Seanad Éireann debate -
Tuesday, 29 Jun 2010

Vol. 203 No. 11

Electricity Regulation (Amendment) (Carbon Revenue Levy) Bill 2010: Committee Stage (Resumed) and Remaining Stages

SECTION 3

Debate resumed on amendment No. 1:

In page 5, after line 53, to insert the following:

"(6) No carbon revenue levy is payable by an electricity generator that has purchased the full value of their carbon allowances available to them until the end of 2012 in a commercial transaction.".

—(Senator Joe O'Reilly)

Minister for Communications, Energy and Natural Resources (Deputy Eamon Ryan)

I join with the comments of the Leas-Chathaoirleach regarding our cousins from Australia, who are very welcome. Unfortunately, I must deal with these rogues on a more immediate basis.

While I am impressed by the intent of the amendment proposed by Senator O'Reilly, I cannot accept it. This is a complex area. I have sympathy with Endesa but I do not think it would be equitable to make a special case. Although Endesa purchased the generating station and the associated allowances for a significant sum, this purchase and the underlying assumptions made by Endesa in the valuation process were commercial judgments and risk assessments made by a private sector firm. A number of factors have changed since Endesa made its valuation and purchase decision, including falling electricity demand and falling electricity market prices. These factors also have an impact on companies that have recently invested in and built new generation stations. This is the nature of commercial investment decisions. At the time of the Endesa purchase, there could be no certainty about the future price of carbon and no commitments were given to any party that generators would continue to be able to benefit from the single electricity market committee decision. The single electricity market committee decision specifically stated it was up to governments to recover windfall gains from generators arising from the decision. As such, any preferential treatment to exempt an individual firm would not be justified.

Investment in new power generation tends to have a projected lifespan of over 30 years. This levy is simply recovering a temporary windfall over the next two and a half years so any effect it might have on investments with such a long projected payback should be minimal. Endesa is likely to pay small amounts under this levy since generating stations are rarely dispatched by the market operator. This legislation carries through the Government's commitment to ensuring a transparent, non-discriminatory and competitive electricity market. In the long run, upholding this commitment is far more important than providing for preferential treatment in this case. I can understand the intent of the amendment but I cannot accept it.

Senator Joe O’Reilly

I join the Leas-Chathaoirleach in welcoming our visitors from Australia.

I am disappointed the Minister is unable to accept the amendment or the spirit of the amendment and come back with an altered version. I do not see that the matter merits further elaboration. I have put the argument and I do not see the point in rehashing it.

Senator Jim Walsh

I have listened with interest to the Minister's reply and I can understand the point he makes. He cannot appear, and should not be, discriminatory in this matter. I have a local concern that Endesa can get up and running. The broader issue is competition in the electricity generating market and in this respect it is highly desirable that Endesa is up and running. I appreciate what the Minister said about companies making commercial decisions and bearing the consequences of those decisions. If some of the factors used in modelling the internal rate of return or if its assumptions turn out to be inaccurate, the company carries responsibility for that. One would like to see that happen in the banking sector but I am conscious of the overall consequences for the economy if we took that line. As a principle, I cannot disagree with the Minister and the points he made. Is there another way of belling the cat in order to ensure a company that has made a specific commitment in terms of capital investment and in being a participant in the energy market is not going to be deterred or disadvantaged seriously because of the manner in which this is being applied? Can the Minister see how we can ensure we have an additional player in the electricity generating market?

Senator Joe O’Reilly

Without repeating the argument, I want to use Senator Walsh's last phrase, belling the cat. Perhaps the Minister can give us an assurance that, without accepting the amendment, he will examine the question and see if there is a method of creating fairness. I take his point on market forces but this is outside the control of the company. The potential for it to happen existed but there is potential for many things to happen. It is unfair to Endesa and we must try to create a competitive environment. Ultimately, this would be good for consumers. Will the Minister assure the House that he will examine this matter and see if there is another way to bell the cat? If so, I am happy to withdraw the amendment in the interests of achieving the objective of the amendment, which is job creation, competitiveness and a successful economy. That is the thrust of our approach to the Bill and to all legislation before the House.

Deputy Eamon Ryan

I am keen to see Endesa investing in our country and in power plants. That is in our interest. When the companies were coming into this country, one of the commitments I gave was that they were coming into a market where there is transparency and non-discriminatory arrangements. This was the crucial centrepiece of the commitment I gave to investors. They were entering a fair and competitive market. This is an important principle from which I do not want to divert. In hard case instances like this, where we see companies in different circumstances, those different circumstances are a vagary of market investment decisions rather than Government regulatory decisions. In the long run it would be much worse and act as a disincentive towards long-term investment. It is important to give a commitment, as the Government has done, to have a regulated competitive market to benefit all players equally. This is the single commitment I can give.

Amendment put and declared lost.

An Leas-Chathaoirleach

Amendment No. 2 in the name of Senator O'Reilly is deemed to be out of order, as it pertains to taxation.

Amendment No. 2 not moved.

Question proposed: "That section 3 stand part of the Bill."

Senator Joe O’Reilly

While I accept the Cathaoirleach's ruling arising from Standing Orders and its objective legitimacy, it is a pity Members are unable to debate the proposed amendment because it was an attempt to return more of the unearned profits directly to consumers, reduce costs and charges to consumers and lower energy prices. While drawing Members' attention to my party's advocacy of this legislation, my colleagues, Senators Coffey and Buttimer, said on Second Stage last week was that Fine Gael took grave exception to the tardiness of its introduction. It is a great failure of the Government that this was not achieved a couple of years ago. Fine Gael has been advocating implementation of such a windfall tax, through Deputy Coveney in Dáil Éireann, for a couple of years. Consequently, this legislation is welcome, although it is late in appearing. Fine Gael advocated such measures early, continues to do so and still supports the principle behind it.

I ask the Minister to consider imposing an 80% rate of tax to enable better benefits to accrue to the consumer and reduce energy costs. One of the best methods and most likely ways in which success will return to the economy and enable the country to emerge from recession is by improving competitiveness in respect of exports and domestic production. Our pricing must be competitive. Central to such competitiveness and competitive pricing is the cost of energy. This is the reason I suggest to the Minister that a rate of 80%, rather than 65%, would be more apt. Electricity generators are earning a profit by charging consumers for the cost of carbon, despite having received an allocation for carbon allowances from the Government that allows them to emit carbon freely until 2012. I will not go through the case to be made for the amendment, given that it has been ruled out of order, but my point is that in the interests of consumers, competitiveness and creating an economy fit to compete in global markets, there is merit in increasing the charge to 80%.

Although Fine Gael supports the legislation, I again underline a point without digressing from the legislation in hand. However, the commentariat, to use that often used expression, in the economic and every other sphere now accepts that Fine Gael's position on the good bank-bad bank proposal was correct. Government policy is evolving towards that position, as is the proposal Anglo Irish Bank has made to the European Commission. Fine Gael is equally correct on this legislation. This is another example of the party's foresight, as I am sure Senator Walsh will acknowledge. Although it may take the party a while to get across its message, it is happy that it will actualise at some point, although one would wish to see it occur earlier. I reiterate that Fine Gael's preference is for a rate of 80%, rather than 65%.

Senator Jim Walsh

I accept the principle that there is no representation without taxation. Therefore, the Lower House should be the one that makes financial decisions. However, given the parlous state of the public finances, perhaps there might be a role for the Seanad, at least an advisory role, with regard to financial matters——

Senator Joe O’Reilly

Hear, hear.

Senator Jim Walsh

——rather than consistently having amendments ruled out of order.

On the subject under discussion, I am not sufficiently proficient to give a view, but I made a point on Second Stage regarding a matter of concern to me, in respect of which I applauded the introduction of this legislation. Taking away such windfall profits from the generating companies makes them focus to a much greater extent on their commercial cost base, rather than having in-built cushions which sometimes give rise to inefficiencies. With regard to the rate of 65%, I understand this means such companies will retain 35% of the profits which, on the face of it, appears high. Perhaps there is a good reason for this.

Deputy Eamon Ryan

The rate of 65% as set out in the legislation is included for a reason. Setting the rate at this level allows the Government to recover a substantial portion of the windfall gains from generators but also to ensure it avoids over-recovery of funds. The latter is a real risk because the levy is only an approximate figure of the windfall gains electricity generators are earning. The easiest and most precise solution would be to charge electricity generators the market price for each free carbon allowance they receive. However, I understand this would be in direct contravention of EU Directive 203/87 which requires member states to allocate at least 90% of carbon allowances to generators free of charge. Since interference with the terms of the directive would be legally impossible, the Government cannot levy for the free allowances directly and has been obliged to consider other options.

The structure of the single electricity market means that the precise calculation of the windfall gain for each generator in each half hour period would be a technical and administrative nightmare and require significant time and resources to accomplish, if it was possible to make it. Further complicating the issue is the fact that a generator may have been obliged to purchase a portion of the carbon allowances it is using. A generator receives its free carbon allowance allocation from the EPA based on the national allocation plans. The current plan which covers the period from 2008 to 2012 based the allowances to generators on an average figure of their output in the period from 2003 to 2004. Whether a generator is required to purchase additional allowances depends on how much its current output varies from this historical output figure. Needless to say, if a generator has been obliged to purchase allowances on the market, it is not earning windfall gains on that portion of its allowances.

The Government also faces the difficulty that a certain portion of the emissions for each generator is attributable to in-house consumption, that is, electricity consumed directly by the generator and not sold to the market. Since it is not sold to the market, generators are not earning a return for such output, yet they are required to surrender allowances for it. Therefore, there is no windfall gain on this element of generators' emissions.

It should be remembered that generators are required to incorporate the opportunity costs of carbon on a day-ahead basis and that all scheduled generators receive the same system marginal price. Therefore, it can be stated the system marginal price reflects the anticipated opportunity cost of carbon. However, the method of calculation of the levy is to use a simple arithmetic average of the daily price of carbon allowances during the levy period, rather than what generators actually bid and receive for carbon. The difference between the two is unlikely to be significant but is yet another abstraction the Government has been obliged to create to ensure the levy can work effectively in practice. For these reasons, I have been obliged to adjust the levy amount downwards by a percentage rate; 65% is my Department's best estimate of a figure that will raise significant levy proceeds, while avoiding over-recovery. My concern is that in setting the rate higher, one would create a risk that the levy would start to claw back sums from generators in excess of the windfall gains they are making in practice. One of the fundamental tenets of the levy is that it can be justified because generators are, in effect, getting something for nothing. We should not lose sight of that in trying to increase the percentage rate at this point. The Bill, however, provides the Minister with power to amend that figure. I will keep the issue under draft review and conduct a review of the percentage rate if I deem that generators are getting off too lightly. As per the Bill, any such review will be conducted in public with any interested parties having an opportunity to respond to any proposed changes.

Senator Joe O’Reilly

That is encouraging in the context of what we are trying to achieve. It is fair. How often does the Minister propose to conduct the review? Would it be an annual review?

Deputy Eamon Ryan

Given the legislation is limited to two and a half years, by definition I do not think it would be an annual review. It is not a multi-annual approach in the sense it is coming to an end. I imagine once a year would be reasonable in that timeframe.

Question put and agreed to.

Section 4 agreed to.

Title agreed to.

Bill reported without amendment and received for final consideration.

Question proposed: "That the Bill do now pass."

Senator Jim Walsh

I thank the Minister. It is always a pleasure when he comes to the House to discuss these issues, many of which are technical. He engages with the House and is very forthcoming with information. I compliment him.

Senator Joe O’Reilly

I endorse the remarks of Senator Walsh and thank the Minister for his engagement with the arguments made. He does so on all occasions when he attends. I also thank the civil servants who accompany the Minister. I thank my colleagues, Senators Coffey and Buttimer, who took Second Stage of the legislation for me last week because I was away. I regret I was not present for the entire debate. I know they will have done an outstanding job and will have applied their usual diligence and capacity to it. I would like to have been present for the entire debate and I apologise to colleagues for my absence. I thank them for their efforts. The legislation is worthwhile. I hope it will further enhance the economic potential of the country.

Minister for Communications, Energy and Natural Resources (Deputy Eamon Ryan)

I thank both Senators very much indeed. I thank the Seanad for its assistance. We must have put five pieces of legislation through the Houses in the past year. That is not an insignificant number of Bills from a Department which is relatively small in Government terms. It is a large output. The Seanad had a key role to play in respect of many of them. I thank my officials for their work, which in this case has been highly productive and timely. We have got the Bill through in time to put it into place, subject to the President signing it. That will have a direct effect and benefit on many Irish people working in companies using energy. This is substantial legislation and I very much appreciate the House's effort in getting it through in time. My officials have done excellent work in bringing the Bill to fruition. I look forward to returning to the Seanad again with the next Bill.

Question put and agreed to.