I am pleased to introduce the Gas (Interim) (Regulation) Bill, 2001, to the Seanad. The purpose of the Bill is to transfer certain powers and functions of the Minister for Public Enterprise to the Commission for Electricity Regulation to provide for the independent regulation of the natural gas sector in Ireland.
In using the word "independent", I mean that regulation of the sector is undertaken by a body that is unconnected with any of the operators in the sector. It is inappropriate that the Minister, as shareholder of Bord Gáis Éireann, should, at the same time, regulate the competitive gas market on a day to day basis. The Bill is designed to regularise this situation and represents the minimum set of provisions to establish independent regulation within the shortest possible timescale. As stated in its Title, the Bill is an interim measure. It is my intention that once these initial arrangements have been put in place, work will begin in my Department on a comprehensive review of the way in which the gas sector in Ireland is regulated.
As with all the utility sectors, the gas sector in Europe is one that is now emerging from a situation in which national markets were dominated by State owned monopoly operators. The pace and manner of change in each sector in virtually all member states is dictated by rules set out in various EU directives. In the case of the gas sector, the relevant measure is Directive 98/30, which sets out the basic rules for initial market opening. It includes provisions dealing with access to networks and pipeline, unbundling of integrated gas undertakings and a liberalisation timetable. In regard to the last issue, from 2000 member states must open at least 20% of national gas markets to competition, with further incremental increases up to 33% taking effect by the year 2008.
In Ireland this process was begun in 1995 through the Energy (Miscellaneous Provisions) Act. That Act obliged Bord Gáis Éireann to offer access to its network to customers consuming 25 million standard cubic metres of gas per annum. The term normally used for this arrangement is third party access and it allows consumers to source their own gas from any supplier and arrange to have it delivered through the BGE network on non-discriminatory terms and at a fair price. The threshold of 25 million gives a level of market opening in Ireland which is the fifth highest in the European Union.
The main consumers benefiting from this are operators of gas-fired electricity generating stations and a number of large industrial users. An analysis of the Irish market shows that these eligible customers are taking advantage of the arrangement and, over the past nine months, over half of the gas in the BGE network was transported on their behalf.
When enacted, the Bill will open up the market further by reducing the annual rate of gas consumption whereby customers acquire third party access rights. Initially, the annual consumption threshold for eligible customers will drop from 25 million to two million standard cubic metres, resulting in the market opening rising from 75% to over 80%. It is my intention to achieve full market opening by 2005, in line with the timetable proposed for the electricity sector. Full market opening will include the domestic market and the proposals fully complement the latest liberalisation proposals from the European Commission. It is my intention to adopt an orderly phased approach to full market opening in 2005 by introducing at least one intermediate step before then. I will be discussing the timing of this with the Commission for Electricity Regulation immediately upon enactment of the Bill.
As with the electricity sector, the introduction of competition into the natural gas market has raised questions as to where responsibility for day to day regulation of the sector should lie. At present, the Minister is both market regulator and shareholder of BGE, and it has been argued that this dual role leads to an unavoidable conflict of interest.
The job being done by my Department in terms of the regulation of Ireland's gas sector is first class. The current arrangements in the Department provide a clear separation of responsibility between the regulatory and the shareholder functions. However, while every effort is taken to ensure that conflicts of interest do not arise in practice, increasingly decisions need to be taken on a range of issues where the potential for conflict arises. These issues include pipeline consents and charges for third party access to the BGE network. It is because of the number and importance of such issues now arising that I am proposing that the transfer of functions to the CER should happen in the shortest possible timescale. For competition to flourish, the market, especially new and prospective entrants and investors, needs to be assured that regulation of the sector is based on the principles of openness, transparency and non-discrimination.
I will now outline the main developments taking place in the Irish natural gas sector. Gas demand is growing rapidly in Ireland, mirroring trends across Europe. It is now the fuel of choice in electricity generation and its share of the domestic and industrial energy markets is also increasing. This reflects a number of factors, including competitive gas prices, the relatively high conversion efficiency of gas and the fact that gas is cleaner than other fossil fuels, such as oil and coal. Market growth is set to continue and, in a report produced last December, the ESRI estimates that over 70% of Ireland's power generation will be fuelled by natural gas by 2010 and that demand for gas may grow by approximately 7% per annum over this decade.
This scenario has a number of consequences. First, rising demand is driving increased investment in gas infrastructure. Second, gas has an important role to play in Ireland meeting its Kyoto targets for reducing greenhouse gas emissions. A modern gas fired power station produces less than half as much carbon dioxide as an older coal fire station per unit of electricity generated. Gas stations also produce much lower emissions than oil stations. Hence a switch in electricity generation away from coal and oil towards gas can give rise to very large reductions in greenhouse gas emissions.
One of the major outcomes of the ESRI report on energy demand was the realisation that there was a very high likelihood of a supply capacity shortfall in the winter of 2001-03 if no further supply capacity was added to the system before then. An independent assessment of possible new supply options concluded that BGE's proposal for a second interconnector with Scotland was the only project capable of being completed within the required timeframe. On this basis the Government gave approval for BGE to proceed with its proposal. BGE is now doing that and, subject to the various necessary permissions being granted, is on schedule to have the interconnector completed in time for the winter of 2002. As part of its approval, the Government has required BGE to seek private sector investment in the project and I am awaiting proposals from the company on how it intends to progress this issue.
Senators are no doubt aware that at the start of this year the Corrib partners indicated they were proposing to land gas from the Corrib field off the Mayo coast. I understand this is expected to come to market in the second half of 2003 and further pipeline construction work is to be undertaken by BGE to allow for the delivery of this gas to the national gas grid. In addition, BGE is proceeding with its proposals for the construction of a new pipeline between Dublin, Galway and Limerick that will bring gas to thousands of new customers. This pipeline will link with the existing Limerick-Cork-Dublin pipeline to create a national transmission ring and enhance the security of the national system.
The completion of all these projects is, of course, subject to the company complying with the various statutory requirements and obtaining the necessary consents from the Minister. I will now provide an update of the progress of each of these projects.
BGE has submitted an environmental impact statement for the second interconnector. I have engaged consultants to carry out a full appraisal of that and can confirm that it meets with all statutory environmental requirements. The proposed pipeline will not significantly or adversely affect the environment in the long term. The public consultation process for the second interconnector application has also concluded and I am currently considering submissions received in this regard.
I can also confirm that an environmental impact statement for the gas pipeline to the west has been submitted and appraised by my consultants. It meets all statutory requirements and the pipeline will not have significant long-term environmental effects. I convened an oral hearing to inquire into BGE's application to construct this pipeline, and its associated applications for acquisition orders, on 24 September 2001. This hearing has concluded and I await the inspector's report and recommendations. My consultants have also concluded their evaluation of the EIS for the Mayo-Galway pipeline and have indicated that it too meets all statutory requirements. It will have no significant effect on the environment in the long term. The public consultation process in relation to this application commenced on 28 September 2001 and will conclude towards the end of this month.
Senators will be aware that early this year the Government decided, in principle, to extend the natural gas network to the north-west. In June my Department received a copy of a report commissioned by BGE on the route options for this network extension. The report made it clear that none of the options would be commercial in its own right and that some form of assistance would be required. Following further consideration of the issue, the Government has decided the preferred option is to proceed by extending the gas transmission system to Sligo via Ballina from the proposed Mayo-Galway pipeline. Work is now beginning on a detailed economic evaluation of this preferred option. The Government's decision takes account of the benefits that will accrue from proposed developments in the natural gas infrastructure in Northern Ireland. The Government has also decided to support the development of cross-Border gas pipelines and I take this opportunity to explain the reasoning behind that to the House.
BGE and Questar, an American pipeline company, have applied to the Northern Ireland regulator to build two pipelines. One, linking Belfast to Derry, would supply the planned new Coolkeeragh Power Station and the city of Derry. The other, comprising a South-North interconnector from Gormanston to Antrim, would tie into the proposed Belfast to Derry line. The Government's decision to make a £10 million grant available toward the development of the Northern Ireland gas network recognises the wider benefits associated with it. For example, the BGE-Questar Belfast to Derry pipeline and the provision of gas to Derry would facilitate the provision of gas to Letterkenny. The development of a 400 MW power station at Coolkeeragh offers the prospect of further facilitating improved energy supplies to County Donegal. As a first step in moving forward with gas to the north-west, BGE will be asked to proceed with detailed engineering and planning for extending gas to Sligo from the proposed Mayo-Galway pipeline and to Letterkenny from Derry.
With my colleague, the Minister for Public Enterprise, Deputy O'Rourke, and the Northern Ireland Minister for Enterprise, Trade and Investment, Sir Reg Empey, I have pledged my commitment and support to working towards the development of an all-island energy market. The Government decision recognises that the development of cross-Border gas supply infrastructure is an essential ingredient in achieving this goal. In particular, the planned network developments in Northern Ireland and in the north-west will improve the overall level and quality of energy infrastructure on the island and enhance the prospect for market integration.
Given the developments I have outlined today, I believe it is timely to provide for independent regulation of the gas sector to ensure investor confidence. This will also act as a catalyst in the development of a natural gas market. My proposal in the Bill is to adapt the role of the Commission for Electricity Regulation so that it encompasses responsibility for the regulation of the natural gas sector. This adaptation will include changing its name to the Commission for Energy Regulation.
I will now outline the main reasons for choosing the CER to carry out this task. There are similarities between the electricity and natural gas sectors that make the CER suited to the purpose. The electricity and natural gas industries, for example, are in direct competition with each other in the domestic market through the supply of alternative means for cooking and heating. The two markets are also becoming more closely associated in the UK where all the regional electricity companies have their own gas supply arms. A similar convergence is expected throughout Europe. There are also commonalities in regard to regulatory activities in these sectors such as price setting, the establishment of performance standards and monitoring quality of service.
Given the growing demand for electricity and increasing dependency on natural gas by electricity generators, it is important to ensure that there is sufficient gas capacity to meet the demand of the electricity market. The commission's regulation of both markets will help to meet this objective and to provide a sound basis upon which Ireland's future energy requirements can be anticipated and met. That the CER is already established, functioning effectively as regulator and liaising with regulators in Northern Ireland, Britain and the rest of Europe will assist in the speedy implementation of the proposed regulatory framework for the natural gas sector. The proposal to have one regulatory body also means that economies of scale can be availed of in regard to its administration. A further practical reason for choosing the CER as gas regulator is that the present legislative framework, established by the Electricity Regulation Act, 1999, lends itself to the purposes at hand. The Schedule to the Act allows for the appointment to the commission of up to a further two members in addition to the present member.
As is the case with the CER at present, the newly-named Commission for Energy Regulation is to be independent in the performance of its functions. The commission will, however, continue to be accountable to the Comptroller and Auditor General regarding its accounts and to a joint committee of the Oireachtas in regard to the performance of its functions. The Bill's provisions have been designed to mirror to the greatest extent possible those set out in the Electricity Regulation Act, 1999, which established the CER in the first place. This will facilitate its implementation and will mean that the market will already be familiar with the principles behind the legislation.
Some of the more important provisions in the Bill are as follows. Section 5 changes the name of the Commission for Electricity Regulation to the Commission for Energy Regulation to reflect its new functions. Sections 6 and 7 and the Schedule provide for the transfer of functions from the Minister to the CER as well as expanding the current duties of the CER in the light of its role regarding the natural gas sector. These duties include advising the Minister on the gas industry, promoting competition in gas supply and protecting the interest of final customers. The Schedule identifies a number of the Minister's functions that are to be transferred to the CER in relation to the construction of gas pipelines such as compulsory acquisition orders and the extinguishment of rights of way. Sections 8 and 9 amend the existing provisions in the Gas Act, 1976, dealing with pipeline consents. A new section is to be inserted into the 1976 Act so that BGE and all other prospective builders of pipelines will in future make their applications for consent to build pipelines under this one section.
There is also a separate provision dealing with consent to the construction of so-called ‘upstream' pipelines. These run from gas fields to on-shore terminals and require the consent of the Minister for the Marine and Natural Resources. Section 10 provides that the commission may direct pipeline operators to publish a code of operations for their pipelines. This facilitates the inter-operability of the gas transmission network and pipelines owned by different operators. Section 11 provides for the increased market opening by reducing the consumption threshold above which consumers can source their own gas supplies from any supplier. As mentioned earlier, it is my intention to introduce full market opening by 2005. The Bill will allow the Minister to reduce, by way of statutory instrument, the annual consumption threshold that defines the level of market opening.
Section 13 provides for a new licensing framework for the supply of natural gas, the operation of distribution or transmission pipelines and the storage of natural gas. No such framework has existed until now.
Section 14 requires gas undertakings to keep separate accounts for their different gas activities such as supply or transmission and, where appropriate, consolidated accounts for other non-gas activities. This is to avoid discrimination, cross-subsidisation and distortion of competition.
Section 17 provides that the Minister may introduce public service obligations or PSOs on natural gas undertakings, for instance, with regard to security of supply, technical safety, or environmental protection. This section specifically excludes using PSOs for non-commercial extensions of the natural gas network.
In conclusion, the Bill I am introducing to this House today will be a major step forward in the liberalisation of the natural gas market. I look forward very much to hearing the contributions of the Members of this House. I commend the Bill to the House.