Willie Penrose (Longford-Westmeath, Labour)
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I thank the Ceann Comhairle for selecting this important issue which is a vital topic for debate on the floor of Dáil Éireann. The PSO levy has had a serious impact on a series of end users of electricity. The levy was introduced by the government in 2000 to ensure that Ireland had a percentage of indigenous electricity generation, peat resources principally from Bord na Móna, and also to encourage development of green energy in the form of wind and biomass. It was also introduced to have security of supply from the Aughinish and Tynagh power stations, which became relevant in the context of the reduction of the ESB monopoly. It was to guarantee new operators an income in the new markets.

The PSO levy is reviewed by the Commission for Energy Regulation each year and the levy is set according to the various formulae laid down in the original directive from government. In this context the proposed decision paper for the PSO levy for 2014-15 was published on 6 June.

The crux of the problem is that despite everybody's involvement in growing the competitiveness of domestic industry, and the clearly uncompetitive nature of the Irish electricity market, it appears all consumers - domestic, industrial and business ones - are again facing into significant and savage price increases. It is noted that large energy users are bearing a disproportionate percentage of the price increase sought: 47% for domestic users as against 80.5% for large energy users.

While the policy was introduced and designed to support laudable national objectives at the time, it has now become a millstone around the neck of Irish industry. It is threatening the sustainability of many jobs across the economy and is becoming a barrier to the entry of new industries, data centres and the knowledge economy which are highly reliant on competitive electricity prices.

This flies in the face of the continuous focus by Forfás on competitiveness and the fact that it disadvantages us economically as a country in this vital component of international competition. Large energy users are bearing the brunt of the cost of this levy. In 2014-15, if left unchanged, the contribution to the fund by large energy users will rise to no less than 80.52%. On a four-year look back when the country was in the grip of its greatest ever recession, the contribution to the fund by large energy users rose by no less than 242%.

In 2010-11, the fund stood at €156 million but is now a staggering €327 million. In just four short years, the fund has risen by 209%, which is an astronomical rise by any standards. We are aware of where the funds are used, so perhaps it is time to take a closer look at the PSO since the market is radically different from the one that existed when the levy was originally introduced.

The Minister knows my view that wind energy turbines are the most monstrous blot on our landscape, being neither efficient nor effective. They are driven by corporate greed and a dismissive approach by those involved. This industry has had its subsidy, via the levy, increased from €9.73 million to €87.8 million in just four years. It is no wonder that armed with this levy, which is provided by consumers at all levels who have no choice in the matter, wind energy promoters think they can do what they like without any care for people's concerns. This proportion of the levy increased by 295%.

However, we still appear to be hell bent on increasing the number of wind farms across our landscape, for which we will no doubt have to pay a further increase in the PSO levy. Are these great wind farms cost competitive and does this policy offer value for money? I say it does not.

A large user of energy in my constituency will have to pay an increase in the PSO contribution of 80.52%. For this company, which employs more than 250 people directly and indirectly, the increase could be the straw that breaks the camel's back. It operates in the export market, competing with Spain, Germany, England and the Benelux countries, all of which enjoy significantly lower energy costs and, in some cases, provide specific reliefs against high energy costs to their own companies. As a high level energy user, the PSO levy means that the company's overall electrical bill will rise by 4%, which will increase its energy bills by an estimated €250,000. As it competes in the markets to which I referred, it is not in a position to pass on the proposed price increases to their customers. How is the company going to survive and what impact will the increase have on workers and their families in this real life scenario?

If this economy is to survive and grow, businesses must be competitive. If we continue with the PSO levy in its current format, the inefficient generators may survive but energy users clearly will not and we will not be able to attract the data centres needed for the knowledge economy or persuade other high level operators to remain here. The outlook could be bleak in this challenging and competitive environment unless we change tack and remodel the PSO levy from its current structure. Competitiveness is the key to our survival.

Pat Rabbitte (Dublin South West, Labour)
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I apologise to Deputy Penrose and the House for missing my slot. I thank the Deputy for raising this important issue.

The PSO is charged to all domestic and business customers and is designed to compensate suppliers for the additional costs they incur by meeting obligations to purchase electricity from indigenous, sustainable and renewable sources, and to ensure security of supply. Its legal basis and method of calculation are set out in the Electricity Regulation Act 1999 and its operation is outlined in SI 217 of 2002. The cost of the PSO levy tends to be lower during periods when fossil fuel prices are higher. In these circumstances the market sufficiently rewards renewable and indigenous peat producers.

Deputy Penrose will be familiar with the most enduring function of the PSO, namely, to support employment in the peat sector in the midlands. The retention of hundreds of jobs in the midlands would not be viable without the PSO mechanism. Successive Governments have supported the PSO for that reason. A further legacy issue is the contract entered into in 2005 to ensure security of supply with Tynagh and Aughinish, at a time when the country was on a knife edge in terms of energy security. This is something we must guard against in the future. The existence of the PSO is vital to the delivery of our renewable energy targets. The PSO has supported the connection of around 2,000 MW of renewable energy to the electricity grid and it will continue to support the development of renewable energy so that we can meet our target of boosting renewable penetration to 40% by 2020.

Any call for a review of the public service obligation should consider the importance of delivering our policy objectives of increased renewables and ensuring security of supply. It is also important to have due regard for regulatory stability in the context of overall energy policy, as I point out in the Green Paper. The biggest driver for the proposed levy rise for 2014-15 is the lower predicted wholesale market electricity price, which is currently estimated to be around 10% lower than last year. This results in lower predicted market income for the PSO plants and, therefore, a higher levy is required to cover the allowed costs. The lower wholesale electricity price is currently being driven by the lower international gas prices in evidence since spring 2014. This drives up the proposed PSO levy but if these lower gas and wholesale prices are sustained for the coming months, it will help to reduce the wholesale cost of electricity that suppliers pay. This should enable suppliers to reduce their retail prices and potentially offset the PSO levy increase. Electricity prices are de-regulated and the Commission for Energy Regulation will continue to actively monitor suppliers and the retail market generally. While remuneration of renewable electricity generation adds to the PSO levy and customer bills, it should be noted that wind also tends to reduce the wholesale price of electricity because the operating cost of wind power is close to zero. Renewable generation therefore displaces fossil fuel generation. This is especially the case when fossil prices are high and associated thermal generation is expensive to run.

I am no less concerned than the Deputy about rising costs to industry and households alike. In the context of the increase in the PSO levy I have written to the Commissioners for Energy Regulation. As the main reason for the increase in the levy is a decrease in wholesale electricity prices, I have asked the regulator to be vigilant in its market monitoring function and to ensure that the reduction in the wholesale price of electricity is passed on to consumers. Otherwise I would expect the independent regulator to take further investigative action to discover why the deregulated market is not working competitively.

Finally, it is worth noting that the current decision is a proposed decision by the regulator. The regulator may use a revised figure for the wholesale electricity price in the final decision paper if forecast fuel prices change for 2014-15. The final decision on the PSO levy for 2014-15 will be published before 1 August. Changes in the forecast wholesale price will affect the amount of the PSO levy, increasing it if the forecast wholesale price falls and reducing it if the wholesale price rises. I urge anyone concerned to make a submission to the regulator on this draft decision by the deadline of 4 July 2014.

Willie Penrose (Longford-Westmeath, Labour)
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I thank the Minister for his comprehensive reply. I am acutely aware of the reason for the levy but we cannot continue to foist charges on industrial and domestic consumers. If the estimated wholesale price of electricity in the all-island market falls by 9% or 10%, the savings should be passed on to the consumer and end user but there is a peculiar anomaly in that, as the Minister pointed out, lower wholesale prices result in plants needing additional PSO subsidies to cover their costs and offset the smaller amounts they will receive on the market. This applies across the board both for renewables and peak energy security and supply. That is the biggest single driver of the increase in the proposed levy. The estimated wholesale price for the next year may be reflected in monthly trends of lower spot and forward prices in the single energy market but in a normal market when a company's revenue declines it seeks to offset the losses by lowering input costs and engaging in cost reduction strategies. Has the Commission for Energy Regulation carried out an investigation to ensure this occurs and, if so, can it provide proof that it has carried out such an exercise and who is overseeing value for money?

The Minister made a strong argument but it can be countered by the fact that many large energy users purchase energy in advance rather than on a day-to-day basis. If a company has contracted forward until the end of 2015 or 2016, short-term energy decreases will not be of benefit. We are in a new environment and we have to review how it operates. Electricity costs are a major factor in competitiveness, as the Minister is aware. A Forfás report focused on this issue. It is not sustainable to increase a levy by 250% over four years.

Pat Rabbitte (Dublin South West, Labour)
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I share the Deputy's concerns, and I expressed them at a meeting with the regulator and subsequently put them in writing. When one considers the three elements of the PSO, the largest element of cost is attributable to the peat stations in the midlands. It would not be viable to maintain employment in the midlands, such as among Bord na Móna workers, without the PSO.

Deputy Penrose will be interested to know that the Edenderry power station will cease to receive compensation from the levy from the end of 2015. Given that it is due to receive €20.6 million, it is a significant factor, although it is not as significant as the contract running out next year with Tynagh and Aughinish. For 2014 and 2015, Tynagh and Aughinish account for €77.6 million of the levy. That was a ten-year contract entered into by the then Government in 2005, and as I noted in my formal remarks, the country was then on a knife edge at the height of the boom with regard to energy security. We are now heading into the last year of that contract, and that is a large element.

Deputy Penrose is correct about forward purchase contracts. The public service obligation, PSO, increases when the wholesale price comes down and in those circumstances large energy users should be able to arrange forward purchase contracts to take advantage of the fact that wholesale prices have decreased. In any event, the PSO as we have known it is in the final straight. Edenderry will be affected from the end of 2015 and the legacy contracts with Tynagh and Aughinish have one year left to run.