I thank the joint committee for the opportunity to present Aughinish's position with regard to the national climate change strategy. I am accompanied by Mr. Pat Sweeney, the safety, environment, HR and PR manager and Mr. Seán Garland, technical and materials manager. I am managing director of Aughinish Alumina, a position I took over on 1 January 2003. Each of us was working in Aughinish when the plant made its first production on 4 September 1983, almost 20 years ago.
I consider this the most important presentation I will make in the next five years. Our submission will be divided into four parts: why we are here; who we are; why we are unique; and what we need from the Joint Committee on the Environment and Local Government.
The national climate change strategy was adopted in 2000 and is currently undergoing a mid-term review. The timescale is tight for the national allocation plan. It has to be prepared for submission to the EU by September 2004. Since 2000 Aughinish has devoted considerable resources to the consultative process in place and we are represented on a number of committees in this area: the steering committees for negotiated agreement, energy tax and emission trading studies commissioned by Forfás; the Minister for the Environment, Heritage and Local Government's emission trading advisory group; and the IBEC environment, energy climate change and CHP working committee groups.
Why are we here? We recognise that we must contribute to Ireland's green house gas emission reduction burden. However, we are here because we see a major threat to the viability of our company - and that threat is an inflexible implementation of the various EU directives within the national climate change strategy.
As an example of the impact of decisions regarding energy, this year alone our costs have increased by €7 million as a direct result of the implementation of the EU directive on sulphur, which means we now consume 1% sulphur heavy fuel oil as compared to 3%. We have serious concerns that the national climate change strategy has potential to make energy intensive industries such as ours uncompetitive and, ultimately, put us out of business.
To avoid this we firmly believe it is critical that the EU and Irish environmental taxes and rules are implemented with the flexibility provided to member states by the EU. In this way it will be possible to permit environmentally responsible Irish businesses to remain viable while operating in a sustainable manner. Therefore, this presentation to the joint committee is a significant event in the history of Aughinish Alumina.
I wish to explain a little about what is Aughinish Alumina. Aughinish is located on the Shannon estuary, 20 miles west of Limerick city, between Askeaton and Foynes. We occupy a 1,000 acre site on Aughinish Island in the estuary. The plant was built between 1978 and 1983. At the time it was the biggest construction site in Europe, employing more than 6,000 construction workers. The initial capital investment was more than $1 billion and there is an ongoing capital investment programme. In the past four years since Glencore took over the ownership following the departure of Alcan, more than $40 million has been invested in the plant. We have a site workforce of 700 people and more than 90% of those are in the high skills category as defined by the IDA. The wage bill alone is more than €45 million per year and the expenditure nationally is over €90 million per year. This expenditure includes €2 million per year on property tax, which makes us the largest property taxpayer in the mid-west region. It also includes €1 million per year to Shannon Foynes Port Authority, which makes us the largest single contributor to that authority.
Our current research and development expenditure is close to €2 million per year, and we see that doubling in the next number of years. We have ten people with Masters, PhDs and post doctorates working on R&D for us in the University of Limerick. This number will increase over the next number of years.
Today, we operate in a very challenging international commodity market. The bulk of our competitors enjoy locational advantages. They are built beside a bauxite mine, which is our main raw material, next to smelters, which are our customers, or close to sources of cheap energy such as hydroelectric power or coal. In order to compete with that, we have adopted a world-class approach to everything within our control in running our business. That has helped us to overcome the locational disadvantages.
Examples of our achievement include the following. On the environment, we sought proactively to be regulated via IPC licensing ahead of the official schedule. We also became the first alumina plant in the world to achieve ISO 14001 accreditation on its full operation. On health and safety, we have won many national safety organisation awards, including the gold medal and the supreme award. We received the Minister for Labour's millennium award for safety in its inaugural year, 2000. On people management, we won the Chartered Institute of Personnel Development award for human resources management. On training and development, we achieved the highest score - 98% - in the FÁS Excellence Through People Certification Award, which puts us ahead of pharmaceuticals, IT, banks or any other companies in the country. One of Aughinish's apprentices has just won the silver medal for Ireland in the fitting craft in the World Skills Competition in Gallen, Switzerland. That silver medal is another success for Kerry.
The National Centre for Partnership and Performance uses Aughinish as an example company for best practice in workplace partnership. We have frequent visitors who are recommended by the group of unions which operate in our company, the ICTU, and the Labour Court has referred both management and union groups to visit our site. On production, we have the best manpower productivity in the alumina industry globally and we have set annual production records for the past 17 consequent years, something which is unprecedented in our industry. Our new owner, Glencore, considers Aughinish a model asset and this experience has contributed to its decision to locate a marketing company in the financial services centre in Dublin. The culmination of our achievements is that we have become the largest, and we believe the most efficient, alumina refinery in Europe.
As I stated in my introduction, our first 20 years of production started on 4 September 1983. Our second 20 years of production begin this year, in less than ten weeks, on 4 September. Our owners have stated that given the right business climate, they are willing to invest between €100 million and €200 million in the plant over the next five years. That size of investment is greater than any of the other investments in major IDA promoted schemes for 2002 and 2003, as reported in a recent interview with the chief executive of the IDA. As I said earlier, this investment is backed up by the major research and development programme we are undertaking in the University of Limerick. We believe this level of investment will guarantee the plant's future for the next 20 years, assuming we can manage the external threats to our business.
I would now like to explain why Aughinish is unique. Aughinish's exposure to the cost impact of the national climate change strategy is unique in Ireland for two clear reasons. The first is that we are the most energy-intensive industry in the country, with energy accounting for 25% of our total production cost. By comparison, the average energy cost for Irish industry is 2%, and the European Union defines an energy-intensive industry as an industry whose energy costs are at 3% or above. We are at 25%. To put this figure in perspective, we are the largest single site customer of electricity in Ireland. Our usage is equivalent to half Ardnacrusha's output. We are the largest industrial consumer of heavy fuel oil. We spend more than €65 million per year on energy. It is easy to see, therefore, that energy and energy-rated costs represent a major part of our business. In fact, they exceed all other costs except those of our imported raw material, namely, the bauxite ore from Africa and Brazil.
The second and critical reason we are unique is that we produce alumina, which is an internationally traded commodity. A total of 87% of our competitors are located in countries not materially constrained by Kyoto greenhouse gas reduction targets. The price for our product is not set in Ireland or the EU. It is set internationally and is reported on the London metal exchange. Hence, we are price takers in an industry where 87% of world capacity is not constrained by Kyoto. There is no opportunity to pass on cost increases to our company and hence our business margin will decrease. Indeed, if we look further within the 13% of countries where greenhouse gas emission caps will occur, we find Germany, a country in which one of our competitors exists, namely, the Stade plant outside Hamburg, has already received signals that it will not be materially affected by any emissions capping. It is ironic that in a country as heavily industrialised as Germany, a similar alumina plant will not be materially affected by emissions capping.
Aughinish's unique exposure within Ireland, which is down to our energy intensity and the fact that our product is traded internationally, is undisputed by various groups. The ESRI believes we qualify for special treatment with regard to energy taxation. The Department of the Environment, Heritage and Local Government recognises our unique exposure. The Minister has still to adjudicate on this and the Government has to make a decision on the issue. How this issue is finally addressed in the detail is of critical importance to our ongoing viability.
I have dealt with who we are, the reason we are here and why we are unique. I would like to pass on to the final part of our submission. What we need from the members of the Joint Committee on the Environment and Local Government relates to three areas. The first is the area of emissions trading. Emissions trading is a form of taxation that is related to the actual greenhouse gas emissions from a site. If a company emits, say, 100 units of carbon dioxide, it may be allocated between 70 and 100 units under the national allocation plan. If we assume an allocation of 90 units, that is then known as the emissions cap. As a consequence, that company then has to reduce its emissions to 90 units or purchase the ten units in the marketplace or, failing this, pay a penalty fine. Approximately 40 Irish industrial installations, in addition to 20 electricity generating plants, are listed in the EU emissions trading directive. Aughinish is one of these sites. How the allowance or cap in emissions trading is determined is a key issue for business.
Two conflicting methodologies exist, a top-down and a bottom-up approach. A top-down approach allocates an emission cap to each participant according to a formula. It is easy to administer but it is seriously flawed as it can consider equal percentages as equitable. This totally ignores the ability of the recipient to adjust. In contrast, the bottom-up approach allocates a cap based on assessing what the firm is capable of doing to reduce its emissions and remain competitive. We believe this approach is suitable for a company in our unique position.
A negotiated agreement based on independent energy audits is a way of achieving this bottom-up approach. We are the lead company in the Sustainable Energy Ireland pilot of negotiated agreements based on independent energy audits. Sustainable Energy Ireland is due to publish its report on this topic in the next few weeks. The negotiated agreement approach has been successfully utilised in other member states. It respects competitiveness and is consistent with EU Commission philosophy. Retention of international competitiveness is a specific criteria to be considered in a national allocation plan, as provided for in annex 3 of the emissions trading directive.
Another significant factor for Aughinish to remain competitive internationally is that the emissions allocation must be based on our projected future production rate. This is necessary to counter our increasing inflation related fixed costs such as labour, insurance, energy, etc. Each member state has the authority to adopt this bottom-up approach in the development of its national allocation plan, which must be presented to the EU by March of next year.
With regard to emissions trading, the actual emission cap is critical for Aughinish. We need the committee to ensure the body responsible for the national allocation plan has within its terms of reference the ability to develop the emissions allocation or cap from a bottom-up approach that recognises both our environmental obligations and the economic realities of our business.
Our second area relates to energy/carbon tax. Aughinish will be subject to the emissions trading system and, therefore, should not be subject to energy/carbon tax, as this would amount to double taxation. The EU energy tax directive provides for exemptions from energy/carbon tax and states: "certain exemptions or reductions in the tax level may prove necessary, notably because of the absence of harmonisation at European level or because of the risks of a loss of international competitiveness." The EU Commission philosophy is that such exemptions are appropriate and it fully expects Ireland to grant such an exemption to Aughinish. The emissions trading directive provides for the legislature in each member state to grant such an exemption and states: "member states may consider the implications of regulatory, fiscal or other policies that pursue the same objectives." We need full exemption from energy/carbon tax, hence, no double taxation. This is also the view of several independent commentators and many Government Departments.
Our third area relates to combined heat and power or CHP. I will briefly explain what is CHP. Normally raw energy, such as coal, gas or oil, is used as the input to make electricity. Depending on the fuel and the technology, between 35% and 50% of the raw energy is converted to electricity and the rest is lost as waste heat in a cooling tower or to sea water. In a CHP plant the fuel is converted to both heat, i.e. steam, and electricity and, thus, the energy conversion can be more than 80%. A CHP plant has a use for the steam and, hence, the entire operation is considered energy efficient and highly environmentally friendly as much less waste is generated. For this reason CHP is sometimes classified as green energy.
As Aughinish uses more than 400 tonnes per hour of steam, an opportunity exists for a CHP plant. Aughinish is generally recognised as the best site in Ireland or the UK for a CHP plant. It is the most significant emission reduction opportunity at Aughinish and it represents a major opportunity for greenhouse gas reduction in Ireland. An adequately sized CHP plant at Aughinish would cost approximately €100 million and would generate 150 MW of power, equivalent to two Ardnacrushas. Since Glencore became our new owners we have spent more than €4 million on two separate joint ventures studying CHP. We are currently preparing a bid for entry into the new electricity generation competition which is now being run by the Commission for Energy Regulation. However, the current market is not accommodating to CHP because it discriminates against CHP.
Sustainable Energy Ireland published a report on the state of CHP in Ireland in 2001. It concluded that Ireland at 2% was significantly below the EU average of 10% and the EU target of 18%. The report stated Ireland is unlikely to narrow that gap unless CHP incentives are implemented. The report then lists all the different incentives which exist in all the EU countries for the promotion of CHP. The EU Commission recognises the benefits of CHP and is in favour of incentivising it at national level. Incentives exist in most EU member states. Such incentives have led to a CHP market penetration of 55% in Denmark compared to Ireland's 2%. We need this committee to work with the energy committee to put the necessary supports in place to make CHP feasible in Aughinish and Ireland.
Aughinish has been a valuable asset to the mid-west region and to the country as a whole over the past 20 years. Given our unique position in Ireland, how the national climate change strategy is implemented will be critical to our business over the next 20 years. Glencore is prepared, given the right business climate, to invest between €100 million and €200 million in Aughinish over the next five years. The biggest threat by far to this investment programme and the future of the plant is the implementation of the interrelated issues of missions allocation and trading, energy/carbon tax and CHP support measures.
If Government recognises our unique position within Irish industry and makes careful decisions around these interrelated issues, I am confident the plant can continue to operate in an environmentally sustainable manner while generating wealth in the mid-west and Ireland for at least another 20 years.
On behalf of my colleagues, and on my own behalf, I thank the committee for this opportunity to make this presentation and we are happy to answer any questions members may have.
