Tom Hayes (Tipperary South, Fine Gael)
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I welcome Mr. Dermot Nolan, chairman, Mr. Garrett Blaney, commissioner, and Dr. Paul McGowan, director of safety, who are here to explain the role of the CER in regulating the electricity and natural gas sector and to clarify the impact of renewable energy on electricity costs. I invite Mr. Nolan to make his opening statement.

Mr. Dermot Nolan:

I thank the committee for the opportunity to make a presentation and to answer any questions from members. I will refer to the submission in general terms. I will speak about the Commission for Energy Regulation, while my colleague Garrett Blaney will speak about renewables. We will do our best to answer questions from members.

Tom Hayes (Tipperary South, Fine Gael)
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We will take groups of questions after the presentations.

Mr. Dermot Nolan:

I will refer to the slide presentation, which may be available to the committee. I hope to talk briefly about the roles and functions of the CER and the impact of renewable energy on electricity costs.

The Commission for Energy Regulation, CER, is Ireland's independent energy regulator. Under European rules the commission is independent of the Government. Its remit includes broad economic and safety functions with regard to energy. It may not be generally known that a significant fraction of our work is in the area of safety issues relating to energy. Dr. Paul McGowan is responsible for the safety division. The commission also deals with economic issues relating to energy. The CER is likely to be appointed as the water regulator. This has been discussed by the Government but no legislation has been published as yet. I can provide members with further information on the role and functions of the commission. The commission website is cer.ie.

I refer to the CER mission statement. In a world in which energy prices and supply are highly volatile, as referred to in the presentation from SEAI, the mission of the CER is to act in the interests of consumers by ensuring that the lights stay on, the gas flows, prices charged are fair and reasonable, the environment is fully protected and energy is supplied safely. These are the five elements of our mission statement.

With regard to the functions of the CER, the commission jointly regulates the wholesale energy market - the electricity generation market - with the North of Ireland. Statutory arrangements are in place in both jurisdictions. Regulation and decisions are made jointly. The energy networks consist of the electricity wires and the gas pipes. Those networks will always be monopolies and CER regulates them directly. We set the prices for those monopolies. The generation market is a competitive market which we do not directly regulate. We set the rules, we issue licences and monitor market players, and we monitor the retail energy sector. All electricity prices and nearly all gas prices are deregulated. We do not set those prices. There is competition between various players, in tune with the EU framework. We work on customer protection issues, providing a complaints resolution process and a customer care section. Customers contact us if they have a complaint with a supplier and we have some statutory powers in that regard.

We also deal with safety regulation. We regulate what we call gas undertakings, which include gas installers, LPG installers and electrical contractors. In the past year we have taken on what we call upstream petroleum safety, which means that we set rules for safety in offshore petroleum exploration. This is a recent new responsibility. Dr. McGowan can speak further about that if needed.

The recent rise in electricity market costs is hugely upsetting. The SEM, single electricity market, operated jointly with the North of Ireland, makes up nearly 60% - it varies from 55% to 60% - of the total electricity cost. The cost of generating electricity is the biggest single cost of electricity. Gas prices are the biggest driver rather than oil or coal prices. Almost 60% of electricity generated in Ireland comes from gas. One of the key points to make is that gas prices affect gas prices. The biggest single effect on electricity prices at the moment is also gas prices. That is the way it will be for a while. However, as more renewable energy is available, that might be less of a factor. We can discuss this later.

The networks are monopolies and they make up 30% to 35% of the entire electricity cost. They are what we call new capital build and interest rates are a big cost driver. There are three residential electricity suppliers and four or five business suppliers. The cost of supply is only 5% or 6% of the total; the main cost is in the wires and the generation. Another component is the public service obligation, PSO, which consists of subsidies paid to certain forms of generation, notably renewables, but also others. We can talk more about this if needs be. It is approximately 3% or 4% of the total but it varies from year to year.

Ireland's fuel generation mix is illustrated on the slide that is currently displayed. The country is currently very carbon-intensive, but the use of renewable energy has increased. Gas use is at about 55% to 60% of the total; coal is about 15% to 16%; peat is at 8%; renewables broadly considered are now close to 20%. The target is to reach 40% renewable electricity generation by 2020. At the moment I emphasise that we are very dependent on gas.

The next slide shows how prices of international fossil fuels have changed over recent years. The price shown in blue is the price of gas. We buy nearly all of our gas from the UK. The price shown in red is the price of oil. Prices went very high in 2008 and then fell. Oil began to recover more quickly while gas took longer, but in the past two years gas prices have risen significantly. In the past year, gas prices have risen by nearly 50%. These are the main drivers of electricity costs. Renewables are a genuine hedge against gas prices. We are very vulnerable to rises in gas prices. This will still be the case in 2020 but less so.

I will ask my colleague Mr. Blaney to speak about renewables.

Mr. Garrett Blaney:

Much of the content has been covered already by Dr. Motherway, so I will not labour the point on the various issues he raised. We support the opinions he presented to the committee. The target for Ireland to obtain 16% of its energy from renewable sources by 2020 is binding. This includes energy all across the economy - not just the electricity sector but also transport and heating. The largest slice of that 16% obligation sits on the electricity sector because the biggest changes can be made in that sector. The 40% target for electricity generation from renewables by 2020 will contribute to the delivery of the overall 16% target.

The next slide shows the position of Ireland relative to the rest of Europe and how the target compares with the rest of Europe. The target of 40% is probably not strange in a European context. Quite a few member states have higher targets than Ireland.

Ireland is different in that it relies mainly on wind energy to deliver on that target. Some 37% of the overall capacity will be delivered by onshore wind. As the SEAI stated this morning, Ireland has a comparative advantage in this regard in that onshore wind energy can be delivered at a much lower cost than it can be elsewhere in Europe because of the significant wind resource we have on the island. In Europe, there is much more reliance on photovoltaic generation. I refer to the use of solar panels to create electricity directly from the sun. Traditionally, the cost has been quite high in Europe in this regard. When we talk to other regulators in Europe, we note there are significant challenges associated with the additional costs associated with photovoltaic generation. Ireland has benefited from not having had the high cost subsidies. We have had much lower cost subsidies through wind. This has been significantly to our advantage by comparison with comparable nations across Europe.

The next slide shows our progress in the growth of renewables. There has been steady progress yearly. I will not say that there have been no challenges as significant challenges arise when delivering on the targets. Networks comprise some of the challenges. The absorption by the system of the amount of wind energy in question gives rise to certain challenges. We have had continuing success regarding delivery, however, and this is recognised at European level. When we talk to other regulators, we note our credibility has been significantly enhanced because we have delivered on renewables. Our activity is not aspirational and has been demonstrated on the ground, as is evident from the facts and figures.

We have set out the various subsidy prices for the various sources of technology. As one can see from the slide, high-volume wind results in the price that is by far the lowest, at €68 per megawatt hour. This is the floor price. There are higher subsidies for other technologies. A much lower volume of these is used in terms of the delivery of the target. One must consider biomass and small-scale hydroelectricity generation. Some members mentioned the latter form of generation.

Onshore wind is by far the largest component in terms of having resources available at the lowest cost. From our perspective, which involves meeting targets at the lowest cost for consumers, there is a clear logic to using as much onshore wind as possible because of the cost advantage Ireland has in this area.

I will talk a little about the impact this has on wholesale prices. Mr. Brian Motherway alluded to this when he spoke to the committee. What happens when a wind farm has a large output in a windy half hour? The wind-generated energy displaces fossil fuel energy on the system. Those fossil fuels are set to price for the wholesale at that time. As the fossil fuel generators are displaced, the wholesale price is reduced. We have seen this demonstrated in a number of studies. It is self-evident that the more wind energy there is in the system, the lower the wholesale price. Obviously, if it is windy at a very expensive time, such as the evening peak, the benefit is much greater. If it is windy in the middle of the night, when generation is much less costly, the benefit is reduced.

It is also self-evident that, as gas prices rise and more expensive plant is displaced, the value of wind is greater to the system. If the prices are lower at that point, the value is lower. The value of renewables to the system is very much dependent on the alternative price from fossil fuels. This is an important dynamic in terms of the value of renewables to the system in Ireland.

We mentioned a number of studies that examined this effect and the other costs. While there is a cost benefit in terms of the wholesale price, there are some incremental costs incurred in terms of the networks and the cost of delivery of networks to meet the targets. There are also impacts in respect of the operation of the system.

As the SEAI representatives said, we are currently working with various parties, including the ESRI and the SEAI. This work is being led by the Department. We are working to try to have a definitive study.

The next slide shows the results of our own study. It is slightly out of date and I attach some health warnings to the figures, which may not now be exact. The study clearly shows that as fuel prices rise, the value of renewables in Ireland is significantly greater. If fossil fuel prices were much lower – one could debate the likelihood – the value of renewables would be reduced. However, it does provide a hedge, such that the risk of higher prices to consumers is protected by having a significant component of energy generated from renewable sources.

Let me refer briefly to the challenge to networks posed by the delivery of renewables. A map of wind resources in Ireland shows that the best resources are on the west coast, particularly the north west. Typically, this has not been an area with very significant network resources. EirGrid, the company responsible for the planning of networks, has a significant programme in place called GRID25 to ensure networks will be enhanced and upgraded to allow sufficient networks to achieve the targets at a reasonable cost to consumers.

There have been significant and ongoing challenges associated with planning. There are growing concerns over public acceptance of the grid. It is important that the message be clearer that if we want to deliver on our renewables targets, we must have a network that can absorb renewable energy at a reasonable price. This is an ongoing challenge. The network companies are working hard. The regulator incentivises the system to ensure that they can deliver on their targets in a timely and cost-effective manner.

Since Ireland is a leader in terms of having high levels of wind penetration into the system, achieving a target of 37% or 40% on the system is more likely than in most of the rest of the world. This poses challenges for the system operator. At present, only 50% of the energy accepted at any point can be wind generated. We have set out a programme with the operators to increase this capacity to 75%. In order to do so, significant technological changes are required. A significant amount of innovation is also required. We cannot follow others in this regard; we will have to be a world leader in terms of having this amount of wind generation in the system. EirGrid and ESB Networks are ready for the challenge. We have certainly incentivised them in respect of price control and oversight to ensure they deliver in this area. There is a significant technological challenge but an opportunity arises for Ireland in terms of its being an innovator in determining what new technologies could absorb the required amount of wind energy into the system.

Mr. Motherway referred to smart grids. We will talk briefly about smart meters and the need to change the way consumers consume electricity in the home. It is important that we, as a nation, move from being a follower to being a leader.

My last slide refers not only to smart grids but also to the need for changes in the way consumers consume energy. We heard the debate on energy efficiency and its importance. It is not just a question of consuming less energy but of when we consume energy. If we can consume less energy when there are high prices or large amounts of fossil-fuel energy and more energy when there are more renewable resources, cheaper wholesale prices and more sustainable sources of generation, it will help not only to develop the renewables industry but also to reduce the cost to consumers. Obviously, the latter is a key consideration for us.

I am sure members will be aware of the challenge faced by consumers in paying bills at this time. Approximately one in ten consumers is struggling to pay his bills at present. We have a helpline that consumers can telephone directly with complaints, problems with suppliers and challenges that arise when paying bills. The difficulties that arise prey hard on us as we regulate the industry. It is very important that the renewables targets are met at a reasonable cost and that the best innovators and brains in the country are used to achieve this in a manner that works for consumers.

Michael Moynihan (Cork North West, Fianna Fail)
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I thank the commission for attending the committee and for its presentation. Energy prices are a major issue as they are constantly spiralling up. I was in correspondence with the commission before about an increase in ESB prices several months ago. Subsequently, the ESB announced it had a half yearly profit of €230 million and was facing a €500 million profit for the full year. The perception is that this substantial profit is being generated by a semi-State body on the backs of the householders. How can the commission, as the public watchdog and the custodian of the consumer, both private and commercial, allow the ESB to get a price increase with such an enormous profit?

Over the past several weeks, we have seen some media reports about the possible rigging of gas prices on the international wholesale market and in the City of London. The commission earlier alluded to the fact that 55% to 60% of the ESB's costs come from gas prices. I hope the commission is following up on this possibility of gas prices being rigged. Has the commission any views on this?

The committee has been in correspondence with the commission on the unprofessional work done by gas installers, an issue raised with us by a plumbers' umbrella body. The commission in its reply stated that unless it was brought specifically to its attention, then it cannot move on it. There needs to be greater awareness of this issue as I believe a serious accident could happen if it is not tackled.

One major issue we as public representatives encounter is that of people not being able to pay their electricity or gas bills. In the commission's experience, what is the level of fuel poverty? Every public representative has been in negotiations with some utility company to ensure someone's arrears are reduced. Does the commission have any figures on disconnections because of unpaid bills?

Dessie Ellis (Dublin North West, Sinn Fein)
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I thank Mr. Blaney for his presentation. I have heard many concerns about electricity prices. When the market was opened up, the ESB had the cheapest prices in Europe. The prices have since then been deliberately increased in advance of privatising sections of the company. Be it some European directive or otherwise, I cannot understand why one would privatise a semi-State company that makes money for the State. I am certainly opposed to any such move. What role did the commission have in the original arrangements that brought this into place? To me, it flies in the face of what I believe. On top of that, jobs have been created by the ESB while profits have been consistently large but we keep jacking up the prices. There seems to be price-fixing in either Europe or in Ireland or a combination of both. What is the commission's view on that?

We are very dependent on gas and our supply is linked into the European network. How sustainable are gas supplies in the long run? Are we talking about 20 years or 50 years before problems emerge with supplies? If gas supply breaks down or we run into resource problems, where are we? Will we have to move over to electricity? Mr. Blaney earlier said targets for electricity have been set at 40% and up to 75%. To reach that there will have to be significant investment in the grid and electricity generation.

How does the idea of better competition in the market by allowing companies take on a semi-State company with high prices work? If smart meters were introduced, would it lead to savings? Would there be a cost to the consumer to install them? Will businesses have to install these smart meters?

Obviously we have the resources for solar and wind energy production. Is sea or tidal energy a viable runner? Are we just concentrating on wind and solar energy?

Ann Phelan (Carlow-Kilkenny, Labour)
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I share the concerns of the other Deputies about how the average household will pay over a third of its income on energy for keeping warm, cooking, washing clothes, etc. We must do much more to negotiate with the utility companies to reduce their prices. We are lucky that the weather has not been too bad just yet. However, if we get a bad winter on top of rising energy prices, it could tip people over the edge. Households cannot scrimp on keeping themselves warm.

Since electricity cannot be stored, it poses problems for wind-generated power. The Spirit of Ireland project believed it had solved this problem by proposing back-up hydro-generating stations to deal with peak demand times.

Could the commission elaborate a bit more on smart metering? I have heard some negative comments about it in the past few days. Is a system whereby a household can put back unused electricity into the grid a utopian ideal? Now that the nuclear industry is waning, what potential does Ireland have to supply alternative energy production, particularly to Britain?

Mr. Garrett Blaney:

Deputy Moynihan's comments about prices and profits were echoed by other Deputies.

I will take the profits question first, if I may. I am unsure how useful it is to say this but in terms of legislation regardless of whether a company is public or private we cannot treat it any differently. I wish to be clear about that. This comes partially from the European Union framework. Under our statute we are bound to regulate the ESB or Bord Gáis in exactly the same way as we would any privately-owned company. It is simply the way the legislative framework works.

The profits earned by ESB include significant aspects that do not come from areas to do with regulation. Having said that, I accept that it is an important area. I put it to the Deputy that I would be horrified if the ESB had full-year profits of €500 million. I am not trying to justify the ESB or explain its actions. Ultimately, the committee may wish to discuss this with the ESB, but my understanding is that it expects its full-year profits be no greater than, and possibly less than, its half-year profits. While I accept that there has been an increase in profits in this half-year I do not expect it to be in any sense replicated in the second half of the year. I do not believe the €500 million profit will materialise. I can offer some reasons for this, if the Deputy so wishes. The ESB manages its own accounts but two reasons likely include the following. The first relates to the ESB Networks business, that is, the wires. It is a monopoly and most of the expenditure it will incur will be in the second part of the year. The company pays salaries throughout the year but most of its expenditure will arise in the second half of the year. It will have higher costs in the second half of the year but the same revenues. The ESB will not have profits in that area in the second half of the year.

The other area is generation. There are several large generation plants and, by their nature, they need to be refitted and production must stop for two or three weeks. My colleague, Garrett Blaney, once ran a plant. The ESB has informed me that it expects two of its largest stations, Moneypoint and Synergen, will basically be turned off for a time in the second half of the year. They will be refitted and something will be done to them - I am not precisely sure what. This happens to all generation firms. The ESB does not expect to make any profit from those stations. These were the reasons offered.

Let us consider past ESB profits. They have always tended to be higher in the first half of the year. The ESB has informed me that this will be the case particularly this year. I am keen to give a full answer to the Deputy and I will try to explain why I believe profits have increased in this half-year compared to the corresponding half-year last year because it may be interesting. One reason has to do with a financial swop. I wish I could explain all the details but I probably cannot. ESB bought the Northern Ireland network business one or two years ago. This was a major financial transaction of more than €1 billion and I understand there is an accounting profit included in the first half-year figures to do with a related financial transaction. I cannot explain any more of the detail although I wish I could. If necessary I will try to follow up if the Deputy seeks further information.

There are two other points and the second is especially interesting. ESB's power generation profits are earning more in the first half-year this year than last year. Why is that? There are two reasons. The first is interesting in the sense that coal prices have not risen but gas prices have. Coal is more in merit than gas. In other words, coal stations, effectively this amounts to the Moneypoint plant, with which the Deputy is probably familiar, is running a good deal more than it was last year and consequently it is earning more profits. Gas is earning less. We have seen that total generation profits throughout the entire sector are approximately the same but those relating to coal stations are higher and those relating to gas stations are lower. The ESB has almost all the coal on the island. There is a coal plant in the North of Ireland but it does not run very often. Moreover, ESB has less than half the gas and it has earned more relatively because of its coal while other generators have earned less.

The second issue is interesting because it shows the potential impact of European Union policy on Ireland and Irish prices. Some five years ago the price of carbon was included in all electricity generation in Europe. A specific decision was made at European Union level to reflect the fact that it is carbon-intensive to generate electricity. One of the purposes was to establish the true cost of generation using coal and gas. These are dirty fuels and they are harming the planet and the view was that this should be priced in to give producers an incentive to use them less and to use renewables more. The point of the exercise at European Union level was that the price of carbon would be included in the price of electricity. However, for reasons that are difficult to explain but involving political compromise in terms of getting the bargain through, all generators were given the cost of carbon free for five years. Basically this amounted to windfall profits for generators using carbon for a five-year period. They were getting 90% of the cost of carbon which they should have had to pay for free. This was a windfall profit that accrued to all generators throughout Europe. It will come to an end at the end of this year and at that point there will be no more windfall profits. Generators have benefited from these profits during the past five years, some more and some less. In France there has been little benefit because they do not use carbon; power generation is all nuclear fuelled while in Ireland there has been a great deal of benefit. To make the story even more complex, the profit ESB was earning five years ago was especially high because of carbon. The carbon price was higher five years ago that it is today. At the time this led to the Commission for Energy Regulation and the Department negotiating an agreement such that the ESB should give a rebate of €250 million in 2008 to all electricity consumers. That was when prices had gone particularly high.

This debate was taking place throughout Europe. After one or two years, the Government moved to introduce a carbon windfall tax. I am unsure if Deputies remember that but it went through the Oireachtas. It lasted for approximately 20 months. Another generator took a legal case against the State, arguing that this was against Europe and against various other things and that it wanted to pass on this cost. The Commission for Energy Regulation defended the case successfully in the High Court but, unfortunately, we lost by a three to two decision in the Supreme Court, for which I apologise, but such is the nature of decisions. As a result, the carbon windfall tax was ended in May of this year but it had only a few months to go in any case. It collected more than €140 million for the Exchequer during that period.

I realise I have been long winded but I am keen to give a full explanation. Last year the ESB did not have all these carbon windfall profits because it was paying tax but for a period during the first six months of this year it did. The ESB has informed me that this amounts to approximately €15 million or €20 million. Unfortunately the ESB will have these windfall profits for the remaining part of this year and, frankly, as the regulator, there is nothing we can do about that. We have no power to take those profits. However the windfall profits for the ESB and for all producers in Europe will end at the end of this year and that is a positive step.

I apologise for taking so long and I can discuss the profits issue further with the Deputy and, if he so wishes, provide any further information. We have done some comparison on ESB profits compared with other vertically integrated companies, that is, companies that have networks, generation businesses and supply businesses. In a study over a four or five-year period the average ESB profit in terms of various measures – I can provide any detail that the committee wishes - have been average or less than average compared with general profit throughout Europe despite carbon windfalls. I accept the point about profits. I would be horrified if profits were doubled but I do not believe they will be, and if they are I expect to be dragged back in here. In any case some of the profits during the recent period have been driven by the windfall profits and they will be ending at the end of the year.

Some of the Deputies have raised issues with regard to prices generally. This gives me the opportunity to discuss the vulnerable consumer issues raised by the Deputy. Prices have risen a good deal. I can provide details on this as required but the latest comparison relates to prices at the end of 2011. Our electricity prices are slightly higher than the average throughout Europe but not a great deal higher. They are approximately 105% where 100% is the average for residential customers. For some business customers the cost is slightly cheaper than the average. We face serious disadvantages compared to most of the rest of Europe. We are largely dependent on fossil fuels. The average European dependence on fossil fuels is 40% whereas ours is 80%. We have one of the most dispersed populations in Europe and only limited interconnection.

The Deputy said that prices were below the European average in the 1990s. I can provide two reasons for that. First, oil and gas were remarkably cheap at that time. Unfortunately, as the price of gas and oil increases we get clobbered while other countries do not. France has almost no dependence or only a 5% dependence on oil and gas while Sweden has 3% dependence. The increase has occurred during the past two years. About one half years ago we were below the European average generally for electricity prices. However, there has been a 50% rise in gas prices during this two year period and this has made it worse.

On gas prices and Deputy Moynihan's second point about abuse of the gas market in the UK, we buy roughly 95% of our gas from the UK. Most of it comes from the North Sea and some from other aspects. As stated by Dr. Motherway, we are price takers and have no ability to influence price. I was horrified by the allegations a week and a half ago to which I will try to give context. It is being alleged that the six big energy companies of gas in the UK, where the liquid market is very large, have been attempting to manipulate gas prices over time. Ironically, the incident identified is a point in time where it was argued they were manipulating the gas price below the true cost. People are asking if they manipulated gas prices below the true cost once, what is happening the remainder of the time and are gas prices higher than they should be? Unfortunately, to be blunt, we have no powers in this regard. We have been in touch with Ofgem, the UK regulator, which is investigating the matter. It is also being investigated by the Financial Services Authority in the UK. We are in touch with both organisations in this regard and hope it will be dealt with. Unfortunately though, as I said, we have no powers in this regard. While I do not like saying it, there is nothing we can do. We are price takers on gas. It relates back to our dependence on gas, which I will comment on again later.

I will try now to address some of Deputy Moynihan's questions in regard to vulnerable customers. Obviously, prices have increased considerably. On the question of whether customers are in difficulty the answers is "Yes, they are". We deal with many queries from customers in difficulty through our helpline. In terms of disconnection numbers, we regularly publish the statistics in this regard but will provide further figures if necessary. From my recollection, the number of disconnections has increased significantly over the past two years. They peaked in the summer of 2010. In the first quarter of this year almost 5,000 electricity and 1,600 gas customers were disconnected, which is a lot of disconnections. We will publish figures next week which indicate the number of disconnections reduced in the second quarter.

I will now speak about some of the protections we have put in place for customers in difficulty and in regard to what we believe is happening in terms of the people being worst hit. We interact fairly regularly with the Society of St. Vincent de Paul and the Money Advice and Budgeting Service, who work with people experiencing difficulty paying their energy bills. I would say - I am not trying to be controversial about this - the biggest difficulties are faced by families with children. The majority of senior citizens' energy bills are paid by the Department of Social Protection by way of the free electricity allowance. By and large, it is families with children rather than senior citizens who are experiencing difficulty paying their energy bills. The committee might like to engage with the Society of St. Vincent de Paul on this issue because it is not one on which we have direct empirical information. There are various protections in place.

We have no role or ability to bring price below cost. As a regulator we set the price at an efficient level of cost. While I wish we had power over fossil fuels, we do not. As I stated, we are price takers. I am confident that regardless of how unpleasant the price increases have been - I know that they are extremely unpleasant - given our dependence on fossil fuels they represent an efficient cost. I will discuss that further if the committee wishes. I know that fuel poverty is a major issue for some people. What we have tried to do is to give people further options and information to try to prevent disconnection. The rules of disconnection are that no senior citizen can be disconnected during the winter months, although as I said earlier - I am not trying to be hard on them - they are often not the worst hit, and a person dependent on electricity for life saving equipment, which is a small fraction of people, can never be disconnected. Beyond this, disconnections have occurred. We have put in place a set of clear procedures that must be followed by an energy company wishing to disconnect. They must have issued a specified number of letters and had various types of contact with the customer. They must give the person every opportunity to pay, in particular he or she must be offered a prepayment plan. The customer must also be offered a plan to get him or her out of debt over time, with no requirement to pay the full amount up front but over an extended period. These are all actions that must be taken by the energy companies. We have and continue to audit this process.

Also, before disconnection, the customer must be offered a prepayment meter. This involves a visit from an employee of the energy company who will remove the existing meter and replace it with another one. While this may seem like something out of the 1950s and 1960s, the Society of St. Vincent de Paul and the Money Advice and Budgeting Service say it is a genuinely valuable tool in helping people to manage their bills. It stops that running up huge amounts of debt. As such, prepayment meters are a reasonably good idea. Many people have had prepayment meters installed. They were used in respect of gas prior to their use in respect of electricity. Approximately 30,000 gas and 13,000 electricity meters have been installed. We have found - we have no empirical way of doing this but I base my information on what we learn from talking to people, the supply companies and Society of St. Vincent de Paul - that one of the biggest problems is the reluctance of people to accept installation of a meter. Some people will accept disconnection rather than have a meter installed. People seem to think - this is a personal opinion - that having a meter installed says something about them. The Society of St. Vincent de Paul and Money Advice and Budgeting Service are working to make them more acceptable. Anecdotal evidence shows that only one in four of people offered prepayment meters accepted them, with the remainder opting for disconnection. Anything that can be done to make meters more acceptable would be welcomed. They are a positive step in trying to assist people with their bills. I can provide any further detail on this issue, as necessary.

Deputy Ellis spoke about privatisation of State companies. Much of this is as a result of a European framework. For good or ill, the European framework is that energy should not be directly regulated and there should be greater competition. The promotion of competition is a major statutory objective given to the Commission for Energy Regulation, CER. We cannot ignore that and must take it seriously. We are not permitted to distinguish between State and non-State companies. Were the statute in this regard changed, Europe would have a serious problem. Personally, I believe that privatising the networks would not be a good idea. However, I do not believe there are any plans to do so. That is all I can say on that issue.

On smart metering, they will not be a panacea and will not be perfect. Nonetheless, we have engaged in a fairly extensive trial of them which suggests that consumers while initially resistant of them have accepted them because they enabled them have more power over their electricity usage. Most important, the ESRI engaged in a lengthy cost-benefit analysis which indicated there will be benefits, although those benefits will not be substantial. I am not talking about the price of electricity falling by 10% or 15% but there will be benefits. We would expect electricity prices to be on average lower because of smart metering. Also, consumers would be more empowered and interested.

Mr. McGowan will comment later on safety issues. While the idea behind export is a good one, a key factor is that our export of renewable energy should not result in an increase in prices here. In terms of what is going on, Britain has its own energy targets. It will have to pay a substantial amount to achieve them, in particular using the offshore wind in the North Sea, which is very expensive. A number of private firms believe they can produce the energy more cheaply here and that they should do so and then sell it to others who will then achieve their targets more cheaply. To me, that appears very sensible. Without being controversial, coalition policy on renewables in Britain is slightly difficult but they are committed to reaching their targets. Work in this area is likely to be privately funded. Spirit of Ireland and a number of other companies believe they can do this. This means generation would be undertaken here. Discussions on the issue are taking place with people in Britain. It is possible that Britain might pay for the construction of an interconnector. In some sense, this is a policy matter rather than one for the Commission for Energy Regulation. My understanding is that conversations on the issue are going on and that a memorandum of understanding may be signed before the end of the year. As to how this will play out, I do not know. It could be a good outcome. While it will obviously be good for Ireland Inc if this happened our main focus will be to ensure that it does not lead to an increase in electricity prices in Ireland.

I will now hand over to Mr. McGowan who will address the safety issues.

Dr. Paul McGowan:

To answer Deputy Michael Moynihan's question on registered gas installers, we take seriously any allegation of substandard work by a gas installer. If the work is carried out by a registered installer, it can be reported to the Register of Gas Installers of Ireland, RGII, which will initiate a disciplinary process against the installer concerned and an investigation will be carried out to determine whether the complaint is substantive. If the complaint concerns an unregistered installer who has carried out legally defined gas works, particularly in the domestic arena, this is a criminal offence. If we hear of such an incident, we will investigate it and if we find evidence, we will prosecute. We have pursued a small number of prosecutions since we were given these powers three years ago and been successful each time.

On the wider question of whether there is a black market of unregistered installers, we have no definitive statistics, but we always have that concern. We address the issue in three ways. First, we invest considerable resources in trying to make the public aware that, from a safety perspective, only registered gas installers should carry out work in their homes. We advertise in print, on radio and television, particularly during the heating season, to reinforce this message. Second, we prosecute where we find out that people are carrying out illegal gas works and, through the RGII, initiate disciplinary procedures against those who do not carry out work in accordance with the standards laid down. Third, connections to the gas network will only be made by Bord Gáis Networks if a conformance certificate has been issued to show the works have been carried out by a registered gas installer.

Tom Hayes (Tipperary South, Fine Gael)
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When we met representatives of the contractors' association, they pointed that Bord Gáis had changed its system from a regulated one under which it employed its own contractors. Is Dr. McGowan happy with the new system? That is where the allegations of people working in the black market arise.

Dr. Paul McGowan:

Please allow me to briefly address the history of the matter.

Tom Hayes (Tipperary South, Fine Gael)
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The contractors made serious allegations. As an independent observer, I would be concerned if they were true.

Dr. Paul McGowan:

I believe the Chairman is referring to the Association of Plumbing and Heating Contractors of Ireland, APHCI. We have met its representatives to discuss these issues. The scheme in question was a voluntary one for the registration of gas installers, but it became statutory when we took it over. I am satisfied that the statutory scheme is now functioning. It is certainly preferable to have a statutory scheme than a voluntary one.

Tom Hayes (Tipperary South, Fine Gael)
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Why is it preferable?

Dr. Paul McGowan:

It was deemed important from a safety perspective that people carrying out gas works be competent and insured. That is what the scheme guarantees. The question arises of whether people are operating outside the scheme and we acknowledge that there probably are people outside it. To some extent, one could say it is inevitable and, therefore, ask what are we doing about it. That is why I highlighted the three aspects we pursue.

On the promotion of public awareness, it is key that customers ask for a conformance certificate. If they are aware of the safety risks associated with gas system installation, they will avoid the black market. When we are successful in pursuing prosecutions, we send a clear signal to the market. People cannot connect to the gas network unless they have a conformance certificate proving they have used a registered gas installer. We are not in any way discounting the concerns of the APHCI and continue to discuss the issues arising with it. At the same time, however, we stand over the scheme in terms of what it is trying to achieve. We are constantly engaging with the industry to identify where improvements can be made.

Dessie Ellis (Dublin North West, Sinn Fein)
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I asked a question about the viability of gas supplies, but it was not answered.

John O'Mahony (Mayo, Fine Gael)
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The issue of vulnerable customers has been addressed, but I refer to the helpline Dr. McGowan mentioned in his presentation. What can be done for customers who contact the CER? Is its role merely to acknowledge that customers have been treated badly or will it also take up a customer's case with the company?

Last year the Minister for Social Protection attempted to reach a deal with the ESB and other companies regarding the money paid on behalf of social welfare recipients. Did the CER participate in these negotiations?

Will the availability of gas supplies from the Corrib field affect the proportion of energy generated using gas which currently stands at 55% and will there be an impact on prices? As regards renewables, the supply largely comes from the west, whereas demand comes from the east. Is that the only show in town or is there potential to reverse this core-periphery relationship in order that the west will become a magnet for development?

We have heard from a number of groups recently on the issue of hydraulic fracking. What role does the CER play in that area?

Michelle Mulherin (Mayo, Fine Gael)
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What percentage of electricity is generated using oil? It is not set out on the generation fuel mix chart. How does the level of oil usage in Ireland compare with that in other countries in Europe? Is the CER's remit confined to electricity generation or does it also deal with transport energy costs?

Dr. Paul McGowan:

We do not.

Michelle Mulherin (Mayo, Fine Gael)
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I will forget that issue, therefore.

I welcome the bilateral discussions with the United Kingdom because the key to exploiting the massive resources available to us is exporting energy supplies. We need interconnectors and the British need green energy. However, the two Governments face certain challenges in drawing up a memorandum of understanding on energy exports. I am from County Mayo which has substantial wind energy resources. While I was on the local authority, I chaired the committee that developed the renewable energy strategy. Even taking NHAs, SACs, housing and visual amenities out of the equation and removing wind farms from these locations, we still came up with more than 20,000 MW of wind energy in County Mayo. While we were never going to develop that level of output, it gives us an idea of what we could do if we were to get our export model right. It is all very well that the British need green energy, but we need to consider a royalty system similar to that in place for oil and gas, although we have an unsatisfactory situation in the case of the Corrib gas field.

Who will pay for the infrastructure, particularly if Britain is to benefit in achieving its renewable energy targets by virtue of wind energy supplies from our shores? We need a deal in place in that regard. Whatever payment the generator receives for the sale of power, an intrinsic part of the arrangement must be a royalties system in order that in the future the people who must live beside this infrastructure will know that royalties are being paid and that the power lines beside their homes are being used to export energy supplies. They should be aware that these royalties are going into the national coffers. We must go at this issue in a big way. We must be massively ambitious in this regard.

On another point-----

Tom Hayes (Tipperary South, Fine Gael)
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Will the Deputy, please, confine herself to questions?

Michelle Mulherin (Mayo, Fine Gael)
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I will. Whether we are talking about transport or energy generation costs, while I agree that we must conserve energy, I do not believe a developing economy or society can proceed on the basis that one must cut back on energy use. Because of our reliance on energy resources and we enjoy living here we cannot build on a model that suggests the availability of energy will not continue. I understand that is what the commission is about. We must look at having cheaper energy costs.

My next questions concerns the State's involvement in energy generation and supply. What is the commission's view on the monopoly held by the ESB? It seems we have an artificial situation, where the ESB has a monopoly, yet corrective measures have had to be taken regarding contracts with other companies in order that we do not fall foul of European requirements. Is that not a clear signal that the ESB needs to draw back a little from the supply side?

The most dynamic sector in developing renewable energy resources is the private sector. It is the one with investment capital. We can barely raise money for State projects owing to our capital problems, but there is private money available. Many private investors have expressed dissatisfaction and concern about the energy market here, particularly the supply side, approximately 75% of which is controlled by Bord Gáis and Electric Ireland and customers switch from one to the other. How is it in the interests of the State to compete with itself on the supply side? These questions must be answered and answering them will assist the private sector to become involved. As someone who comes from County Mayo on the west coast, I know there is a serious deficit when it comes to the grid. However, people who are trying to speculate and become involved are asked to trump up money well in advance of receiving a connection to the grid and without certainty that all of the ducks will line up. What is the position on grant funding and the issues that will impede our ability to achieve the 2020 targets? How proactive is the CER in dealing with the private sector which has legitimate concerns about how some things have been done to date in the context of the single electricity market?

Mr. Dermot Nolan:

The three of us will answer the questions posed. I will take the questions about gas supply and the fuel mix. I will also talk about State competition. Mr. Blaney will probably deal with the questions on renewables, while Dr. McGowan will deal with questions on vulnerable customers and safety. If I miss anything, I ask members to let me know.

Tom Hayes (Tipperary South, Fine Gael)
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Please try to keep the responses as brief as possible.

Michelle Mulherin (Mayo, Fine Gael)
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Perhaps Mr. Nolan might include the bilateral agreement with the United Kingdom and the issue of royalties on generation.

Mr. Dermot Nolan:

I will ask Mr. Blaney to answer that question.

We are hugely dependent on gas supplies and will remain very dependent on them in 2020. We do not know what the situation will be beyond that date. The chief economist of the International Energy Agency who has more knowledge of the issue will be in Dublin next week and will talk about it then. The demand for gas has risen significantly in the past few years. One of the reasons for this - it is driving up gas prices - is that nuclear power plants are being closed down in Japan and Germany. Therefore, the demand for gas will probably rise as a result. I am not a scientist, but it is my understanding that there are still significant gas deposits in the world, but extraction costs may rise. I do not know how this will impact on the industry.

It would be great if there was another energy or heating source. For example, in most of Scandinavia gas is not used to generate heat, rather electric storage heaters are used. Currently, we are very dependent on gas supplies. A comment I would make which might relate to fracking which is a tricky issue is that currently gas is very cheap in North America. It is half the price, but there are no facilities to export supplies. The reason it is only half the price is that fracking practices are used. Perhaps they should not, but I am not expressing an opinion on that issue. I wish I knew how gas prices will evolve here in the next five or ten years, but we will certainly be dependent on such supplies.

Deputy Michelle Mulherin asked about oil usage, the figure for which is less than 1%. Therefore, oil has almost no role to play in electricity generation. Energy is generated mainly using gas and, to a lesser extent, coal.

With regard to the State and competition, we do not have a view on whether something is public or privately owned. We might have personal views, but the commission does not have a view. Perhaps I should not say this, but I have the personal view which would probably be shared by my colleagues that the monopoly network should remain in State ownership. There will only ever be one set of wires, one group running the electricity network. There will only ever be one entity running the gas network. These will be monopolists. My personal view is that it is better to have a publicly owned monopolist than a privately owned monopolist.

Michelle Mulherin (Mayo, Fine Gael)
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Ownership of the network is different from generation.

Mr. Dermot Nolan:

I accept that. Both the ESB and Bord Gáis are involved in generation and supply. For good or ill, the supply side of Bord Gáis is up for sale and supposed to be sold next year; presumably, it will be privatised. There was mention of the sale of the ESB, but that is a matter for policy makers and the Government. The only issue of concern is that in the generation market the ESB probably still has a bigger share than what we think is good for competition. However, that is a policy matter and it is up to the Government to decide what it wants to do. I cannot offer any other view. All I can or should say is that I think the network should remain in State ownership.

I will pass over to my colleague, Mr. Blaney, who will deal with the issue of renewables.

Mr. Garrett Blaney:

A number of issues were raised. Deputy John O'Mahony mentioned generation in the west and demand coming from the east. This is an important dynamic. One of the factors in the electricity sector is that the sector has been affected by the downturn in the economy. We have seen the level of demand reduce year on year since 2008. There has been an approximate 2% reduction year on year. As there are a lot of fixed costs in the system, this puts upward pressure on prices. From our point of view, while the efficient use of energy is very important, there is an opportunity for Ireland to have new sources of demand.

One of the areas we find particularly interesting is data centres which have a high demand for energy. There is worldwide interest in such centres and we have sufficient capacity in the system to absorb them. We have talked to IDA Ireland and others about what can be done in this regard. As regulator, we have a limited role to play, but we watch out for opportunities to make better use of our energy supplies. There is an opportunity to export energy supplies and there might be another to attract industry and increase demand in Ireland. That would be a very attractive proposition. In the case of data centres, we probably need to look at the data corridors and where the backbone of communications is. Currently, it is on the east coast, but if more demand was developed on the west coast, that would be advantageous. However, we need to look at all of the options. If there was an opportunity to create more demand, that would be great, but we have limited capacity in that regard, although we have worked with other State agencies to try to encourage it.

On the issue of exports generally, we have no statutory role to promote exports. That is not required of us by way of legislation. However, from our point of view, we see anything which would benefit consumers as something we should do our best to facilitate. Therefore, if there is an opportunity to ensure some positive benefits, by allowing further interconnections without the cost of interconnectors falling on the Irish consumer or making better use of the networks and thereby reducing the cost to consumers, this will be encouraged.

The issue of royalties is very much one for taxpayers and Government policy. As regulator, it is important that we do what the body was set up to do under statute and leave broader issues of policy to the Government which must make the decisions on them. However, we have been involved with the Department in advising it and helping to ensure we find robust export solutions.

We are happy to facilitate exports. The issue of royalty levels is one for the Minister and his Department.

I was asked about the challenges for renewable energy projects. The number of such projects is not matched by the level of network availability to facilitate them. In effect, we have had to ration capacity on the network to ensure projects are developed in a timely manner. That rationing process has been challenging. We are in the third of three gates in the gate process and keen to try to reach a conclusion. A number of important issues have arisen during the process. As we hit the 50% limit about which we spoke, there is a point at which we will have to start turning down wind farms, even though they have the capacity to generate. Obviously, that is inefficient. Nobody wants to turn down those who can generate electricity at a low cost, but we will have to do so in order to facilitate the stable and secure operation of the system. We are keen to try to increase the 50% limit to 75%. If that is to prove possible, the issue of who bears the cost will have to be dealt with. Should it be borne by those renewable energy generators who would like to generate but cannot do so? How do we allocate the cost? Should the consumer end up with all of it? We have been working through this issue at the all-island body with our Northern colleagues. I cannot say too much about it because it is still out for consultation. I can say, however, that there has been active engagement with the industry on the matter. We are trying to reach a balance that will work for the industry without imposing extra costs on consumers. We will have to go through due process and engage in consultation to that end.

It has been somewhat frustrating for the industry that this has not happened as quickly as we would have liked. Some of the biggest challenges in the system are posed by planning and the need for public acceptance of the grid as being necessary to meet renewable energy targets. If members of the committee have influence in ensuring the planning process is efficient and streamlined, it would help consumers and everyone else. It is difficult to meet the challenge of striking the balance needed. The regulator will try to do its bit to ensure consumer interests are protected, national targets are met and the 40% renewables target is achieved.

Dr. Paul McGowan:

Deputy John O'Mahony mentioned a couple of matters, including our helpline and fracking. We operate an Internet service at energycustomers.ie, a straightforward, plain-English, user-friendly site. We also operate a lo-call number that energy customers can use to contact us. Typically, we receive queries, general complaints about prices or other issues and complex complaints from people who have serious issues with their network operator or supplier. We receive calls, faxes, letters and e-mails. When we receive a query, we try to assist the customer directly. If it involves the customer's supplier, or if we consider he or she is having difficulty with his or her bill, we direct him or her to his or her supplier, in the first instance, or the Money Advice and Budgeting Service or the Society of St. Vincent de Paul. We always encourage customers to deal with their suppliers first. Each supplier has a process that must be followed when dealing with customers who are in financial difficulty. The first thing we do when a complaint is made about a supplier or network operator is ask the customer to go through the complaints process of his or her supplier. It is important for the customer to try to seek a resolution with his or her supplier because suppliers typically try to resolve complaints.

John O'Mahony (Mayo, Fine Gael)
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The CER is the last resort.

Dr. Paul McGowan:

Yes. If a customer has been through that process and is not happy with the outcome, we will accept a complaint from him or her. The statutory process then initiated is akin to arbitration. Our decisions are binding on the supplier or network operator involved but not on the customer. We deal with a constant stream of complex complaints.

Typically, fracking - the full term is hydraulic fracturing - is a method for extracting gas from shale bed rock. We are aware that some companies have proposed to pursue fracking in Ireland. I will put our role in perspective. The question of whether someone should be authorised to explore for or extract gas by means of hydraulic fracturing is a matter for the Department and the Government. Our role relates to the safety of the process used to carry it out. The simplest way to put it is that a company cannot explore for or extract natural gas, whether by conventional or unconventional means, unless it has a safety permit from us. No company will receive such a permit unless it can demonstrate to us that it is able to carry out the process safely. The international standard is that the risk must be "as low as is reasonably practicable". We are in the process of putting the framework together and expect to go live with it in November 2013. We are conscious that a major study of fracking is being pursued by the Environmental Protection Agency. We are involved in the steering group that is developing the terms of reference for the study, but we will not be directly involved in deciding on the content of the report. Our future role will be to adjudicate on each individual application to engage in hydraulic fracturing on its own merits.

Tom Hayes (Tipperary South, Fine Gael)
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I thank the officials from the CER for dealing with so much information. There is no doubt that the sourcing of energy presents a huge task for the Government and everyone else involved. I thank the delegates for the information they have given to us. I do not doubt that we will ask them to come to this forum again at some time in the future. I thank the members who stayed on and helped us to negotiate our longest meeting for a long time.

Ann Phelan (Carlow-Kilkenny, Labour)
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The Chairman said he would circulate certain information to a member of the committee. I wonder if he will circulate it to us all.

Tom Hayes (Tipperary South, Fine Gael)
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I will do so.