Eamon Ryan (Dublin South, Green Party)

I move: "That the Bill be now read a Second Time."

I commend the Electricity Regulation (Amendment) (Carbon Revenue Levy) Bill 2010 to the House. I am very pleased to have this opportunity to present the Bill for consideration and I thank the Opposition Deputies for their co-operation in ensuring that it can be addressed today. Carbon windfall gains will only exist up to the end of 2012 which means that we only have a very limited window to recover these gains and a failure to enact the legislation in this session would see that window shrink considerably.

I know this subject is close to Deputy Coveney's heart in particular. His Private Members' motion of June 2008 set out the policy on this extremely complex matter. This legislation required substantial work to be undertaken by my Department, involving legal discussions with the Office of the Attorney General and much technical work in concert with the Commission for Energy Regulation. Electricity consumers did not lose out during this period of examination as the ESB, which is the largest electricity generator receiving the majority of the carbon windfall gains, provided a €300 million rebate which was used to reduce prices for all electricity consumers.

I propose to outline the background to the legislation and the structure of the electricity market that gives rises to carbon windfall gains for electricity generators, followed by a brief outline of the major provisions of the legislation. I hope that this can be accomplished relatively quickly to allow more time for me to get the views of the Opposition Members of the House in advance of the Committee Stage, which I believe is provisionally scheduled for next week. I have already held an informal briefing session for Deputies off-site on these measures and officials from my Department will also be happy to provide clarifications on any issues that may arise.

The main purpose of this Bill is to recover a substantial portion of the unearned carbon windfall gains that electricity generators are currently receiving through the single electricity market. Electricity generators are receiving these windfall gains because the market structure allows them to pass through to consumers the full opportunity cost of their carbon, in other words, what they would get for selling their carbon allowances. However, the generators receive the vast majority of their carbon allowances for free. This gives them a profit without any significant commensurate cost and it is these windfall profits that the levy will recover.

The European Union and its member states, including Ireland, are signatories to the Kyoto Protocol, which requires reductions in emissions of greenhouse gases by specific amounts. The EU emissions trading directive, Directive 2003/87/EC, was implemented to assist member states in achieving these targets by establishing a carbon trading regime whereby large emitters of greenhouse gases were required to possess allowances for their emissions. Article 10 of the directive requires member states to allocate at least 90% of the allowances free of charge in phase two of the emissions trading scheme which runs from 2008 to 2012.

The directive was transposed into Irish law by the European Communities (Greenhouse Gas Emissions Trading) Regulations 2004, SI 437 of 2004. These regulations led to the creation of national allocation plans which determined how the allowances were to be allocated sector by sector. Under the Irish national allocation plan covering phase two of the ETS, which runs from 2008 to 2012, electricity generators receive the vast bulk of their required carbon allowances for free with only a small amount of the allowances auctioned. The individual allocation to each generator is based upon an average of its emissions in the period 2003 to 2004.

Although generators receive the majority of their allowances for free, they are only able to monetise them through a decision taken by the single electricity market committee, which governs the operation of the all-island wholesale electricity market. In a decision paper published in March 2008, the SEM committee determined that regardless of how they receive the carbon allowances, all electricity generators must include the full opportunity cost of carbon in the bids they submit to the gross mandatory pool of the single electricity market. The net effect of this decision was to raise the wholesale cost of electricity by the opportunity cost of carbon faced by the marginal generator in the single electricity market, which in turn impacts the retail cost of electricity to all consumers.

However, as noted earlier, since generators receive the vast majority of these carbon permits for free, the higher system marginal price leads to increased profits for all generators in the market without any significant commensurate cost. These unearned gains are what we call carbon windfall gains and it is these gains that the carbon revenue levy seeks to recover. The levy will recover most, but not all, of the windfall profits that accrue to generators by requiring each electricity generator to pay a sum equal to its emissions on a quarterly basis, multiplied by the average price of carbon over that period, further modified by a percentage rate of 65%.

Technical and administrative restraints make it impossible in practice to determine the exact windfall gains that accrue to each electricity generator. In order to develop a levy that is workable, we have had to base the levy upon an approximation of the gains that are accruing to generators. To do this we are placing a levy upon each generator's total emissions, multiplied by the average price of carbon over the levy period. Calculating the levy in this way means that we do not have to consider the source of the generator's allowances, the internalised value they may represent to the generator or that portion of the emissions that may be attributable to the in-house consumption of the generator.

Using this methodology potentially creates the risk of placing a levy upon generators that would actually be in excess of the windfall gains that they are earning. Therefore, I have specified in the legislation that the levy will applied at a rate of 65%. This rate can be modified by ministerial order, following advice from the commission on the operation of the levy and a public consultation. I am satisfied that 65% represents an equitable return for the State at this stage. Some electricity generators claim that they already use some of their gains from the carbon windfall to offer lower electricity prices to their customers via their supply arms. Allowing generators to retain a portion of their windfall gains ensures that we do not entirely eliminate the scope for generators to pass carbon windfall gains on to consumers through their supply arms if they so wish.

Generating stations which are the subject of the public service obligation order made under section 39 of the Electricity Regulation Act are exempt from the carbon levy. In the case of conventional PSO plant such as the peat generating stations, Aughinish and Tynagh, these generators are not earning any carbon windfall profits. Since the levy is specifically designed to recover unearned carbon windfall gains, where there is no windfall gain there can be no levy liability. The gains arising from the incorporation of carbon to PSO plant accrue to electricity customers through reduced PSO costs.

With regard to the renewable plant in the PSO, renewable generators create no emissions and as such have no carbon allowances allocated by the EPA. Therefore, there is no basis upon which to levy renewable generators. The original purpose of the emissions trading scheme was to incentivise and make renewable electricity generation more competitive than conventional generation. Exempting renewable generators from the levy is, therefore, in keeping with the spirit of the directive.

It is anticipated, based upon modelling work undertaken by the CER, assisted by EirGrid, that setting the percentage rate at 65% will lead to the collection of approximately €75 million over the first 12 months of the operation of the levy. Of course, these sums are based on certain assumptions and any deviation from the assumptions made in the modelling work has the potential to affect levy proceeds. For example, changes in the price of carbon will directly affect the sums raised by the levy. Increases will see the levy raise additional sums, while falls in the price of carbon will see levy receipts decrease. The windfall profits earned by generators are of course affected in the same way.

It is also possible that changes in underlying fossil fuel prices could affect levy receipts if the changes are big enough to shift the dispatch schedule of the market. For example, at present, with gas prices at historical lows, gas plants tend to be cheaper to operate than coal plants. In the Irish market this means that over the past year Moneypoint has run considerably less than it would otherwise have expected to. Since coal is particularly carbon intensive this means that our emissions are currently lower than would otherwise have been expected. Therefore, if gas prices were to increase enough that Moneypoint is dispatched before gas plant this would increase the sums raised by the levy, as coal is a more carbon intensive fuel than gas and ESB's emissions would be higher.

The legislation provides that proceeds from the levy will be disbursed into or for the benefit of the Exchequer. The CER will be collecting and accounting for levy proceeds on behalf of the Government and I, with the consent of the Minister for Finance, will direct the CER as to how the levy proceeds should be disbursed in line with Government policy.

Protection of the competitiveness of Irish enterprise is a key motivator of this legislation. The large energy users that will benefit are significant employers with both indigenous and multinational bases. Electricity costs are a key part of the competitive pressures on large energy users in Ireland, particularly energy-intensive exporters or those that are part of large multinationals which regularly review and benchmark costs across multiple locations. The Government is of the view that it is imperative to take all possible actions to support the enterprise sector and employment by focusing efforts on reducing costs, where we can, for large energy users.

The levy will come to an end at the close of 2012 as after that date all carbon allowances will be auctioned, rather than allocated to generators for free. This will end the issue of the windfall profits.

I now propose to outline the main provisions of the Bill. For the convenience of the House an explanatory memorandum provides a synopsis of the provisions of the Bill. Part 1 of the Bill is a standard provision concerning definitions. Part 2 of the Bill is an amendment to section 9 of the Electricity Regulation Act of 1999, assigning the collection and recovery of the carbon revenue levy to the CER as a new statutory function. Part 3 is the substance of the Bill. It inserts a new Part into the Electricity Regulation Act 1999 and deals with the calculation and collection of the levy.

Section 40B contains the definitions which are used in the new Part. The bulk of these definitions come from SI 437 of 2004, which is the Irish implementation of Directive 2003/87/EC which establishes a regime for greenhouse gas emissions trading. Section 40C clarifies which electricity generators will be subject to the levy - those who are in receipt of allowances from the Environmental Protection Agency and who are bound by the single electricity market trading and settlement code. Section 40D sets out the formula to be used for calculation of the carbon revenue levy. Section 40E provides for the modification of the amount calculated in the formula in section 40D by a percentage rate, as specified in the next section. Section 40F details the percentage rate that will be used to modify the levy amount payable. It also allows for the modification of this rate by the Minister via order, following a review of the levy's operation. Any draft order changing the percentage rate will be subject to public consultation before any final decision is made.

Section 40G requires electricity generators to make returns to the commission within ten working days following the end of each levy period. These returns must specify the emissions made by generator in the preceding levy period. This section also gives the commission the power to make regulations relating to the information that must be contained in the returns from the generators. Giving false information to the commission in a return will also become an offence under this section. Section 40H requires the commission to issue each electricity generator who makes a return to the commission, a levy assessment notice detailing the precise amount of the carbon revenue levy payable by each generator, along with the calculations used by the commission to determine that figure. The notice must be issued by the Commission within ten days of the receipt of the returns from generators containing their emissions.

Section 40I stipulates that each electricity generator has 15 working days from receipt of its levy assessment notice to pay the commission the amount specified in the notice. Section 40J makes compliance with the carbon revenue levy a condition of licences granted to electricity generators. Section 40K details the interest rate that will apply to any late payments made by electricity generators. The rate that will apply is the standard rate outlined in the late payments in commercial transactions legislation. Section 40L grants the commission the ability to recover any outstanding amounts owed by electricity generators as a simple contract debt in any court of competent jurisdiction.

The final section, 40M, outlines how the levy proceeds are to be dealt with by the commission. It is to pay the levy proceeds into an account which shall stand separate from all its other accounts and shall be subject to audit by the Comptroller and Auditor General. A report on the performance of the commission on its functions with regard to the carbon revenue levy will also be laid before the Houses of the Oireachtas each year. Funds will be disbursed from this account only on the direction of the Minister, with the consent of the Minister for Finance, and they shall be disbursed into, or for the benefit of, the Exchequer.

It is vital that the legislation be enacted by the end of June. I have signalled my intention to use the proceeds of the carbon levy to reduce electricity costs for large energy users who are typically large employers and concentrated in the high value export sector. To enable this, the levy must be in place by 1 July 2010 at the latest. For every month that the legislation is not enacted, approximately from €6 million to €7 million will be lost to the levy and electricity generators will continue to enjoy these unearned windfall gains. Over the past 12 months, Ireland had the second largest price reduction in gas prices to business in the EU and the third largest reduction in electricity prices for both business and householders. This Bill is another important measure that will boost our competitiveness and deliver real benefits to business and consumers alike. I look forward to working closely with the CER on ensuring the speedy implementation of the Bill's provisions, following enactment.

See this speech in context