I thank the Chairman for his welcome and the opportunity to put our views to the joint committee. I introduce my colleague, Mr. David de Casseres, managing director of our power generation business. He and his team built the Huntstown power station just north of Dublin and if we decide to proceed, his team will also manage the project to build our second power station. As managing director of Viridian Power & Energy, I have responsibility for the company's power and energy businesses, North and South.
We will do our best to keep the presentation as succinct as possible. Of necessity, it covers only the main points we would like to put to the joint committee. Notwithstanding the range of views we offer during the presentation, members will find that a recurrent theme will be our emphasis on the creation of a competitive market as the single, overriding objective for the way forward to new market arrangements on the island.
I assume members have a copy of the presentation. The first slide gives the background of Viridian. We own and operate the only large-scale independent power plant in the Republic, the Huntstown power plant commissioned in November 2002. In terms of the station's running, availability and performance, the project has been very successful. Our retail business, Energia, supplies approximately 20% of the competitive market and a number of Ireland's largest customers. We have a growing green business, North and South.
In Northern Ireland, Viridian is the parent company of Northern Ireland Electricity which owns and operates the transmission and distribution networks. We sell to approximately 740,000 customers, essentially the total customer base of the North where part of the market is open to competition and a number of competitive players are operating.
When the market in Northern Ireland was liberalised in 1992, it was decided to deal with any dominant position NIE held.by selling off the power stations the company owned. The process was reinforced by a provision in NIE's licence prohibiting it from becoming involved in generation in Northern Ireland. We may address this issue later.
It is important to understand what should be the goals of a new market. They should be made explicit which has not been the case until now. Security of supply is paramount. Without it price is inconsequential because one has a product that is not fit for the purpose. If we have security of supply, consumers naturally turn their attention to the price they must pay for the product. The goal of a new market arrangement must be to introduce maximum competition in terms of the price of the product. All customers should participate by virtue of the fact that if the market is to bring benefits to customers, nobody should be precluded.
The impact of whatever technology is decided upon to supply the market must be environmentally sustainable. An emerging goal has received some attention recently, namely, that any market arrangements put in place must encourage an all-Ireland market to emerge. Any new arrangement should be tested against these goals at the outset and as the market develops.
While much remains to be done, we should not overlook the significant work achieved thus far. Three new generating plants are in place or under construction, two in the South and one in the North, which is definite progress in terms of the investment people are prepared to make in the market. As I noted, Viridian is the only truly independent power company in the market.
The competitive market has been introduced for business customers and full market opening will take place in the Republic of Ireland as of next year. The problem with full market opening is that if no independent capacity is available to supply it, nothing will happen. At the heart of the new market arrangement is what is known as the wholesale market. We did not agree with the original proposals for this market, which we regarded as overly complex. We put our views forcefully to the regulator. A decision on the design of the new market has been shelved or at least deferred. This, in turn, has been slightly overtaken by the emergence of the proposals for an all-island market. We hope that whatever emerges in the very near future in terms of new market design, it is a good deal more simple than the proposals we have seen to date. I believe that view is shared throughout the industry.
We should briefly address the reasons an all-island market is emerging as a requirement for market design, North and South. Competitive activity is likely to be greater in a larger market with more players. The large customer market in Northern Ireland, for example, benefited from being able to access prices from Great Britain across the Moyle interconnector. In a sense, therefore, bringing a source of independent power into the Northern market has had an effect on the prices large business customers have been able to access.
It is also noteworthy that the majority of Airtricity's customers in the Republic are supplied by power from the interconnector to Scotland. We buy hydropower in Scotland and bring it to the customers in the Republic of Ireland, thus exemplifying the opening up of markets and interconnectors.
Larger markets, which are more integrated, should bring economies of scale. At present we have a fair amount of duplication in that we have two markets, North and South, and the administrative infrastructure for those two markets essentially exists in both regions. Ultimately, Ireland is a pretty small piece of geography and it seems a reasonable assumption that an all-island market could do without the duplication of overheads, as is the case at the moment.
Regarding the opportunity to take an all-island view of matters, we are all concerned about fuel diversity, security of supply and renewables policy on the island, to name but a few issues. It makes sense that the issue of fuel diversity be addressed on an all-island basis rather than in two separate jurisdictions. More economic solutions lie in looking at how an integrated market across the island of Ireland could provide answers to concerns about fuel diversity.
Larger and more integrated markets provide greater security of supply. As I said, Ireland is a very small place and there seems to be an overwhelming case to bring together the rules and operation of the two systems. We are acutely aware of the price increases in the market over the past two to three years and the associated concern. Potentially, this is one of the most contentious issues for businesses and public representatives. It is vitally important that we understand what is behind those price increases. The recent increase in international fuel prices has been pretty well discussed. The price of gas, for example, has increased by 50% over the past year and that of coal by approximately 100% over the past year. There are a number of reasons for this but the committee should bear in mind when considering alternative fuels under a fuel diversity heading that there has been a reasonable correlation between the price of one fuel and another. As we consider what the appropriate fuel mix for the island should be, we need to understand that total reliance on one fuel as opposed to another — such as moving away from gas towards coal — has implications for the read-across of prices from one fuel to another.
The heavy investment in the networks by both the ESB and BGE gives rise to substantial increases in the prices of transporting electricity from power stations to customers. The emissions legislation that has been emerging in Europe in recent years is adding significantly to the cost. The most recent example is the well-publicised so-called carbon tax on greenhouse gas production. Emissions legislation unfortunately tends to mitigate against fuels such as coal, in its capacity as a substitute for gas, for obvious reasons.
It probably should be appreciated that the Single Market directive requires liberalisation of energy markets. Market liberalisation, in turn, requires cost-reflective prices to exist in those markets. However, cost-reflective pricing in the markets simply stalled because nobody can enter them. These factors have been driving the price in recent years. On the escalation of world fuel prices, we can take some comfort from the fact that world fuel prices decreased from their historic highs and therefore prices to customers should follow suit.
Against this background there are actions that will ensure that costs customers face are as low as they possibly can be. For example, higher availability in existing plants would mean that less investment would be required in total. EirGrid, when it was before this committee, estimated that if the existing plant portfolio were improved to best practice, it could probably save approximately €50 million to €60 million per annum.
There should be competition in the building and operation of new plants. This would ensure that best prices are obtained. Without this, who is to decide that a monopoly organisation has secured the best deal in the purchase of a plant? The same applies to the operation of a plant. Retail competition would exist if we could attract retail businesses into this market to compete for final customers.
On the point I made regarding the escalation in infrastructure costs, it should be appreciated that for the average domestic customer infrastructure costs amount to approximately half the final bill, which is a substantial portion. This is very much an area to which attention should be paid.
There are many examples of markets in which competition has made a very significant difference to cost and quality of service. The next slide I am about to show the committee is an example of what has happened already, particularly in the market in Great Britain. The examples with which committee members would be immediately familiar include the airline industry and retail banking. We would all agree that the changes in those industries over the past ten years have been very substantial.
To give an example concerning the electricity and gas markets in Great Britain, some 11 million electricity customers — about 40% of the existing customer base — have changed supplier. In the gas market, about 8 million customers have changed supplier. Obviously, those customers have seen something by way of an attractive competitive offering from an alternative supplier. In the Republic of Ireland some 40,000 customers have changed supplier to date. Most of these are large industrial customers or customers that have opted for a green product, mainly from Airtricity.
If we seek a competitive market and agree that competition is good, one of the most important issues we, and I hope this committee, need to address is to identify the barriers to achieving competition. Competition is not possible without new entrants to compete with incumbent organisations. Therefore, if new entrants are not encouraged into this market the whole exercise is essentially futile. A dominant player in the market is always frightening to new investors. The investments being made are 20-year investments to the value of €250 million and naturally investors are looking fora sign that the market over the longer term is stable and will not be subject to some form of erratic behaviour, from whatever quarter. The investment community is not persuaded that regulation can effectively curtail dominant behaviour. It is our strong view that as long as the vast majority of the generating plant in this market is owned and operated by a single player, a truly competitive market will be very difficult to achieve. These views are widely held by the investment community.
For an all-Ireland market, in particular, to be a reality, it would be necessary to improve the infrastructure between North and South. A barrier to effective trading between the two markets is the restriction on transfers on the existing interconnector. This is especially the case from South to North owing to the congestion on the transmission networks north of Dublin. Even to make the existing interconnector work properly, some investment is required.
Notwithstanding that, both NIE and ESB National Grid have been studying a second interconnector for some time. A feasibility study has been carried out on the route and it has been costed. We contend that the benefits of the existing interconnector with Scotland into Northern Ireland and a potential future interconnector into the Republic of Ireland will not be fully realised unless there is further investment in interconnection between North and South. That can take the form of improving the capacity of the existing interconnector but probably requires investment in a second interconnector.
Let us highlight what we regard to be the next steps. Following the regulator's recent and very welcome joint memorandum with a design for a market for the entire island — I hope it will be a simple one — the regulator should decide urgently that additional interconnection is needed and should be funded. We estimate that with a favourable wind behind the project, it will still take five years to put such an interconnection on the ground. Almost certainly, this is not something which happens within 18 months or two years. To plan and get consent for another interconnector and construct it would take something like five years.
Most critical of all will be to remove the barriers to effective competition taking root in the market. I again emphasise that without effective competition, the whole exercise which we are going through here will be a non-event. If you are questioning what our view would be in terms of what effective competition would look like, we feel it can be achieved only by finding a way to have competition between all power stations that are connected to the network. The chief issue in that will be how to create competition between the present portfolio of the ESB plant. Further than that, we regard as a prime example of dominant behaviour the replanting of existing power stations. We think it is a sort of nonsense to consider how you introduce independent power plants into this market as a means of bringing competition into it and yet allow the ESB to continue to plant existing power stations. Aghada would be an example as I know the ESB has received tenders to re-plant that station, and to us that further reinforces the dominant position of the incumbent. We regard that as extremely anti-competitive because effectively the ESB has ownership of those sites and no one else can get the opportunity to compete for the building of plant on those sites. We think that alternative options can be arranged quite easily.
The points we would make are such as we would make regarding any incumbent in any market. The ESB happens to be the incumbent in this market and I am sure it would be inclined to make similar comments regarding NIE in the Northern Ireland markets. The fact that the NIE and the ESB are incumbents is not really the issue here. The issue is the shape of the market today and what needs to be done to make it right as we develop a new one. There is an argument with regard to interconnection to a larger Great Britain market which suggests that the existing incumbent will be no longer dominant. That is a piece of arithmetical nonsense because the only thing that matters when one interconnects with a larger market is the size of the interconnector, not the size of the market one connects to. The only competitive pressure that can be brought into the market is directly proportionate to the size of the interconnector one builds.
With respect, there is a "to do" list for members of the committee. Regarding the design of the all-island market, let us keep the thing simple. We can always add complexity at a later stage if it is warranted. Regarding barriers to effective competition, if there is not a collective will, through government and the policy instruments, in terms of the organisations in place to deal with the barriers to competition, then we should all be talking about a completely different type of market design altogether. If those barriers are not dealt with, competition is not possible. Regarding the aiding of competition and creating the best possible opportunity for an all-island market, further infrastructure investment that allows proper trading between North and South is essential. We cannot afford to get it wrong. If we do these things and take the necessary action, there should be no reason the sort of market we are striving for should not be in good shape by the end of this decade.
