JOINT COMMITTEE ON ENTERPRISE, TRADE AND EMPLOYMENT (Sub-Committee on Job Creation Through Use of Renewable Energy Resources) díospóireacht -
Wednesday, 20 May 2009

Electricity Generation: Discussion with Commission for Energy Regulation.

Acting Chairman (Deputy Mary Alexandra White)

I welcome Mr. Michael Tutty, chairman, and Mr. John O'Connell, manager of distribution and interconnection, Commission for Energy Regulation. Before they begin their presentation I draw their attention to the fact that members of the committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

I ask Mr. Tutty to address the committee.

Mr. Michael Tutty

I thank the Acting Chairman. We were asked to address the potential to allow greater freedom for the sale of electricity from primary electricity producers direct to customers in the context of the Güssing model in Austria. While we have a little knowledge about this model the committee has much more than us because it has visited the site. As I understand it the district is trying to achieve self-sufficiency in energy usage by using the local fuel, wood and waste to produce electricity to provide heating and power, using a local private electricity utility network. It has a significant support system on the lines of our re-fit scheme.

I am not entirely clear which aspect of this the committee wants to discuss, so I will be brief and take whatever questions the committee puts. We need to consider the three areas of the electricity system in Ireland, namely, the generation of electricity, the supply to the end customer and the distribution system in the middle, and how something similar to the Güssing model would fit in here.

On the generation side we have quite a long queue of applicants to build generating stations, particularly using wind. We have gone through a system of gates, trying to group the wind systems to get them onto the system as quickly as possible. Our recent gate 3 provides for 3,900 MW of wind to be connected that would bring us up to the 40% target set by the Government for the use of renewable energy sources by 2020.

We try to fast-track non-wind renewables to bring them forward because in some cases, such as bio-gas, if it is not done now the gas will disappear. We recognise that there is merit in having renewables other than wind on the system, particularly those that are available all the time and are predictable. We have fast-tracked any applications to come onto the system as far as possible. We have been doing this on an ad hoc basis but are trying to achieve a more formal basis and have consulted on what we should do in this respect.

We have a system of simplified licensing for generators smaller than 1 MW which include many of the micro-generators in households. They do not need to go through the normal licensing system. We simply licence them by order and have a much simpler application process for those below 5 MW. The only difficulty in setting up a generation system is access to the grid and we have been trying to do our best to ensure that renewables get onto the system as quickly as possible.

We have support systems for renewables but that is a matter for the Minister for Communications, Energy and Natural Resources rather than for the Commission on Energy Regulation, CER. We are not at all involved in it. The Minister announced a subsidy under the refit scheme to the value of 120 MW for biomass and anaerobic digestion. Any questions about support systems should be addressed to the Minister and the Department.

Now that the market is fully open, any supplier can supply customers without restriction. A supplier has to get a licence from us and to participate in the single electricity market that we set up recently which brings together generation North and South, on the whole island. In principle, every generator must sell its output into a gross pool and every supplier must buy from that pool. All the generation in the country should flow through a single market or pool but, in practice, small generators of fewer than 10 MW can contract bilaterally with customers outside the single electricity market. The bigger ones, even while operating through the single electricity market, can contract bilaterally with customers through contracts for differences. This effectively means that while they are working through the single electricity market, there is a bilateral arrangement between the generator and the supplier. Even in those cases, there will be a need to participate in the single market for balancing supply and demand. The generator will never be producing all the customers' needs at every moment of the day. Therefore, there must be some interaction with the single market.

I understand the members are interested in the use of private networks for distributing electricity. At present, the CER can only issue a licence to ESB Networks to operate a distribution system and to the ESB itself to own a licensed system. I have set out the relevant legislation in the slides I circulated. At present, we cannot licence any group other than the ESB and ESB Networks to run a distribution system.

Legislative change is a matter for the Minister. From our point of view, if there were a legislative change, we would have to consider how the system would operate. From what we know, there are not many private distribution systems in other countries. In many countries, there tends to be more than one distributor. Many local authorities ran distribution systems in the past but they are generally being amalgamated into larger units, such that there are national distributors rather than local ones. If we were to consider a private distribution system in Ireland, we would have to ask whether it would stand alone or be totally cut off from the rest of the national grid. If not, we would have to ask whether there would be parallel connections to every user such that one would have a supply from the national grid in addition to a supply from the private network. One would have to ask whether the private network would be linked into the national grid and whether all movement into and out from the national grid would be done by the private network operator. That is all very relevant in the context of what I said about generators not being able to supply the needs of all customers at all times. There would most likely be a need to be connected in some way to the national grid.

We would have to consider the licensing system that would operate and how it would fit in with EU legislation. EU legislation requires third-party access to all networks. In principle, any supplier who wants to supply to a customer in a particular place should have access to the existing network in place to supply that customer. It is not just a case of saying the network is private and that nobody else can supply electricity thereon.

Questions must be asked about unbundling requirements to try to stop people acting as generators, distributors and suppliers at the same time, thus discriminating against others. These are the sorts of issues we would have to examine, in addition to questioning the contribution to the general grid that would be made by the private network operator if connected thereto and if using the supply from the general grid at certain times every day. In this case, there would have to be charges. It would have to be ascertained that there would be no free riding, for example. If the people in the private networks are not paying their fair share in respect of the rest of the networks, someone else will have to do so.

Before considering private networks, one must consider the costs and benefits. With regard to the cost, there are economies of scale associated with having the ESB as the sole provider of distribution systems and networks. There are economies of scale associated with operating the system in addition to building it. One would need to consider what would occur if a fault occurred. If a private network requires somebody available all the time to deal with faults and safety issues, significant costs could accrue. While we have no difficulty contemplating private networks in principle, we do not believe it is simply a question of changing the legislation to allow for them. We would have to ask how the private networks would interact with the existing system and consider the charges involved.

I do not know whether the committee is contemplating a private network in a confined area. If so, has the area an electricity system or distribution system already? Is it being contemplated that the private network will somehow buy out the ESB network in the area? There are many questions.

I do not have too much knowledge of what is happing in Güssing. Members, having been there, may know more. I will be happy to answer members' questions and determine whether we can help them.

Acting Chairman

I thank Mr. Tutty for his opening statement. I invite Deputy Michael Fitzpatrick to ask questions.

Deputy Michael Fitzpatrick

I welcome Mr. Tutty and Mr. O'Connell and compliment them on their excellent presentation. This committee is trying to create jobs through the use of renewable energy sources. While Mr. Tutty stated legislation is a matter for the Minister, which we accept, I am sure he has some views on the matter and on how we should proceed.

With regard to whether a private system should stand alone, the committee is considering trying to use the Güssing model in some of our towns and villages. I envisage using biomass and other sources of renewable energy that are available to us. The goal is to keep down the cost of electricity to the consumer. Electricity prices are dropping but they still represent a major cost to manufacturers and domestic users.

We have heard a lot about the generation of electricity, on which I am not up to speed. There is a new group called the Micro Electricity Generation Association. I saw a short presentation by Spirit of Ireland recently. This group proposes to build a number of reservoirs in the west or north west with a view to supplying electricity. The main problem for Ireland is our electricity distribution network, which is not very good. It is old and probably out of date and it needs to be upgraded. We will run into major problems in providing a high-voltage network over land in the future. We have heard much talk about placing lines underground, but we are told it is not warranted due to the cost. The cost of providing a new distribution network, however, is prohibitive.

We are told there is a waiting list of people who want access to the grid. Perhaps the witnesses could outline the process that takes place when a person wants to begin the production of electricity. At what stage is he or she informed he or she will get a connection to the grid? Is it at the pre-planning stage or the planning stage? In the view of Mr. Tutty, as chairman of the CER, do we need legislation now to bring in more private producers of electricity?

Mr. Michael Tutty

The Deputy started by talking about keeping down costs, which is something we all want to do. There is no doubt about that. Whether the supplying of an area through local generation is a low-cost solution could only be established by considering the costs involved in a particular case, but in view of the fact that for biomass and other energy sources at the moment we must have Government supports to keep the cost down, I am not sure that cheap electricity can be produced for local businesses by going down that road.

The Deputy also mentioned the Spirit of Ireland proposal. I had a visit from those involved last week and have another discussion lined up on Friday. They have great proposals which would transform the whole electricity system here, provided one can find places to put pumped storage around our coast and obtain planning permission, and provided we can build all the high voltage lines they envisage to bring electricity not only from the storage stations to the grid but from wind farms to the pumped storage area. They have put forward an idea but they are not planning to do the work; they suggest it as an idea that will be taken up and financed by the people. I have no idea whether their figures hang together; whether it is an economical proposition I am not in a position to say. However, the Government and the people would have to grasp the idea, agree to follow through on it, and make sure the planning process is amenable in terms of being able to get permission to do all these things. Unfortunately, we have already found difficulties in this regard. Even though the line that EirGrid wants to build between Cavan, Meath and Monaghan and the North will save around €25 million or €30 million in electricity costs for the consumer when it is built, trying to get it under way is proving very difficult.

The Deputy asked about access to the grid. People who want to build a generating station apply to EirGrid for a connection. If there was no backlog the CER would not even be involved in the process but, because a large number of people were applying to build wind farms and EirGrid could not cope with the volumes in the way they had been dealing with the process previously, which was to take them one by one, we were obliged to step in and arrange a system under which the applications were dealt with in groups. We had gate 1, which had 330 MW, and gate 2, which had 1,300 MW, and now we have gate 3, with 3,900 MW. However, we have another 7,000 or 8,000 MW in the queue. If these were all connected up we would have wind generation that is a multiple of the actual demand.

Applicants are informed about getting a connection when the composition of each gate is determined. Thus, for the people who are now in gate 3, even though some of them have been in a queue for three years or more, it was only when we laid down the guidelines for who would get into this group that they knew they would get a connection offer. Many of them had obtained planning permission in the meantime, which in some cases is running out. Unfortunately, however, if they were to wait until they knew they would get a connection offer before applying for planning permission the bottleneck would be at the other end — the planning end — rather than the connection end. It is rather difficult, given the number of people in the queue, to establish a system that brings the planning permission and the connection offer into line. We hope the planning authorities will be willing to extend the dates because of the difficulty in getting the connection offer.

With regard to the need for legislation, we do not see a need for it unless something is put forward that will definitely be much cheaper than what we have. We do not have any particular proposals before us, so I am not sure how we can compare things, but a single distribution system with a single owner is in principle a good thing. A network will always be a monopoly in any area, as we could not have two distribution systems running side by side. That would be crazy. Whether we could have parts of the country with distribution systems owned by different people is a matter of policy and cost.

The difficulty with the networks should not be put down to ESB Networks' being inefficient and not having done the work. Before the CER took over responsibility for regulation, the Government, in its wisdom, kept electricity prices down. There was little investment in the networks and they became run-down, not really keeping up with the increases in demand. Since we took over responsibility there has been significant investment each year by ESB Networks. It is completing the refurbishment of the system and that has resulted in fewer customer minutes lost each year and fewer complaints about voltage being too low. The economic boom and rising consumption of electricity meant the network did not catch up with the full needs of wind farms scattered around the country. I am not sure a private operator would do it better. The ESB is investing money and improving networks. Many of the difficulties lie with securing planning permission for new lines and securing access to the fields they will cross rather than the ESB being inefficient.

Deputy Arthur Morgan

We are considering encouraging a number of centres that would operate along the Güssing model of power generation. Currently, the licensing process is slow to say the least and we feel we should try to eliminate the bottleneck in that process before we encourage the establishment of such centres.

We do not envisage a substantial development of the private distribution network. It might be limited to the area around the centres we are encouraging for heat and power generation. Clearly those would fall within the licensing remit but would be limited. If we can develop these centres, there will be no stand alone distributors because they would need the back up of the national grid. I have not heard anyone advocating anything else.

The gate model makes sense to a degree. It would lead to rationalisation and would ensure efficiency but are the delays happening because that model is your choice?

We remain one of the highest areas for electricity prices in the European Union. I accept there is a need to refurbish some of the ageing ESB network but there are rural areas in Scotland that must be as expensive. Is there anywhere we could compare with similar population distribution in terms of the costs of modernising and maintaining a network? Are our prices in line with such areas?

I am of the view that electricity prices have been artificially high for some time to encourage the entrance of private interests to the market. Can the CER refute that claim?

Mr. Michael Tutty

I reject utterly the suggestion that we have kept prices artificially high. I have done that on the "Six One News" and before other Oireachtas committees but we still keep hearing that the CER keeps prices artificially high to stimulate competition. We do not, we try to keep prices at a level that reflects the costs the ESB, as the main supplier of electricity, faces so it does not charge too much or too little to the consumer. If it was allowed to reduce its prices overnight by 20% to keep Bord Gáis and Airtricity out of the residential market, it would last for a short time but it could not do that for too long before it would have a monopoly in the residential market. We do not keep prices artificially high.

We have relatively high prices because of our dependence on fossil fuels. When those fuels were at a low price in the late 1990s, our prices were relatively good compared with the rest of the EU. With the price rising so much our relative price has changed in the same way as in Italy, which is also dependent on fossil fuels.

A report for the Minister by Deloitte stated that 70% of the cost differential is due to the use of fossil fuels because we do not have hydroelectric or nuclear power. There is not much we can do about that, although we are developing the renewables as quickly as possible and a study we recently published shows that in 2020, when we have 40% renewables in the system, the wholesale price of electricity is likely to be 15% lower than currently assuming commodity prices remain the same. It depends on the level of fossil fuel prices, if they are low; wind will not have such an impact.

We do not have much in the way of alternatives that could be suddenly switched on and which would change our situation unless the Spirit of Ireland proposal with pump storage turns out to be economic. Until now pump storage has not been seen to be an economic proposition for any private developer. The Spirit of Ireland group says its proposal costs much less than anything that has come before but we will have to wait and see.

It is hard to make a direct comparison with other countries in a similar position. Every five years we carry out a full review of the costs incurred by ESB Networks and EirGrid and employ consultants to look at their costs. We try to find comparable situations abroad to see if unit costs or pay costs are higher here. For each five-year period we set targets for the ESB to meet in terms of improving its productivity and reducing its unit costs. While there may still be inefficiencies there, in the current five-year period it is required to get significant efficiencies and if it does not, it pays the cost. The revenue it is allowed to recover from the consumer is capped by the CER and it must get its costs down to meet that. The fact that we are putting heavy investment in the networks is adding to our costs because the ESB must fund that investment. However, we are doing our best to squeeze efficiencies from ESB Networks and the next five-year review is about to get under way.

Whether a stand-alone system would have lower costs is a question I cannot answer. For a small area there may be extra costs, particularly if they have to maintain it and deal with faults themselves. It would depend on what Deputy Morgan is talking about. From what he is saying about having it in a limited area around centres, it sounds as if the private network would have to take over the existing networks in that area. In a greenfield site where there is nothing, such as a new industrial estate that has only a private network which it build from scratch, maybe it could be done cheaper than the ESB. However, the ESB contracts out a large proportion of the work it does. It does not have all its employees there working inefficiently and at high costs. There is a market mechanism to ensure it does not charge far too high a price.

The Deputy talked about the licensing process being too slow. When ESB Networks had to deal with each individual application one by one, there were interactions between them all. If one said one would build a line for a particular applicant, down the list there is another one in that area and one has to build another line for them. It is much more logical and easier from a planning perspective to try to group them and build a common system for a group in a particular area. That was the idea behind the gate process.

It would be wonderful if we could do them all at once. Say there are 10,000 in the system, we could build for them all at once. We felt that to try to deal with too large a group at once would delay the start of everything. One would have to feed them all into the system, decide how much network we have to build for the 10,000 networks there, work out how much that will cost and how much each one will have to pay. We figured that to try to ensure we got the 40% Government target built as quickly as possible, we would try to build enough to meet that target. If the 3,900 are all built it will bring us well beyond that target. We are leaving room for significant fallout, if people in the queue decide not to build now because costs are too high, planning permission has expired or whatever.

Once we have the process going and EirGrid issuing connection offers for all these, we will go back and examine the others. Meanwhile we must examine issues such as if we are to have far more capacity on our system than is needed for our domestic demand. How do we deal with it? How do we organise an export system and what sort of domestic market can we have if people are trying to sell a huge amount of wind power on the domestic market, maybe driving the price below what even the wind farms need to be economical and only the balance being exported? As a country we must examine how to organise this. It is easy for people to say we can be great exporters of wind power but we must work out collectively how that can be organised.

While the gate 3 process is going forward we should examine that. It is one of the aspects the Spirit of Ireland group is examining. I have been asking that within the renewable energy development group the Minister re-established a year or two ago to bring all these stakeholders together, we try to have a decent discussion on how we organise ourselves for the export of wind energy. It will not happen just by building more and more wind farms. We must build the networks to deal with them and we need a market system that is able to deal with them. The gate system has helped accelerate matters rather than delay them because dealing with things one by one was becoming very inefficient. Offers that had been issued had to be revised because there was somebody else down the road who also needed to be accommodated. Having a queue and delays is not good. We would like to wave a magic wand and get everything done, but getting networks built in this country is a slow process.

Deputy Arthur Morgan

Has Mr. Tutty any idea of the cost of security of supply? We all know it would be wonderful to have all these wind farms, but the wind does not blow all the time. While one can reduce the risk to some degree, could Mr. Tutty address the cost of security of supply? The businesses, industry and domestic-residential customers across this land will depend on the power to be there, from whatever source.

We examined Dundalk Institute of Technology's project, and it was very lucky because it had a greenfield site for the residential aspect. Across the road was the Xerox plant, which was ready access and gave an industry element to it. A couple of hundred metres on the other side was Louth County Hospital, a huge public facility. One would not always get such a lucky fall and we have not developed our thoughts on that model yet. However, my view is that these centres would be on the periphery of a fairly urban settlement and one can share some of the new build, for example by zoning to ensure industry comes in to adjoin it and one gets a mix of all those uses — residential, public facility and, perhaps, education, as in the case of DKIT.

Acting Chairman

The remit of the sub-committee is primarily to create jobs through renewable energy. Those of us who have been to Güssing were really fired up by what they could do there. They have a different source of raw material in Güssing, namely, a huge amount of wood which they can fell and use in chipping, pelleting and as raw material. Did I notice a little hesitation when Mr. Tutty spoke about biomass? While it needs Government support, I thought he was a little bit hesitant in his wholehearted support for it.

As a very rural country, this is a great opportunity for the agriculture sector to use waste straw and slurries to produce methane and to connect to the grid. In Güssing, they produced electricity and used it locally and that attracted many multinational companies. The excess electricity was sent to the grid. As Deputy Morgan said, we would use the main supplier rather than a series of networks.

From an agriculture point of view and in regard to biomass, what did Mr. Tutty mean when he said maybe we should not go down that road? Correct me if I have used the wrong words. Biogas can be produced using corn, maize or certain types of grass and can supply power to the grid. From the rural dimension, that is very important in terms of creating jobs.

I have a question about the oldest watermill in Ireland which is in my constituency in County Kilkenny. It is on a miserly 5 cent per unit. It does not fit the sort of ReFIT or the auto-gen projects. To where do people who want to get up to perhaps 25 cent per unit to make them viable go? The natural resource of the River Nore which flows through Kilkenny is being used to power this wonderful watermill but there is a worry about the long-term viability of it. There should be some method to increase the price from 5 cent per unit, which is derisory.

As a rural Deputy, I meet many people interested in the renewable energy sector, whether in biomass or biogas and, in particular, farmers who want to get into wind farms and to promote a new form of farm income for themselves. They face frustration not only at local authority level in terms of planning but at Mr. Tutty's end in terms of getting on to the grid and getting a decent price. While ReFIT is giving them a better price, there was much concern when the offshore producers were getting far more than the onshore ones. These people's planning applications had been in the pipeline for a considerable length of time and they were immensely frustrated by not being able to be connected. Perhaps Mr. Tutty could address those points.

Mr. Michael Tutty

If I sounded negative about biomass, it was purely in the context of wanting cheaper electricity and seeing biomass as being the answer. All I said was that biomass is not cheap and requires significant Government support to make it viable. Wind is also getting support but biomass is getting much greater support. The support is directly related to the costs involved in producing electricity from biomass.

I would be far happier if I had a queue of people producing electricity from biomass, bio-gas etc., wanting to get on the system than people almost entirely producing electricity from wind for the very reason Deputy Morgan mentioned, namely, the wind does not blow all the time. At least with biomass, one can determine what is produced whereas with wind, we must ask if it will blow on a particular day. If not, we must bring in something else. It is purely a question of the economics of it.

The economics are being brought into line with the thermal generators through the ReFIT scheme. However, that only means the biomass can be sold at the same sort of price as the thermal generators rather than this being a great source of cheap energy.

We should use our natural resources as much as possible as it will reduce our dependence on fossil fuels and imports. I am all for it but my reservations were in the context of the suggestion that they were getting cheap electricity in Güssing because they were using it. My understanding is that biomass is not a cheap source of energy at this point but it may be in the future.

It is a matter for the Minister to determine the subsidies for offshore and onshore. Offshore is undoubtedly more expensive than onshore and needs a greater subsidy which has left me a little perplexed at times at some committees when I have been asked by members why we do not promote offshore rather than onshore. I have said it costs more. Members have asked why prices are high while at the same time asking why we do not promote offshore rather than onshore.

I refer to the watermill which wants to get up to 25 cent per unit. Unless some supplier is able to pay that sort of money and to get it back from the consumer, the only way the watermill could get 25 cent is if the Government was willing to subsidise it to that level.

Many are now talking about micro-generation and how the household can generate its own electricity and sell the excess to the grid. They seem to think that if they can sell it, they should get the same price for the electricity they are sending out as they are paying for what is coming in. However, they forget that what they should get for it is the wholesale price of electricity at that particular time and not the retail price because the wholesale price ignores the cost of the networks. Whoever takes it will have to pay network charges to deliver it to somebody else. They will have to pay the normal supply costs of dealing with customers etc. What should be paid for the output being put on to the grid is the wholesale price at that particular time. The wholesale price varies every half an hour. Outside peak times, it is obviously much lower. If one is not using one's output at 3 a.m., others do not want it either, so the price at that time is very low. That determines what suppliers are able to pay.

Apart from subsidies from Government, it is a case of the value to suppliers — ESB Customer Supply, Energia, Airtricity and others — of this output at 3 a.m. or whatever time. We have persuaded ESB Customer Supply to at least put a price on the micro-generation. ESB is adding something to it and is subsidising it. The price ESB Customer Supply is paying is 9 cent per megawatt hour, if I remember correctly, which is the real value to it. That is the only price it should pass on to the consumer.

I return to Deputy Morgan's question.

Deputy Arthur Morgan

I asked about the cost of the guarantee of supply.

Mr. Michael Tutty

We must have something there ready to supply electricity at all times. Even with the thermal plants, one has reserves waiting to come on if one generating station trips. With wind, one must have reserves of thermal plants ready to come on to replace them. With the forecasting of wind improving, it is becoming a little easier to know how much will be there. One must have some reserves at all times. With a lot of wind on the system, one must have substantial additional thermal plants or biomass if available. It is usually the case that on the coldest winter days experienced in Ireland, the wind does not blow. On such days, all of one's output must come from fossil fuels or biomass or one must have interconnectivity to allow one to import energy supplies from other countries. That is one of the difficulties with wind power. However, over time, wind power should prove beneficial.

As stated, it will be necessary to have reserves, even with only thermal plants on the system. When we considered what would be the effect of a figure of 40% for wind on the system, we took account of the need for other plants to be in place. We examined whether those plants would be remunerated to a sufficient degree and considered what would be the overall effect on price. We were happy to discover that, even with the additional plant that would need to be in place in order to supplement the energy provided by means of wind turbines, there would still be overall benefits to be obtained. Interconnection is another aspect of the matter. As members are aware, the EirGrid interconnector will be up and running by 2012.

Acting Chairman

I thank Mr. Tutty and Mr. O'Connell for assisting us in our deliberations. If we are to be successful in establishing Güssing style enterprises, it is essential that the legislation relating to the distribution and sale of electricity should facilitate this. Electricity produced from local renewable resources must be available to local customers without there being a necessity for it to go through the national grid. As in Güssing, the national grid could benefit from excess electricity produced by local suppliers. As well as attracting industry to rural areas, enterprises such as those to which I refer will help reduce our dependency on imported fossil fuels which we purchase at a high cost to the economy and the environment. Mr. Tutty and his colleague are now excused from these proceedings.

The joint committee went into private session at 1.23 p.m. and resumed in public session at 1.24 p.m.