Magny for her time this morning. It has been very helpful for us as we consider the pre-legislative scrutiny of the general scheme of the Bill that is before us. I thank her again.

I will suspend the meeting for a few minutes to allow our next witnesses, the officials from our own Department of the Environment, Climate and Communications, to come in. I will suspend for two or three minutes.

Sitting suspended at 12.28 p.m. and resumed at 12.34 p.m.

An Cathaoirleach

On behalf of the committee, I welcome the officials from the Department of the Environment, Climate and Communications, namely, Mr. John Burke, principal officer; Ms Laurena Leacy, senior geologist and Mr. Evan Walker, economist assistant principal. I also welcome Mr. Kevin Hagan, manager of the wholesale electricity market division of the Commission for the Regulation of Utilities, CRU; and Mr. Michael Kelly, director, of EirGrid.

I remind our guests of the long-standing parliamentary practice that they should not criticise or make charges against a person or entity by name or in such a way as to make him or identifiable or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. If a witness's statements are potentially defamatory in relation to an identifiable person or entity he or she will be directed to discontinue such remarks and it is imperative that any such direction is complied with.

Mr. John Burke

I thank the Chair and members of the Oireachtas Joint Committee on Environment and Climate Action for the invitation to this meeting of the committee on the pre-legislative scrutiny of the general scheme of the energy (windfall gains in the energy sector) Bill 2023.

I am principal officer in the Department of the Environment, Climate and Communications in the area of energy security. I have just taken over from Mr. Kevin Brady, who briefed the committee a couple of weeks ago on the general scheme. I am joined by Mr. Evan Walker, economist assistant principal, who is working on the cap on market revenues, Ms Laurena Leacy, senior geologist, who is working on the temporary solidarity contribution, Mr. Kevin Hagan, manager of wholesale electricity market at the CRU and Mr. Michael Kelly, director in EirGrid.

The energy (windfall gains in the energy sector) Bill 2023 will implement the temporary solidarity contribution and cap on market revenues of EU Council Regulation 1854/2022 in accordance with the Government decision on 22 November 2022.

High energy prices have had a significant impact on consumers and the revenues from this initiative will be available to Government to offer additional supports going forward. Ireland, along with other EU member states, is implementing measures to address windfall gains in the energy sector. The general scheme aims to ensure the right balance between maximising the collection of windfall gains while minimising any negative impact in energy markets. The prize is a strong revenue stream for the State without introducing risk to our security of energy supply or a reduced appetite for future investments.

Increased wholesale gas and oil prices have led to potential windfall gains for producers and refiners of these fuels where the costs of production have not increased to the same extent. In the electricity sector, there are also potential windfall gains with the wholesale price of gas being the key driver of the wholesale price of electricity. As a result, some electricity generators such as wind and solar which have seen limited increase in production costs may be realising windfall gains.

EU Council Regulation 2022/1854 is an emergency intervention to address high energy prices and came into force in early October 2022. Ireland was an active participant in the negotiation of this EU Council regulation and successfully sought additions to the proposal that would not constrain Ireland's ability to collect windfall gains in the energy sector and to address unique Irish concerns.

The EU regulation seeks to address windfall gains in the energy sector through a mandatory temporary solidarity contribution, TSC, based on taxable profits in the fossil fuel production and refining sectors and a mandatory cap on market revenues of specific generation technologies in the electricity sector. On 22 November 2022, the Government approved the introduction of these measures which included: that the TSC will apply for both of the years 2022 and 2023, the maximum permitted under the Council regulation; that losses from previous years would not be taken into account when calculating the TSC; that the rate of 75% would apply, and it would be administered by the Revenue Commissioners; that a cap on market revenues of €120 per megawatt hour would apply for wind and solar reflecting their lower operating costs; that a floating cap would apply to some technologies such as oil and coal, based on their operating costs, thus ensuring no impact on security of supply; that no cap would apply to small projects up to 1 MW; and that it would be administered by the CRU.

The Department undertook stakeholder engagement on the implementation of the windfall measures with relevant Departments, agencies, companies and representative bodies within the scope of the TSC and cap on market revenues. Information sessions on the TSC and cap on market revenues in the EU Council regulation were hosted by the Department with stakeholders in October 2022 just weeks after the regulation was published.

Following the Government decision in November 2022, further information sessions were held to inform stakeholders of the Government’s decision on the implementation of the windfall measures. Additional meetings with stakeholders, including bilateral meetings, were held throughout December 2022 and the first quarter of 2023.

During this stakeholder engagement, concerns were raised by companies about the impact of these measures on their operations, ongoing viability and capital and future investments. Stakeholders also submitted proposals to the Department on the implementation of the windfall measures. As the Department was developing the general scheme for this energy Bill, consideration was given to the concerns raised and the submissions received from various stakeholders on both the temporary solidarity contribution, TSC, and cap on market revenues.

The general scheme for the Energy (Windfall Gains in the Energy Sector) Bill, produced by the Department and approved by Government on 21 March 2023, is in accordance with the Government decision of last November, including maintaining a 75% rate for the TSC and a €120 per MWh cap for wind and solar electricity generators, with further provisions to avoid significant impacts on the energy sector. The general scheme aims to balance the collection of windfall gains in the energy sector across a broad base and a high rate, with consideration to impacts on Ireland’s energy security.

I will now discuss the Chair the estimates of proceeds from the wholesale gas market, and the uncertainties surrounding them. In November 2022, an Estimate of the proceeds was provided to the Government, indicating a range of €340 million to €1.9 billion. The wide range reflected the unprecedented uncertainty surrounding potential scenarios of wholesale gas price trajectories, as of end October 2022. In situations of extreme levels of uncertainty, such as +10% or -10% volatility on a daily basis, it is technically appropriate to model with a focus on the range of possible outcomes, rather than the precision of the final number. This approach is supported by a consistent body of economic and statistical literature, which recommends the use of scenario and sensitivity analyses, as well as forecast averaging. The economists present are available to comment further on this.

In February 2023, revised estimates of the proceeds ranged from approximately €280 million to €600 million. The primary driver of the reduction in these estimates since end-October 2022 is the significant reduction of approximately 70% in futures prices. As such, the extreme scenarios that were anticipated in the futures markets for quarter 4 of 2022 did not materialise and the range in the scenarios has abated for now. It is important to note that the revised estimates remain highly sensitive to wholesale gas prices, which can be influenced by various unpredictable factors, such as weather, gas storage levels and developments in the war in Ukraine.

External estimates, conducted separately from the Department by Aurora Energy Research in January 2023, indicate that the market cap could generate between €49 million and €591 million. Their similar use of an extremely wide range is acknowledged also. The distribution of the proceeds collected from the TSC and the cap on market revenues will be decided by Government. These proceeds are required to be distributed in accordance with measures set out in the regulation, such as supports for energy customers.

The general scheme of the Energy (Windfall Gains in the Energy Sector) Bill 2023 is divided into three parts. Part 1 of the general scheme provides for the title of the Bill, its commencement and definitions, which are used in the Bill; part 2 provides for the TSC and part 3 provides for the cap on market revenues. There are four chapters in part 2 of the general scheme for the TSC. Chapter 1, heads 3 to 4, sets out the methodology to calculate the TSC, the rate of the TSC and the definition of taxable profits and average taxable profits for the purposes of calculating the TSC. Key elements of the definition of taxable profits are that losses outside of the period 2018 to 2023 will not be carried forward or back; group relief will not be included; capital expenditure in the period 2018 to 2023 will be deductible and TSC will be deductible when calculating corporation tax. Chapters 2 and 3 provide for the Revenue Commissioners to administer the TSC, provide the necessary powers to the Revenue Commissioners and provide for the reporting obligations of companies to the Revenue Commissioners. Chapter 4 provides that the proceeds from the TSC will be distributed in accordance with Article 17 of the regulation.

There are three chapters in part 3 of the general scheme for the cap on market revenues. Chapter 1 provides for which entities and technologies are subject to the cap; the level of the cap, method by which the cap is calculated; calculation of preliminary surplus revenue and adjusted surplus revenue; payment obligation; hedging and company obligations to report to the Commission for Regulation of Utilities, CRU. Chapter 2 provides for the administration of the cap on market revenues by the Commission for Regulation of Utilities. Chapter 3 provides that the proceeds collected from the cap on market revenues will be distributed in accordance with Article 10 of the regulation.

There is currently a large amount of work being undertaken at a very rapid pace to develop the Bill, by this Department, other Departments and agencies, the Office of the Parliamentary Counsel; the Revenue Commissioners; the Commission for Regulation of Utilities; EirGrid and the Irish Government Economic and Evaluation Service. It is complex legislation and this is a major collaborative effort on behalf of all those organisations. We look forward to the recommendations from this committee, which will inform the development of the general scheme, as it moves towards being published as a Bill and then to it becoming enacted, having completed its passage through the various stages of the House, which will afford further opportunities for debate. The Department, along with the CRU and EirGrid, will attempt to answer any questions from the committee on the general scheme or alternatively, we can supply additional material after today’s session as required.

An Cathaoirleach

I thank Mr. Burke for his opening statement.

Deputy Richard Bruton

I thank Mr. Burke for his presentation. How did the Department decide on the €120 and the 75%? How do we compare with other member states? How was that decision reached? There is a sense out there that wholesale prices are coming down and have been for a considerable time and consumers have not seen the benefit of that. As I understand it, if electricity companies are not passing on reductions in wholesale prices or the benefits of their hedging contracts, they will not be susceptible to this new tax. Does the Department have visibility on the hedging policies of individual companies to see that they are passing on, in a reasonable manner, the gains they may have got from the very high prices of fossil fuels, because it is not just the oil companies that could potentially be gaining here? We heard that in future, the EU is requiring two-way contracts for difference. In other words, if one has a renewable price and pitches, then if the price is higher, State claws back and if the price is lower, the company gets some compensation. Do we have many contracts out there with renewable providers that do not have that two-way, claw-back arrangement in place? We may have a problem with continuing supernormal profits among some of these providers.

Mr. John Burke

I will pass the question on hedging policy and the latter questions to Mr. Walker, if he is comfortable.

Mr. Evan Walker

I will take the Deputy through how the caps were calculated. With regard to the €120, every year reference prices are published for what the Renewable Energy Feed-In Tariff, REFIT, prices would be, that is, the contracts that are already in existence for wind and solar. There are not too many solar projects in REFIT, but in 2023, the reference prices were to be €71 for small wind farms and €81 for large wind farms, plus a capacity-balancing market payment of approximately €10. By that calculation, it looks as though the expected normal rate of return on a unit cost basis was approximately €91. Anything above €91 could be considered a windfall gain, because it was beyond the expectation of the market, what they would receive with regard to euros per MWh. That was considered in terms of the options. Anything above €90 is considered a windfall. That might be the ceiling, all the way up to €180. The options were taken with regard to €90, €120 and €180, as per European regulation. They were put in to a multi-criteria analysis, basically, which is how we decided at what level it should be or which option one would go for.

The criteria in the multi-criteria analysis were to capture windfall gains but maintain positive investment signals and minimise country-specific risk. Going with €90 would capture the windfall gain to the fullest extent but it was deemed it would deliver negative investment signals. It would also be an outlier relative to other European countries with regard to €180. This is where the €120 figure came from. There is a windfall gain and it is captured but at an extent that maintains positive investment signals. It was the appropriate rate that came out of the multi-criteria analysis. That is technically how €120 was decided. For all of the other sectors, the €180 figure just comes from the European regulation.

The variable cap is not a fixed figure. It is cost plus a maximum marginal limit. Recital 33 of the European regulation states there should be differential caps where there are differential marginal costs. For example, a wind farm might have smaller marginal costs and a very different cost structure to a coal plant that has fluctuating market prices that could go way beyond €180. If we set the cap at €180 while market prices are above €180, the unit would not run. As per recital 33 of the regulation, the solution is to apply the cost structure. The company is allowed to maintain a maximum margin limit to incentivise it to run. Otherwise it would not run in the morning. This is on an adjustable basis and is reflected by what the market price would be for coal, biomass or oil. This is technically how the caps were set.

With regard to the hedging structure, once we have a cap, the regulation is very clear that how we implement it is based on realised market revenues. It is very strict on this. It states we have to incorporate and account for hedging operations to reflect realised market revenue. While €120 might be the market price in March, the average cost per megawatt hour was €147. According to our market engagement and research, at least 50% of the book of most of these companies is hedged on a 12- to 18-month basis. Hedging means contracts engaged in by the firms and other parties to make sure they are not fully exposed to the daily volatility. The cap will be based on realised market revenue and this does take account of hedging operations. In the Bill, we have given the CRU full remit to verify fully an account. This is backed by the regulation. The regulation states the competent authority, in this case the CRU, will have full visibility in order to verify and allow for it.

Deputy Richard Bruton

Does the CRU have this now or is it in the Bill?

Mr. Evan Walker

In the Bill we have included provisions so that the CRU can verify the hedging operations. If a firm states it has not received the market revenue and has hedged away 50% of it, this has to be verifiable to the regulator in order for it to progress. Otherwise the payment obligation stays the same.

Deputy Richard Bruton

At the moment, there is a sense that perhaps consumers should be seeing a reduction that they are not seeing. Does the CRU have that visibility on hedging operations at present so it can state company X is engaged in gouging?

Mr. Evan Walker

No, at present the regulator does not have full visibility of the individual contracts and portfolio hedges that a company has. In order to implement this regime, if a company states it has hedged away 50% at a particular price, it has to be verifiable to the regulator. Otherwise the full payment obligation stands. We start from a point where there is a preliminary surplus at €120. This is the surplus we see at societal level. To reduce this and adjust the surplus basis, the company has to be able to show it to the regulator. This is for the regulator to challenge and verify. It goes back to the default if the company cannot show it or is unwilling to show it and the full payment obligation stands.

I want to make a point on prices. It is important that we maintain an evidence base when we have a contention that consumer bills increased very quickly and are now not coming down. Between January 2021 and August 2022, wholesale prices in gas increased by 417%, whereas information on estimated annual bills from the CRU showed an increase of 138%. The wholesale side increased by 417% between January 2021 and August 2022 at the peak and consumer bills increased massively but at 138%, versus 417%. It is a similar story on the electricity side. Wholesale electricity prices in Ireland increased by 493% during that time period, whereas electricity bills increased by 98%. There is a difference between the wholesale price increases and direct elasticity or propensity to pass on an increase in consumer bills. This has to be taken into account in managing expectations about the objectives of the Bill and what this measure can do.

Ms Laurena Leacy

In response to the Deputy's question on how the contribution was calculated, the 75% TSC was calculated on average taxable profits from 2018 to 2021. A company is allowed a 20% increase on the average taxable profits and the rate applies to anything above this increase. The rate of 75% applies to anything above a 20% increase on the average taxable profits. The regulation also provides that the rate must be fair and proportionate. A 75% rate was considered fair when we were looking for a rate that would collect windfall revenues.

Deputy Bríd Smith

I thank the witnesses for their presentation. It has been said that this is very complex legislation and indeed it is. It strikes me that there is a lot of accountancy trickery going on here. I could be wrong and I do not want to make a wrong accusation but it needs a lot of explanation. When it comes to being scrutinised it will require a large amount of legislation. It is extraordinary how complex legislation is being applied to something as simple as a massive increase in people's bills at the same time as there are massive increases in the profits of the companies issuing the bills. This is the simple thing that has happened but the legislation to address it has to be extraordinarily complex.

I have several questions on this. My first question is the same as one I asked the representative from the European Union. There seems to be an anomaly in the description about whether losses from previous years would be taken into account when calculating the temporary solidarity contribution. The heads of the Bill seem to suggest that losses can be taken into account, and certainly that losses and capital expenditure will be taken into account when calculating for corporation tax. Somewhere along the line, is the tax being reduced? What comes back to the State is being reduced by the accountancy mechanisms being put into the Bill. The witnesses look confused at me asking this question but I am extremely confused when reading the document. This is why I am asking the question.

I also want to ask about the CRU. Its representatives have come before the committee at many meetings to discuss issues and delve into what is going on, particularly when consumers' bills were increasing and at various points there were threats to the delivery of energy during the winter months. I ask myself whether the CRU is fit to be involved in checking on this hedging. Not that there is anything wrong with it but on various occasions, it clearly indicated to us a lack of resources. A very simple example is that it is either not capable or involved in regulating the district heating market. This is the market that penalises people who live in district heating systems very extraordinarily, over and above what the rest of us have to endure in the energy market.

People who are in that system cannot shop around and do not have the advantage of being able to find a company that will provide their electricity more cheaply. That is a question for both the CRU and the Department. Is this appropriate? Is the CRU sufficiently resourced and fit to deliver on that issue?

The Electricity Association of Ireland, EAI, has stated that it will resist any attempt by the State to impose a windfall tax on companies' profits because it is of the view that this could deter the future investment needed in the renewable energy sector. That speaks volumes to me as to the nonsense of having private companies dictate an energy market that is crucial to everything we do. As I have said repeatedly, energy should be in public control, not for profit and run on the basis of what the country and the system needs rather than these companies' profits. Having said that, I would like to ask the Department about what it said in its submission with regard to stakeholders. Was the EAI consulted about this? Does the Department agree with its narrative that this measure could put future investment at risk?

Mr. John Burke

On the first point, it is complex legislation. While this is a levy, it applies to taxable profits and so we inevitably have to be cognisant of the tax code and a fair bit of engagement with the Revenue Commissioners is required. There is a lot of complexity involved. The Deputy can see the complexity even within the EU regulation.

Ms Laurena Leacy

I will take the Deputy's first question, which was on the losses. Under Article 15 of the regulation, the contribution applies to taxable profits under national tax rules. If Ireland were to implement the contribution in accordance with the corporation tax rules as they are now, due to the nature and history of the sector, we would collect little if any contribution due to the amount of losses carried forward from previous years. Recital 55 of the regulation provides that member states are to implement fully the contribution and may account for the treatment of losses in previous years. In 2022, the Government decided that the losses from previous years would not be included. This has the effect that companies cannot offset their losses from previous years against the contribution, resulting in a lower collection by the State. Under the general scheme, losses from before 2018 cannot be carried forward into the period and losses cannot be carried back from 2023. Losses within the period from 2018 to 2023 can be brought forward, as the Deputy has said. The reason that losses predating that period are not included is that we are attempting to maximise the return and windfall gain to the State. I hope that answers the Deputy's question.

Deputy Bríd Smith

Ms Leacy certainly did a great job of giving an answer to the question but I do not understand it. I look around me and wonder whether anybody on this side of the House really understands it. I do not know, but we will find out as we go through this process. Ms Leacy has certainly done her best to address the issue.

Ms Laurena Leacy

Under normal corporation tax rules, companies can offset their tax bill by reference to losses in previous years. If we had implemented those same rules, there would be little if any temporary solidarity contribution collected by the State, which is why we have provided for the treatment of losses from previous years differently.

Deputy Bríd Smith

I am sure we will be teasing it out in the future. I thank Ms Leacy for that answer. Will the witnesses address the other questions?

Mr. Evan Walker

The Deputy asked about the EAI. I did consult with that body. We had stakeholder engagement with all of the main representative bodies, that is, Wind Energy Ireland, EAI, IBEC and the Irish Wind Farmers Association. In addition to those representative bodies, there was also engagement with individual firms but they were all taken together. There were at least 30 entities per stakeholder engagement. The EAI was on the call. In both the regulatory impact assessment and the briefing, we have summarised the views of the sector, which will obviously differ from the objective of Government, which is to capture the windfall gain.

The Deputy asked whether we agree with EAI's view that a windfall tax will deter future investment. We have looked at ex-post evaluations of windfall taxes in many jurisdictions and across different sectors from the banking windfall tax under Margaret Thatcher's government right up to energy windfall taxes in Australia in 2008. We looked at approximately ten case studies where there is clear ex-post evaluation. The evidence is mixed. If you express even a passing interest in windfall taxes, you will hear strong assertions that the implementation of windfall taxes will definitely deter investment. The situation is a lot more nuanced and complex than that. It depends on the degree to which you can actually capture the windfall. To define a windfall, it is the excess return above the normal expected return. As long as you are targeting the excess above what was expected, the impact on future investment should be limited. The period is also very important. A temporary and clearly defined windfall intervention limits the long-term effect on investment. That is what we have done here. We have tried to clearly identify where there are windfall gains in excess of expected returns as reflected by what wind farms got for their refit prices. We have only targeted the revenue above that and it is clear that this intervention is temporary and time-bound. We have done everything possible in line with the previous literature and case studies to mitigate the risk.

Deputy Bríd Smith

Arising from what Mr. Walker has told me, the Department has had several stakeholders, something like nine, at meetings.

Mr. Evan Walker

It was about 30.

Deputy Bríd Smith

I am sorry. One of these was the Electricity Association of Ireland. What sector does that body represent? Am I right in saying that it is mainly the fossil fuel sector it represents?

Mr. Evan Walker

No. I will not speak on who it represents specifically but it also represents supplier firms and electricity generation firms.

Deputy Bríd Smith

On a related matter, do other stakeholders have the same view as the EAI that this measure will be detrimental to future investment? Do they also want to resist it?

Mr. Evan Walker

In summary, I will make two points I made in the briefing. To summarise the stakeholder views, the two most common themes were that €120 is too low, should be higher and will create country-specific risk and that, if we do create country-specific risk, it will negatively impact on future investment. That is a summary of the concerns expressed in stakeholders' submissions.

Deputy Bríd Smith

My last question was on the CRU.

Mr. Kevin Hagan

As to the CRU's role in administering the market revenue cap, this legislation will require generators and other market entities covered by the cap to submit self-declarations to us. These should lay out their market revenue, the capped revenue they will get to keep under the market revenue cap and their gains and losses from hedging operations, which will feed into the final amount owed under the cap. Once we get all of those self-declarations, which should be by the end of July, we will cross-check with SEMO EirGrid market data to see if they are accurate and comprehensive. We will also have expert consultancy support to help us review the self-declarations to see if hedging operations meet the conditions in the legislation and if the gains and losses are applicable. We also have the ability to ask for further information where there is uncertainty or if we do not believe operators have provided all information.

Deputy Bríd Smith

The CRU believes it is adequately resourced to deal with this thoroughly and to ensure this hedging is transparent to us all.

Mr. Kevin Hagan

Yes.

Deputy Darren O'Rourke

I thank the witnesses very much. I will go back to the question of the 75% and the €120. Mr. Walker mentioned that there had been a multi-criteria analysis of caps of €90, €120 and €180. Were all the numbers or possibilities in between assessed? I note, for example, that the French are applying a cap of €100 on solar and wind energy.

Mr. Evan Walker

It also applies to nuclear energy.

Deputy Darren O'Rourke

And nuclear.

Obviously, there is an argument to be made that €91 and everything above represents super profits or whatever term we want to put on it. There is quite a gap to €120.

Mr. Evan Walker

We start off with a long list of options for how it could be tiered. Obviously, it does not go from €90 to €91 and it is necessary to put in thresholds. We considered a long list of options of what the various rates would be and that is borne out in the multicriteria analysis. We arrived at the short list. The question was whether to capture the windfalls at €90, which would be the minimum threshold or in public spending code terms the "do maximum" option. It is to go after that fully. There are also other criteria in the multicriteria analysis, one of them being to reduce country-specific risk as well as maintaining positive investment signals and security of supply. It is covered in the RIA in some detail. The briefing outlines where we ended up relative to other countries. We are in the lower decile of caps.

Deputy Darren O'Rourke

Mr. Walker mentioned the RIA. Regarding the multicriteria analysis, I guess the same applies for the 75%. Why is it not 100% given that 20% already seems quite generous? Are those available?

Mr. Evan Walker

Does the Deputy mean the RIA?

Deputy Darren O'Rourke

Not the RIA, but the multicriteria assessment.

Mr. Evan Walker

I can give the Deputy as much of that as he wants.

Deputy Darren O'Rourke

I appreciate that.

Mr. Evan Walker

Where we stand relative to other countries would obviously inform the level we choose. Do we go with €90 or do we go with €120? There are a couple in between. The UK just announced its new electricity generation levy in January. The UK is at £75 pounds per MWh but it is a 45% rate above that. That is the context of where we are. We are in the lower end of caps relative to the other member states. Most of them are at €180 and some of them are below that.

Deputy Darren O'Rourke

I have a question on the estimates. We had the briefing earlier. Obviously, there was a headline figure before Christmas of potentially €1.9 billion. We received a briefing with the breakdown from the departmental officials. That broke down to €280 million to €2.4 billion on the market cap, which is now reduced to €80 million to €150 million or €49 million to €591 million if we are to use this external figure. The TSC, temporary solidarity contribution, was initially €60 million to €480 million and it is now estimated at €200 million to €450 million. I ask Mr. Walker to expand on those estimates. I might capture two questions in one. They all indicate that huge revenue has been made in the renewables industry in particular before December which will not be captured in this design. Having talked to the European Commission earlier, we know that other countries are taking the approach of taxing that. Has that been considered? Has the Department been given an instruction to consider it at departmental level? Where does that stand?

Mr. Evan Walker

I will take the second question first on where we stand with leaving a lot of 2022 behind. I will then walk the Deputy through the estimates. Full disclosure: it was my estimates that were originally so high and are now lower. It again goes back to the consideration of all options. I have been assigned to this from the Irish Government Economic and Evaluation Service for I think a year now. The first discussions on a windfall tax took place last April. All options were considered. Italy imposed a windfall tax and it was a similar structure to what is now being done on the TSC. At the time Portugal, Spain and Italy had moved on a windfall tax. There was no consensus in Ireland that a domestic policy for windfall tax was appropriate, or would be effective or efficient. While options were considered on how this could be dealt with in a domestic sense, it was clear that once those options were considered - they are considered in the cost-benefit analysis and the RIA - the optimal solution or preference would be a European solution. Once we had the European solution, this is what the European solution is and this is what I need to work with. It is not for me to comment on the European Commission's policy as to whether it should go back further. It is for me to say that this is what the policy and stated objective are and to work to implement it. There is no doubt that in quantifiable terms, the highest prices and the highest volatility in the market were seen between April 2022 and August 2022.

This leads me nicely to the point of the estimates. Hindsight is great in that we have come down from those. There was not clear view at the time that prices would fall as significantly as they have which would lower the take based on the market cap between December and now. When we were looking at these in September and October, we got to the €1.9 billion estimate - I have put it in the briefing - based on the trajectory of the futures. The future prices in September were forecasting that by February UK gas prices would be up at more than 400 pence per therm. They were actually about 147 pence per therm. At the time, in October, it was very unclear. We could not have forecast that there would be a fourfold reduction in prices.

We had to model that with a scenario analysis. When dealing with such high levels of uncertainty it is technically appropriate to model the scenarios. We say that this scenario could be that these future prices will hold, but there is also a scenario where these future prices will seriously abate and that is why there was such a wide range. There was a clear case that the war might be over, but who knows? In that case there would be a very low scenario with a minimal take or these future prices that were forecast in September and October at more than 400 pence per therm could have held and we would have ended up with €1.9 billion. Thankfully, the prices have fallen and that is a good thing. However, that also means that the revenue-collection aspect of this will also fall. We have always said that as prices fall it would lead to a lower take. That should not be considered as having missed and that it is terrible not to have a good take. Ultimately, lower prices are good. It goes back to the objective, which is trying to capture the windfalls. If prices fall, there should be less windfalls there.

Deputy Darren O'Rourke

Mr. Walker said that he is constrained by the EU regulation. I would make the legitimate point that the significant time from April to August is not included in the cap on market revenues here. Mr. Walker is saying it is a question for Government or somebody else to seek the answer for that.

Mr. Evan Walker

That is the policy. It is first and foremost for the Commission. This is a regulation and so it is stronger than just an opinion piece from the Commission. The regulation stated at the time that this was to run from December until March only. That is first and foremost for the Commission and second for the Government. It is not for me to come up with a different policy.

Deputy Darren O'Rourke

I accept that.

Senator Alice-Mary Higgins

I am joining from my office.

I wish to follow up on the question on the calculations of potential revenue. I will focus mainly on the solidarity contribution. What is the potential difference between the expected revenue from the solidarity contribution before and after the decision to allow for the writing-off of capital expenditure? That is capital expenditure on the acquisition and construction of tangible assets in respect of 2018 to 2023. This follows up on the question that while losses were excluded, capital expenditure is deductible in terms of the amount of contribution.

I understand it is deductible in addition to any other relevant capital allowances that may have already been deducted in calculating taxable profits as per the normal rules. We know from reports in the newspapers that this was specifically lobbied for. Apparently, it was not initially envisaged that capital expenditure would be deductible. A decision was made to make it deductible. I would like to know what difference that has made in terms of the expected revenue coming from the temporary contribution measure. I am concerned about the measure in that context. I also wonder about the context in which this measure is coming forward in Ireland. It was rightly acknowledged earlier that the way our current corporation tax measure is being applied, particularly by large energy companies, means that they have effectively been paying 0% tax. I have quotes from Vermilion in 2017, before any of the increases happened, stating that it does not expect to incur income taxes in Ireland for the foreseeable future. It also has no royalties, low operational expenditure and minimum outgoing capital expenditure. To an extent, we had been subsidising fossil fuel companies by means of tax relief measures for a long period leading into the current boom. Does that not create a dynamic whereby not only do we need to ensure we do not carry those measures forward, but we also need to examine the way we have effectively allowed tax relief subsidies to the fossil fuel sector in the lead up to these new measures? I would like a comment on that, and then I want to come to the other important part of it, which is the distributive element of the proposals from the EU.

Mr. John Burke

I do not think it is within our remit to get fully into the corporation tax issues and the angles relating thereto. I do not think we can do that in the context of this discussion.

Senator Alice-Mary Higgins

Is it not the case that Ireland does not collect royalties and has had an effective tax rate of 0% for most of the companies impacted by the solidarity contribution?

Mr. John Burke

I would like to keep the discussion around the general scheme. The Senator makes valid points about corporation tax, but we will not hit all of those issues here. On the points made by the Senator on stakeholder engagement and how that played out, companies made strong cases about how this would impact on them, their viability and future decisions. That was factored in. Ms Leacy can speak further on those engagements.

Ms Laurena Leacy

I will give a brief overview of some of the stakeholder engagements alluded to in the questions.

Senator Alice-Mary Higgins

Briefly, because I have follow-up questions.

Ms Laurena Leacy

As Mr. Burke has already stated, we had information sessions with stakeholders before and after the Government decision of 22 November 2022. There were requests from various stakeholders for bilateral meetings between the Department and themselves. Common concerns were raised by the stakeholders. I will be honest, and say that I need to be careful, because the contributions came from a small number of companies. I do not want to talk about individual cases. There were concerns about the impact of the contribution on their ongoing activities, potential capital investments in coming years and other future investments. They also made proposals to the Department on how it could implement the contribution. I have detailed some of this in the briefing. The Department considered these submissions, and the deductibility of capital expenditure was considered fair in the context of not wanting to impact any capital expenditure coming online from the companies. The issue of how much it may cost was also part of the Senator's question. I stress that these are estimates. The Department estimates that it would be about 10% to 15% of the total proceeds.

Senator Alice-Mary Higgins

To refer again to what is reported in the newspapers, Irving Oil was referenced in that context. Irving Oil is interesting because there are articles from New Brunswick and Bermuda about its successful tax management measures. It pays quite a small amount of tax in those locations. In that context they also increased their registered losses by eight times in 2022, despite high revenue. I am concerned that 10% to 15% would be an underestimate in terms of difference. It would be useful to get the figures when monitoring this, so that we are monitoring how much is lost by allowing the write-off of capital expenditure. This is not a small company. It is a large, successful and profitable company, as are some of the others. We have seen shareholder dividends from some of the other major players that will be affected, such as Equinor and others, which have continued to make significant profits. We have heard about the stakeholders a lot. However, the list of stakeholders seems to be all of those with a financial interest, specifically on the company side. IBEC is also mentioned. The stakeholders that seem to be missing make up the second half of the equation, namely, who this entire measure is meant to be about helping - households, citizens and small businesses. It is meant to be a measure to ensure it is a solidarity contribution. Those impacted by the decisions to have €120 instead of €90 as the price cap are those impacted by the decision to allow a potential reduction in the amount of solidarity contribution. Those are the ones experiencing the emergency, which is the premise for the entire legislative proposal.

An Cathaoirleach

We must give the witnesses a chance to respond.

Senator Alice-Mary Higgins

Head 29 gives us no information about how the revenue raised is going to be targeted. We heard from the Commission that they should be targeted at small businesses and households and not, as we have seen with the temporary business subsidy, large companies. Where were the stakeholder households in the consultation process?

Ms Laurena Leacy

The stakeholders we initially engaged with in the context of the general scheme were those who will be directly impacted by the contribution. The Senator is correct. That is who we approached first. The next stage, on how proceeds will be distributed will be the subject of a Government decision in the coming months. The Department is engaging with other Departments. We are the head on the steering group for an energy poverty steering committee, so there will be discussions on how those proceeds will be distributed. The stakeholder engagement the Senator referred to is not part of this work. That is the next job we will be undertaking.

Senator Alice-Mary Higgins

Why not, when it is the premise for this work? They are impacted. They are impacted by whether it is €400 million, or €200 million or €600 million. That is an impact.

Mr. John Burke

What the Department is trying to do is find that balance between maximising the revenue stream, and those other issues around company viability and energy security. In conjunction with our discussions with the Departments of Finance and Public Expenditure, National Development Plan Delivery and Reform, the aim is to maximise the revenue stream available to supplement the supports available in the next budget. The Senator will appreciate that significant support packages were provided in the budget. The intention is to have another significant revenue stream from this measure to do so. We welcome the Senator's observations, but I presume the aim will be targeted measures to those who most need them.

Senator Alice-Mary Higgins

We are being asked to sign off on legislation, which has a purpose, and we are not being told what the purpose will be. As I already mentioned in terms of the temporary business support scheme, we had €10,000 per month or per week going to large energy users, who were not the solidarity goal. The Commission made that clear. Head 29 is undeveloped, and it is crucial. It is not revenue gathering for its own sake, so I wonder if some of the decisions would be made slightly differently.

An Cathaoirleach

We have the general scheme, Senator Higgins, so we can look at it.

Senator Alice-Mary Higgins

Is head 29 specifically of the scheme? I am not speaking about an abstract issue. I am speaking about an issue that is intrinsic to-----

An Cathaoirleach

The scheme is before us now, so I think it is really for us to look at-----

Senator Alice-Mary Higgins

That is why I am asking how head 29 is going to be developed.

An Cathaoirleach

Okay.

Mr. Evan Walker

They are not mutually exclusive. We have one phase which is the implementation and how we are actually going to impose this on the sector. That is why the initial stakeholder engagement has been quite expansive for a non-formal process - it is not a public consultation - and has taken up a lot of time. However, to understand the nuts and bolts of actually implementing this regulation, without having to try to mitigate the negative impacts or unintended consequences in the electricity market, that does not mean there is not a next phase of stakeholder engagement with vulnerable groups, and on how this feeds into the poverty action plan and where there is even a whole strand of work in the Department of the Environment, Climate and Communications relating to energy poverty and vulnerable consumers. What I am saying is these are not mutually exclusive. In the first instance, we have had to engage with these stakeholders-----

Senator Alice-Mary Higgins

It is in this Bill. We are speaking about the Bill, and we are speaking about head 29.

An Cathaoirleach

I am going to have to ask Senator Higgins to stop interrupting and let our guest continue.

Senator Alice-Mary Higgins

Apologies, but I would like them to speak to the head rather than the general policy issue.

Mr. Evan Walker

Regarding head 29, the regulation says the proceeds have to be used for the market cap in a way that is distributed directly to final electricity consumers. There are some conditions to that. It says they should be transparent, proportionate, non-discriminatory and verifiable. On the solidarity contributions, it is a little bit broader, but it is still a directive in the regulation which says how they should be used, and again they are similar. There should be supports for energy customers, but they can be a little bit broader in ways like encouraging renewable investment.

As it is specifically called out in the regulation as to how the ring-fencing of the proceeds should be, that is why in head 29, which we are asking the members to approve, specifically outlines that these funds will be used in a manner that is completely aligned with the regulation. How the specifics of that is done is a budgetary process. We, as the Department of the Environment, Climate and Communications, cannot fully outline exactly how Exchequer funds will be used and how proceeds will be distributed. That is obviously a matter for the Estimates process and for other Departments like the Department of Finance and the Department of Public Expenditure, National Development Plan Delivery and Reform. We are limited. We cannot say we are going to give €600 million and it is going to be divided X, Y and Z across these specific policy measures. Our job here is to estimate the level of the proceeds and, within the regulation, it says the proceeds should be used in a clearly defined, transparent and proportionate way. We are making sure this is followed through in head 29 by saying the proceeds must be ring-fenced in a way that is for electricity consumers and that they will be targeted, transparent and verifiable. That is as far as we can go regarding the scope. The question Senator Higgins raised is more an issue around the budgetary process thereafter.

An Cathaoirleach

I thank Mr. Walker. I am going to go to Senator Boylan.

Senator Lynn Boylan

I thank the Chair and all the speakers. I am going to pick up on a couple of questions that have already been asked. The first is to go back to the Commission for Regulation of Utilities, CRU, and the capacity to administer the scheme. I am going to repeat what Deputy Smith was saying, that we have heard from the CRU around concerns about resources. In December 2022, noteworthy.ie reported that the CRU needed an additional 70 staff, and that was before the introduction of a windfall scheme. Is Mr. Hagan categorical in saying the CRU has the resources necessary to administer this windfall scheme?

On the engagement with stakeholders and how much they have influenced the design of this scheme, Irving Oil very clearly had huge concerns around this scheme, and I believe this is in the public domain. What we know from reports in the newspapers is that the scheme was adapted because of those concerns. Maybe the witnesses could elaborate on exactly what changes were made to the scheme on foot of Irving Oil making its concerns known to the Department?

My last point is for Mr. Walker. For clarity, when he said wholesale gas figures increased from June 2021 to August 2022 by, I think, 440%-----

Mr. Evan Walker

From January 2021, yes.

Senator Lynn Boylan

Is it not true the Irish suppliers would have hedged up until October or November, which is when the largest increase took place? The hedging would not have run out at that point.

Mr. Evan Walker

Does Senator Boylan want me to answer that now?

Senator Lynn Boylan

Yes, just to clarify that.

Mr. Evan Walker

The visibility on hedging strategy beforehand was obviously very limited. The Department would not have visibility on what individual firms are doing with their portfolios. Since then and with the engagement, it seems the rule of thumb is that most of the hedging portfolio is done on a 12- to 18-month basis. Looking at the wholesale prices on a 12-month moving average or an 18-month moving average, that is where that 417% figure comes from. Between January 2021 and the peak in August 2022, on a 12-month moving average basis, it increased by about 417%. Every month, they will have a new round of hedging, which is fed into our Estimates.

Senator Lynn Boylan

The hedging continued for October and November, which was when we saw the largest increases.

Mr. Evan Walker

If the wholesale prices have increased on a moving average basis of about 417% and the retail prices have moved between 98% and 138%, that shows the effects of hedging. Some firms are not fully exposed, 100%, to the spot price. If they were, the consumer price increases would have been one for one - 417%, or in the UK, in many of these cases where firms operate just on the day-ahead market, they are out of business. It is just to highlight the effect of hedging. Hedging is a huge part of this market. For example, if there is a 417% increase in wholesale prices but that has not acted as a 417% increase in consumer prices, then it shows how important hedging is in this market, which is something we have to comprehend and verify fully when we implement this. It is difficult with visibility. We do not have full visibility of every hedging contract that is out there, nor will we.

Regarding this Bill, the objective, and it will be seen in the Bill, is not to define every hedging contract or financial instrument there might be. It is to give full breadth that we understand that these hedging operations are there and that we take account of them. We are giving full powers, as we can, to the CRU to verify, check and challenge that fully. That is the objective.

Senator Lynn Boylan

That tees up nicely for Mr. Hagan to answer the question as to whether the CRU has the staff that it needs.

Mr. Kevin Hagan

I thank Senator Boylan. We will be procuring expert consultancy support on this to help us review all the self-declarations, and we will have the support of EirGrid, the single electricity market operator, SEMO, in checking the accuracy of the market-related data that will be sent on to us, which are their quantities and their market revenues and how they compare with the capped revenues. We are confident we have the resources to administer the market revenue cap.

Senator Lynn Boylan

So it will be external consultants. About 25% of CRU's budget is already spent on outside consultancy. We have seen it is very rare for the CRU to challenge requests from the transmission system operator, TSO, and the distribution system operators, DSOs, when they are looking for revenue. I am concerned it not going to be in-house expertise if it is going to be a case of more outside analysis.

Mr. Kevin Hagan

We will have in-house people working on it, but we will get the expert consultancy support to help us with the hedging aspects and the type of contracts that are allowed to be taken into account in terms of the losses they can subtract from the preliminary surplus revenue to get to the final amount owed. We will be getting expert support on that aspect of it.

An Cathaoirleach

Okay. Ms Leacy can go ahead.

Senator Lynn Boylan

Yes, on Irving Oil and how much it has influenced the design of the scheme.

Ms Laurena Leacy

I will speak about the stakeholder engagement and not about one company specifically. I do not wish to comment on newspaper reports. I know in her question Senator Boylan mentioned public information, but I do not want to comment on those specific newspaper reports, if that is okay with the committee.

On our stakeholder engagement, we had two information sessions, before and after the Government decision, and there were a series of bilateral meetings between the Department and multiple stakeholders, including companies within the sectors affected by the contribution. These meetings took place from December 2022 up until as recently as February 2023, and there would have been, possibly, around 15 meetings between all the companies, both online and in person.

As part of that engagement, there were also formal submissions made to the Department on the impacts the contribution could have on ongoing viability, future investment, capital investment and serious concerns for the Department to consider as part of the overall collection of the windfall tax but also maintaining security of supply. As the members of the committee are aware, there is an international and domestic energy crisis. The Department considered these submissions. Taking account of the Government's decision in November 22 that the TSC would be a 75% rate applied for 2022 and 2023, losses for previous years would not be carried forward and the Revenue Commissioners would administer the scheme.

Head 4 of the general scheme shows the adjustments that have been made to the definition of taxable profits. In the regulation under Article 15, the TSC relates to taxable profits under national tax rules and under some of the cycles there is guidance around how the there may be adjustments in national law to take account of the full implementation of the solidarity contribution. Under head 4, losses from before 2018 are not deductible and losses after December 2023 can now be carried back and deducted. Group relief was an additional adjustment that was put in. Multiple stakeholders had concerns regarding capital expenditure.

The Department considered the submissions and engagement. In some cases, we requested additional information from the companies in order to better understand these impacts. In putting together the general scheme, we sought to create a balance whereby we would maximise the returns while minimising any potential risk.

Senator Lynn Boylan

The Irish Wind Farmers Association wrote to the committee and stated that the Department and the Minister had failed to engage with it. The association made the point that there is scope for flexibility in the EU regulations to the effect that community windfarms do not have to have the same standard applied to them. Did the Department engage with the association? We only have its word.

Ms Laurena Leacy

I will pass over to Mr. Walker.

Mr. Evan Walker

I have the dates and list of all the companies we have met. A clear line has to be drawn between engagement, lobbying and capture. It is very clear that we did not have a full public consultation, but I have met firms and groups at least eight times as a full group. Obviously, there will be different views and concerns.

We have gone through all of the submissions. Where we have flexibility, we have outlined our rationale. I do not want to comment on a particular lobby group, but if it has said it we did not engage I have clear evidence of where we have engaged multiple times. The particular group suggested we should have greater flexibility on smaller scale farms. We are bound by the regulation that we can only exclude windfarms up to the point of 1 MW. We have to implement the regulation. We could not go to 10 MW requested.

To be very clear, we have engaged as much as we can and there is a line that policymakers have to be very aware of between engagement and regulatory capture. I still have an objective to deliver for the Government on that. We do our business in the sun. There are clearly areas where groups will disagree with me, but my mandate is to deliver the objective for Government, namely to capture windfall gains while minimising the risk. At some point, that will have to come to a head and we will have to go our separate ways because we will not make everyone in the audience happy all of the time.

Senator Lynn Boylan

I get that 100%. How much scrutiny was given to the threat that this would end the oil refinery in Cork? Was it verified or backed up, other than what we heard from the oil refinery? I am not accusing the Department of lobbying or capture, but such organisations definitely had an influence on the design of the scheme. The oil refinery said it would shut down if we go the way we are going to go. Changes were made. Community wind farms have said the Department did not engage and there were no changes made or flexibilities for them. What level of scrutiny was given to the threat expressed by the oil refinery that it would have to cease operation?

Mr. John Burke

We do not want to get into specific entities. The energy security risk was real and we consulted the relevant experts available to us within the State, including the National Oil Reserves Agency, NORA, and the relevant people in the Department. There was a significant issue around energy security. We had a concern in that regard. Ms Leacy referenced the fact that the amendments made were fairly minimal in terms of the impact on the yield.

Mr. Evan Walker

There is a dual mandate. There are captured windfall gains, but that is not at the expense of seriously negatively impacting security of supply. We may have one objective which is to capture and not take on any feedback from companies. One company has average operating profits in terms of the calculation of the minimum or losses. It is not that this is a high margin industry.

Senator Lynn Boylan

Nobody wants to risk energy security. My concern is that there has been a lot of talk in the public domain about legal threats from energy companies, including the Irish Wind Farmers Association-----

Mr. Evan Walker

It has come good on those threats.

Senator Lynn Boylan

-----which is supporting a European Court of Justice case. We have concerns. The committee has discussed the energy charter treaty and risks that it protects the current and future profits of energy companies. When we read in newspapers that companies are threatening legal action against the State for taking measures, I have real concerns about how much scrutiny we are putting into what they are saying and the potential and actual risk to energy security.

Mr. Evan Walker

It was borne out quantitatively.

Senator Lynn Boylan

Okay. That is fine.

Mr. Evan Walker

We work for the Government's economics and evaluation service. We thoroughly evaluate all proposals that come in. It was borne out quantitatively that this was a credible risk. Our job involves a dual mandate, namely, to maximise the captured windfall gain and minimise risk. It would be a different conversation if we were in here and an oil refinery closed during the middle of an energy security crisis. We would be asked why we did not take feedback on board.

An Cathaoirleach

I thank Senator Boylan. We have a few minutes for a second round if members wish to indicate.

Senator Alice-Mary Higgins

I am interested in the capital expenditure. Group relief was also inserted. We know group relief is what allows sets of companies to access reliefs in terms of other members of that group. Can the witnesses elaborate on what has been introduced in terms of group relief and what the implications of that would be? I understand 10% to 15% is the estimated reduction because of the capital expenditure write-offs on the amount of revenue that would have been raised. What is the amount of revenue that may be lost through group relief? All capital expenditure is allowed to be written off in full. Is consideration being given to putting a ceiling on this in order that, for example, we do not have more than 20% of payable revenue? That includes the 20% profit that has already been made. We should have some ceiling though that we do not end up in a situation whereby 50% or 60% of the solidarity contribution is discounted because of capital expenditure group relief.

Ms Laurena Leacy

On the first question on group relief, group relief is under head 4. It is designed to maximise the return of contribution to the State and avoid a situation where a company may have other entities and use group relief to lower contributions. That adjustment will increase the contribution. It is an anti-avoidance measure. That will not result in a reduction to the contribution.

On introducing a ceiling to capital expenditure, when we considered capital expenditure we had discussions with tax experts, including the Revenue Commissioners.

In keeping with tax principles, there were two conditions put on capital expenditure, so it is not just any capital expenditure can be deducted. It must be allowable for capital allowances and claimed with normal corporation tax and tangible assets for the purpose of activities for which the contribution relates in Ireland or within the maritime jurisdiction area and within use for a period of at least five years. This was to avoid situations where companies might buy assets or form other ways to artificially lower what would have been their contribution. We have taken measures through those two conditions to ensure that the capital expenditure deducted is fair and related to the activities for which the temporary solidarity contribution, TSC, applies. However, I take the Senator’s point about a ceiling.

Senator Alice-Mary Higgins

So the ceiling is a possibility which could perhaps ensure protection against something.

Ms Laurena Leacy

We would need to consider how one would be implemented. If the committee puts forward a suggestion or recommendation of how the capital expenditure should be implemented, we will consider it.

An Cathaoirleach

No other members are indicating to ask questions.

Senator Alice-Mary Higgins

I have one other question but I did not want to ask it in case other members had indicated. It is perhaps one to come back to. On our commitments on fossil fuel divestment, fossil fuel subsidies and the move away from that and so forth, is there a danger in terms of these relief measures and other measures? They are still subsidies, effectively. We even subsidise capital expenditure by fossil fuel companies. They are still fossil fuel subsidies indirectly in that context. Is there concern about that in respect of our policy of divestment?

An Cathaoirleach

Senator Boylan has indicated, so I will bring her in now as well. We will then go back to our guests.

Senator Lynn Boylan

On the capital expenditure deductions, will that be transparent? Will we have that data?

An Cathaoirleach

Deputy O'Rourke wishes to ask a question as well.

Deputy Darren O'Rourke

It is a complicated market and there are market-to-market transactions. There is a huge amount of complex accounting. Deputy Bruton asked about the oversight of the hedging policy. Will there be oversight of that more detailed interaction with the market and what are real profits and what are not?

Ms Laurena Leacy

I will answer the question on the capital expenditure reporting. The solidarity contribution will be administered by the Revenue Commissioners and they will be given powers. As this is not a tax, they need powers to administer, collect and undertake assessments of the returns on this contribution. Those kinds of figures will be provided to Revenue by the company. There is strong data protection around company information that is provided to Revenue Commissioners, so I do not want to promise that data will become available to the Government. It is something that I will possibly need to come back to the committee on - the rules around data protection for companies providing data to Revenue and what to extent, I assume, to the contribution. I can look at that a bit more closely.

An Cathaoirleach

There were one or two other questions.

Mr. Michael Kelly

I will answer questions on the electricity market complexity. The Deputy asked about the ability to identify clearly the revenue that generators will be making in the market. One of the things we heard a couple of times this morning was that the legislation looks complex when, in fact, through our development and design of the legislation, we were looking to make it in some ways robust and simple by picking up definitions from the existing market. One will see definitions in there about quantities and prices that we are using that are already codified in the electricity market. By using those defined terms, it allows us to be clear with the people who will be affected about how much they will be liable for. The indexes we are using are already published and understood so, to that extent, we are hoping that the initial liability will be clearer.

An Cathaoirleach

We will finish up. I thank the officials for attending today and engaging with the committee. It was an interesting session and complex at times. However, they answered our questions expertly and thoroughly and we appreciate that. We will seek to get the pre-legislative scrutiny report completed as soon as possible with a view to getting the legislation enacted this side of the summer. That is an undertaking the committee has given. I thank everyone again.

The joint committee adjourned at 1.55 p.m. sine die.