JOINT COMMITTEE ON COMMUNICATIONS, ENERGY AND NATURAL RESOURCES díospóireacht -
Wednesday, 21 Apr 2010

Proposed EU Regulation and Security of Gas Supply: Discussion.

Chairman

The Joint Committee on EU Scrutiny referred the proposed regulation to this committee for further scrutiny. The purpose of scrutiny is to examine the implications of the proposal for Ireland, and, if necessary, to seek to influence the provisions of the measure as it progresses through the Council working party process. Copies of the proposed regulation have been circulated to members, the original information note prepared by the Department and the advice note originally prepared for the Joint Committee on EU Scrutiny.

We have invited representatives from the Department of Communications, Energy and Natural Resources and the Commission for Energy Regulation to speak to us today on the proposed regulation and on the issue of the security of gas supply in general.

I welcome Ms Sara White, Deputy Secretary General and Ms Una Nic Giolla Choille, principal officer, who is welcome back as she has attended the committee before and Ms Rebecca Minch, assistant principal. I also welcome Mr. Denis Cagney, director of gas, from the Commission for Energy Regulation, to the meeting.

Before we begin I draw everyone's attention to the fact that members of this committee have absolute privilege, this same privilege does not apply to witnesses appearing before the committee. The committee cannot guarantee any level of privilege to witnesses appearing before it. Further, under the Salient Rulings of the Chair, members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I ask Ms White to make her presentation.

Ms Sara White

Thank you. As always, we are at the disposal of this committee on this and on all issues. We are glad to be here this morning and to see our colleagues from the Commission for Energy Regulation here. Ms Minch will make the presentation which will be followed by a presentation by the regulator.

I will make three points before we go into detail — under the bonnet — so to speak. There is atrocious complexity such as algorithms but I suggest we focus on the key desiderata for Ireland. First, there is never room for complacency to do with security of gas supply, either for Europe or for Ireland. On the other hand, there is a great deal happening which should reassure us in terms of our own work and the work of Europe that the conditions for gas security of supply are progressively improving.

Second, Ms Minch is the lead Irish negotiator in Europe on this issue. We are working seamlessly with the regulator, with BG Gaslink, with Northern Ireland and very closely with the UK, to ensure that this regulation supports and reinforces the all-island gas security of supply position. It is important to reiterate this point. It is a collective enterprise for the interests on this island to ensure this regulation works for Ireland and works for the region of Ireland-UK.

Third, we should not lose sight of the fact that what is good for Europe in energy supply and security of supply, including gas supply, is good for Ireland. This is a fundamental principle. We have strongly supported the Commission in developing this regulation because it will mean that every member state has to step up to the plate in a very new way. This is allied to the development of robust gas interconnection within Europe and broadening the number of third country producer sources. This is very important for Ireland because it is important for making Europe work better and work well in terms of a robust internal gas market, a robust interconnected gas market and to ensure the diversity of supply, including LNG sources which are not dependent on pipelines so that Europe is robustly placed to supply its gas needs. This is good for Ireland.

Ms Rebecca Minch

I work in the electricity and gas regulation division of the Department. I will give a short presentation on the proposal for regulation of the security of gas supply which is currently under discussion in the energy council working group in Brussels.

I will present a brief background to the regulation and place it in context, in the EU context and to give a sense of how it relates to the issues we face with regard to gas security in Ireland. My colleague from the Commission for Energy Regulation, Mr. Cagney, will expand on this point.

By way of introduction, it is true that the regulation is distinguished by a fair amount of operational detail and I will expand on this point. I will examine the key principles underpinning the legislation. In that regard, the members may find the note produced by the Presidency for the European Parliament a useful introduction to the text, given that the text has become quite complex at this stage in that it reflects the amendments now proposed by the European Parliament.

I will then look at the two obligatory standards proposed in the regulation for infrastructure and supply. I will then move on to look at the other major focus in the regulation which is on achieving a co-ordinated approach across the EU to emergency planning and response processes.

I will finish by looking at the principle of regional co-operation which is a very important principle in this regulation. It is very much embedded in the text now. I will also look briefly at the work under way on regional co-operation.

The regulation has emerged as a result of a process which has been under way for the past two to three years, revolving around the first two strategic energy reviews which the European Commission has undertaken. The Commission undertook the first strategic energy review in 2007 and the second in November 2008. This shows that very soon on the first review they realised there was a general consensus reached on the fact that security of supply is the key challenge facing the EU's energy policy. On that basis the European Council gave the mandate to move ahead with revising the existing legal framework for gas security which was provided for by EU Directive 2004/67. One of the things this proposal for regulation will do will be replace that existing directive. It is recognised at the highest level in the EU that a secure and reliable energy supply is of fundamental economic importance for all member states.

This work began through the gas co-ordination group, which is chaired by the European Commission and consists of all the member states and representatives of the gas industry. It is proving to be a very useful group and adds considerable practical value to the work to monitor the security of gas supply within the EU. The work on beginning the revision of the existing legal framework on gas security then coincided with the events of January 2009 and the Russia-Ukraine gas crisis, which added even greater urgency to this work. In addition it gave the Commission and member states a much greater understanding of what could and should be done and where value could be added by an EU legal framework.

It was on this basis that in July 2009 a draft proposal for regulation was put forward by the European Commission. It is also worth noting that the publication of the proposal coincided with adoption of the third package. A key premise of the regulation is that the market is the first and best guarantor of security of supply and that security of supply in the first instance should be delivered by the market and then in the event of a disruption to normal supply conditions the market should be allowed to function for as long as possible. That is a fundamental premise that informs the entire proposal.

One feature of the early part of the discussions last autumn was whether it should be a regulation or a directive because the existing legal framework is provided for by a directive. It was agreed then — we supported the Commission in this — that it was very important that it should be a regulation because a directive takes longer to negotiate and transpose. Member states can interpret the resulting legislation according to their own legal requirements. We supported the Commission in making the proposal a regulation on the basis that implementation would begin immediately on adoption and also that provisions would be addressed directly to all the players identified in the regulation. In terms of the wider events such as those we saw in January 2009 it is very important that the EU is seen to be taking decisive action in a timely manner on this. As Ms White has mentioned, as Council discussions have been ongoing we have worked extremely closely with the CER and Gaslink, the transmission system operator.

Discussions on the proposal are at an advanced stage at the Council working group. The next step is for the Spanish Presidency to begin discussions with the European Parliament. The document supplied to committee members outlines some of the amendments proposed by the European Parliament. It indicates where some of these amendments have been accepted and compromise proposals made. The Spanish Presidency is having its first discussion with the European Parliament tomorrow. Those discussions are scheduled to continue into the middle of June. We expect that there will be political agreement on the proposal by the end of the Spanish Presidency but that the adoption process would continue on into the Belgian Presidency. We envisage adoption some time around September, which implementation would begin by the end of the year.

I will now deal with the key principles that underpin the regulation. The overarching aim of the regulation is to increase the security of supply of gas throughout the EU by ensuring each member state has an adequate level of preparedness for gas supply disruption. That sounds like a straightforward proposition, but there is a level of complexity through which we must work to achieve that aim. That has been the objective of the Council discussions since last September. The legislation proposes to create a framework within which each member state can ensure it has an adequate level of preparedness for gas supply disruption and in doing so contribute to the energy security of the EU as a whole. If we are to achieve that we need to achieve some level of commonality in those levels of preparedness across the EU. Set against this is the reality that there are differences in the way gas is consumed in each member state. There are differences in gas markets across the EU. The challenge is to achieve that level of commonality despite the diversity of gas market conditions in the EU. What I mean by that diversity would be, for example, the place of gas in the fuel mix, the proportions of consumption by domestic or industrial users and the configuration of the network. All these conditions are different in different member states. We need to reconcile that diversity with the common aim in the regulation.

This is why the regulation takes as its starting point the obligatory standards for infrastructure and supply. That is an important way in which this commonality would be achieved. I will discuss those standards in more detail next. It is also why co-ordination is proposed for the process of planning for and responding to a gas disruption. For example, taking risk assessment as the starting point, there should be a common approach to that process which should in turn feed into the preventive planning process which would cover action to address the risks identified. It would then move on through the standards and then to a commonality of emergency response.

Member states are required to clarify roles and responsibility throughout this emergency and planning process, which would include consultation with neighbouring member states, and the Commission having the opportunity to ensure consistency between preventive action and emergency plans. Hence we see the principle of transparency being brought into the regulation. I point to the importance of the emphasis on ensuring that the Internal Market functions for as long as possible in that regard. It is all aimed at avoiding a protectionist response by member states in the event of a gas supply problem.

On the basis of achieving these levels of commonality and it being done in a transparent way, the aim of the proposal is to create the conditions under which member states can have the mutual confidence they need to be able to act in solidarity should a member state or region of the EU be in difficulties that the market cannot overcome due to a gas supply disruption. It is very important to remember that any response would be based on a three-step process: first, industry; second, the member state, co-ordinated by the competent authority; only then does it move on to the regional or Union level which is where the European Commission would come in with a co-ordinating role working with the Council and the co-ordination group. At that level it could be said that this level of response could reflect the level of subsidiarity.

I will now deal with the infrastructure standard. The aim of the N minus 1 principle is to ensure that should there be a disruption to the largest gas infrastructure there would be capacity available in the alternative infrastructure to meet the demand. It is intended to ensure that member states have alternative capacity to their main infrastructure. There are complex calculations for that, which we examined working closely with the CER and Gaslink. The demand side measures may be used in terms of voluntary interruptible contracts and so on.

There has also been, in terms of this provision, quite considerable discussion around the processes of enabling reverse flows. It is worth noting that the events of January 2009 and the Russia-Ukraine situation are definitely reflected in these concerns. In that case, it was not a question of a shortage of gas as a commodity. The issue was that the infrastructure, in terms of pipelines and the capacity to have reverse flows, was not sufficient to transport gas to the site of demand. Therefore, an emphasis has been placed on the importance of improving the coverage and flexibility of European gas infrastructure.

Deputy Liz McManus

What does TSO stand for?

Ms Rebecca Minch

It stands for transmission system operator.

Deputy Liz McManus

Okay.

Ms Rebecca Minch

We expect a new financial instrument to be brought forward by the Commission on the funding of energy infrastructure later in the year. It will replace the existing 10E provision. It is expected that the new instrument will provide for funding on a much larger scale than the existing one. There will be a particular focus on investments for security of supply purposes. We are already getting a flavour of that scale of funding with the approval of a grant of €110 million for the east-west electricity interconnector.

Deputy Simon Coveney

Can we ask questions as we go along?

Ms Rebecca Minch

Certainly.

Deputy Simon Coveney

As just two members are present, perhaps we can have a slightly more informal discussion.

Ms Rebecca Minch

Yes.

Deputy Simon Coveney

That would be great.

Chairman

I have no problem with that.

Deputy Simon Coveney

Many interesting matters have been raised. The witnesses may be aware that the Dáil debated some of these issues last night. We were not talking about EU security of supply, but about Ireland's security of supply issues, particularly with gas. I want to ask a number of questions about Ireland-specific issues before Ms Minch completes her presentation, if that is okay. I understand the process that is taking place.

Ireland is in a particularly vulnerable position when it comes to gas because we are at the end of the pipeline. We import the vast majority of our gas, although it is hoped the benefits of the Corrib field and the use of liquified natural gas will change that. They are not yet on stream, however. Is Ireland hoping that specific issues will be covered by the new EU directive on energy security? Will we place a particular emphasis on gas? Rather than telling us what is happening, can the delegates highlight any specific issues that this country is hoping to get covered in the new directive? Will the new directive affect Ireland's capacity to seek to put in place a bilateral treaty with the UK, for example? I think we should be doing that. Would such an approach be contrary to the spirit of the 27 EU member states' efforts to reach agreement not to have a protectionist approach towards the use of gas in cases of emergency?

There are some conflicting issues for Ireland. As two islands on the periphery of the EU, it would make sense for Ireland and Britain to have a bilateral arrangement in the case of an emergency on either island so that we could share resources, etc. Would such an arrangement be possible under the directive we are discussing? I have just been given a quick briefing from my colleague on that.

I am also concerned about issues like reverse flow. What would be the financial consequences of that for Ireland? I presume that we are talking about the interconnectors with Britain. If we bring gas ashore at some stage in the future — and if we find new reserves, which is quite possible — we could be exporting gas, in the case of an emergency, as well as having an active liquified natural gas storage facility in Foynes. That is something we need to understand. Are we in the process of doing that? Will it be paid for by the gas suppliers, the system operators or the taxpayer?

My understanding is that the N minus 1 standard, means that back-up systems are made available. If a gas pipeline breaks somewhere, it ensures there is an alternative way of getting it to its destination. The same thing applies in the case of electricity, although it is easier with a wire than it is with a gas pipeline. Do we have the N minus 1 capacity in the Irish system at the moment? If one looks at the actual map of Ireland and sees the system that is in place, one will see that it is very hard to guarantee an N minus 1 system in the case of gas. It is not a loop, unlike the electricity network which loops all over the place. The gas network basically reaches out to certain parts of the country. I suggest that if Ireland is to achieve N minus 1 in terms of gas infrastructure, it will be a very expensive project. Perhaps I am wrong in that regard. My understanding is that unless we have double pipelines running parallel with each other, which we do not have, we will have to create loops in our gas pipeline infrastructure. We do not have such loops at present.

The more secure Europe's energy supply is, the better for Ireland. We are the most exposed country in terms of importing fuels. Perhaps we are not the most exposed country in terms of political threats to supply. We are certainly exposed in terms of the amount of fuel, particularly gas, that we import. Our gas supply is entirely dependent on UK prices. This measure will have a positive effect on Ireland's security of supply and will allow us to manage crises. It will ensure that mainland Europe and the UK do not adopt a protectionist mentality in the case of a crisis across the EU. Such a mentality would leave Ireland terribly exposed.

There are certain Irish-specific issues that need to be highlighted. I would like to get a sense of what we are fighting for in these negotiations. What specific benefits will arise to alleviate problems that are unique to Ireland? We have been given a really good briefing. This is a good thing for the committee to be doing. It is unusual for us to be given this level of detail about ongoing negotiations at Commission level. That is very welcome.

Ms Sara White

I wish to underline a point Deputy Coveney has made. As we said at the outset, the very fact that this is happening is good for Ireland. He asked what specific details we are working on to ensure the directive will work best for Ireland. We are part of a regional market with the UK. I will ask my colleagues, Ms Minch and Mr. Cagney, to follow up on that point. As we see it, one of the benefits of this approach is that it reinforces Ireland's bilateral relationship with the UK. It does not impede in any way the proposition that we might introduce a much more formal or high level treaty arrangement with the UK authorities. The committee is aware that bilateral arrangements are in place. We agree that such arrangements should be signed off more formally and at a higher level. Far from diminishing the opportunity for us to do business with the UK, this regulation enhances it. Ms Minch and Mr. Cagney can probably explain that in greater detail.

Deputy Coveney made the valid point that an interesting scenario may potentially arise for Ireland. Three potential developments have the capacity to transform the Irish gas scene. When the Corrib field is on stream and we have the capacity to store liquified natural gas, we will have the potential to export not just in emergency circumstances but also in normal market trading conditions at certain times. We have to prepare and plan for such a scenario, which is pertinent to this regulation.

The Deputy rightly pointed out that the N minus 1 standard will ensure that member states have back-up systems in place. It will show the Commission and other member states that each state has sufficient infrastructure to comply with the requirement. During the negotiations, we have been trying to ensure that the N minus 1 system does not, almost by stealth, inflict an enormous infrastructural investment requirement on Ireland or on other member states. The conclusion reached was that we should not be gold-plating for no purpose. Does the N minus 1 rule, as it is now evolving, ensure that whether in a regional context or how one interprets the existing infrastructure or how one looks at demand management issues, one does not get into an invidious position of building more infrastructure than one needs? Ms Minch and Mr. Cagney will address some of these points, including the financial impact of reverse flow.

Ms Rebecca Minch

I will make a few points before handing over to Mr. Cagney. The N minus 1 indicator relates to the import infrastructure, for example, the interconnectors with Scotland, rather than the internal transmission system. The Commission for Energy Regulation recognises that we have two pipelines in place. The focus is on that infrastructure and on how one brings gas into the country rather than how one moves it around internally.

Deputy Simon Coveney

It is about interconnection rather than domestic supply.

Ms Rebecca Minch

Exactly. Reverse flow, which is strongly related to that issue, has been the subject of much discussion. The Deputy referred to avoiding unwarranted costs, and so on. This issue has been widely discussed. The regulation requires that an analysis is done of the costs of such work and the potential benefits of security of supply for the member state to which gas would be transported by the reverse flow.

Ms White pointed out that it is not necessarily something that would only be done on a strategic basis to improve security of supply. It could also be market driven, particularly in the potential scenario of high supply, for example, arising from Corrib, increased gas storage, LNG, and so on. One of the points we made in the negotiations is that this is not only a question of installing reverse flow on interconnectors and a certain amount of planning and work also needs to be done on reconfiguring the transmissions infrastructure. It is now recognised in the regulation that this issue must also be taken into account as part of the reverse flow because such work would be required for reverse flow capacity to be installed.

Deputy Simon Coveney

If gas was to be carried from storage facilities in Foynes, Corrib or Kinsale to an interconnector point, Ireland's gas infrastructure would need to be reconfigured to facilitate this transportation.

Ms Rebecca Minch

Yes, some work would have to be done to facilitate it. Under the regulation the premise would be that the market should deliver these investments if possible. There is provision for market testing to be done before any investment would be made purely for strategic purposes. This also relates to relations with the United Kingdom and the question of regional co-operation. The potential for further co-operation between Ireland and the UK and current co-operation were recognised early on in this process. We are included in Annexe 4 to the regulation in which Ireland and the United Kingdom are listed as one of the regions.

Deputy Simon Coveney

There is nothing in the regulation to prevent Ireland and the United Kingdom reaching a bilateral treaty on security of supply in gas.

Ms Rebecca Minch

That is absolutely correct. The regulation is very clear that it wants member states to build on existing bilateral co-operation. This makes sense from the point of view of the operational realities of European gas markets.

Mr. Denis Cagney

Although I cover some of the issues in the presentation, I would be pleased to discuss them if members prefer. The European Commission acknowledged at the outset of discussions on this regulation and its proposed approach the hazards inherent in any type of one-size-fits-all philosophy for Europe. Circumstances differ enormously in the various member states in terms of the scale of reliance and degree of interconnection. Some member states have many transit pipes. The question, therefore, is whether these are deemed to be an input for the purpose of determining the N minus 1 indicator.

The definition of N minus 1 is important. There was concern at one stage that the total interconnector, namely, the two interconnector pipes from Scotland to north Dublin, would be treated as one interconnection point. That is not, however, the thinking of the European Commission, which has taken a much more practical approach under which we have two interconnector pipes. To return to the Deputy's specific question, if one of these pipes was disrupted by an anchor or whatever, we would still meet the N minus 1 criteria.

Deputy Simon Coveney

Energy usage reached the highest ever level recorded in January this year. It was a freak occurrence in that there was no wind on the date in question, 7 January, and 80% of our power supply was provided by gas. Bord Gáis has given me this figure. Both interconnectors were in use on the day, one fully and the other at roughly 30% capacity. This is extremely unusual because in normal conditions one pipe provides more than enough capacity. In that type of scenario do we run into trouble in terms of the N minus 1? Clearly, if anything had happened to the pipeline infrastructure on 7 January last, we would not have the N minus 1 back-up facility. If one of the pipes were to go, we would not have sufficient capacity. Does the N minus 1 definition take into account events which occur once per decade when, for a short window of time, demand for gas is excessive and abnormal?

Mr. Denis Cagney

The N minus 1 is designed to respond to extreme circumstances. In the case of the extreme circumstance which arose on 7 and 8 January, we met the one in 50 criterion, which is applied in Ireland on the issue of security of supply. Were it not for the existence of the second interconnector, the indications are that there would have been curtailments of demand.

Deputy Simon Coveney

I accept that. I refer, however, to the N minus 1 definition.

Mr. John Melvin

The N minus 1 means one must have sufficient supply to supply protected customers, which in this case, in terms of the definition, is domestic customers. They can also be defined by the member state, if I am correct. To put a figure on it, demand in Ireland on the day in question was 22 MCMs, million cubic metres, per day. One of the two pipelines can supply 23 MCMs, while the other can supply 17 MCMs. Seventeen MCMs is sufficient to meet the one in 50 criterion — the worst winter — for protected customers, that is, domestic users.

Deputy Simon Coveney

That is the answer I sought. In other words, a state can decide in extreme circumstances that it has priority customers who must receive gas. This issue is covered under the N minus 1 definition.

Ms Sara White

The definition of "protected customer" is fundamental to the regulation.

Mr. Denis Cagney

Domestic customers must be included as vulnerable. Member states have some discretion to add to this category in the definition by including small industrial and commercial customers.

The N minus 1 concept is undoubtedly tricky. It derives from electricity generation but even in that area it is not used primarily for long-term planning purposes but more for day-to-day operation, for example, in terms of how much reserve one needs to prevent cascading effects on the system. There are undoubtedly hazards with applying the N minus 1 philosophy to gas. That which is progressively emerging in the redrafts of the regulation allays some of our worst fears.

Treaties are in place between Ireland and the UK governing the interconnectors. As Ms Minch and Ms White indicated, the regulation encourages co-operation, although it must be done on a voluntary basis. Apart from the treaty, there are also other co-operation measures. For example, in the event of load shedding being triggered in the UK, Irish customers will be treated on a pro rata basis with customers in the UK.

Deputy Simon Coveney

Does that mean that if the UK experiences a dramatic collapse in gas supply and must prioritise where it sends gas, it would, under the existing arrangement, be precluded from prioritising supply to British customers over supply to the Irish market?

Mr. Denis Cagney

No, not completely. For example, if load shedding required that 20% of residential customers or 50% of gas fired generation had to switch fuel, this requirement would apply pro rata to the affected customers in Ireland, as it would in the UK.

On the question of financing, contractual reverse flow as opposed to physical reverse flow on the interconnector should not cost much by way of capital investment. However, we are talking about more serious sums of money to ensure physical reverse flow to be available at all times. That is something we are keeping under consideration. We want to ensure that Ireland is an attractive location for projects such as the Shannon LNG and others. If further gas fields are found near Corrib, for them to be realistic commercial projects the developers should over time wish to be in a position whereby they can export the gas to the United Kingdom.

Deputy Simon Coveney

Yes, of course.

Mr. Denis Cagney

The question of who pays for the installation is a matter that, not surprisingly, the regulation leaves open for negotiation between the member states, whether it is between the various governments or perhaps more likely between the regulators as regards how that burden would be shared among their respective gas customers.

Deputy Simon Coveney

The regulation specifies there will be a set requirement on states to have storage capacity for gas. Reference is made to Ireland's 11-day figure, which is not that accurate, but that is the figure that is quoted all the time. If, God forbid, our interconnectors were shut off because of an undersea earthquake, for example, which is totally unpredictable or because of a wartime situation politically, it is stated that this country would have 11 days of gas in its system. When one compares that with what most countries have, which is somewhere between 40 and 60 days, it is a concern that we have allowed that situation to develop without requiring storage or even back-up capacity at individual power stations that have a five-day timeline at the moment in terms of having oil backup for gas-fired power stations. In the context of the debate we had last night, the Minister seemed to be amenable to the idea of potentially extending the five days to ten, and to support an increase in gas storage capacity in Ireland. Are there set guidelines around storage in the directive because that is not apparent in the briefing Mr. Cagney sent me, or is it just part of the action plans that countries are required to submit to the Commission?

Ms Rebecca Minch

The key point is that this regulation has a supply standard but it is not telling member states how they should fulfil that supply standard. The thinking behind it is that the market should deliver. Whether that is from storage is up to member states and up to the market as well to deliver.

Mr. Cagney may wish to contribute on this point also. It is worth bearing in mind that when it comes to strategic storage the regulation is not obliging member states to have strategic storage. That was a finding in the strategic energy review, that strategic storage would cost approximately five times that of oil to install so there is potential for those costs to put upward pressure on gas prices. Much analysis has been carried out by the European Commission and there is concern that an obligation to have strategic storage by every member state could lead to a distortion of the gas market and it could also lead to the hoarding of gas. That could conflict with the principles of the liberalisation and the proper functioning of the energy market in that it could make it less likely that gas would flow in times of disruption of normal gas market conditions when one needs to find ways of moving gas from alternative sources or in alternative directions.

Deputy Simon Coveney

Other countries have strategic storage.

Ms Rebecca Minch

Some do.

Deputy Simon Coveney

The United Kingdom, for example, can store large volumes of gas.

Ms Rebecca Minch

They have commercial storage not strategic storage.

Ms Sara White

There is a definitional issue that is interesting. Strategic storage is often code for "the government is paying for it".

Deputy Simon Coveney

It is a bit like what NORA is doing with oil.

Ms Sara White

That is funded through the industry so it is not a case of Exchequer funding buying the oil. The Commission has been at pains to avoid strategic storage which is a code for saying governments must invest in gas storage. Those member states that have such storage — we will not mention names — were not always that keen to share gas when it came to the crunch in January 2009 so that would not necessarily help matters. If we think about strategic gas storage for Ireland as being the strategic interest of Ireland in storage, it does not matter whether it is delivered by largely commercial storage with the requisite arrangements for third party access so that one can ensure the gas moves when it is needed. That is the issue for us. The regulation is not prescriptive around how one might deal with storage but nonetheless it does underline that storage should be part of one's toolkit, which indicates how helpful the regulation is for us.

Ms Rebecca Minch

Yes.

Ms Sara White

We do have the advantage now that there are a number of commercial gas storage projects, including in Northern Ireland. We are supportive in terms of helping those projects to proceed. We need to create conditions conducive to those projects going ahead, including through the development of a legislative framework to which the Minister would have referred last night. That is something on which we are beginning work now. Perhaps Mr. Cagney or Mr. Melvin would like to add something.

Mr. Denis Cagney

Storage is caught in the N minus 1 formula in the regulation. Without going into detail, the ability to meet the N minus 1 formula results from a combination of one's indigenous production, imports and storage. To the extent that a member state does not have storage, that increases the burden on it to meet that criterion from the other sources, namely, production and imports.

There are a number of commercial projects including two separate salt cavern storage project developments for Northern Ireland in the Larne area. The new owners of the Kinsale gas field are developing the gas field. They have been in to see us. They are developing their plans in that regard. They are also carrying out investments in updating facilities. At present, because of the limited outflow from its storage facility it can meet up to approximately half of the domestic customer base over a period of 50 days. Assuming the project goes ahead, the upgrading they are carrying out at present, combined with a new pipeline would have the ability to meet virtually 100% of the NDM or residential market.

An issue arises for both the regulator and the Department in that a number of commercial projects are pending, including for example, Providential Resources, who are coming in to see us this afternoon which has developments in the Dublin Bay area, but it is difficult to know whether all of the projects will go ahead. To date, in the various discussions we have had the projects are being viewed as commercial projects. No one is saying we need to have strategic storage in the sense of a State subvention, either through the Exchequer or a PSO type arrangement. That has not happened so far. The same is true of the Shannon LNG project. For the moment anyway the prospects are reasonably comforting. It appears that market-driven storage may evolve. If it does not then it is the kind of thing that the Department and the regulator would have to keep under constant review.

With regard to the United Kingdom, we are exceptional regarding the scale of our reliance on imports from one member state. That is not necessarily the same as being at the end of a long pipeline by virtue of the investment in LNG in the United Kingdom in recent years. During the last Russia-Ukraine crisis, the United Kingdom was a net exporter of gas. Last winter, when we experienced exceptional circumstances that occur only once in 50 years, the regime here worked, notwithstanding the fact that there was an accident in the Norwegian gas fields. It worked in the United Kingdom also. I do not mean to sound complacent but believe it is important that we retain a sense of perspective about our being at the end of a pipeline. One important development would be increased investment in energy in the United Kingdom and, I hope, Ireland in due course.

Mr. John Melvin

It is important to note that Great Britain exported gas in January 2009 when continental Europe was experiencing a shortage of supply. Up to that point, there was peak demand in Ireland and there was very high demand in Britain. At the time, it was entirely unaffected by the crisis that had afflicted Europe. Ireland has very low storage capacity by comparison with some other European countries, as does Great Britain. The reason is historical in that Great Britain was, and still is, a producer of gas. Yesterday's figures show Great Britain produced 50% of the gas from its own North Sea region. It has a direct connection to Norway via the Langeled pipeline and is, therefore, connected directly to one of its nearest neighbours. It has invested heavily in LNG.

Ireland's location at the end of a long pipeline could be viewed in two ways, as highlighted in one of Mr. Cagney's slides. One could state Ireland is at the end of a long pipeline and that Russia is at the beginning or one could state Ireland is fully integrated into the UK market and that the United Kingdom is still producing gas and is directly connected to the other largest producer in western Europe, Norway. It has a significant supply of LNG. The LNG can be sourced from anywhere in the world, not just troublesome regions. It can be sourced in Qatar, Trinidad and Tobago and even Australia, from where there were shipments. Great Britain does not have storage because it was until now a producer.

Should we have strategic storage or should we allow for commercial storage? The difference between oil and gas is that there is a commercial incentive to build storage for gas. There is a profit motive for people to build storage for gas because winter gas tends to be 15 p to 20 p per therm more expensive than summer gas. One can buy it, stick it in the ground and take it back out, pay rent to the builder of the storage facility and make a profit or pass the price reduction on to one's customers. There is a commercial incentive to store gas in a way that is not possible for oil. If one stores oil, there is no winter-summer differential and one must hope the price will increase.

The key point for governments and regulators is that if there is an incentive, the market should be let build storage, and that if the market does not do so, the approach should then be reconsidered. If we allow for strategic storage at this time, we will end up interfering with what the market could build at its own risk and cost.

Deputy Liz McManus

If one is depending totally on the market, one will be all right as long as there is a crisis in the summer.

Mr. John Melvin

I do not understand.

Deputy Liz McManus

If storing gas is price related and based on commercial reasons, one may not have the strategic storage required if there is a problem or major crisis in the middle of winter.

Mr. John Melvin

It is a question of supply rather than storage. If there is supply, it can come from storage, production or LNG. The key focus should be on whether there is supply to meet the demand in winter. In this regard, one should consider the past two crises. In January 2009, there was sufficient supply, much of which came from LNG rather than from storage. Great Britain is in a different position from the rest of Europe. France and Austria, for example, never had production. They had geological formations that made it easy to create storage facilities. Therefore, the cheapest way for them to get gas was to build a pipeline of a certain size, run it all summer and put the gas in the ground. It was cheaper for those countries to have storage than to build more pipelines.

The proof of the pudding is in the eating. In January 2009, Great Britain was exporting gas and during the prolonged one-in-50-year cold spell, it was able to withstand the falling over of one of the major Norwegian gas field facilities.

Deputy Simon Coveney

Mr. Melvin's definition of a crisis or risk is related solely to the provision of gas from external markets, such as gas from the United Kingdom or, potentially, LNG. Great Britain has dealt with this by providing 50% of its own gas and by having a great deal of LNG. It is linked with Norway and mainland Europe and therefore has a good spread of risk. Ireland's spread of risk is not nearly as wide. We just have two pipes and they come from one country. In five or six years, we may well have the luxury of having Corrib gas coming ashore and an LNG facility, thus resulting in a spread of risk, but at present we have no such spread. Many are concerned that we rely entirely on the interconnector working efficiently.

My concern, which is not solely related to supply, is that if there were a physical problem with the infrastructure, supply would essentially be shut off. We have no storage or alternative source of gas at present. This is a fair enough concern and it has been expressed in many quarters, including the energy generation sector. A shutting down of supply is the potential crisis for which I am concerned about planning. If, for any reason, there were a physical disruption to our pipeline infrastructure at either end or in the middle under water, which would take a long time to fix, we would not have stored gas to fall back on. We would not really have any storage capacity apart from the small amount provided by Bord Gáis through the pumping of gas into small disused gas fields off Kinsale. This allows for the building up of pressure so gas will be available for the autumn period. The amount stored is very small.

Mr. Denis Cagney

It is definitely a concern. There are two drivers behind investment in commercial storage. One is strategic, which, as Ms White said, normally implies some underpinning by the State or general customer. Mr. Melvin's point is that there are several drivers behind investment in commercial storage, which I acknowledge is not designed to meet the requirements alluded to by the Deputy. One of the projects in Larne, for example, is very much modelled on a business plan based on the view that as more wind-generated electricity enters the system, gas generation will become more intermittent and demand for the latter will change. I am not referring to the aggregate level throughout the year but to the fact that there will be a greater premium on short-term products. That will be an added incentive to commercial investment in gas storage. If this investment takes place and if there is capacity, it will help in terms of national storage capacity.

Deputy Liz McManus

Even allowing for the greater penetration of renewables, Mr. Cagney is allowing for greater demand for gas. According to the presentation, the demand would be greater. Certainly, in the presentation it is a bigger demand, overall.

Mr. Denis Cagney

Yes, and I shall put it this way. As more and more of our electricity generation comes from renewables, by definition the generation from fossil fuels is going to decline. That will be across coal-fired and gas-fired stations. The probability is that it will be at the expense of coal-fired generation. That will depend on a number of factors, including the relative prices of coal, the price of carbon, etc. We are examining the situation where increasingly we are relying on renewables and gas as our source of fuel for electricity generation, which probably makes the case for further interconnection more relevant.

Deputy Simon Coveney

Is Mr. Cagney discussing whether the regulator should be driving a requirement for commercial storage by actually saying, in effect, that all suppliers of gas in Ireland are required to have X amount of storage backup? Is that model not used in other countries, in the same way that energy generators are required to have a certain amount of oil backup in dual-fuelled power stations? In the event, gas suppliers would be required to purchase storage capacity from a provider, say, off Kinsale. The expense then would be spread across the industry in terms of having some degree of storage for all gas suppliers. Is that a model Mr. Cagney has considered or looked at?

Mr. Denis Cagney

It has been considered, although it is not on the table at the moment. The nearest equivalent to that would be the obligation on gas suppliers, for example BGE, primarily, towards residential customers. They must at all stages have sufficient secured network capacity to meet what is known as a one in 50 probability. That is the extent of the obligations in place at present.

It is not there at present. Whether it should be or if it is a role for——

Deputy Liz McManus

The EU regulation will not have any effect on that.

Ms Sara White

This has been ongoing for the guts of two years, and we need to plan for these issues that Deputy Coveney has adverted to. The nightmare scenario of something happening to the interconnector is a prospect we need to plan for. We have been having some discussion about this, in that context.

As Deputy McManus knows, we have three interconnectors coming out. We have the Scotland-Northern Ireland pipe with two interconnectors and a single pipe. At the risk of being shot by my colleagues, my personal intuition is that we should twin that pipe. It is being kept under regular review. The general consensus over the past few years has been that Corrib coming on stream brings an element of certainty, security and confidence back into the Irish gas market, which we have not had, given the depletion at Kinsale. Corrib is crucial in terms of creating for the period that we have it that restoration of confidence in the security of supply issue. However, in the context of where we are at, we have been having discussions with Bord Gáis and the regulator about the timing and prospect of twinning the pipe.

I should be glad to hear countervailing views if there are any, but it is just a question of what we do here. In the context of funding, storage and twinning pipes are probably the two major investments in gas infrastructure that we need because the transmission system is well built out, as the committee knows. However, on the prospect of European funding, under the economic recovery plan a number of commercial gas storage projects across Europe have received funding in that context. There is a prospect for Ireland in the next round of TEN-E, as regards the twinning of pipes, we have shown the Commission the map in various bilateral discussions we have had and it is now very much aware of what it looks like in terms of Ireland's strategic position. There is a fundamental onus on us in an all-island security of gas supply context, because Northern Ireland is——

Deputy Liz McManus

I would like to ask Ms White about that because I should have thought this was an obvious opportunity. Have we exploited this as far as we can or is there more linkage required?

Ms Sara White

There is more to be done, although Ms Minch has done an enormous amount of work with them, as has the regulator. We work very closely with them on security of supply. Last year we had an all-island gas capacity statement and this will be the situation from now on. The two regulators, North and South, work together. It is self-evidently an all-island issue from a security of supply perspective. We work together to progress common arrangements for gas which will effectively mean a single gas market on the island. Obviously, we are still working to ensure that the business case from a Northern Ireland perspective is stood up for them. However, this is an all-island issue. Storage on an all-island basis, whether it is in Larne or Kinsale is about working for the island as a whole.

We need to focus continuously on these issues, we do not demur for an instant and indeed for the last two years the collection of issues we have discussed today has been very much to the fore.

Deputy Liz McManus

What about twinning the interconnector between Northern Ireland and Scotland?

Ms Sara White

It is not the undersea interconnector but rather the piece on land in Scotland, where we have a single pipe out of which three interconnectors actually link the island of Ireland to Scotland. That is an issue we all need to come to a view on in terms of the timing of doing that.

Deputy Liz McManus

Last night in a debate on Deputy Coveney's comprehensive Private Members' motion, the Minister referred to legislation that would be introduced. Is that linked in with the EU regulation or is it separate legislation independent of it?

Ms Sara White

It is separate. The regulation will apply directly so there will not actually be a legislative requirement. The Minister was just flagging, in the context of the Private Members' motion, that a regime for gas storage is required. The current arrangement whereby the regulator regulates gas storage at Kinsale, is a function of the extraction of gas in terms of what the owners can or cannot do in conjunction with Bord Gáis.

However, like the UK which has very recently done this, Ireland needs a legislative regime that will underpin the development of commercial gas storage. The Minister was indicating that this is work which is now getting under way. We shall be working very closely with the regulator and there will, obviously, be consultation on that in a whole variety of ways. It will not happen this side of the summer recess, but we are working to develop proposals over the course of the rest of the year.

Deputy Liz McManus

I should like to make one suggestion to the Chairman, while it is on my mind. I wonder whether we should consider visiting Northern Ireland and meeting the Minister. I do not know which Minister it is, incidentally.

Ms Sara White

It is Ms Arlene Foster, MLA.

Deputy Liz McManus

That is great.

Deputy Simon Coveney

That could change in the next few weeks, however.

Ms Sara White

Perhaps the committee should wait until after 6 May.

Deputy Liz McManus

Yes, after 6 May, definitely. However, the message keeps coming back to us that many of the solutions are all-island considerations and we need to inform ourselves.

Chairman

We shall make contact with them.

Deputy Simon Coveney

I have a final comment. I do not know whether this has been useful, since it has been less formal than normal, but certainly there is no point in going through the formalities when there are only two of us here and——

Deputy Liz McManus

Three.

Deputy Simon Coveney

Yes, I am sorry. It is three, since the Chair has to be included. The reality is that not too many people understand this stuff. It is boringly detailed but at the same time very important for people. It is only if the system collapses that households and businesses will be asking the hard questions as regards why this had not been planned for. Ireland should be pursuing EU funding very aggressively for infrastructure whether for storage or interconnection. Everyone agrees that more interconnection is a good thing in relation to electricity and, potentially, gas. I was interested to hear that there is a new financial instrument being put in place in the EU to support that. I do not know whether such an instrument would also extend to domestic backbone infrastructure for electricity, which is where Ireland is really weak. The vision of the Minister and the Department on this massive shift to renewable energy sources simply cannot happen unless that infrastructure is built. It is not being built and we must find new ways of persuading communities to facilitate that.

One way to build this infrastructure is look at options on underground, over ground, DC lines, HVDC lines and applying new technologies to solving problems that are universal across the European Union, but to which Ireland is much more exposed because we do not have as mature a network as most countries. This is particularly the case with electricity, but also in respect of extending the gas network to counties like Kerry, Donegal and so on. I appeal to the Department officials to secure the funding. I know they have €110 million already for the interconnector, but that is a different fund. Many of our security of supply issues are related to capital investment in infrastructure, and if there is assistance available then we should go after it.

Deputy Liz McManus

There seems to be some concern in the gas market about changes to the tariff rules on competition. Bord Gáis still has a very dominant position in that sector. Are there any plans to change that tariff regime?

Mr. Denis Cagney

The Deputy is referring to what is known as the RTF, or the regulated tariff formula. At the domestic customer level, we regulate BGE in the same way we have regulated the ESB to date. We approve the tariffs, revenues and so on. The upper end of the market is effectively deregulated. The area to which the Deputy refers is the small business end of the market. We regulate the tariff structures that BGE can offer those customers. It is done by formula and they must be able to demonstrate that the tariff they offer is related to regulated network costs plus the commodity price of the gas they purchased. There are restrictions on how much flexibility they can offer and how innovative they can be. There are currently six or seven suppliers in that market.

We introduced this regime as a transitional measure in 2003 and 2004. BGE's share of that market is down to about 40% at the moment, so on the face of it, there is a case for loosening——

Deputy Liz McManus

Is it not higher for the SME sector?

Mr. Denis Cagney

It is 40% of what is known as the RTF, which is determined by function of the sector's gas consumption. The concern is that if we were to let go, then what would happen? How sturdy is the existing competition? Would BGE drop its prices so aggressively that it would see off the competition? We are hearing that argument a great deal. Some of BGE's advantages are legitimate by virtue of scale, and some of them are slightly contrived. They have secondary capacity that they can sell to others and so on. Unless there are further structural changes to the market, it is hard to see how we could end this RTF regime in the short term. It is a tricky situation, because we are dealing with a particular market segment.

Deputy Simon Coveney

Will the CER apply the same rationale to the gas market that it has applied to the electricity market in respect of the 60:40 market share?

Mr. Denis Cagney

I will not commit to the same figures, although it may well be the same figures. The core criteria will be the same, including things such as the barriers to entry for new suppliers. If there are bigger barriers in the electricity side than in the gas side, then that would warrant a stricter view on deregulating electricity. The same type of philosophy should apply to gas, but I do not know whether it will be 60:40 or 55:45. There was much soul searching in the commission on the actual figure that finally emerged for electricity, so none of my colleagues would thank me for giving a final answer now.

Deputy Liz McManus

The announcement has not officially been made, but it is all over the newspapers. I presume there is nothing we do not know——

Mr. Denis Cagney

I think there is a press conference this morning. The announcement may have been made by now.

Deputy Liz McManus

I presume there is nothing additional that has not been in the newspapers that we should know about.

Mr. Denis Cagney

I do not think so. The newspapers have captured the essence of what has been going on.

Deputy Simon Coveney

My understanding is that it is not just about the 60:40 split, as there is also a requirement for the ESB to change its brand. Will that also apply to the gas market? That is an issue of much more concern for the ESB than the market split. The idea that the ESB would be required to change its brand, when the reason it is dominant is the brand it has built up, is of much more concern to the company than the 40% market share that is being given away. It is much more difficult to win back business with the new brand, while there is a substantial cost to change brand at a huge company like the ESB. Is this change required under the energy directive?

Mr. Denis Cagney

The commission's decision is ultimately a recommendation because it will require the Minister to amend the statutory instrument. Our view is that one of the essential conditions for liberalisation of electricity is that the same brand cannot be used for the monopoly networks business as for the retail business.

Deputy Liz McManus

It is not.

Mr. Denis Cagney

The brand should go to the networks rather than to the retail business.

Deputy Liz McManus

That is not fair on the consumer. There are many elderly people who like the idea of being secure with a brand name they know and trust. They decided that they did not want to switch to a lower cost provider because they felt secure. I resent the idea that the CER is interfering so much in the interests of the market. I am delighted that the decision has been made and it will be good for the consumer, but to extend it so far that companies must be told about their brand names is restricting consumer choice.

Mr. Denis Cagney

In all the debates on liberalisation, the brand is one of the most contentious issues. There are countering views, including from economists. There is not a specific requirement for the third package, with the exception of the networks business. It should not use a brand that could be confusing to customers as regards the supply business versus the network business, where they are both——

Deputy Liz McManus

In that case, CER should change the name of the networks business.

Ms Sara White

I was about to make that point. This debate will continue for some time and the point the Deputy makes is valid.

Deputy Simon Coveney

An instruction is being given.

Ms Sara White

No, it is not an instruction. CER is saying there has to be a clear differentiation between ESB customer supply and the monopoly networks business. One choice for the ESB, as I have understood it for the past four years, is that it could decide to change the name of ESB Networks.

Deputy Simon Coveney

It could call it "Smart Grid" or something like that.

Ms Sara White

Yes, although we have EirGrid to consider as well. There will have to be further discussion about this——

Deputy Liz McManus

That is fine. However, the newspapers are giving the impression that that is the retail brand — that is what is on breaking news.

Ms Sara White

That is what CER is talking about today but it is not——

Deputy Liz McManus

I am delighted to hear that it is different.

Ms Sara White

It is not written in stone. The same point would apply with regard to gas. Bord Gáis would also have to consider rebranding at some point. However, the issue of rebranding has to be examined in the round. There is a consumer interest issue alongside a competition issue that cannot be ignored, although I am not gainsaying the regulator on that.

Deputy Liz McManus

These are companies in which we should be taking pride.

Ms Sara White

I was about to say "Thank God for State energy companies" because they are vibrant and their standing in global capital markets, their ability to deliver networks, their ability on all occasions to actually put on the green jersey, with gas supply being a case in point——

Deputy Liz McManus

"Anglo Irish Bank" is the name that needs to be changed.

Ms Sara White

That is my party political broadcast. To conclude, we will come back to the committee at any time for a further update on this regulation, which is close to panning out in any case, and on any other EU developments on which the committee would like to have an exchange rather than a set presentation. Whatever way works best, we are at the committee's disposal. I thank members for their interest today.

Chairman

Is it agreed no further scrutiny of this proposal is required? Agreed.

Deputy Simon Coveney

We will trust the experts to deal with it.

Chairman

A report will be laid before the Houses and sent to the Joint Committee on European Scrutiny for its information, as well as to the relevant Minister. I thank our guests for coming in this morning. As there is no other business, the meeting is adjourned.

The joint committee adjourned at 11.45 a.m. until 9.45 a.m. on Wednesday, 12 May 2010.