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Electricity Prices.

Dáil Éireann Debate, Thursday - 1 April 2004

Thursday, 1 April 2004

Questions (42, 43)

Joan Burton

Question:

37 Ms Burton asked the Minister for Communications, Marine and Natural Resources if any study has been carried out or is planned on the possible consequences for electricity prices of recent decisions in regard to the allocation of carbon dioxide allocations, particularly in view of fears expressed that it could lead to a significant increase in prices; and if he will make a statement on the matter. [10208/04]

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Paul Nicholas Gogarty

Question:

50 Mr. Gogarty asked the Minister for Communications, Marine and Natural Resources the discussions he has had with the CER with regard to the windfall gains that electricity generators will receive following the introduction of emissions trading; and if he intends to introduce a system whereby such windfall gains would be recycled to reduce the cost to the consumer. [10305/04]

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Written answers

I propose to take Questions Nos. 37 and 50 together.

The Commission for Energy Regulation, CER, in its advisory statutory function, has advised me that under the EU emissions trading scheme, electricity generators are likely to benefit financially from windfall gains arising from the impact of the allocation of greenhouse gas allowances on the wholesale market price of electricity. In its opinion, in order to give the correct price signal to final customers, they should see in their retail price, the full costs of allowances, that is allowances which are freely allocated under the scheme together with those required to be purchased by generators.

Reflecting the true costs of conventional generation, including emissions costs in wholesale electricity prices, will introduce transparency into the process of correctly valuing renewable energy insofar as its environmental benefits are concerned. This will mean that generators using cleaner, less carbon intensive fuel will have a comparative advantage in the wholesale electricity market with higher relative increases, as is the intention of the scheme. If prices were to reflect only the cost of allowances which had to be purchased by existing generators, then it would be a disincentive to attract the required new generation capacity with serious implications for national security of supply.

The CER commissioned a study carried out by ILEX on the impact of the EU emissions trading scheme on the Irish electricity market. This study, which was published in December 2003, is available on the Commission's website at www.cer.ie. The study found that emissions trading may lead to a 12.8% increase in the wholesale price of electricity by 2006 based on a 70% allocation of historical emissions, a €10 per tonne price of carbon and 100% pass through of the cost of carbon. Assuming only the additional cost of carbon is incorporated, the study indicated a 2.6% increase in the wholesale electricity price.

I am advised that, based on the proposed allocations, where there is full cost pass through, the impact on the wholesale electricity price could be in the region of 14% which might result in an average retail tariff increase of 7%. Tariff increases resulting from this full cost pass through would adversely affect competitiveness and would lead to windfall profits for existing generators who received allowances for free.

Bearing in mind the need to keep electricity prices at the lowest sustainable level, I have considered the CER's suggestion that the windfall gains to the generators could be recycled in the electricity sector to mitigate the effect of the introduction of emissions trading on retail electricity prices. In this regard, I have brought legislative proposals to the Government which it has just approved. I propose to empower the CER to make regulations, subject to my consent, to claw back from generators any such windfall gains arising. It is intended that the bulk of the gains will be recycled back into reducing tariffs and the remainder possibly used in other areas which could include fuel poverty, energy efficiency and R&D focused on renewables. It is expected that, due to the moderation of tariff increases through recycling, customers will only see tariff increases of 1% to 2% which reflects the rise in wholesale prices due to the actual cost of purchasing the balance of allowances required.

Question No. 38 answered with QuestionNo. 14.
Question No. 39 answered with QuestionNo. 10.
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