I welcome the Minister for Communications, Energy and Natural Resources, Deputy Pat Rabbitte, to the House. We will deal with 1a. on the Supplementary Order Paper, Electricity Regulation (Carbon Revenue Levy) (Amendment) Bill 2012.
Electricity Regulation (Carbon Revenue Levy) (Amendment) Bill 2012: Second and Subsequent Stages
Question proposed: "That the Bill be now read a Second Time."
I am very glad to have the opportunity to present the Electricity Regulation (Carbon Revenue Levy) (Amendment) Bill 2012 for consideration by the House and I thank the Whips in this House as in the other House for their co-operation in ensuring that the Bill can be taken today. The legislation seeks to cease the inclusion of the carbon revenue levy in wholesale electricity prices bid into the single electricity market. On its enactment it will end the charging of the levy so that it can no longer be included in prices bid into this market. This in turn will end the associated wholesale electricity price increase thereafter.
The inclusion of the carbon levy in wholesale electricity prices is a result of the Supreme Court decision in the case of Viridian Power Limited and Huntstown Power Company Limited v. the Commission for Energy Regulation, CER. The decision issued on 23 February quashed the prohibition of the carbon levy being included in wholesale electricity price bids in the single electricity market.
The consequence of the Supreme Court decision to quash the prohibition means that the levy is now mandatorily included in all generators' price bids. As it stands, after the judgment and without any action being taken, electricity generators are not only allowed to include the opportunity cost of the free carbon allowances they have received in their price bids but also the cost of the levy they pay to the regulator, thus increasing the wholesale price of electricity by the amount of the levy. The expected impact of the decision is to increase wholesale electricity prices by a figure estimated at between 3% and 6%. This potentially could increase electricity prices to end consumers. Certain large businesses have already seen increases in their prices because of the inclusion of the levy in the wholesale bids. As time goes on, again assuming no action is taken, increases would also be expected to take effect in due course in the prices paid by medium and small business and those paid by domestic consumers.
As Members are aware, prices in the retail electricity market for all business and domestic customers have been deregulated. There is no ministerial or regulatory role in setting retail electricity prices. It is therefore an entirely commercial matter for electricity suppliers to decide whether, when and by how much to increase or decrease prices depending, for example, on market circumstances, contract terms and hedging practices. I note some electricity generators are also suppliers in the retail market, whether domestic or business or both. The Government is also concerned about the potential impact on Northern Irish electricity consumers and this reinforces the need for urgent resolution of the issue. The levy's inclusion in wholesale prices, again assuming no further action, would also have the effect of increasing wholesale prices in Northern Ireland, as well as in the Republic, because of the existence of the all-island wholesale market for electricity.
The Government recognises that the cost of energy in Ireland is a serious competitiveness issue facing energy consumers during this difficult period for the economy. As I have noted, prices in the retail electricity market for both domestic and business customers are now fully deregulated. Prices charged to electricity customers are wholly a commercial and operational matter for the suppliers. Ireland's electricity markets, both wholesale and retail, are characterised by vigorous competition regulated by the Commission for Energy Regulation. Ireland's concerns about high oil and gas prices are shared at EU level and by fellow member countries of the International Energy Agency, IEA. The EU and IEA agree that high fossil fuel prices underline the need to reduce dependence on fossil fuels by radically enhanced energy efficiency measures and the development of renewable energy. At a national level, competitive markets in electricity help put downward pressure on prices. I am committed to working with enterprise and with the energy sector to ensure the costs of energy are as competitive as possible, including sustained focus on energy efficiency measures.
In view of the importance the Government attaches to electricity costs, for business competitiveness and because of their role in domestic bills, it therefore has agreed to end the charging of the carbon revenue levy. This is to mitigate the increase in wholesale electricity prices resulting from its inclusion in generators' price bids into the single electricity market, SEM. The purpose of the Bill is to end the charging of the levy on enactment, thereby ceasing its inclusion in these bids and thus ending the associated wholesale electricity price increase thereafter. Amending the Act in order to cease the imposition of the levy from the earliest possible date will ensure the wholesale electricity price increase has effect for the shortest period possible. In this way, the inclusion of the levy in wholesale prices will have the least possible impact on retail prices. This is vital for business competitiveness and for domestic consumers' electricity bills. Senators will appreciate, from what I have just said, the protection of the electricity cost competitiveness of Irish enterprise, as well as the impact on domestic consumers' electricity bills, are the key motivators for this legislation. The impact on Northern Irish electricity prices is also a significant concern. I am confident that Senators will agree, for the reasons I have just outlined, as to the urgency of taking action to ensure such price rises do not happen and to minimise their duration if they do happen. We had an unusual consensus in the Lower House, where across the divide in every sense of the term, it was accepted that the enactment of the legislation was an urgent priority. Our collective concern, therefore is reflected in the urgent priority the Oireachtas is affording to this Bill, which I acknowledge.
As I have previously outlined, the need for this legislation is to end the inclusion of the levy in price bids into the single electricity market and the associated wholesale price increase. In turn, the levy's inclusion in these price bids is because of the Supreme Court decision quashing the prohibition on the inclusion of the levy. Given this context of the levy and the judgment, as well as the undoubted complexity of these matters, it would be useful for all concerned for me to set out the wider background and explain how the levy came about. This requires me to briefly explain carbon allowances under the emissions trading scheme and describe the wholesale single electricity market. The manner in which carbon was allowed to be bid into electricity prices in this market is also relevant. I will also speak about the nature of the legal challenge itself.
Free carbon allowances originate from the EU emissions trading scheme, under which electricity generators have received these allowances. The EU emissions trading directive, Directive 2003/87/EC, was implemented to assist member states in achieving reductions in emissions of greenhouse gases by establishing a carbon trading regime whereby large emitters of greenhouse gases were required to possess allowances for their emissions. These measures were implemented following signature of the Kyoto Protocol. The directive was transposed into Irish law by the European Communities (Greenhouse Gas Emissions Trading) Regulations 2004, SI 437 of 2004. These regulations led to the creation of national allocation plans, which determined how the allowances were to be allocated sector by sector. Under the Irish national allocation plan covering phase 2 of the emissions trading scheme, which runs from 2008 to 2012, electricity generators receive the vast bulk of their required carbon allowances for free, with only a small amount of the allowances auctioned.
The single electricity market created a single market for electricity on the island of Ireland. On 1 November 2007, the market went live, commencing the trading of wholesale electricity in Ireland and Northern Ireland on an all-island basis. In its review of Irish energy policy last year, the ESRI stated that one of the key successes of Irish energy policy in recent years was the implementation of the single electricity market on the island of Ireland and concluded that the single electricity market had ensured a secure supply of electricity at a competitive price since 2007. The single electricity market committee, which comprises the energy regulators North and South and two independent members, is statutorily responsible for the regulation and oversight of the single electricity market. The committee governs the operation of the all-island wholesale electricity market.
Although generators receive the majority of their allowances for free under the emissions trading scheme, they are able to receive revenue for them from the single electricity market through a decision taken by the single electricity market committee. In March 2008, the committee decided that regardless of how they receive the carbon allowances, all electricity generators must include the full opportunity cost of carbon allowances in the bids they submit to the single electricity market. Therefore, generators participating in the single electricity market were allowed to bid in the opportunity cost of the free carbon allowances to the price they charge for electricity generation by this decision. As a result of this decision, electricity generators receive additional revenues from the market due to the inclusion of the opportunity cost of carbon allowances in their allowable costs for the purposes of price determination in the single electricity market. This is despite the fact that all or some of the allowances have been granted for free.
The Electricity Regulation (Carbon Revenue Levy) (Amendment) Act 2010, which was enacted on 30 June 2010, amended the Electricity Regulation Act 1999. Its provisions allowed for the charging and collection of a levy from the electricity generators by the Commission for Energy Regulation. This ensures a portion of these additional revenues — the opportunity cost of the free carbon allowances — are recovered for the use by the Exchequer. The legislation provided that the carbon revenue levy would end on 31 December 2012 in line with the ending of free allowances and the requirement to purchase them after 1 January 2013. The 2010 Act provided for the introduction of a carbon revenue levy payable by fossil fuel generators of electricity. It provided that proceeds from the levy were disbursed into or for the benefit of the Exchequer. It required the Minister for Communications, Energy and Natural Resources, with the consent of the Minister for Finance, to direct the regulator on how the proceeds of the levy should be disbursed in line with Government policy. The proceeds of the levy have in this manner been utilised for rebates to large energy users to mitigate their electricity costs in accordance with the provisions of the Act. The large energy users that have benefited are significant employers with an indigenous and multinational base. This rebate scheme is temporary and will be paid in accordance with the existing annual direction to the regulator. There are no implications for the Exchequer.
After charging and collecting of the levy had commenced, two companies sought to bid in the carbon revenue levy as an allowable cost for price purposes in the single electricity market. In response, the single electricity market committee issued a determination confirming, in effect, that the levy could not be included in the electricity generators' costs in determining the wholesale price of electricity. Two private electricity generators, Viridian and Endesa, brought a High Court case against the regulator to challenge the decision that prohibited the inclusion of the levy in price bids. This was decided in the regulator's favour in late 2010. Viridian then brought an appeal to the Supreme Court stating that the High Court judge erred in his judgment. The Supreme Court issued its judgment in February 2012, stating that the prohibition on the inclusion of the levy in the electricity generators' price bids was incorrect. The legislation was not challenged in the case and the Supreme Court judgment was not directed at it. As a result of the judgment, the levy had to be included in wholesale electricity price bids in the single electricity market, with knock-on impacts on the wholesale price as I set out in detail earlier. This required action to be taken to minimise the duration of the price increase.
I will outline the main provisions of this short Bill. For the convenience of the House, an explanatory memorandum has been published to provide a synopsis of the provisions of the Bill. Part 1 is the substance of the Bill. The single substantive provision of the Bill is to bring forward the end date of the final carbon revenue levy period as provided for in the original 2010 legislation. I mentioned earlier that the end date was 31 December 2012, in line with carbon allowances having to be purchased after that point. The legislation being discussed here today advances the end date from 31 December 2012 to the date of enactment of the Electricity Regulation (Carbon Revenue Levy) (Amendment) Act 2012. Part 2 is a standard provision providing for the Short Title of the Bill. I commend the Electricity Regulation (Carbon Revenue Levy) (Amendment) Bill 2012 to the House.
I welcome the Minister. As he suggested, this provision will be not be opposed in this House. How confident is the Minister that there will be a price reduction as a result of this legislation? Will that reduction be passed on to the consumer?
I welcome the Minister to the House. I am pleased to have an opportunity to speak on this Bill. There is a good chance that I will repeat some of the points the Minister has made. It is important for Senators to understand the aim of this legislation and the positive effect it will have on the end users of electricity. This Bill will amend section 40 of the Electricity Regulation Act 1999 to enable the adjustment of the final levy period in which the carbon levy is payable from 31 December 2012 to the date of the passing of the legislation before the House. The 1999 Act provided for the establishment of the Commission for Energy Regulation, as directed by the EU. Under that Act, the Commission for Energy Regulation is empowered to grant electricity supply and generation licences to identified bodies and authorised to sanction the construction of power generation stations and transmission and distribution systems. The 1999 Act gave the commission the following functions: to publish proposals for a system of contracts and other arrangements, including appropriate rights and obligations for trading electricity; to engage in a public consultation process on the procedures to be adopted by those trading; to advise the Minister on the impact of electricity generation on sustainability and international agreements on the environment to which the State becomes party; and to make regulations, where necessary, for those involved in the production and generation of electricity, including in areas such as safety, efficiency, security and supply. A further important function of the commission is to promote competition in the market and in so doing facilitate an environment in which the consumer pays the lowest possible price for electricity. This is an outcome all of us would welcome.
Over the years, the functions and responsibilities of the Commission for Energy Regulation have changed to reflect changes at national and European Union level. Our requirements regarding the amount of electricity we produce from renewable sources have increased and we have been required to reduce emissions from gases such as carbon dioxide and nitrous oxide. This has been reflected in the evolution of the 1999 Act. The reason for the amendment to the Act is to ensure any increased charge in the wholesale cost of electricity is justified. Electricity generators have been receiving free carbon allowances under the EU emissions trading scheme. Those generators operating in the single electricity market, SEM, as determined by the single electricity market committee as per the Electricity Regulation (Amendment) (Single Electricity Market) Act 2007, were allowed to bid the opportunity cost of the free allowances, despite having received these allowances free of charge. Additional profits were earned by the generators from this windfall gain.
As with all legislation, certain amendments must be made over time and the 2007 Act was amended in 2010 by the Electricity Regulation (Amendment) (Carbon Revenue Levy) Act 2010, which allowed for the insertion of a section 40D in the 1999 Act. This new section addressed the payment of the carbon revenue levy by each electricity generator through participation in the single electricity market in relation to the amount of emissions attributable to each generating station. The levy was for the use of the central Exchequer. A formula —"E x P"— was devised to calculate the carbon levy where "E" is the total emissions during the levy period and "P" is the average daily price for allowances, as determined by the Commission for Energy Regulation. The Bill before us addresses section 40D of the 1999 Act by bringing forward the end date for the final carbon revenue levy period from 31 December 2012 to the date of enactment of this legislation.
As I noted, the Government wants the end user, namely, the consumer, to obtain electricity at the lowest possible price. While we do not have control over certain external factors, including the price of oil and gas on the world market, where we can influence the direction of domestic costs, we must step in for the benefit of consumers. The Bill will close the carbon revenue levy period and thus remove the ability of generators to receive an unearned windfall. A High Court case was brought by two energy companies, Viridian and Endesa, against a decision by the Commission for Energy Regulation preventing energy companies from including a carbon revenue levy as an allowable cost in bids for wholesale price purposes. The High Court found in favour of the regulator but Viridian subsequently appealed the decision to the Supreme Court, which found in favour of the company at the end of February 2012. The expected impact of the decision on wholesale electricity prices was estimated at between 3% and 6%. With this in mind, the Government has been forced to act to protect small and medium business users as well as hard-pressed domestic consumers from unnecessary price increases. For this reason, it introduced the Bill to shorten the lifespan of the levy from 31 December 2012 to the date of enactment of the Bill, thus closing the door on electricity generators' ability to pass on the carbon revenue levy in the wholesale market and, ultimately, to consumers. I fully support the Bill.
I support the provisions and objectives of the Bill and commend it to the House. I also commend the Minister on the prompt and expeditious manner in which he introduced the legislation. The last thing commercial, industrial or residential users of electricity need at this time is an increase in the price of energy. An increase of between 3% and 6% would be seriously detrimental to companies' cost base and add to pressure on families. I also commend the Senators opposite on unanimously supporting this sensible and sound Bill.
I join Senator Whelan in thanking the Senators opposite for facilitating the passage of the Bill. In the process I give Senator Daly the assurance he seeks. The entire purpose of the legislation is to prevent a knock-on to the consumer. This has not yet happened and I hope the enactment of the Bill will halt such a possibility in its tracks. This is one of the reasons for speed in having the Bill enacted before both Houses rise next week. I should perhaps speak only for the Dáil, the House I know best, as I do not know if the Seanad is in session next week.
It is not sitting next week.
It is important to have this legislation enacted this week as its purpose is to prevent any increase in the cost of electricity, consequent on the Supreme Court decision, by preventing the bidding in of the carbon revenue levy. I greatly appreciate the co-operation of the House in this regard.
While this is a minor Bill in terms of length — it contains a single substantive section — it is very important in terms of arresting a process to which some exception was taken in the other House. Owing to my position, I cannot comment on the matter but a number of Deputies were critical of the Supreme Court decision. Those of us who examined the judgment made in the High Court believed the regulator was on safe ground. In any event, it is my duty to respond to the decision of the Supreme Court and the Bill seeks to do so in the national interest.
Question put and agreed to.
Bill reported without amendment, received for final consideration and passed.