Energy Ireland Conference

We had a good meeting earlier this morning to review progress on all aspects of the All-island market project.

Maria, you are most welcome and I very much look forward to working with you. I would also like to pay tribute to your predecessor, Angela Smith, M.P. /…

We had a very co-operative and productive working relationship and I wish her well for the future.

Circumstances have not changed much since I addressed your conference last year. Continued volatility and high international prices in the oil and gas market has ensured that international attention continues to focus on security and continuity of energy supply. That will not change in the foreseeable future.

Shortly after I became Minister with responsibility for energy, I was convinced that we needed to update and restate energy policy and immediately commenced a process, which will culminate in the publication of a White Paper later this year.

This morning I want to spend some time laying out the context for that Green Paper and the challenges we face in balancing the three key principles of energy policy in an Irish context.

In common with other developed economies, Irish energy policy must ensure

• security of supply;
• environmental sustainability and
• maintain economic competitiveness.

While we share many of the same challenges as many other countries, Ireland also has a number of specific characteristics, which require distinct policy responses. These are:

• the Irish energy market is small and geographically peripheral;
• it is experiencing continued high levels of demand growth (in the order of 4% p.a.);
• there has been limited new entry/ competition into the generation/ supply sectors;
• we have low levels of international physical interconnection to wider markets, unlike our European counterparts;
• there has been an historic under-investment in energy networks;
• we have a very high dependency on imported fossil fuels, with gas dependency for power generation set to grow to almost 70% by 2020 and
• overall energy and electricity costs in particular, have risen sharply since 2000.

Thus while everyone would agree that each one of the three key principles of energy policy are all priorities, there are inherent contradictions which will force us to ask some difficult questions and make difficult choices.

For example, our nearest neighbour has decided, on the basis of a commitment to sustainability and security of supply to put the replacement of nuclear power stations, ‘back on the agenda with a vengeance. We have confirmed our long standing policy to ban nuclear power here for precisely the same reasons … security of supply and sustainability.

That decision has consequences, which we must face in terms prices and fuel mix into the future. It means that we have to find alternatives specific to our own circumstances. Solutions proposed in other countries do not necessarily fit neatly into our situation. Thus those who cite the recent Swedish decision as the exemplar for Ireland to follow ignore reality.

You will know that in January this year, the Swedish Minister for Sustainable Development, announced plans to break the country's dependence on oil by 2020. Wouldn’t I love to be in that position! However the reality is that the Swedish fuel mix is comprised of over 48% hydro and 28% nuclear with less that 13% oil currently being used for power generation.

With a clear and confirmed Government view in relation to nuclear power and the potential for hydro extremely limited here in this country, our choices become narrowed or perhaps more accurately, very different.

It is in this context that the Green Paper will set out a series of directions and questions for us all to consider.

Taking each of the principles in turn, I would like to explore each one briefly.

1. Securing Energy Supply

Addressing the size, scale and geographic location of our market requires us to build on all available opportunities. The development of an All-Island Energy Market is a vital opportunity to maximise our market size on this island and to create economies of scale in the energy sector for the benefit of consumers and enterprise North and South.

The timely delivery of a well-functioning, transparent Single Electricity Market by July 2007 is key priority under the all-island energy framework.

I would like to take this opportunity to thank both Departments, Regulatory Authorities, EirGrid, SONI and all industry players for the committed joint work to date, which has seen great progress.

The two Governments will continue to lead the way in redoubling the committed efforts of all concerned to the successful delivery of the SEM for next year.

We are fully committed to ensuring that the necessary legislation is enacted to schedule to allow the SEM to proceed.

For our part we are pressing ahead with priority drafting of the legislation with the aim of publication at the earliest possible date, in line with our joint timetable North and South.

Enhanced electricity interconnection with Northern Ireland and the development of a new electricity interconnector with Britain are also key to security of supply for the future. I expect these critical infrastructure projects to be completed no later than 2012, and sooner if possible.

In conjunction with interconnection, the All-island Energy Market is the logical first step towards creating a regional market between the island of Ireland and Britain. This is the Government’s clear long-term goal.
It is fully aligned with the EU emphasis on physical interconnection as a crucial component of a fully developed single EU energy market.

2. Towards a more sustainable and diverse energy mix

Someone once defined insanity as doing the same things over and over again and expecting to get a different result! It is clear to me that we cannot keep doing the same things over and over again.

The status quo will not work for us into the future and nowhere is this truer than in relation to fuel diversity.

If current policy remains unchanged, continued growth in gas-fired electricity generation would see our gas dependency grow to over 70% by 2020. This is not sustainable from a security point of view. In the absence of significant additional hydro resources and a public policy prohibition on nuclear, we need to aggressively embrace all available alternatives.

Ireland has one of the richest potential renewable energy resources in Europe. I intend to maximise renewable energy as a mainstream component of a diverse energy mix into the future.

We have doubled our renewable generating capacity over the past two years and we are on course to exceed our 2010 renewable electricity targets of 13.2%. Because of our rapid progress over the last two years and the necessity to challenge ourselves into the future I am today setting a new target of 15% by 2010. The new €119m Renewable Energy Feed In Tariff (REFIT) Programme will ensure that developers can deliver this target.

The Green Paper will propose an even more ambitious target for electricity consumed to come from renewable sources by 2020.

Our more ambitious targets will only be achieved by developing a broad range of renewable technologies, which is why REFIT is a banded system to assist the more expensive hydro and biomass technologies.

Achieving these increased targets will depend on overcoming the identified technical and infrastructural challenges. These are challenges for the island as a whole. The joint work of the All-island Grid Study, now underway, will address the economic and technical issues involved.

Co-firing with biomass will play an important part in extending the role of peat in our fuel mix. We are already committed to maintaining coal in our fuel mix with investment in Moneypoint.

Clean-coal technology developments internationally will mean that further coal-based generation will be an option for the future.

We look forward to the Corrib gas field coming to market as this will help to reduce our dependency on imported natural gas for some time. The recent announcement of a plan to construct an LNG terminal on the Shannon Estuary is welcome – I am given to understand that the scale of project proposed could meet about 40% of Ireland’s gas requirements.

In terms of the transport sector, we were keen to build on the success of the 2005 pilot biofuels excise relief scheme. In the last Budget, the Government announced an expanded multi-annual scheme valued at €205m. This new programme, which is subject to State-aid approval, will be rolled out from this year to 2010. It will enable us to reach the initial target of 2% market penetration by biofuels by 2008. The Government has also put in place a €5m fund towards the capital cost of developing biofuels processing facilities, which will critically underpin the excise relief package.

3. Environmental Sustainability

I am also very keen to inform and stimulate change in consumer/ business behaviour with regard to energy consumption.

Improved energy efficiency has the potential to be the cheapest and cleanest method of reducing greenhouse gas emissions and energy costs for consumers, both domestic and business alike.

Sustainable Energy Ireland has been working for a number of years with the Large Industry Energy Network and is now rolling out a new programme of Energy Agreements aimed at adopting a strategic approach to energy management. /…

In 2004 alone €20 million in energy costs for business were avoided.

SEI is also promoting an Energy Management Action Programme aimed at the Small Enterprise sector and these programmes have the potential to maximise energy efficiency throughout the economy. This will be a key element in our competitiveness strategy for the future.

Along with a comprehensive range of grant supports for Commercial Bioheat and CHP units, we recently launched a €65m fund to develop Greener Homes, which prompted a terrific response from domestic consumers.

However, I believe that we can and need to do more, reach more people and raise awareness of the benefits of improved energy efficiency among individual consumers and across all sectors of the economy, in particular the transport and public sectors. Accordingly, this coming Autumn, I will launch a multi-annual national campaign aimed at increasing an awareness of the benefits of energy efficiency.

Along with energy efficiency, a greater focus must be brought to bear on energy research and development. Just yesterday the Government launched the Strategy for Science Technology and Innovation 2006 – 2013, which is a major programme to support the development of Ireland as a knowledge economy. Energy research is an important part of this Strategy.

My Department and associated Agencies are strongly committed to the research agenda. While volume of R&D activity is important, it must also be focussed, and relevant. Therefore I have taken actions to improve the coordination of existing energy research activities, as well as laying the groundwork for planning for the future. To this end, I inaugurated, last week, the new Irish Energy Research Council.

The outputs from this new Council will undoubtedly make a critical contribution to how we address challenges such as those posed by the issue of climate change.

4. Economic Competitiveness

Energy policy must be strongly focussed on ensuring a consistent regulatory framework, which will enable the energy sector to support national competitiveness and maintain economic growth.

I recognise that rising energy costs are a contributory factor in the increased cost base for Irish industry.

In many cases businesses are constrained in their ability to pass these costs through to final prices, which erodes overall economic competitiveness.

A large proportion of the higher prices experienced in Ireland can be explained by our fuel mix and the existing structural constraints of the market. These factors limit our ability to manage and mitigate future energy price increases.

However, I believe that a number of steps can be taken that will contribute to ensuring economic competitiveness. The creation of a truly competitive market and a much stronger focus on domestically controllable costs must be key priorities going forward.

Perceived and actual dominance by any market player in a market can frustrate the best efforts of Government/ Regulatory Authorities to stimulate competition.

Over time the SEM is expected to deliver the cost-efficiencies, transparency and investments needed to promote an efficient electricity market that will contribute positively to competitiveness.

However, one of the major factors identified as influencing the reluctance of independent generators to enter the market is the perceived and actual dominance of ESB. This arises from ESB’s ownership of a large and diverse portfolio of plant and from its ability to set prices.

While the SEM will have an overall positive effect, it will not address ESB’s price setting ability. In this context, decisions on future market structure will be also be important.

The current situation requires an undesirable level of regulation and I do not believe this approach is tenable in the context of pursuing a market model. And in the context of the Single Electricity Market, it is equally clear that structural and market issues will need to be progressively addressed, both North and South.

One thing is certain, the status quo will not suffice if we are to meet the challenges and opportunities ahead.

Without changing the current structure, the market will evolve slowly without a competitive downward pressure on prices and there will be few opportunities to break the current cycle of market evolution. Such a scenario is not in the interests of consumers or market players. Nor does it deliver for the economy and competitiveness.

It is against this background that Deloitte was engaged to undertake a detailed review of the electricity sector in Ireland. Their report, which is a comprehensive analysis of institutional arrangements and market structures, is an important input into the Green Paper.

ESB has played a fundamental role in the economic and social development of the State and the Government recognises the strategic value of maintaining the ESB as a strong and commercially viable company into the future. The retention of natural monopoly networks in State ownership is also a core policy tenet for the Government.

The Government does not in any circumstances favour the privatisation or atomisation of ESB. With that taken as given, structural reform must deliver outcomes that are in the best interests of consumers, the market and ESB itself.

This market needs to attract new players.

We cannot have a market where the barriers to entry are so high that potential entrants see no opportunity or where existing ones see no growth potential. We need more competition to deliver better choice, innovation and competitive outcomes for all consumers.

Our small market size requires us to build on all available opportunities to make our market attractive to generators and suppliers alike. Invariably, the process of change will require substantial planning, time and resources to implement.

I started out this morning by emphasising the challenges inherent in the development of policy choices, which meet, in a balanced way, the requirements to ensure security of supply, environmental sustainability and economic competitiveness.

I am confident that the directions, as set out in the forthcoming Green Paper, will provide the basis to positively shape the future of the sector and its contribution to overall competitiveness. Any consideration of a Green Paper has to be based on reality. We have a series of constraints, which are specific to our circumstances and a need for choices to be made.

Some of the choices are obvious, others not so, some are easy, some not so. One thing is certain, none can be avoided if Ireland is to maintain its economic growth levels and international competitiveness.

ENDS