The Northern Ireland Assembly -

The Chairperson: Good afternoon, you are very welcome. I propose that you make your submission to the Committee after Ms J Morrice says a few words. We will then ask you some questions.

Ms J Morrice: I want to declare an interest because Susan Morrice is my sister. I would, therefore, prefer not to ask questions during this session.

Ms S Morrice: Thank you very much for inviting us here today. I would like to introduce Mrs Gries and her company, Priority Oil and Gas, from the United States and then tell you a little bit about our background. Then I will outline the history of this area and how we reached the conclusions that we will tell you about today. I will also tell you about what we see for the future, and about how important a new energy aspect would be for this area.

Mrs Gries is president and chairman of Priority Oil and Gas in Denver, Colorado. Her company was particularly suited to this area because of its expertise in exploring for and developing natural gas. Additionally, the company has expertise in the infrastructure needed to convert natural gas into electricity. That will be particularly important in this area.

Mrs Gries has more recently become rather famous worldwide because she has been elected president of the American Association of Petroleum Geologists, which is a global body comprising 50,000 explorers. In 84 years a woman has never been nominated for president of the group, let alone achieve it first time. I am particularly proud to have Mrs Gries as my partner in Northern Ireland because she brings a tremendous global perspective to the project.

I have been based in Denver, Colorado for the last 21 years and have been working in the exploration for oil and gas internationally. Eighteen years ago, a consortium actually explored for natural gas in Fermanagh, Tyrone, Armagh, Cavan, Leitrim and Sligo.

This is a geological map of Ireland. It will give the Committee some idea about what we are doing. The colours on the map represent the different rocks, the ages of which go back 400 million years. A huge geological time-span is represented on the map. I believe that the Committee has copies of the Northern Ireland section of the map. Our focus has been on the blue-coloured area, which we call the north-west carboniferous basin. The word carboniferous indicates that hydrocarbons were found here many years ago.

Marathon drilled this area 38 years ago and discovered the first signs of natural gas at the Dowra Well, just across the border from the Blacklion and Belcoo areas. There was quite a significant gas flare which some of the older locals in the area remember well. That show was not significant to Marathon then because of the lack of infrastructure and the pricing of natural gas. In addition, they discovered natural gas offshore Kinsale, and they have since brought this supply onshore by pipeline into the Dublin area and to Dundalk, Cavan and Limerick. That natural gas at Kinsale has been the backbone of some of the developments that have occurred in Dublin.

Eighteen years ago a consortium came to this area, and I was involved as a consultant. Again, we drilled four wells in this area, two on the northern side of the border and two on the southern side. All the wells had natural gas shows. But given the price structure, the lack of infrastructure and interest, and the different technological concepts of the time, it was not deemed the right time to proceed with the project. The whole area was left aside again, and interests were returned to the respective governing bodies - Dublin taking responsibility of counties Leitrim, Cavan and Sligo and Belfast for the Fermanagh and Tyrone area.

10.

Eight years ago, Mrs Gries and I were very involved at a significant conference in Denver, which was attended by Ministers from all over the world. In fact, Mrs Gries was the chairperson of that conference. At that time, one of the key factors was the importance of a country's natural gas as a backbone to its development - it was the backbone of clean development in the United States. We told those Ministers and their staff about the exploration for natural gas right into the electrical units in Colorado, and that provided a seed model to go forward on.

11.

Four and a half years ago, Mrs Gries and I discussed the validity of returning to this basin in Ireland. A lot of work had to be carried out, looking back at the old data, and some of the records were very old. More important was the new technological perspective which Priority Oil and Gas had gained - it now knew how to actually open the rocks and allow the natural gas to flow more freely and, therefore, more economically, into an area. It also recognised the importance of developing an infrastructure that makes sense for a local community, both industrial and domestic, and of creating access to the grid.

12.

Mrs Gries will outline her expertise and explain the technologies that have been adapted here. We will then take your questions.

13.

Mrs Gries: There are acute similarities between this basin and those located in the immediate surroundings of Denver, Colorado. Until approximately 15 years, Colorado was a net gas importing state. Our energy needs could not be met by our own indigenous oil and gas, of which we have considerable quantities. This was the case until new technology was developed which allowed us to excavate tight gas sands and develop the natural gas there, particularly in the Denver area, but throughout Colorado. Tight gas sands occur where there are small holes in a rock that contain the gas. However, the rock is not permeable enough to allow the gas to flow out of the rock and into a well-bore.

14.

This is a rock sample from the Fermanagh area. The white rock is sandstone - we call it reservoir rock, as it holds the gas. You can tell, even by feeling it, that it is porous. If you poured some water over the rock, you would see how porous it is. This black rock comes from Bundoran, and it is known as the source rock. The black colour is derived from the organic material that was buried with the sediment and has since been converted to hydrocarbons, mainly natural gas.

15.

Once the gas was produced, it was then squeezed into the sandstone. The problem is that the pores in the sandstone are not permeable enough for us to access the gas by simply drilling a borehole. The technology, that has been developed over many years for use in this area, is called hydraulic fracturing. A borehole is drilled, steel casing is set in it, and cement is put around the casing so that all other rocks, from the surface right down to the sandstone layer, are completely sealed off from the open borehole. That means that no fluid can go back and forth from behind that pipe, until the reservoir is reached.

16.

The section of pipe which runs through the reservoir, is perforated. If the sandstone were very very permeable, the natural gas would automatically flow into the well-bore, allowing us to pick it up at the surface, and pipeline it off for sale.

17.

But the sandstone here does not allow gas to flow into the well-bore. Our new technological device is to pump water into the reservoir, through these holes, at such a high pressure that the sandstone is literally fractured. This creates little fissures throughout the rock. Sand is then added to the water and it passes down in to these fractures. When the water stops pumping, the cracks would close up, but they cannot because of the quartz sand, which we get from England. The natural gas can therefore flow automatically back along those fractures up into the well-bore, which can then be put in to production.

18.

Early on, this technology cost an enormous amount of money. Twenty years ago the technology could fracture rock just a short distance from the well-bore and perhaps only 15,000 pounds of sand would be packed into it - this did not make the process cost-effective. Technology has really improved in the last 15 years. Today, 10 times the amount of sand can be pumped into the rock for just half the cost of 20 years ago. It is now possible to fracture rock at a further 1,000 feet straight out from the well-bore, and up to 2,000 feet below the ground, allowing gas within this radius to flow back into the well-bore. If more gas can be accessed, the cost of this new fracturing job will be covered.

19.

Wells in the Denver basin, which were totally uneconomic, are now able to pay for themselves. They are economic enough for companies to continue to drill them and put them into production. The state of Colorado has become a net exporter of gas as a result of the new technology, and the Denver region exports one trillion ft³ of gas a year. It is an enormous help to the Colorado economy that we no longer buy in a portion of our energy, but instead produce all the energy we need and export some for use elsewhere, particularly the Chicago area, which I can assure you is a great deal colder than Denver.

20.

The technology has of course never been tried in Ireland. There are similar rock formations with tight gas sands running at around 2000-3000 ft in drill depth which can be practically exploited with small portable drilling rigs - we do not need huge structures like those in the North Sea to go into these areas. We can go around with smaller drilling rigs the size of a large lorry and drill wells to a depth of 2000-3000 ft, fracture them hydraulically, and with this effort see if we can access and test the gas known to be in the counties of Fermanagh, Tyrone, Armagh, Leitrim, Cavan and Sligo. If we can do that, we can find out - it is to be hoped in the next year or two - whether they will be economically viable, with enough flow to produce saleable gas in large enough quantities.

21.

We encountered a second problem in examining the viability of this area for exploration. In the United States, if an exploration company like my own finds reservoirs of natural gas, we bring it to the surface. A gas purchaser will connect it up to his gas pipeline, examples of which are all over the United States. I offer to sell it to the person concerned for a given amount per 1000 ft³, and that is the end of the matter.

22.

However, there are no gas pipelines in this area, so we had to come up with an idea of what we could do with the gas once we found it. At present, there is no system by which we could transport it to any place where it might be used. As you probably know from laying cables all over the country, building a pipeline is very expensive because they are buried underground, out of harm's way. After looking at the region, we felt that the most effective way of dealing with the sale of gas would probably be "gas by wire", in other words gathering it at a central location and putting it into a gas-fired electrical generating plant. That is our idea of how we could use the gas.

23.

The advantage of moving immediately to electrification with natural gas stems from the fact that the by-product of converting natural gas to electricity is heat. We have projects in the Denver basin where this is being done. It was found that "co-gen" projects blossomed in the area, examples being greenhouse businesses, pig farms and any kind of vegetable operation. One could have pulp or incinerator operations. Any number of "co-gen" projects can draw on the waste heat from converting gas to electricity. We see this as a quite attractive way of using the process in the area.

24.

Our big question at this point is whether the volumes are economic. Can we produce and sell the gas in a way that would pay for the drilling and testing of the wells? That is the point we are at now.

25.

Ms S Morrice: Working a cross-border project of this magnitude, which involves both Government Departments means that there are different types of incentive schemes on either side of the border. These are very interesting. In the South, the Government has reduced its corporate tax rate substantially, but it has also done away with the Government royalty. That means that we can find less gas in Leitrim, Cavan, Monaghan and Sligo, and there will still be an economic gain, because the Government taxation rate is not as onerous on the driller.

26.

In Northern Ireland the Government has a 7·5% royalty and a higher corporate tax rate. That has not made the situation impossible, because we are forging ahead on both sides of the border now. However, when economics start to dictate operations, my concerns would be that the focus of drilling may be in Cavan, Leitrim and Monaghan, on account of the incentive scheme available there.

27.

We are also dealing with the rather different issues of planning permission and development on both sides of the border. I am lucky, in that I studied at Trinity College in Dublin, therefore quite a number of my friends, with whom I studied geology, now work in the relevant Departments. On the other hand, having been born in Belfast, I know some of the geologists and people working up here. We have been able to get together to talk about how to achieve this project together. When it comes down to economic incentives, planning permission and procedures, the situation differs a great deal. I would like to find a way for such a large-scale energy project to work in a cross-border administrative setting in the future. That would make the economics of drilling for natural gas and the logistics of electrical and gas pipelines across the border more feasible for us.

28.

I thank you all for listening and for looking at the rocks. This is very much a preliminary discussion to outline what we are doing. We are here this time with a company and we have been to a number of the drilling sites to look at the exact locations involved. Hopefully, our next appearance before the Committee will be to give you the results of the drilling or at least of the progress we have made.

29.

Dr O'Hagan: I must declare my ignorance of this subject, so please bear with me. Am I right in saying that the major consideration is location of quality reservoir rock? In the last five years, what advances have been made in locating this quality rock, and what amount has been found? If it is not too early to tell, how finite are these resources?

30.

Mrs Gries: A couple of your questions have some history to them. Nine wells have been drilled in this huge basin, which covers one million acres. Those wells gave us a lot of information about the extent of some of the reservoir rocks. The first sandstone to be drilled is the Mullaghmore sandstone, which is named after Mullaghmore Head, in north Sligo, where the sandstone crops out onto the Atlantic Ocean. That reservoir was visible in the well-bores, because of drilling that had taken place in the past.

31.

We have ways of sending down geophysical tools through the drilled sandstone, to map the thickness of that rock and its characteristics, such as how permeable and porous it is. From those old well-bores, we were able to make some calculations about how widespread that first horizon is. Under that, there are actually two or three more horizons which have prospectiveness.

32.

Our feeling is that if we do not make an economic venture out of the most shallow rock - which will be the least expensive one to develop - we will probably not be able to develop the deeper ones either. We are therefore focusing on the shallow rock. Because of those nine wells, we have some idea of the extent of the gas - we have a minimum aerial extent. We know, for instance that, at a minimum, it stretches from Garrison down to Glen Gevlin, as far east as the Glenaan Mountain, and as far west as the rocks that are cropping out around Sligo. However, where it crops out, it will no longer trap gas, therefore we have to back off the coast a little bit and find a location where the rock is completely sealed off from ocean water, or anything else.

33.

We have a fair idea of the aerial extent, and we know the thickness of the rock from drilling. What we do not know are the quantities of gas that might be stored in it. We know that there was gas, because when the early wells were drilled, gas shows came up to the surface. Some of those flared for several days.

34.

Tests showed that it is methane gas, which is very clean. At the time these were drilled, gas prices were extremely low. In the 1960s, 1000 cubic feet of gas cost 10 cents. Marathon, and other companies, would not deem this to be economical at all, because the quantities were very low, compared to those in Kinsale. It is only because of our recent technology that we can perhaps think that this will be economical. These will always be considered low-volume wells. They will not produce millions of cubic feet of gas in a day. They will always be small producers, but in the United States we gather supplies from a lot of small producers and use that. The advantage of the small producers is that they produce for a very long time, say 20 or 30 years. If you put an electrical plant on track with natural gas that way, you can count on your gas supply for 30 years. You can then continue to drill wells and add your supply to it for 50 years. It can work, even though the quantities are small, if it is done on an economy of scale.

35.

Ms S Morrice: I would like to add one extra point, because it is fascinating. These big lines running through Ireland are like the San Andreas Fault system in California, where many earthquakes have occurred. (Indicates on map) This one is quiet, but it was very active 300 million years ago. In fact this whole northern part of Ireland, including Donegal, was part of Canada. The rest of Ireland was part of Europe, and there was a whole ocean, called the Protoatlantic, through the middle. That sounds amazing -

36.

Dr McDonnell: We knew there was something wrong with it.

37.

Dr O'Hagan: It sounds like a new concept of the repartition of Ireland.

38.

Ms S Morrice: But we cannot get it to go backwards. Had we lived then we would have been trilobites, which are like little slaters. Why it is relevant today -

39.

Dr McDonnell: There are still a few of those around.

40.

Ms S Morrice: These major faults create major cracks in the rock which, if located, would be the sweet spots for natural gas. If we are successful in locating these cracks, we would see there being some more linear fields in this direction. So that is an additional point to Mrs Gries's more extensive response.

41.

Dr O'Hagan: On to a slightly different subject, I know that licences are required to carry out agreed work programmes, and that these have to be reported to the Department. What sort of work programmes have you developed with the Department, and how advanced are they?

42.

Mrs Gries: We have done a couple of things. We have carried out complete magnetic and gravity mapping of the area. These gravity and magnetic readings give us an idea of the bottom of the basin structure, and tells us where the old long-range faults are located. We took all of that data and made structure maps that covered the area between Lough Neagh and the west coast. This gives us the structural configuration of the entire basin. We also collected a lot of rocks and had them measured in special laboratories for organic content. In other words, we wanted to see how much organic material was available to turn into oil and gas. Then we had them measured for maturity - to see how far into the gas-making process those rocks were pushed.

43.

We took samples from everywhere - from the coast near Sligo through to the south of Lough Neagh, and in the Armagh area. We ran approximately 60 samples. We took a lot of samples out of the well bores too, and mapped the organic content, the maturity and gas-generating ability across the basin. We have done a good deal more, but those are the major projects.

44.

Mr Neeson: I am fascinated by what has been said this morning. In many ways, what you are trying to achieve reminds me of a lignite-type operation. In other words, to maximise the potential you would need to develop an on-site power station - bearing in mind that you are covering a very wide area. Can you quantify, even at this early stage, the size of the power station that could be developed to maximise the potential resources of the area.

45.

Mrs Gries: We have made projections, based on the gas production of similar rocks in the United States, and we have come up with several case scenarios. Once we start drilling, however, none of these scenarios may apply, because there might not be enough gas production to fire even one electrical plant. That is the risk that we always take in exploration.

46.

However, from the readings that we have had so far, we will go in and assume that we will have enough gas in a certain thickness of rock to begin production. We suggest that the gas development should start with small plants - for example, five megawatt plants. If there is gas over the entire area that we are looking at in our first reservoir, we can visualise that we might have enough gas for a 110 megawatt plant, or a 330 to 350 megawatt plant - that range is very large. If we knew that we would only be able to develop enough gas to supply a five or 10 megawatt plant, I can assure you that we would never find a company willing to spend $5 million or $10 million to drill for such a small supply.

47.

We have convinced ourselves - from looking at the scientific facts and at other companies - that there could be the potential here for, at the minimum, a 110 megawatts plant. That would be very far in the future. It will take five to 10 years to drill and develop each of these well bores and gas systems. Therefore, even though we think that there could be widespread potential, we envisage small projects working up to a larger project. That will allow you to ascertain slowly whether it is economically viable - whether people can afford to drill and produce, and whether technology can be refined for this specific area.

48.

Mr Neeson: I want to move on to exploration licences. They are granted for five years and can be renewed for a further five years. Will the consortium seek to renew the existing five-year licence, and what progress on exploration still needs to be made?

49.

Ms S Morrice: Yes, we have already discussed extensions and renewals. Both sides - North and South - have been very positive about working with us. For the next phase of work we are talking about a minimum of $5 million to drill the wells. It involves "fracking" and looking at the flow rates to ascertain economic viability. We are here this week to start that process.

50.

Mr Neeson: What has the consortium's experience been of working in Northern Ireland compared to working in the Republic? Was there any difference?

51.

Ms S Morrice: Both sides have been very good to work with - particularly from a people point of view. However, it is clear that the incentives of no royalties and a lesser corporation tax in the South will have an effect on the project.

52.

Dr O'Hagan: This is not a politically loaded question. Which is the more economically viable - North or South?

53.

Ms S Morrice: From the rock point of view?

54.

Dr O'Hagan: From your company's point of view. You mentioned the lower corporation tax rates in the South, which is obviously an advantage. Which is the better economic climate to work in?

55.

Ms S Morrice: For going forward and discovering the gas, the better economic climate will be in the South.

56.

Dr O'Hagan: We need to catch up then?

57.

Ms S Morrice: Yes.

58.

Dr O'Hagan: As I said, that was not a politically loaded question. I just wanted to know which was better.

59.

Dr McDonnell: You mentioned some of the technology, and we will perhaps leave going further into that for another occasion. I am sure that you will be back with us. However, what is the environmental impact of the drilling? Is it wholesale destruction or is it environmentally sensitive?

60.

Mrs Gries: Natural gas represents one of the easiest ways of accessing energy with the least environmental impact. The drilling equipment is the size of some large lorries. It is on location at a drill site for a maximum of five or six days once the drilling environment has been learnt. It will probably start in a 70m x 100m area - to have room to move the trucks around. Once natural gas has been found in the well bore, a metre high gauge with a cap is put on. That enables them to gauge the amount of gas coming out.

61.

They connect it to a pipe which is buried in the ground to transport the gas to the gathering location. In that actual spot you end up with a pipe with a meter on it, three feet tall and very small in circumference. We usually cover it with a little kiosk, so that it is unobtrusive.

62.

Dr McDonnell: Your technology may also include horizontal drilling. Would that have any extra impact on the landscape?

63.

Mrs Gries: The effect is the same, because all drilling is carried out underground. The pipe that comes up to the surface is vertical and would still have the same type of cap.

64.

Dr McDonnell: Has community consultation been an issue?

65.

Ms S Morrice: That has actually been very important. Five years ago, before we even licensed this area, we held cross-border county council meetings. We invited all the representatives to hear about the whole concept, and asked for their feedback. We found that there is already a grouping of county councils in this very area - which practically follows the geological boundary, something they did not know about. They were rather amazed and interested.

66.

Dr McDonnell: Are you sure of that?

67.

Mrs Gries: Indeed, how do you know?

68.

Dr McDonnell: You have concentrated a lot on Fermanagh, Cavan, and Leitrim, up as far as Armagh. There are two shaded areas in Antrim on one of our maps. Who is involved in those, are they covered by two different companies?

69.

Mrs Gries: Are you talking about the Cookstown/Dungannon area?

70.

Dr McDonnell: No, I am talking about the areas around Coleraine and the Glens of Antrim.

71.

Ms S Morrice: Those are not shaded in; they represent the licenses of other people who have been exploring. Our ambit extends to the boundaries of Lough Neagh, and includes Portadown and Dungannon as well. It does not stretch into the Larne basin, which is covered by other people's licenses.

72.

Dr McDonnell: Have you any information on them?

73.

Ms S Morrice: The Larne basin is a more difficult area in which to carry out exploration because of the Giant's Causeway, which is formed by Antrim basalt. It is represented by the purple area on the map, which extends all the way down to Belfast. The presence of basalt makes exploration and studies more difficult. We do not know if there is natural gas in this area but, due to previous drilling, we do know that there is natural gas in our basin area.

74.

Dr McDonnell: Could you give us any indication of the expenditure, including previous costs on your basin? What sort of money are we talking about and how far short of commercial viability are we? That is the big question for us.

75.

Ms S Morrice: Interestingly, there are almost two separate questions there. To date, the costs are probably the equivalent of $30 to $40 million, depending on the rate of exchange, given that this figure relates to a period of 35 years. But to go forward, you cannot count those costs alone, even though you do use the information. This next phase will cost between $5 million and $10 million. After that the project would cost in the region of billions of pounds, because the development will include power station construction.

76.

Dr McDonnell: I am a little worried about the electrification of the gas. Have you studied the pipelines that may be constructed?

77.

Ms S Morrice: We are keeping up to date with where Enterprise's pipelines will run. The Corrib discovery is offshore and the Enterprise pipeline is coming onshore at Mayo. It would be ideal if that pipeline could come across as far as the point, just south of Cavan town, where the Kinsale pipeline extends from Limerick. I do not know if it has been decided that the pipeline will extend down as far as Limerick/ Galway in order to service that area. Ultimately, it would be excellent if the whole of Ireland was served by a ring pipeline. If a ring pipeline were in place, industry could use the gas. You would not need to electrify it, and there would be a choice of energy sources.

78.

Dr McDonnell: I would anticipate, sooner rather than later, a pipeline from Dublin or Drogheda to Portadown. That would solve a lot of the questions that you have raised.

79.

Ms S Morrice: That would be handy for that part of the licence area. There is a power station south of Derry which could use a natural gas supply. Beside Lough Allen there is the old Arigna power station which we have looked at carefully. The north-west carboniferous basin is part of Donegal Bay and basin. So that is another area that needs to be looked at.

80.

Dr McDonnell: I gather from what you are saying that it will take five to 10 years to make it work. What is the timescale? At present, it could be 15 years before anything happens, even if there is good news.

81.

Mrs Gries: Fifteen years would be pushing it. With new technology in the next two to three years we will have drilled and tested enough wells to decide if we should go ahead. If we can find enough gas to go ahead, then a more active drilling programme would commence. We could then start making projections, based on those first five or 10 wells, of how much gas we can count on. You cannot move on to that next step unless you know how much gas you can count on. We will not know that for two to three years. We can then project a medium or small-sized programme.

82.

Dr McDonnell: Is that when the five to 10 year period starts?

83.

Mrs Gries: Yes.

84.

Dr McDonnell: That is why I was adding two to three years. Would it, therefore, take eight to 13 years?

85.

Ms S Morrice: It could happen sooner.

86.

Mrs Gries: You would not wait until you got enough gas with which to do something major. You would try to market that gas immediately because a company cannot do without cash flow into a project for a long time.

87.

Dr McDonnell: That conveniently brings me to the next part of the question. How do you raise cash for the exploration? Is it venture capital? How much public funding, if any, would be involved?

88.

Ms S Morrice: At this stage, none. Our philosophy is that we want a company which will totally understand the risk and which has the expertise to take it forward and finance it. So we are not going to the public markets. We are closely considering a public company in the United States, which has been drilling in the United Kingdom and has the correct rig capabilities.

89.

With regard to public funds, whether they are market funds, cross-border grants or power generation situations we will have to address the variation as it comes up. For example, Quinn's facilities - glass and cement - are in our basin. End users are particularly important because they allow us to develop a cash flow to keep the whole project going while we get to these major capital-intensive positions.

90.

Mrs Gries: The initial part of the project is high risk and we look for people who are sophisticated and who are accustomed to that kind of risk. We are talking to three or four companies with a view to their joining us, and we expect them to have the money to do this, while remaining aware that they might have to walk away from $5 million or $10 million if the project is uneconomic. We find those people in our business.

91.

Once it is established that there is a commercial value in gas here, there are many things that we envisage happening. For instance, a company with which we were in the west of Ireland this week has its own drilling, hydraulic "fracking" and logging crews from Colorado. It will also bring these crews over here and use them for the project. If it is successful, the company will want to put together a training programme and send people from Fermanagh, Tyrone, Cavan and Leitrim to Denver and train them to carry on the work. You do not want someone from Pueblo, Colorado, living here for 20 years when they could be drilling wells in Colorado.

92.

Dr McDonnell: So, are you telling us that Derrylin will probably join Denver and Dallas as a world energy source? Or better still, Teemore.

93.

Mrs Courtney: I want to welcome Ms S Morrice and Mrs Gries to the meeting; it is nice to see two women in the positions that you are in. It is not often that that happens. You said that you have one million acres in the south-west. Do you know the extent, at this stage, of the reserves in each of your seven licensed areas? Have you calculated the environmental cost, as discussed by Dr McDonnell, of producing gas at this location, taking into account the contribution of the climate change levy and the levels of reduced emissions?

94.

Ms S Morrice: Mr Neeson loosely compared it to lignite. But I would like to explain a very important environmental point - the natural gas we are looking for is about a quarter of a mile under the ground, while lignite is usually on the surface and requires strip mining. Therefore, a hole the size of a dinner plate has a depth of a quarter or a third of a mile, and you take the gas out from there. Let us visualise a farmer's field - in the corner is a green box the size of a car while the rest of the field is grazed by sheep. The gas comes out from under the ground at that gauge box. So the impact is minimal, much more so than in the extraction of oil, for instance -

95.

Mrs Gries: Or peat.

96.

Ms S Morrice: Obviously, for peat. The sourcing of peat, lignite and other materials has a greater environmental impact, and, in addition, these materials are not calorifically equivalent. In other words, they do not produce the energy per unit that natural gas does. So you are getting "a better bang for your buck", as they say in Denver.

97.

Mrs Gries: And the emissions are so much lower with natural gas.

98.

Mrs Courtney: You referred to other explorations throughout Ireland - both off and on-shore - and you mentioned the Corrib gas field off the coast of County Mayo. Do you know of any other exploration programmes that might affect your enterprise? For example, if gas were found at Rockhall, how would your business be affected?

99.

Ms S Morrice: I believe that a country can never have too much of an indigenous natural resource. As Mrs Gries said, if you move from being a net importer to becoming a net exporter, it can only be good for the economy. With the EU directives, if Rockhall comes in, or Porcupine, or our basin, we might be selling to Monte Carlo through the grid. That is the advantage of the EU link.

100.

Mrs Courtney: You made reference to the plant at Derry. At the moment, we are fighting very hard to get a gas pipeline to the north-west and we are hoping that an announcement will be made shortly. Everything possible has been done to try to get one there. It may now be economically viable, but you are right that it costs an awful lot. You referred in your presentation to the gas by wire system. How would that work for us in the north-west? I find that technology hard to understand. It seems to us that we need a gas pipeline, yet you are talking about wires. What kind of technology is that?

101.

Mrs Gries: Gas by wire is a slang phrase, meaning that instead of building a huge system of pipelines, we access the energy locally and then transport it by wire rather than by pipeline. The natural gas is gathered as close to the source as possible, and a plant is built there, or an old plant used, to convert the gas to electricity. However, I would like nothing better than to have enough gas in our basin to supply the plant at Derry. That would be lovely.

102.

The Chairperson: I am fascinated by all of this. I myself have a copy of the map that you showed us, but I am a real amateur. If you do not look after those stones, I will put them in my wall, because I build stone walls when I get a chance. Does the same rock formation exist under the sea at Corrib?

103.

Ms S Morrice: It is different. Mrs Gries referred to Mullaghmore where the sandstone came from. If you drive to Mullaghmore, you will see the very rocks and their sequences, which are actually part of an ancient river system and delta. The rock outcrops at this part of the coast. If you look east from there, the rock dips to a depth of approximately one mile below the basin. We need it to be deeper because pressure must be built up, and the gas needs to be contained. Offshore, there has been a totally different geological history. That is why gas found in the North Sea, Kinsale and Corrib rarely exists onshore because the fact that there is a big ocean has created a totally different geological history. The Corrib rocks are much younger than these rocks.

104.

The Chairperson: You said earlier that the technology allows you to work about 1,000 or 2,000 feet out from each borehole. You used the term sweet spot when talking about these veins. Do they run for miles?

105.

Mrs Gries: I would not say miles. They can run for a mile or two.

106.

Ms S Morrice: However, they can extend for miles. The drainage of one well into a sweet spot -

107.

Mrs Gries: The system might be 50 or 60 miles long, but the drainage into a well bore might be from within just one mile or two.

108.

The Chairperson: You have answered my next question. I was wondering whether, if you hit one of these systems in the South, you could access gas in the North, but you could not.

109.

Ms S Morrice: Only if you were sucking it under.

110.

Mrs Gries: Or vice versa.

111.

The Chairperson: Which Departments are you dealing with in the South and in the North?

112.

Mrs Gries: In addition to the planning department, we deal with the Department of Enterprise, Trade and Investment in the North, and the Department of Public Enterprise in the South and the Transportation and Energy Division.

113.

The Chairperson: That is Mary O'Rourke's Department.

114.

Ms S Morrice: We have not met the new Minister.

115.

Mrs Gries: We tried to get together with her. We met the former Minister.

116.

The Chairperson: I have several questions. How many people would be employed, assuming that this was commercially viable? Can you quantify that in stages?

117.

Mrs Gries: The company that we are talking to about drilling in this basin has a similar project in southern Colorado. They started there about ten years ago with just a few wells, which they used to test the supply before deciding that the project was economic. They have now drilled several hundred wells and they have approximately 100 employees involved in that project directly, as well as many indirect employees from service companies who help those working in the field, such as welders who put together the well heads. People are needed to read the gas gauges, take measurements and draw up charts and mind the wells on a daily to weekly basis. So the project could directly involve as many as 100-200 people.

118.

Ms S Morrice: One of the key factors that impressed the foreign delegates we brought to Colorado, was the way in which natural gas was generated into electricity, and the very comprehensive greenhouse system in operation. That caused rural regeneration in Colorado - a good deal of the rural farming population were able to come and work there as part of this process. They were cultivating tomatoes and selling them in huge quantities to McDonalds - at one stage, that was the most economically beneficial element of the whole chain. Neither gas nor electricity was as profitable as tomato production. That has been particularly advantageous to Colorado in the context of rural regeneration. Ministers who visit from different countries are particularly keen on this concept because it creates more local jobs.

119.

The Chairperson: Can each rural community take its own supply from the main line?

120.

Ms S Morrice: Eventually that is certainly possible. In the Appalachians in the east of the United States, that is exactly what happens. A hospital, small town and university are fed by a natural gas system from a couple of wells. Had this basin been in the United States it would already have been developed because the rocks are the same. In fact, in the past, Newfoundland was stuck to the west of Ireland therefore the geology of the two areas are not just conceptually the same - they are actually the same as the Appalachians trend.

121.

Mrs Gries: Therefore, in areas around Pittsburgh, Pennsylvania, where they have been producing oil and gas since the mid 1800's, little pockets of gas were developed for use by local communities.

122.

The Chairperson: Thank you. Are there any further questions?

123.

Thank you for the presentation and for the way you dealt with all these questions. We will possibly see you at some time in the future.

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MINUTES OF EVIDENCE

Wednesday 28 March 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Ms Morrice

Dr McDonnell

Dr O'Hagan

Mr Wells

Witnesses:

Mr L Hannaway ) Banbridge District

Cllr S Doyle ) Council

124.

The Chairperson: Gentlemen, you are very welcome. We are constrained by time, so you will have half an hour.

125.

Mr Doyle: I am councillor Séamus Doyle and I am vice chairman of the Economic Development Committee of Banbridge District Council. Mr Hannaway is our director of economic development.

126.

Mr Hannaway: I know that representatives of the Canal Corridor Natural Gas Task Force (CANCO) have already spoken and we agree with them on the need for gas provision to the eastern axis is very important. Several industrialists have told me that the availability of gas would be a major factor in reducing their business costs.

127.

Energy costs are critical for the environment and for businesses. We must look at businesses' energy costs. Many economic bodies place emphasis on e-business and endeavour to get businesses to consider the financial implications when starting up; they also encourage them to consider e-commerce. Waste minimialisation and energy reduction in businesses should be built into that.

128.

Renewable energy could play an important role. The island of Ireland has great potential for creating waste energy from natural resources and the effluent produced from the strong agricultural industry. Austria has used the potential for creating energy from trees. Ireland has the same potential with wind, waves, et cetera. We should be working towards that goal.

129.

Dr O'Hagan: Can you give us some details of the actions that the council has taken to encourage the reduction of energy costs in local business?

130.

Mr Hannaway: We are new to this and being a small council we do not have the same technical expertise as some others. The University of Paisley did work with the council on energy reduction and waste minimisation in businesses. In 1999 we commissioned the university to undertake a study with 10 businesses in Armagh and Banbridge to look at waste.

131.

Those 10 companies spend about £1·3 million worth of energy. The university's audit and work showed that the companies could save £0·5 million - 20% - of total energy costs through good management. We produced a handbook based on our research and gave it to the businesses. It showed the work that could be done to help businesses do an audit to identify where waste could be reduced. It also gave examples of local companies that have reduced waste. The Committee Clerk has copies for your perusal.

132.

It was a joint study, assisted by Industrial Research and Technology Unit, between Armagh Council and Banbridge Council. From a cold start we found that in six months five of the companies that had worked through the training had saved £16,000 on energy. Through the Department of Enterprise, Trade and Investment we have circulated copies of our handbook on waste minimalisation to local businesses to show them how they can reduce waste.

133.

Mr Neeson: The original proposal was to develop a natural gas pipeline from North to South. That is no longer on the table; it is now from South to North. Will that be an advantage or disadvantage to your case?

134.

Mr Hannaway: It will be a disadvantage. The preferred option and the stronger economic arguments favoured the North to South option. The gas is needed for a power plant from an economic point of view. The contract to supply a power plant is normally essential to any sort of economic proposal for the private sector to develop a gas pipeline. We have lost that incentive. A company, which would have set up in Belfast or in County Down and would have supplied a power station in, say, Dublin, which would have generated a core business user. We could have reaped the benefits of that. Now that that option is not available, it will take a stronger political argument to make the case for a South to North pipeline.

135.

It is necessary. Banbridge and Craigavon are in a central area with much industry, a large number of households and a growing population. Dundalk and Lisburn will have a natural gas pipeline, but we will not. The political and economic arguments must be made to show that gas is an option and it should be provided in that area.

136.

Mr Neeson: CANCO stressed that Lurgan and Portadown had a town's gas industry, therefore they have a pipe network. Did Banbridge ever have a town's gas industry?

137.

Mr Hannaway: I must pass on that question. I am new to Banbridge; I do not know.

138.

Mr Doyle: There has not been a town's gas network in Banbridge for 20 or 30 years.

139.

Mr Wells: It is a big step, and the council must lead by example. Can you give any examples of increases in energy efficiency in premises and at your amenities in Banbridge?

140.

Mr Hannaway: In 1997, following a survey of energy use, Banbridge Council employed consultants to help devise an energy strategy with its staff. Between 1994 and 2000 we reduced energy consumption in the council offices by 15% and reduced energy costs in the council by 9%.

141.

Such savings, when energy usage is increasing and the use of council facilities has increased, are a testament to our committment to energy efficiency in the council area. We are building a new leisure centre which will have a combined heating and power generator which will run on diesel. It will not take energy straight from that source; it will recycle the water to the cooling mechanisms, which can be used to heat other spaces and supplement water for the swimming pool, at no additional cost.

142.

Mr Wells: Has that been just in the town, or have you been able to implement energy savings in leisure centres and community centres elsewhere?

143.

Mr Hannaway: Our leisure centre is under construction, and the savings in the council, to which I refer (in the leisure centre, the swimming pool and other facilities in the Banbridge area) are total figures for the council facilities.

144.

Mr Wells: It has helped that many of your buildings are modern.

145.

Mr Hannaway: It has. When councils are considering development or rehabilitation they must build in energy efficiency. That is why we provided power for a supply of hot water and heating and why we installed a combined heat and power unit in the new leisure centre.

146.

Mr Wells: That is commendable. I know that Banbridge has launched a major IT upgrade and is now very au fait with the latest technology. To achieve a real saving in increased electricity use in IT is very commendable. We have a problem in this building - the more computers and new gadgetry we install, the higher the energy use.

147.

Mr Hannaway: That is our point - these are real savings.

148.

Dr McDonnell: How does the council encourage the use of renewable energy in the home? What action has it taken to encourage renewable energy sources? How successful has it been?

149.

Mr Hannaway: The council is new to this and it has not had any major involvement in it. We have done roadshows with touring environmental officers looking at energy efficiency in the home, at using different kinds of bulbs and at ways of controlling and reducing heat in the home. Short of solar energy, it would be difficult to get individual householders involved in renewable energy.

150.

However, our new rural development programme looks at renewable energy in the agriculture industry. We want to work with the agricultural community. If renewable energy is to work, it will have to be a partnership between the Department of Agriculture and Rural Development, the Department of Enterprise, Trade and Investment and the agricultural community, because they are the main custodians of the land.

151.

Many energy producing initiatives must be located on the land. For example, the use of farm effluent for methane requires the agricultural community to work together. The Government need to take a more proactive role, with local councils, developing renewable energy as an option for the agricultural community.

152.

Mr Wells: Are there any concrete examples of renewable energy production in Banbridge district?

153.

Mr Hannaway: No. The idea of wind farms has been discussed. However, part of our district is located in the Mourne mountains, which is an area of outstanding natural beauty, and there are planning constraints and other matters to be dealt with.

154.

We must take a partnership approach and affirm our wish to deliver more renewable energy in Northern Ireland. Those Departments with a role in renewable energy production should come together with the agricultural community and the councils to discuss a long-term strategy for increasing the level of renewable energy Northern Ireland. If we work together we will be able to address the constraints that restrict us at the moment.

155.

Dr McDonnell: Is there scope for local councils to set aside rural land for growing trees to produce firewood, for example? Perhaps this is an EU issue.

156.

Mr Hannaway: Such innovation is necessary. However, the problem which affects the production of biomass by farming co-operatives is the cost of equipment, cutting and transportation. In addition, a good deal of our land is boggy therefore the large machinery used in this process cannot operate on it, nor can it operate effectively on hills. Local practitioners need to work with scientists to prevent this activity from being regarded as a pilot project, but a long-term, gradually developing scheme. Such work could be done either by developing the strengths of production or developing the machinery to enable farmers to work on their land on a small-scale basis to produce and develop projects which involve willow, effluent or wind farms.

157.

Mr Clyde: What potential does the agriculture community in Banbridge District Council area have for developing alternative sources of energy?

158.

Mr Hannaway: The potential is there. Traditionally, the farmers in the Banbridge area are of two extremes; there are many large farms but there are also a good deal of small farms in the Mourne area to the east of the Province. With the potential for innovation, there is a willingness to engage in alternative types of farming, such as energy production. However, given the current situation affecting the agriculture community, it would be naïve to expect a farmer to meet the total capital outlay of building, for example, a wind farm or an effluent centre. There needs to be more extensive discussions about a long-term strategy.

159.

Ms Morrice: Banbridge District Council has been the only local council to contribute to this inquiry, therefore you obviously have a special interest in energy. I assume that this is because you want to have gas. Is there scope for a council-led strategy, perhaps on an individual basis, to push for renewable energy, whether that be through agriculture, wind, the sun or waste recycling? Not only would this provide cheaper electricity in the long term, it would also lead the way in the protection of the environment.

160.

Mr Hannaway: I agree with you. The problem is that renewable energy is a relatively new issue for the council. A good deal of the expertise in this field is located at Loughgall or in other specialised centres, therefore we do not have the necessary technical knowledge. However, we can facilitate the development of renewable energy by bringing together different groups to develop this expertise in partnership, in the same way that we approached economic development.

161.

The Government needs to provide strategic steering. It needs to draw up targets, for example, to increase the level of renewable energy in Northern Ireland from 3-4% to 10 % in ten years. It also needs to commit a fixed level of funding to setting up capital projects in the area which could be accessed via a bidding process or the councils could bring together the agriculture and business communities to address that. We see ourselves as having a facilitating role, rather than a development function. The Department of Agriculture has been working independently of businesses for too long, and we believe that Banbridge District Council could provide the linkage between the two sectors.

162.

On your first point, Banbridge District Council could take a role similar to that which it took in its waste minimalisation study, a copy of which I have circulated to you. One of the companies involved in this study, Bowman Windows, is now a champion for energy reduction in the workplace and has reduced its waste, particularly its energy waste, by 10% to 20%. They now work on behalf of the Industrial Research & Technology Unit to promote this issue to other businesses.

163.

Banbridge District Council believes that energy efficiency and reduction measures should be built into every type of business - be it a business start, business advance or business development programme. It should be regarded as being just as important as e-commerce for the development of a business, because it reduces costs and aids growth. It is also good from an environmental point of view. This matter must be considered as we seek to help businesses grow.

164.

Ms Morrice: Does the council have an energy strategy which can combine energy efficiency, renewables and other sources of supply? Is there any need for the council to have an energy strategy?

165.

Mr Hannaway: It is part of the council's local Agenda 21 strategy, and it will be built into our integrated plan. However, I believe that it will tie into the LEADER programme, rural development and our economic measures. It is a core theme of our economic strategy to reduce waste and energy. It must be built into those strategies. I argue that if Government and others promote that view more it will receive greater attention and more people will act on it. That can only be good for Northern Ireland.

166.

Mr Wells: We know what Banbridge District Council's stance is on the crucial issue of the gas pipeline, and you have lobbied Assembly Members strongly on that point. Lobbying is not always welcome, but it is in this instance because it provided us with plenty of useful information.

167.

We heard this morning that the proposal to take the gas pipeline to Coolkeeragh power station is unlikely to proceed at present without grant aid because it is uneconomical. Are there sufficient numbers of companies and domestic customers in the Banbridge and Craigavon areas, et cetera who are interested in utilising gas to make the proposal viable? Have you received clear indications that the large users in your area will use it?

168.

Mr Hannaway: Yes. Two months ago I met with Fane Valley Co-op Society Ltd (Armaghdown Creameries Ltd), which is based on the A1. The company offered its support after reading reports in the local papers about gas. They are making a strong case through the Confederation of British Industry, because the co-op exports milk powder worldwide. Energy is their biggest cost, and they believe that the provision of a gas pipeline will drastically reduce those costs. They and a number of other companies are using diesel generators, and I know for a fact that the co-op operates their generator between 4pm and 7pm, because they cannot afford to pay the tariff. That alone indicates the need to reduce energy costs by providing natural gas.

169.

Mr Wells: They are in for a big shock next year, because I can confirm that there is going to be a 31% hike in the 4pm to 7pm tariff. No matter what company they use, Northern Ireland Electricity or Energia, there will be a massive hike in that tariff. However, it is OK for Armaghdown Creameries Ltd and perhaps Down Shoes to express an interest, but if every company in Banbridge put their weight behind gas would there be a sufficient mass to justify the enormous capital cost of bringing the pipeline south to link up with Dundalk?

170.

Mr Hannaway: Representatives from the Department of Enterprise, Trade and Investment, the Minister's office and counterparts from the South have told us that the big draw is a power plant. If another power station is going to be built then it must be used to make the business case. Business and domestic customers alone cannot prove the economic case.

171.

The Chairperson: The Committee has prepared a number of written questions that will be sent to you in the short-term. As the inquiry progresses we may think of other questions, but we will contact you if that is the case. Once again I thank you for attending today and for the manner in which you answered the questions.

ADDENDUM TO MINUTES OF EVIDENCE
banbridge district council

Q. Could the Council provide examples of local businesses which have succeeded in reducing energy costs? Could the Council also provide details of how these businesses reduced their energy costs and outline what environmental and economic benefits the businesses achieved through increased energy efficiency?

A. As referred to in my presentation I provided the Committee with a copy of the report "Armagh/Banbridge Waste Minimisation" which was published following the Council's work with local businesses. The key achievements were:

n Fii identified an £8,000 annual saving on heating and £11,500 saving on equipment.

n Bowman Windows have installed various energy saving measures and procedures to reduce energy.

n Fane Valley have identified an annual £20,500 saving and installed various energy saving procedures and machinery.

Further details can be found in the report referred to above.

Q. How would the Council like to see it's relationship with the Industrial Research and Technology Unit (IRTU) develop? What benefits for local industries and businesses would result from this relationship in terms of reducing energy costs?

A. The Council has a good working relationship with LEDU and as detailed above has in the past worked with IRTU. However, we believe that the latter could be further developed. We believe that the Council could be a conduit for the promoting the reduction of energy costs in business. For example, this could be a part of Business Start training or other business training developed by the District, which the Council manage jointly with LEDU.

In regard to the promotion of Renewable energy projects should be actively promoted in areas which have potential for development. Wind farms could be promoted in locations which are recognised to be technically feasible and would not have a detrimental environmental impact. Effluent recycling for energy purposes should be targeted through farmer co-operatives.

DARD, DETI, farmers' representatives, LEADER boards and Councils should work jointly on a strategy for increasing renewable energy throughout Northern Ireland. This will ensure a co-ordinated approach at a central and local level which will have a greater impact in terms of practical projects.

Q. Could the Council elaborate on why they believe renewable energy has been poorly developed in Northern Ireland?

A. Renewable energy within Northern Ireland is much lower than within the rest of Europe. This needs to be addressed. The Council recommends that Government actively promotes the development of renewable energy projects in Northern Ireland. This can best be achieved through:

(i) DARD and DETI working actively with Councils and Local Strategic Partnerships to promote renewable energy as part of the Integrated Local Strategy.

(ii) earmarking funding for renewable energy within all areas of Northern Ireland.

(iii) sharing Research into all types of renewable energy projects with local organisations, farmers co-operatives, community groups, etc.

In the past renewable energy development has been piece meal and very laboratorial in terms of development. This needs to be mainstreamed.

Q. Has the Council worked with its own agricultural community in order to develop alternative energy sources? How successful have the agricultural community been in developing alternative energy sources within the Banbridge District Council area? Can the Council identify any barriers which have impeded the agricultural development of alternative energy sources?

A. To date the Council has not worked on renewable energy projects. The reasons for underdevelopment of alternative energy by the agri community is due to:

(i) lack of information.

(ii) planning constraints and ignorance of the types of development by local people.

(iii) cost of development in an industry which is under severe financial pressure.

Q. There are currently proposals to provide a gas pipeline from Scotland to Dublin. How would this pipeline benefit domestic households and businesses in the Banbridge District Council area?

A. Banbridge District Council is part of CANCO which has presented the argument for a gas pipeline. I do not intend to reiterate the points they have made. Banbridge District and indeed Banbridge Town is one of the fastest growing areas in terms of residential development. Gas as a means of cheaper energy is very important to the domestic and industrial customers of this area.

I hope you can take these points on board.

LIAM HANNAWAY
Director of Development

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MINUTES OF EVIDENCE

Wednesday 28 March 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr E Beattie ) Canal Corridor

Mr L Porter ) Natural Gas

Mr B Walker ) Task Force (CANCO)

172.

The Chairperson: You are very welcome. We are fairly constrained by time therefore I propose that you give a brief summary of your submission, which we have read. We will then move to the questions.

173.

Mr Walker: I do not propose to deal with the submission at length as you are short of time. The Canal Corridor Natural Gas Task Force (CANCO) was established in 1996 for the five local district council areas of Craigavon, Armagh, Banbridge, Dungannon, and Newry and Mourne. The object of the exercise is to bring natural gas to this area of the Province - the south-east - which has the greatest concentration of industrial capacity in the Province outside Belfast. It is very important that the cost of the energy source for that industry be kept as low as possible, as industry will migrate according to cost base. It is very important that energy can be provided as cheaply as possible. It is often forgotten, however, that large consumers of energy are not limited to the private sector, but are also found in the public sector. Large hospitals, in particular, are heavy consumers of energy. Everyone would agree that the provision of patient care for the sick and elderly should be a social priority, and providing it at as low a cost as possible when energy is a high constituent of that cost is a very important goal. We have a number of major hospitals in the area.

174.

CANCO consists of representatives of all five local councils as well as various industrial and voluntary sector representatives. It does not have the high profile of other organisations which are lobbying for natural gas, but seeks to bring about its objective in a quiet, efficient manner.

175.

Mr Clyde: What would be the social, economic and environmental impact of extending the supply of natural gas to the south-east of Northern Ireland?

176.

Mr Porter: Mr Walker has already referred to the high concentration of industry in the CANCO area. Of the five council areas represented on CANCO, Craigavon alone provides one third of Northern Ireland's industrial base, with the largest number of IDB businesses and client companies outside Belfast. The area has attracted 44% of the IDB inward investment over the past 10 years. The recognition by IDB of the area's attributes would also lend itself to its being a main focus for industry. It currently holds in excess of 200 acres of undeveloped wasteland, as well as over 400 acres which have already been developed for industrial purposes. The new Craigavon draft area plan has identified, in addition to the IDB land, about 250 acres of land in private ownership which is zoned for industry.

177.

Given the extensive area of land available for industry in Craigavon, together with those areas owned in Newry, Banbridge and Armagh, we want the south-east to have a level playing field in the form of energy costs which are competitive with those in Greater Belfast and on the United Kingdom mainland. We have a number of examples of local industries which have sister companies in Scotland. The difference in the energy costs between Scotland and Northern Ireland makes the local industries uncompetitive.

178.

An extension of the natural gas supply would assist IDB in attracting industry to Craigavon. It would also assist indigenous companies to stay in Craigavon, rather than moving to the Greater Belfast area. At present, Craigavon has a potential gas user rate of 60 million therms per annum and with the additional land that is ready for development this could easily exceed 120 million therms per annum. CANCO believe that an extension of natural gas to the south-east would help attract industry to the Newry side of the border. If the gas price were as cheap as it is in Belfast, it would also be cheaper than the Dundalk supply and hopefully attract industry here.

179.

On the social front you mentioned three areas. If natural gas is brought into the area employment opportunities will be created. That is good for the industry and it also increases the disposable income of the individual employed, which can only be good for the economy. Natural gas would also reduce the need for displacement of work and people who have to travel to work - people would have to travel further to get to work thereby increasing the demands for roads, travel and related issues.

180.

Craigavon Borough Council, which is the lead council partner in CANCO, has been identified in the new regional strategic framework as being one of the major growth areas in the Province. We believe that without a natural gas extension there would be massive regional disparities across the Province. From an environmental point of view, natural gas would lead to a reduction of emissions from coal and oil heating systems and reduce the potential for increasing exhaust emissions - at present, more people have to travel a greater distance to work where there is that cheaper source of supply.

181.

Dr McDonnell: How would you evaluate the conversion of coal fired and other heating systems to gas in south-east in comparison to other regions in Northern Ireland, and what actions need to be taken? How will they be taken? How effective will it be, by comparison to coal, where coal is used?

182.

Mr Walker: The only available statistics relate to the public sector, rather than domestic matters. In our area there are about 18,200 Housing Executive houses. Of those, 46% have no central heating at all, while another 28% have coal room heaters, which are inappropriate. The infrastructure of the gas supply is still available in a number of towns in our area, particularly Lurgan, Portadown, Newry and large areas of the centre of Craigavon. Only about one mile of pipeline is needed in Craigavon to join up the whole town together because parts of the framework exist and can easily be converted. There would be no need to dig up huge amounts of roads or spending large sums of money to make these pipelines operational again. Public-sector housing would greatly benefit from the introduction of a cheap and efficient form of central heating.

183.

Mr Neeson: Am I right in saying that Portadown had the last town gas industry?

184.

Mr Walker: Correct.

185.

Mr Neeson: As a Committee we have supported the extension of natural gas to as many areas as possible, including a gas pipeline to the north-west. Circumstances have changed - we were very supportive of a North- South gas pipeline, but now the Irish Government have decided on South-North. Would that be more advantageous to you than the original plan?

186.

Mr Walker: The top priority is security of supply. As I understand the present situation, the South-North pipeline is the only show in town. The North-South alternative, for various reasons involving the Republic's needs, has been ruled out, largely because the Republic sees itself as being incapable of keeping all its lights on within a very short period. Since they can bring the second pipeline across the sea much more quickly than they can bring it across land, we are stuck with the South-North option. As far as CANCO is concerned, if we got the supply, such considerations would be of secondary importance. We do not want to say that the south-east of the Province should have gas at the expense of any other area or that the north-west should not have it before us - or vice versa. We have only the selfish interest of promoting the supply of natural gas to the south-east of the Province.

187.

Mr Neeson: In your view, which towns would take advantage of natural gas if a supply were made available?

188.

Mr Walker: I understand that there are three existing pipeline structures in Lurgan, Portadown- Craigavon and Newry. However, the issue is much more fundamental, since the south-east of the Province is the centre of the food industry and, therefore, a high consumer of energy. The food industry, as members of this Committee know better than I, has an all-Ireland function. For example, one of the manufacturers in Craigavon controls 75% of the Irish market in prepared salads. Similarly, Norbrook Laboratories Ltd in Newry have a huge share of the trade in veterinary products. Those are all tied into the food sector in an area which, by comparison with the Republic, already suffers a tax disadvantage. The local Administration can do nothing to remove that. All they can do is ensure that no energy disadvantage is added, because it is much more expensive in Northern Ireland than in the Republic.

189.

Ms Morrice: The aim of your existence, if I am right, is to get natural gas in to those areas. Is that your sole focus, or do you examine other sources of energy? I am very interested in renewables - would you consider using your group to push in other directions, including the use of renewable energy such as biomass? You are aware of the potential in harnessing agricultural production, wind and solar energy. Could you not widen out your remit to push for other energy sources?

190.

Mr Walker: That is a very interesting point. However, the task is to provide immediate relief. Although renewable energy sources are to be encouraged, present technology is in its infancy. If you install a solar panel in the roof of a domestic property it will take 50 years, on present costings, to pay for itself.

191.

If you install a windmill to produce renewable energy, experts have calculated that the material and energy that you will have consumed to construct the windmill will actually outweigh its advantages. The technology is very much in its infancy. Everyone would say that it is a great goal, but at the moment the technology is so much in its infancy as to make it unrealistic in the foreseeable future.

192.

If we attract natural gas to our area, of course we would want to look at renewable sources of energy. Craigavon Borough Council has run a scheme for renewable energy and windmill generation of electricity for some of its facilities, but the technology is very much in its infancy.

193.

Ms Morrice: It is interesting that you mentioned those statistics, which I assume the Dutch ignored when they were using wind power. Sean Quinn uses wind power to supply his industry and has managed to get over those problems. Is there any potential for using energy produced from recycled waste and biomass at council level?

194.

Mr Walker: There is great potential, but within an individual council area it is limited. The costs are so great that one would have to focus on setting up a maximum of two or three facilities in the Province. There would have to be huge co-operation between councils to meet the cost of setting up such facilities.

195.

Ms Morrice: You have already got huge co-operation in council areas, so you have got the foundations.

196.

Mr Walker: I agree.

197.

Dr O'Hagan: I am interested in the reference to gas. I remember using gas in Lurgan, so I must be showing my age. I am interested to know how it would work given that the infrastructure already exists. Could those pipelines be used?

198.

Mr Beattie: The old Belfast gas network was re-used to a large extent after new plastic pipes were inserted into the old ductile metal pipes, which saved quite a bit of excavation. In Portadown, the network is much younger than the system that served the old Belfast corporation supply area, so it should be of a high standard and much of it should be reusable. It will have to be extended to cover the loads required, but it would result in a saving.

199.

Mr Porter: One of the other advantages of the existing systems is that the wayleaves still exist in relation to the underground pipelines, so those would not have to be renegotiated.

200.

Dr O'Hagan: Do you believe that the council areas that you represent have received, and are receiving, fair and equal treatment in relation to the supply of electricity and gas?

201.

Mr Beattie: Renewable energy is good to have, and no-one questions or doubts that. The issue is the higher cost that would have to be met. In Northern Ireland, we are already faced with a higher cost for energy than people in the rest of the United Kingdom and the island of Ireland. For example, the cost of electricity to a domestic customer here is 20% higher than for those in the rest of the United Kingdom. Our electricity costs are 30% to 35% higher than those for customers in the Republic of Ireland. Northern Ireland consumers are paying an unacceptably high price for electricity.

202.

Greater Belfast is getting gas, therefore we are at a disadvantage. The primary purpose in being here today is to say that, against electricity prices, we are treated fairly compared to other parts of Northern Ireland, but against the United Kingdom and the rest of Ireland we are at a disadvantage, and we want that corrected. We also want the disadvantage relative to Greater Belfast corrected.

203.

The Chairperson: The Phoenix Natural Gas network extends as far south as Lisburn and Bord Gáis Eireann's extends as far north as Dundalk. There are only about 40 miles in between them. Have you approached either, or both, of the companies directly to get them to develop an interconnector or could you work with them to develop the gas supply? Forty miles is not an awful great distance to cover.

204.

Mr Beattie: Forty miles is not an awful lot. The gas network on the other side of the border towards Dundalk comprises a fairly small diameter of pipeline. It has a limited capacity, which is being used up rapidly because of developments in the Dundalk area. In the longer term, it will not supply anywhere beyond that. It might provide some customers in Newry, but to enable it to supply gas beyond that the pipeline would need to be reinforced right back as far as Dublin.

205.

Phoenix has a licence area which extends as far as Lisburn - beyond that it has to go out to others for development. The regulator and Government have gone through a process, over a two-year period, seeking interested developers to come forward. That is an ongoing process, and there have been a number of applicants, but nothing has been finalised.

206.

As part of that process, the north-west was proposed as an area, the south-east was proposed as a possible development area and the regulator held a competition. Representatives in the south-east questioned the fairness of its treatment by comparison to the north-west during the competition.

207.

We want gas to be brought to as wide an audience as possible but we want that to be done in a fair and equitable manner.

208.

Mr Walker: We have also worked very closely with the East Border Region Committee, which is an organisation of councils, North and South, in the east of the Province. We have made representations to that body on many occasions and, in fact, on the last occasion that the Minister attended such a conference we made such a representation again.

209.

We have also made representations in Dublin and have encouraged members of the Executive to make representations to their colleagues in the Republic. If it comes, the gas pipeline will run from south to north. We see that as not only a necessary part of continued economic development, but also as a symbol of continued trade co-operation between the North and South.

210.

Mr Neeson: Following on from Mr Beattie's comments, he seems to be inferring that a completely new pipeline might be needed from Dublin north, rather than using the existing limited supply pipeline. Is that what you are saying?

211.

Mr Beattie: Yes. There was a proposal by British Gas and an American company called Questar to bring gas from North to South. As far as Craigavon is concerned, it does not really matter whether you call it North/South or South/North, as long as the pipe passes there and has gas in it.

212.

However, the original concept was to extend the pipeline that links Scotland to Ballylumford and Belfast into the market in the South, because there was a good 50% surplus capacity within that Scotland to Northern Ireland Pipeline (SNIP). That surplus capacity could be taken into the South of Ireland to support their generation market for the next number of years. That was one option.

213.

The new pipeline has now been confirmed by Bord Gáis Eireann as coming from Scotland. That decision was probably made on the basis that the decision to allow generation to be sited in Coolkeeragh would result in the use of quite a bit of that surplus capacity. As a result, the remaining gas volume to flow into the South of Ireland was insignificant and unable to support the cost of building that pipeline, so that plan was rejected. The latest proposal would be to build across. It would then be proposed that we take gas from the South to the North, using the new increased capacity of the second pipeline. That is where that concept originates.

214.

The Chairperson: Could the 50% spare capacity in the pipeline which is already coming from Scotland to the North be used as far south as Lisburn?

215.

Mr Beattie: It could. The transmission pipeline from Ballylumford was extended into Belfast in the direction of Newtownabbey, and was then taken across under the harbour to supply the Bangor area. The network through Belfast out to Lisburn is a distribution pressure network, and it does not extend any further than Lisburn. To get gas into Craigavon, to the CANCO area, the transmission network would need to be extended from the Newtownabbey side of Belfast, the Bangor side, or the pipeline would have to come from the South. The pipe from Dundalk is fairly narrow and would therefore have to be reinforced with a pipe with a larger diameter pipe as far as the border and presumably up to Belfast.

216.

The Chairperson: I was focusing on the 50% spare capacity - could it be picked up in Bangor or Newtownabbey?

217.

Mr Beattie: Yes. However, if gas is taken to the north-west for generation, a considerable amount of that capacity would be used up. The remaining spare capacity, therefore, is insufficient to make it viable to build a pipeline between Belfast and the border.

218.

The Chairperson: Are you saying that it is a case of "either or?"

219.

Mr Beattie: No. I am saying that there is very good logic in building from South to North to reinforce the network in the North, because the new pipeline will bring additional gas to reinforce the Southern and Northern markets. It will provide a resupply route. The alternative would have been to build another SNIP from Scotland into Northern Ireland to provide additional gas in Northern Ireland. There might have been enough gas in that to take it into the South of Ireland. That was the original concept. As far as Bord Gáis Éireann was concerned, it was either a new SNIP down through Northern Ireland or a direct line from Scotland. They preferred it to come directly from Scotland.

220.

The Chairperson: Thank you for your submission and the way you dealt with our questions. We have some written questions which we would like to send to you. As the inquiry continues, other issues may arise, and we may write to you again.

221.

Mr Beattie: I have made a separate submission on my own behalf as a consultant in a private capacity, and have been asked to appear to address different questions. If that is all right, I will be here next week.

ADDENDUM TO MINUTES OF EVIDENCE
CANCO (canal corridor natural gas task force)

Q. What would be the social, economic and environmental impact of extending the supply of natural gas to the South East of Northern Ireland?

A. To begin with the economic impact of the five Council areas represented by CANCO, Craigavon alone provides one third of Northern Ireland's industrial base with the largest number of IDB client companies outside Belfast - having attracted 44% of all IDB investment over the past 10 years.

IDB's recognition of the attributes of the area is witnessed by virtue of the fact that it is currently holding in excess of 200 acres of industrial land in the Borough for future development. This is in addition to the 400 plus acres currently owned and excluding those sold off to the private sector.

In the Draft Area Plan 250 acres of land in private ownership have also been zoned for industrial use.

Given this extensive land holding for new industry in Craigavon together with those lands zoned for industry in the other four Council areas, we trust the Committee will recognise the need to offer the South East a level playing field in terms of energy costs which are competitive with the Greater Belfast Area and the UK mainland.

Extending the supply of National Gas would assist IDB in attracting further investment to the area to utilise the lands zoned for industrial development.

It would also greatly assist the indigenous companies and prevent any need for relocation to areas where Natural Gas is currently available.

Craigavon has a large and increasing potential gas user base which currently equates to 60 million therms per annum which could exceed 120 million therms per annum given the anticipated future industrial and population growth.

An extension of the Natural Gas supply could also encourage and transfer of businesses to the Newry side of the border if, as is the case in Belfast, gas prices would be lower than in Dundalk.

In respect of social benefits, availability of Natural Gas to the South East of the Province would reduce energy costs for individuals on the domestic front as well as for industry, resulting in an increase of disposable income for families.

Natural Gas being made available would reduce the very real threat of displacement of jobs to the Greater Belfast Area - were this to happen there would be greater congestion on roads as more people would be forced to travel further to work.

Lower costs for industry will create new employment opportunities.

Craigavon, the lead Council partner in CANCO, has been identified as one of the major growth centres in the Province in the Regional Strategic Framework document - 'Shaping our Future'. Without the extension of the Natural Gas network there are real concerns that regional disparities will result.

With regard to the environmental impact - Natural Gas would, in short, lead to a reduction in emissions from coal and oil heating systems and reduce the potential of an increasing number of exhaust emissions from vehicles travelling to the Greater Belfast Area and also the need for yet more roads.

Q. What action should be taken to ensure that businesses and private domestic households within CANCO's council areas have equal access to competitively priced energy resources in comparison to other areas of Northern Ireland and the Republic?

A. We are really talking about electricity and gas here. First, electricity throughout NI is the same price irrespective of location but is known to be more expensive relative to Great Britain and the Republic for domestic and commercial customers. We need to see prices coming into line. The greatest contribution to the discrepancies is the overhang of the long-term power purchase contracts between NIE and the stations.

Action: either regulatory or governmental, is needed to redress their impact. Government benefited at the expense of customers by getting high valuations for the stations at the time of their sale - due to the lucrative long-term contract attaching to the sale conditions imposed on NIE.

Action: We also need to have gas extended into our council areas as quickly as possible. When (not if) gas is made available, we need it to be at a similar price to that in Belfast to ensure fair competition. Grant aid was made available for the Belfast transmission link, giving them an unfair advantage.

Action: If grant aid is needed to bring gas to our areas, then we expect similar aid treatment.

Q. How would CANCO evaluate the conversion of the coal-fired heating system to an alternative fuel process in the South East in comparison to other regions in Northern Ireland? What actions would they suggest should be taken to speed up this process in the South East?

A. Some 46% of the 18,260 NIHE homes in the CANCO council areas are without any form of central heating. Another 28% have coal room heaters that are considered inappropriate.

We do not think we would be promoting the conversion in the South East ahead of other regions, but we would certainly want to see the replacement and new installation process speeded up in our area and it being linked to the arrival of gas so as to help make a business case for gas distribution. We want actions, like this, to encourage a developer into the area. Greater funding - or perhaps use of PFI by NIHE - is required.

Q. Could CANCO elaborate as to how a further derogation of the Climate Change Levy in Northern Ireland would benefit the extension of the gas network to its council areas? How long should the Climate Change Levy be delayed in order to permit the development of a gas network in the CANCO council areas?

A. The additional cost of extending the gas transmission network into our areas would necessitate an additional cost to customers relative to Belfast customers. In order to keep these extra costs down and encourage good uptake by customers - thus encouraging network developers - we need to look for ways to counteract this additional cost. The imposition of a CC Levy is counter-productive in a gas development area. It penalises customers for moving to a clean fuel! Providing derogation for the developing gas area would offset additional gas transportation costs. The delay in the CCL imposition would probably be determined in negotiations with a potential network developer and reflect the build cost and allowed return on their investment. It is likely to be much greater than the 5 years provided for the Belfast area since the per customer cost to build to Canco's area will be very much greater. It might be 15+ years.

Q. CANCO suggests that there should be a reduction in the electricity charges for both businesses and households. How does CANCO justify the need for a reduction in charges? How much should electricity charges be reduced by?

A. Published tariffs show NIE domestic rates are around 20% higher than comparable regions in Great Britain. Electricity tariffs consist of two main elements - the 'transportation' or transmission and distribution (T&D) part - accounting for 30% of the bill; and the energy part - making up some 65%.

CANCO has not itself carried out a detailed analysis or comparison of electricity tariff structures but accepts the findings of OFREG as set out in their price review consultation paper of April 2000. The paper indicates that T&D charges for NI domestic customers have risen steadily and are now over 50% higher than in England and Wales. At privatisation they were about the GB average. We would ask that this trend be reversed as quickly as possible and NI T&D charges again brought into line with the GB average. Eliminating this 50% differential would lead to an overall reduction in the end-tariff of around 10%.

The 65% energy element of the bill is outside NIE's control but in real terms, is also much higher in NI than GB. NIE argue that the generation costs that were imposed on them - and hence customers - by the privatisation deal struck between government and the station buyers, is the primary cause.

These generation contracts are long-term, and unregulated. OFREG have no control over them. Therefore any meaningful action to reduce power station charges can only come through government action, possibly by buying out part of the station contracts. We would want to see a similar reduction of 10% in the end-tariff coming from such action here - leading to an overall reduction in the combined end-tariff of 20%.

Q. What would be the best method of both reducing the cost of electricity whilst simultaneously improving the Northern Ireland Electricity network?

A. As stated above, electricity tariffs consist of two main elements therefore two contributions to reductions are needed:

The network can be improved through better initial design and more focused on-going maintenance. The financing of this need not lead to increased network charges. Better design might, though not necessarily, cost more initially. But the replacement network would last longer and therefore could be written down over a longer period leading to lower net charges. Better design should also lead to lower on-going maintenance costs. Greater action by NIE to clamp down on stolen units would also raise money to help finance these changes. And of course, some contributions from NIE's profits would be needed. Greater powers for the Regulator are needed to examine the profits taken out of NIE's operations through the Viridian 'service' subsidiaries is required.

In the short term, energy prices can be brought down through government using/returning some of the proceeds from the stations sales to buy back long-term contracts and eliminate the cross-subsidy to large customers from the domestic customers.

In the longer term, ensuring greater competition in generation and interconnection can lower energy costs. More interconnection is being obtained but charges for their use need to be such as to encourage trading. New generation needs to be the most efficient available ie CCGT and positioned so as to minimise both electricity and gas network charges and on-going losses. However, over-dependence on gas as the fuel source might be a concern (interconnection reduces that concern).

Q. What action should be taken to protect the rights of domestic customers in relation to the opening up of the electricity market to other suppliers? What should be done to improve the regulation of the electricity market in Northern Ireland?

A. First, reversing the decision to 'smear' the cost of providing lower energy charges for the large customers or 'open' market, across the franchise or domestic customers, could best protect customers rights. Government from the station sale proceeds should have met these costs. Then, by ensuring that the NI Consumer Committee for Electricity, who should have ensured this smearing didn't happen, is truly independent and not based at, or appointed by OFREG.

The General Consumer Council might better undertake their responsibilities. Any future market opening decisions should ensure domestic customers are not disadvantaged and get a benefit too.

We have not studied regulation in any detail but could make some general comment. There must be a concern that dual functions - electricity and gas - of OFREG may give rise to distortion of regulatory process and the markets. Decisions taken on gas matters may not be in the interests of electricity customers. An example of this is the decision by OFREG to favour generation at a North West site on the pretext that it gets gas to a wider population.

We would also want to see regulation of generation activities and charges.

There must also be benefits from co-ordinating and aligning the regulatory regimes on either side of the border with each other and even with that in GB. Again, with separate all-island Regulators for gas and electricity.

Q. What can be done to improve cross-network energy trading? What benefits would this prove to have for both industrial and domestic customers?

A. We need to ensure there are more interconnections and that the charges are regulated and are such that they encourage competition. Also, ensure this activity is in independent ownership or control from that of the incumbent network operators - NIE/ESB and BGE/Phoenix to prevent their constraining or manipulating the flow and hence, competition.

Industrial customers will benefit most from interconnection since they can access competition. Domestic customers cannot at present due to long-term contracts and their metering arrangements. Some 'virtual' mechanism needs to be devised to allow them to get some benefit also.

Q. Does CANCO believe that their local council areas are receiving fair and equal treatment in relation to the supply of electricity and gas resources?

A. For electricity, yes. For gas, no. Belfast has gas and we don't. We want to see gas brought to our area on the same timescale as for any other area likely to get it. And we want government to ensure that any competition that is run for issuing new gas conveyance licences that has power generation as a requirement, allows our region to be treated on equal terms to any other region.

Q. What would be the economic and environmental justifications for locating a generation station in the South East of Northern Ireland? What impact would this have for customers in the southeast region and for customers in the rest of Northern Ireland?

A. To deal with the environmental issue first, new gas-fired generation is extremely clean and environmentally friendly, so we don't have a problem with that. Also, the new gas-fired CCGT stations are neat and compact in appearance - not dissimilar to a factory unit. We believe a suitable location could be found near the existing 275kv transmission lines and along a future North-South gas pipeline route thus providing the optimum location near the primary electricity loads of Belfast and the South East. This would lead to lower electricity prices for industrial customers than say, a station at North West where the additional cost of a pipeline needs to be recovered. Without government action on long-term contract structure, as discussed earlier, franchise domestic customers would not benefit from a new station, either in the South East or the Northwest.

Q. What does CANCO suggest to be an appropriate means of funding the cost of new gas pipelines?

A. As with electricity networks and in line with the privatisation of the industries, the starting point should be commercial viability and minimum grant aid.

We understand the marginally viable project to build a North-South pipeline to bring gas to the southern market is now in question as the surplus capacity that the SNIPS pipeline had and which would have been directed to the south, will disappear if a North West power station takes that capacity. Projects should be examined to ensure that they take the minimum of public funding and that the commercial interest of the developers is not being unduly subsidised by the public purse. Any grant aid must benefit customers' not commercial enterprise.

Practical steps, with minimal cost implications could be devised to assist developers and should not be ruled out. For example, pipeline should not be subject to rates for an initial period. Councils and government might forego such revenues (which would not materialise anyway in the event of the project not going ahead) to get the benefit from increased commercial activity in the region.

The Climate Change Levy on gas should be suspended for a long period of time within the new gas development areas.

Grant aid from the EU might be a possibility. We would have concerns that any aid to pipelines would be at the expense of other, more worthwhile projects (such as hospitals, education, and roads).

We would not want to see any increase (or delay in decreasing) electricity charges through postalisation mechanisms that spread the pipeline costs across electricity customers throughout the province who will never get gas.

J L PORTER
Principal Administrative Officer

top

MINUTES OF EVIDENCE

Wednesday 28 March 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mr McClarty

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr M Ennis )

Mr N Smyth ) Confederation of British Industry

Mr P Carroll )

222.

The Chairperson: You are very welcome, Gentlemen. I am afraid that our time is limited to half an hour.

223.

Mr Ennis: The Confederation of British Industry in Northern Ireland has two major concerns. One is that the differential with the rest of Europe is at its highest ever level. The other is that we have the highest electricity costs in Europe; even at a differential of 25% to our near neighbours, that is significant. This is due to the generating contracts which were introduced some time ago with terms and conditions that have penalised Northern Ireland industry and commerce since their introduction.

224.

For example, I run an operation in Dollingstown and one in Crewe, and the contracts for both are to be renewed on 1 April 2001. Our Lurgan operation uses twice as much electrictiy as the Crewe operation, which should by all accounts have a cheaper rate. The actual price per kilowatt hour for Lurgan in the year 2000 was 4·05 pence, which is to increase to 5·02 pence from 1 April. That is contracted to the Electricity Supply Board, which I will come back to later. Our Crewe operation price per killowatt hour is 2·64 pence, which will reduce slightly to 2·63 pence in 2001. When the Crewe operation was looking for quotes, 23 different companies made offers. Dollingstown received two.

225.

If the Northern Ireland operation in Lurgan had the same rate as Crewe it would save £500,000 a year on electricity. That is the scale of the problem. You can clearly see that the differential has increased significantly between 2000 and 2001.

226.

Mr Carroll: From both a Dupont perspective and a regional perspective, we are obviously keen to attract inward investment. However, in doing so we are not only competing against other companies around the globe but also against our sister sites in Europe. Electricity and energy costs are a significant component for our industry, so we must do benchmark surveys.

227.

Our plants in the Northern Ireland pay a 30% premium compared to those elsewhere in the UK, in the Netherlands and Belgium. The differential with Germany, France, Luxembourg and Spain is between 80% and 100%. More worryingly, the gulf is widening, as they can expect significant reductions in future, whereas in Northern Ireland there is just uncertainty. There is a lack of clarity that further confuses the picture. It is a growing divide. The final straw is the climate change levy which could widen that already enourmous gulf by another 8% to 10%.

228.

Mr Ennis: Those two startling examples provide a fairly bleak summary, Mr Chairman.

229.

Mr Neeson: Does Dupont not have its own generating plant as well?

230.

Mr Carroll: It does. In the last 40 years we have invested in every possible mechanism for energy efficiency. That includes building a combined heat and power (CHP) plant in the early 1980s to generate some of our own electricity. The figures I referred to are the components of our total energy bill that are purchased across the fence line. The ability to manage our energy usage is constrained by the relative balance of heat and power load on the site, which is one of the fundamental constraints around CHP technology. It depends on the balance between heat load, such as low pressure steam requirements, and power load, such as lighting or electrical power.

231.

Dr O'Hagan: Has enough been done to reduce energy costs?

232.

Mr Ennis: We told the Minister that Northern Ireland made a heavy rod for our own back in its negotiations with the Treasury on the sale of generating contracts. Until that fundamental issue is addressed, we will remain at a disadvantage - not only in the UK and Ireland, but in the rest of Europe.

233.

Mr Smyth: The core problem stems from the nature and design of the contracts introduced during the privatisation of 1991. This problem was identified in the early 1990s, and energy has been on our agenda and on the agenda of energy users for the last 10 years. In the mid-1990s the Government appeared to pass the buck to the regulator. The regulator has certainly put a lot of time and commitment into it. Unfortunately, companies measure this by results, and these are extremely depressing at the moment. Expectations were raised in 1998 and 1999 that things would improve, but they are in fact a lot worse than we had envisaged.

234.

Businesses are very worried. We received calls last week from fairly large energy users saying that they can cope in the short term - but is it for the short term? We are now under pressure for future investment. Where will we be in two or three years? If the position has not improved, we will cease to invest, as energy is so important. Addressing the matter of contracts is vital.

235.

We are disappointed with the climate change levy, and only a five-year derogation of gas - this is the last thing Northern Ireland needed. Many companies in Northern Ireland are large users of electricity and do not meet the eligibility criteria. We argued, and we highlighted this in our submission, for a sectoral agreement for Northern Ireland entailing a 100% rebate - provided that companies sign up to energy efficiency agreements. We would not have a problem with that.

236.

The only hope in the current proposals is the Northern Ireland-Scotland interconnector. When that comes into play it will start to bring downward pressure. Our problem is that there are only a few players in the competitive market. The interconnector would bring downward pressure and further integration in an all-Ireland market.

237.

Mr Ennis: I can give you another example of how uncompetitive the market is. We have an operation in Cavan and one in Lurgan. We tried to make a joint purchase from either ESB or NIE. Neither had enough freed-up capacity available to service that contract. That is not a real option for us to proceed with.

238.

Mr McClarty: You have said much about the climate change levy. Has the CBI assessed what impact the climate change levy will have on businesses in Northern Ireland?

239.

Mr Ennis: The immediate effect will be an eight to 10 per cent increase in our electricity prices, which is significant given the differential I have already mentioned. Those figures did not take the impact of the climate change levy into account. Northern Ireland is at a major disadvantage. Because our energy costs have been so high for so long, industry here has already taken several of the initiatives now being implemented across the water. Mr Carroll has already referred to the combined heat and power project; he also observed that all the low-hanging fruit in Northern Ireland has been picked. That is what this legislation is designed to do, but circumstances have already obliged us to do this.

240.

Mr Smyth: We have not undertaken an economic impact assessment - that would be a major task. When this was proposed two years ago, we did some very detailed assessments, in particular on the impact on manufacturing. This is offset by a 0·2% reduction in national insurance. In the original proposals, which were looking at a 15% increase or premium, every manufacturing company would have lost out. There have been significant changes nationally, but many manufacturing companies are still losing out.

241.

This is another burden on Northern Ireland's competitiveness. Many of our significant electricity users use a lot of water. Water costs in Northern Ireland are in the top quartile of UK rates and other utility costs. All of this increases the cost of doing business in Northern Ireland.

242.

Ms Morrice: Can industry push for increased use of cheaper renewables? Have you any ideas or policies on that?

243.

Mr Ennis: We are very much in favour of renewables - they could be very positive.

244.

Mr Carroll: DuPont has a corporate commitment to have 10% of its energy sourced from renewable sources by 2010. The commitment is there, but we need practical means to make it work. For example, Northern Ireland could act as a role model, but it needs a readily available renewable source with a secure supply at affordable rates.

245.

Ms Morrice: Your corporate commitment of 10% by 2010 is also Government strategy. If the Government fail to achieve that, can individual companies ensure it with solar panels or wind energy on site? The Sean Quinn Group makes use of wind power. Could you do the same?

246.

Mr Smyth: There certainly is potential in Northern Ireland. We have not assessed it, but I believe that several studies are being undertaken. We will certainly look at it. We held an energy forum in February at which we were addressed by a representative of the renewables sector.

247.

Wind power is the obvious area for development, as well as Northern Ireland's eco-tariff. The premium has been reduced to about 5% - it is almost market- driven. We would adopt wind power if it were practical. Perhaps there is a role for Government in creating such a market.

248.

Northern Ireland's environment favours wind power. The price of electricity from conventional sources tends to be higher. If wind power is going to work in Northern Ireland, it must be cost-effective. Indeed, the regulator has made some innovative proposals on financing. That is encouraging. We have a very small critical mass which must be developed. Nevertheless, there is cause for optimism. If we are to attain the goals, such as combined heat and power, set in the waste management strategy we will have to secure energy from waste.

249.

Ms Morrice: That is Government-led. Could the industry not take the lead? The Government are obviously dragging their heels, perhaps industry can make electricity more competitive.

250.

Mr Smyth: The private sector is reasonably active in delivering wind power. We have an eco-tariff which should be better marketed as it is not far removed from commercial realities. We hope that that effort will bear fruit in the next few years. A growing number of multinationals are committed to purchasing a certain amount of their power from renewables. The eco-tariff allows the domestic customers to do that as well.

251.

Mr Neeson: What impact has the arrival of the natural gas industry had on industry in Northern Ireland? How important is the extension of the gas pipeline to the Craigavon corridor and to the north-west? Will this create the level playing field which the Committee wants in Northern Ireland?

252.

Mr Ennis: We have been very supportive of the extension of the pipeline into the north-west. In fact, I would be keen to see it extended into our region. It has a significance for the whole competitive agenda in Northern Ireland. Our operation in Mallusk has moved to Phoenix Gas and has made not insubstantial savings.

253.

The Confederation of British Industry (CBI) supports creating economic competitiveness and the balance that exists in other parts of Ireland and in the United Kingdom.

254.

Mr Smyth: Phoenix Gas says that companies have saved about £5 million in areas where it is available. It does provide choice and helps to create competition. It is an alternative and would probably be the fuel of choice for CHP plants. That is one of the reasons why the CHP market has not developed, and there is obviously a significant environmental impact for people who turn to it.

255.

We would like to see it extended. We do not believe that other electricity customers should pick up the bill for the extension, but it should come out of, say, structural funds. That would obviously tie in with the regional strategic framework. It is important to create that environment. Belfast is already becoming congested, so we must ensure that the benefits of natural gas are spread as widely as possible.

256.

We must be realistic in not raising expectations. We will not get gas in every town and village in Northern Ireland. That does not happen anywhere else in Europe. However, the key cities in the north-west - and Craigavon - should have gas sooner rather than later.

257.

Mr Neeson: What is CBI doing about it?

258.

Mr Smyth: CBI has supported and responded to various consultations from the regulator. Our members, particularly those in the north-west, are using various other forums to lobby, and we have been supporting them. We have some key principles which must be adhered to in developing that.

259.

It is our role to respond, and we have been supportive and have highlighted some ideas on how that can be addressed. It is down to individual companies and groups to lobby on specific issues.

260.

Dr McDonnell: Are you satisfied that the Governments in the North and the South are committed to creating an all-Ireland energy market or do you feel that they are still working independently?

261.

Mr Ennis: We are pleased that the Programme for Government listed the creation of an all-Ireland energy market as an objective. However, we have been disappointed that it was not tackled with more enthusiasm - there is not much competition.

262.

Mr Smyth: In July 1999 the Department of Enterprise, Trade and Investment published a consultation paper called 'Vision 2010 - Energy Action Plan'. It highlighted the importance of the North/South energy market. However, we have been disappointed in the follow-up development. Earlier this year we welcomed the proposal for a joint study, although we would like to have seen some firmer timescales.

263.

We were disappointed, and we lobbied the Irish Government on their recent announcement to go ahead with the direct pipeline to Scotland instead of taking advantage of a North/South one. We have not had access to any of the proposals, but it is very difficult to understand why they should want to develop a Dublin to Northern Ireland pipeline if going the other way relied on getting a major user and a generating plant at the other end. The cost of extending a pipeline from Scotland to the South would be significantly higher.

264.

We are making some progress with electricity although we would like to see further interconnections strengthened and an extension of smaller, higher voltage interconnectors across the border to facilitate trading. There has been some progress, but we would like to see firmer timescales. Obviously, politics plays a part, but the Irish Government assured us that they are looking at the matter in an all-Ireland context. Nevertheless, we are very disappointed with their recent decision.

265.

Mr Carroll: We would appreciate a clear outline on strategy, policies and definitive timescales. The uncertainty causes the biggest problems; it means that we cannot make the appropriate investment decisions.

266.

Mr Ennis: Most of industry must take a long-term view on energy investment decisions. Therefore clarity on timescales is vitally important. We must know that there is a commitment and when it will be followed through.

267.

Dr O'Hagan: Earlier, Department officials spoke of a system of bonds to deal with generator contracts. It is a bone of contention, but is the Department doing enough? What solution do you propose to the problem?

268.

Mr Ennis: We suggested bonds. The whole matter boils down to financing - the Treasury pocketed all the funds from the generating contracts. That money left Northern Ireland and has not returned in any form. We have lobbied through CBI and Centrepoint. We have been - for want of a more delicate expression - screwed. There are, however, ways to address that.

269.

For example, when the port was to be privatised we thought that rather than let the Treasury take back everything after £70 million, it would be better to assign those funds to buying back the generating contracts - let us get on with life. If that is not an option (and we encourage the Department to look at various options) Government bonds could be used. We must bite the bullet.

270.

Mr Smyth: It is a challenging issue, but we are not aware of the commercial details. There are mixed views on the matter. Moving to bonds could mean moving from high costs now to higher long-term costs. Our members have mixed views on that. What the Treasury took from us was worth twice, in megawatts, what it took from similar companies in the rest of the United Kingdom. That is the main problem.

271.

From 1 April, Northern Ireland electricity costs will increase. We should be telling the Treasury that as this is a problem of the Treasury's making it is obliged to help solve it.

272.

The Chairperson: Thank you for your written submission and your answers. We have more written questions which we will send you. As the inquiry progresses we might come up with other issues, and we would appreciate your co-operation.

273.

Mr Ennis: On behalf of CBI Northern Ireland, I would like to thank you for taking the time to listen to our views.

addendum TO minutes of evidence
confederation of british industry (cbi) northern ireland

CBI Northern Ireland has considered the questions set out by the Committee and responses below.

Q. It is estimated that energy consumption can be reduced by over 20% by measures that are economically viable. The Industrial Research and Technology Unit (IRTU) offer energy efficiency advice and a Loan Action Scheme to provide financial support in the development of energy saving projects? Can the CBI advise how many of its members are aware of this scheme and indicate if any have taken part in the scheme?

A. IRTU role for promoting Energy Efficiency would be known by majority of medium and large business especially manufacturing companies where energy usage is much greater than in the service sector (typically a service business will have energy costs of about 0.2-0.3% of total costs where as manufacturing companies will have energy costs of over 1% and in many case significantly more than this).

CBI Northern Ireland has involved IRTU in its regular Energy Forums (the last one was held in February 2001 - usually attended by 40-60 business reps). We would not know how many of our members are either aware of taking advantage of the various schemes on offer.

Loan Action Scheme - there is more limited awareness of this particular scheme. This scheme is restricted in it's applicability and is geared to SMEs with a limit on the number of employees and turnover. It is not relevant to most larger energy users.

A general point to make is that firms have a wide array of various schemes and initiatives to chose from - some are more effectively marketed than others. Awareness of many of these schemes is often surprisingly low. (CBI has done research on marketing support schemes available but not on energy efficiency schemes). A proactive approach is needed. A good example of this would be the uptake on the Airsave Program (which was available to all industry and we understand was a success). This shows that specific programs tailored to industry can work.

On the 20% figure - this is big generalisation and makes no reference to the investment required. Certainly potential for more savings especially in SMEs but for most energy intensive companies, energy efficiency is taken seriously and measures will already be in place - these level of savings are not likely to be achievable without very substantial capital expenditure and payback periods may be unattractive.

CBI is a strong supporter for promoting energy efficiency.

During 2000 on the back of the threatened CCL we encouraged IRTU to take a more proactive stance regarding its marketing of energy efficiency schemes - this has since been undertaken.

Q. Have the CBI quantitatively assessed what impact the introduction of the Climate Change Levy may have on businesses in Northern Ireland?

A. We have not carried out any economic impact assessment.

We tend to view this as a direct impact on reducing Northern Ireland's competitiveness especially with electricity prices so high already - our European competitors do not face this levy - those other countries with a energy tax have more generous rebates and derogation's.

Our concerns are set out in Para 21 or our written submission.

Q. Point 4 - 'Recognition by Government of the importance of creating a competitive energy market'. Is the CBI concerned that government does not currently recognise the importance of a competitive energy market?

A. Over last 4/5 years it has been the Regulator that appears to have done most of the running on trying to achieve more competitive regime - but our members would state that expectations were raised which haven't been delivered.

We believed it needs stronger Government commitment to address the issue - they might recognise it but what are they doing about it - business is interested in outcomes and these are not positive at present. Needs tripartite involvement (Ofreg, Government (UK and NI and generators).

Our members are also concerned that timescales keep slipping (e.g. some of the proposals set out in DEDs Autumn '99 consultation paper).

Currently Government saying the right thing - but biggest issue is contracts - UK Government benefited at initial sale - unfortunately we have not got the UK Government on side. However the existing price differential should be used at the highest level to secure the UK Government's support to help address the issue.

Government also failing to give indication of medium term outlook for prices (in contrast in GB Ministers are quoted as saying that prices are expected to fall by 10%). This is particularly important as companies are reconsidering their investment plans - the key question is can Northern Ireland offer competitive electricity prices in the medium/long term?

Q. Point 4. Could the CBI elaborate on the point that there is an urgent need to remove "expensive" obligations and impediments to the development of a fully competitive market?

A. This refers to the continuing existence of the longterm contracts put in place at privatisation - it is the nature of these contracts that have underpinned the major structural problems that we currently face.

Our industrial members do not believe that there is an effective competitive market especially regarding the limited amount of competitive generating capacity that is operating in the competitive market (consumers are facing all the risks of fuel price uncertainty).

It is also worth noting that the different market structure imposed on Northern Ireland by the UK government and the associated longterm contracts will make it difficult to meet full market opening (as required by the EU within 5 years) without either contract buy-out or excessive stranded costs.

Q. The CBI contributed to the development of Vision 2010. Are they satisfied that this is a suitable energy action plan for Northern Ireland?

A. In general are members were disappointed so the answer is no.

The issue of resolving the generating contracts was ducked.

We also stressed the importance of needing to broaden the context of an energy strategy (incl. reference to integration with other policies).

There is a need to set out a clear role for government.

Q. Points 8 & 9. Does the CBI believe enough is being done to reduce energy prices in Northern Ireland?

A. A stronger commitment (and timescale) for concluding the generator contract negotiations is essential.

Disappointed that we have been unable to secure a total derogation from CCL - with electricity prices rising so rapidly from 1 April another opportunity to get message across to Treasury etc of special Northern Ireland situation.

Civil servants need better understanding of importance and impact of high energy costs.

We welcome the Northern Ireland-Scottish interconnector - this has potential to bring downward pressure on prices and help to create a more competitive market... but it is essential that strict controls are in place to prevent the price of output from the I/C simply drifting upwards to meet the current Northern Ireland generation price.

We also welcome proposals to strengthen interconnection with RoI - the Regulator must ensure that potential benefits from open competition from the RoI and Moyle interconnectors will take place. To aid this it is essential that clear rules and terms for superposition are put in place well in advance and the firm capacity from S->N must be maximised (at the very least varied on a time of day and seasonal basis).

Q. It has been reported that market opening has proceeded in a quicker timeframe than was anticipated in Vision 2010 and is two years earlier than the required original EU Directive. Is the CBI dissatisfied with the current progress being made in providing greater competition and choice in the energy markets in Northern Ireland?

A. We have welcomed the market opening earlier than EU Directive.

But a key issue is having enough competitive generation capacity available within the liberalised market and enough competitive players. In GB companies can be approached by over 20 potential suppliers while in Northern Ireland there were three in 2000/1 reducing to two in 2001/2. The problem can again be largely attributed to the long-term contracts.

We have argued that all industrial/commercial customers should have access to the liberalised market by 2003.

Choice will be aided by extending the natural gas network - we would welcome an early indication of when and where the natural gas network is likely to be extended to - this is important for business planning purposes.

Q. Point 12. Is the CBI satisfied with the current level of commitment of government both North and South to the creation of an all-island energy market?

A. Our members have been disappointed that it appears to be taking so long to develop proposals - there is a need some firmer timescales.

The recent announcement by Irish Government regarding supporting a second natural gas pipeline direct to Scotland is a disappointment - it is difficult to see justification now in commercial terms for a south-north pipeline in the near future.

On electricity we are keen to see speedier progress - in 1999 we felt there was insufficient urgency at addressing the matter.

In DED's 1999 consultation, commitment to joint working group to report by Feb 2000! The announcement in January 2001 to proceed with this study was welcome albeit much later than we had hoped.

Q. Point 16, 17 & 18. Is the CBI satisfied with the regulators attempts to buy-out existing electricity generation contracts?

A. There is a broad view that he has tried hard but with insufficient support from the Department.

High expectations were set in the late 90's by Ofreg - these have not been met and indeed with fuel price increases the situation has never been as bad as it is now.

We have always had a concern that government was not as involved as it should be - resolution will require Government input - this was never very visible.

We believe additional money is required to secure an appropriate buy-out.

Q. Point 19. How does the CBI compare their programme for the development of an all-island market with progress being made by the Department?

A. Immediate - on course except for north-south gas pipeline (we are not hopeful here).

Medium/long term - Dept has not set timescales. Unlikely to deliver on gas pipeline but hopeful that strengthened electricity interconnection can be in place.

Recognise short term capacity issues in RoI may make energy trading largely one way in short-term (i.e. north to south), but with new capacity being put in place the outlook for medium/long term is reasonable encouraging - electricity prices in RoI are significantly lower than in Northern Ireland but may rise (they have been kept artificially low).

Q. Point 23. What are the barriers to CHP? Is CHP economically viable other than for large industry?

A. Rather than size it depends on having an appropriate balance of need for heat and electricity and to have continuous running - some 6000 hours per annum is recommended. However it is likely to be of interest to larger organisations rather than smaller firms.

Suitable for a range of public buildings and facilities i.e. leisure as well as specific industrial uses.

There are barriers - lack of knowledge about technology, limited experience in Northern Ireland (indeed some bad experience exists), limited availability of natural gas (favoured fuel) - this latter issue is a major issue in that companies who may be able to either build new CHP or expand/replace existing facilities do not have access to natural gas, which is essential for modern CHP. Nor is there any definitive statement of when and if gas will be available to facilitate forward planning within these companies.

There have been previous institutional barriers - included inability to wheel power between sites, high costs of connection to grid, etc although we understand that these have been addressed in recent years.

A major study of CHP potential was completed for the Department in c1994 by ETSU.

CCL should help encourage CHP as new CHP is exempt from CCL.

Q. Point 25 - develop the export potential of new and renewable technologies. Have the CBI assessed the potential market potential for new and renewable technologies in Northern Ireland? What role can the CBI play in the promotion of renewable energy technologies?

A. We have not assessed market potential.

The cost of renewables will be major driver - we support strongly a market driven approach - we welcome the existing Eco-tariff.

We strongly reject any additional costs being imposed on existing customers.

The renewable industry itself must also become more proactive and imaginative in it's offering to industry.

We believe there is a compelling case, especially for wind power with costs of conventional power being so high and favourable conditions for wind power in Northern Ireland.

CBI role - at our last Energy Forum we had presentation on renewables to help raise awareness. We have also an important role in helping to identify barriers and seek to get these addressed.

We believe that to achieve Environmental waste management targets for Northern Ireland energy from waste plants are likely to be an essential part of the solution.

We need to ensure a favourable planning regime for renewables especially wind.

CBI Northern Ireland
April 2001

top

MINUTES OF EVIDENCE

Wednesday 28 March 2001

Members present:

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mr McClarty

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr McConnell ) Department of

Mr McGeown ) Enterprise, Trade

Mr Beattie ) and Investment

274.

The Deputy Chairperson: Gentlemen, you are very welcome. You are the first witnesses from whom we will take evidence on our energy inquiry. We are under very strict time constraints - each group will have half an hour.

275.

Mr McConnell: I am Greg McConnell. I am the deputy secretary responsible for departmental policy, including energy policy. My colleagues are Jack Beattie and Gerry McGeown. Mr Beattie is responsible for gas provision, and Mr McGeown for electricity. They will deal with questions on renewables.

276.

We welcome the opportunity to give oral evidence in support of the Department's written submission to the inquiry. Our submission of 31 January in response to the Committee's terms of reference concentrated on developments since the publication in July 1999 of the 'Energy Action Plan - Vision 2010'. Matters have moved on very significantly since then. We also concentrated on actions taken to reduce energy costs, progress in promoting the extension of the gas industry, and the potential for renewable energy.

277.

As the Committee will be aware, the Minister, Sir Reg Empey, made a statement on energy to the Assembly on 5 March in which he highlighted the energy agenda for the remainder of the year. He highlighted the priorities and identified the problems to be addressed. By the end of 2001 the Department expects to have a new energy market strategy for Northern Ireland in an all-Ireland and European context. This strategy will have evolved from a process of consultation and collaboration with all interested parties.

278.

As part of the Programme for Government's priority of securing a competitive economy, the Department's objective is to achieve a secure, diverse, competitive and efficient energy market. We must recognise that the energy industry is in private hands, but the Department has policies to address all four aspects of that objective. We acknowledge that there are major issues to address. The existence of long-term generator contracts is a serious barrier to the opening up of the market to further competition and to reducing our very high electricity prices, and we do not hide from that. Along with the regulator, we are seeking ways of overcoming this barrier, and the Minister has asked the regulator to prepare and publish for consultation his views on moving to open the market quickly and on encouraging competition.

279.

The regulator is conducting a transmission and distribution price control review, which is due to come into effect in April 2002. We are also examining the possibility of buying out some of the generator contracts using a bond. This is highly complex and it remains to be seen whether a sound proposal can be developed.

280.

It is very important to ensure that the regulator has the tools to do his job properly. Work has commenced on the preparation of new legislation, following the lead set by the GB Utilities Act 2000, with the aim of reforming and, if necessary, increasing the powers and functions of the regulator. Legislative proposals will emerge in the course of the year, and the Department expects to consult on these in the autumn.

281.

The Department also wishes to see a strong, single voice representing the consumer across the full remit of energy issues. A paper setting out the Department's initial thoughts on the new organisational arrangements has been passed to the Committee and to other interested parties.

282.

The agenda is a challenging one. We are confident that we are tackling it in a holistic manner. We genuinely look forward to the Committee's report on its inquiry on energy and its views on the other planned consultation exercises. It will be a very valuable input on the new energy strategy and to the Department's work over the next decade and beyond.

283.

Dr O'Hagan: In your submission, you touched upon the energy market strategy for the north of Ireland. Whom did the Department consult in developing that strategy, and will the strategy be completed by November 2001?

284.

Mr McConnell: We certainly hope so.

285.

The energy market strategy is intended to set the scene for the next decade and beyond - it is a long-term agenda. It must address all aspects of energy. As the Minister said on 5 March, its development will emerge from a process that is both collaborative and consultative. The Department intends that there should be full consultation during the process. The Minister has also stated that the Committee's report will be a valuable contribution.

286.

The consultation exercise will cover several areas. First, consultants have been appointed to report on energy markets in Northern Ireland and in the Republic of Ireland to make recommendations on an all-Ireland energy market. A public seminar on the findings is planned for early June 2001. Advertisements have been placed, and there is a website to take consultation. The consultation is extremely wide, covering all of Ireland.

287.

Secondly, the regulator has been asked to prepare and publish a consultation paper on the opening of the market and on encouraging competition. That will be issued shortly before Easter. The Committee will certainly be consulted on that, but it will be a complicated and technical matter. That complexity means that it is unlikely the public will be consulted, but the industry and other potential protagonists will be involved.

288.

The Department also intends to publish a consultation paper on renewables which will also be relatively specialised but which will certainly have wider appeal than the regulator's paper. There will also be consultation on the draft strategy itself and on the accompanying legislative proposals, which will, of course, contain equality impact assessments. During those assessments, we will go out to the 400 or so consultees.

289.

We are confident that the target - which is tight but achievable - will be met by the end of this year. Realistic periods of consultation will be allocated as a priority. That is how we see it developing during the year.

290.

Mr McClarty: As well as setting deadlines for the energy market strategy, the Programme for Government sets out the following deadlines. First, a deadline of summer 2001 has been set for the Department to appraise private sector proposals received for North/ South gas interconnections and a gas supply to the north-west.

291.

Secondly, by September 2001 the Department should have secured agreement between Northern Ireland Electricity (NIE) and the Electricity Supply Board (ESB) on actions to address the conclusions of a joint feasibility study into further interconnection between their networks.

292.

Can you tell the Committee what progress has been made on those objectives and whether you are on target?

293.

Mr McGeown: Electricity interconnection between the NIE and ESB systems was restored in 1995. That was the main interconnector between Tandragee and County Louth.

294.

As part of the 1994-99 European round of structural funds three smaller complementary interconnection projects are currently being supported. They allow for trading on an all-Ireland basis and provide mutual reinforcement of the NIE network in the west of Northern Ireland and the ESB network in the north-west of the Republic of Ireland. Those three projects are underway and are due for completion this autumn.

295.

Building on those reinforcements, NIE and ESB are engaged in a feasibility study which is being supported with European funding. NIE has completed some preliminary work on the proposed all-island electricity market, the wider liberalisation of a European electricity market and the need for further interconnection between their networks. NIE is appointing some outside consultants for assistance. Various options will be examined, including the possibility of a second main interconnector.

296.

This action point is on target, although the outbreak of foot-and-mouth disease may lead to a slight slippage, as regular meetings between NIE and ESB staff are being affected.

297.

The Department of Enterprise, Trade and Investment and NIE meet regularly. The next progress meeting is scheduled for 9 April when we will discuss the present situation. Work is progressing satisfactorily at the moment.

298.

Dr McDonnell: What is the intended location of the interconnectors?

299.

Mr McGeown: They are named in the Department's statement to the Committee. There are two standby links; one is between Strabane and County Donegal and the second is between Enniskillen and Swanlinbar. The third project that is being assisted is a reinforcement of the main interconnector between Tandragee and County Louth which will increase the capacity of the main interconnector from 300 megawatts to 600 megawatts.

300.

Some preliminary projects are being examined. Should there be a second main interconnector west of the Tandragee to Louth interconnector, or should there be several smaller interconnections at 110kv at Newry to Dundalk, Coolkeeragh Power Station to Buncrana or perhaps between Tyrone and Monaghan?

301.

Mr Beattie: With regard to gas, reference is made to North/South, South/North and north-west. It has always been said that it is for the private sector to bring those projects forward. For the first time, the Department of Enterprise, Trade and Investment has received submissions for new projects. Those submissions are from Bord Gáis and Questar, an American company.

302.

The project submissions are divided into two or, some would say, three parts. One is a pipeline from Dublin as far as Newry/Craigavon that is called the South/North pipeline; and the other is for a pipeline to the north-west. It could also be - and this is a secondary part of the submission - that the pipeline from Craigavon could join a pipeline going to the north-west. Therefore there would be a full system joining Dublin to the north-west.

303.

Those projects have developed in that way because British Gas and Keyspan, another American company, made proposals for a North/South pipeline. Unlike the South/North pipeline, the gas would flow from the North to the South in a North/South pipeline.

304.

It brings three advantages, one of which is security of supply. It completes the triangle. A pipeline from Scotland to Northern Ireland and one from Scotland to Dublin joined up the middle completes the triangle. Therefore if either pipeline fails, each jurisdiction can get gas through the other.

305.

It also facilitates the development of the gas industries of towns along the route in the North. Not in the South, because the towns along the route in the South already have gas. Because the gas came through the Scotland/Northern Ireland pipeline (SNIP), unit costs were cut. Those were the three advantages of a North/South pipeline.

306.

The North/South pipeline is not now going ahead because British Gas and Keyspan have withdrawn as they could not get the essential power station customers in Dublin to sign up. The pipeline was to be funded by the power stations in Dublin. I will not go in to the reasons now. However, I am more than happy to explain in detail at any time why British Gas could not sign the customers up.

307.

Bord Gáis has made a proposal: a full pipeline would give security of supply and facilitate the supply of gas to towns along the route. Those are two very positive points. Unfortunately, it does not provide the volume advantages. That means, bluntly, that the gas would be more expensive, as the great volumes going through the SNIP pipeline would be absent.

308.

Although British Gas and others have also made proposals for the north-west, the only show in town is Bord Gáis and Questar with their proposals in the north-west to supply Coolkeeragh power station, which would convert to gas. The main people behind the power station at Coolkeeragh are Electricity Supply Board Ireland (ESBI). However, ESBI, Bord Gáis and Questar are all working closely together. Neither of the projects, however, are economical. That is the bottom line. If they are to proceed, they will require a grant.

309.

The other word that comes to mind is postalisation. Just as posting a letter to different places costs the same amount of money, delivering gas to the various parts of Northern Ireland would cost the same. Rather than, for example, gas in Greater Belfast costing one amount, and in the north-west or south-east another, it spreads the load. It will require a combination of grant and/or postalisation, particularly with regard to the South/North or the south/east pipelines. The economics are particularly difficult. The north-west is not easy, but not as difficult.

310.

Mr McConnell: There are very complicated economic issues associated with these pipelines. We would be happy, if the Committee thought it helpful, to return to talk specifically on that matter, if that is the direction in which your inquiry takes you. We thought that it was important to let you know of the complexities involved.

311.

The Deputy Chairperson: That would be very helpful, as the Committee is very disappointed that the North/South pipeline did not go ahead. The Committee met with Minister O'Rourke on the issue. Time is not on our side, as Coolkeeragh's life is limited. How long would the South/North proposal take?

312.

Mr Beattie: Coolkeeragh really needs gas by 2004 at the latest. This could be done by bringing gas through the SNIP pipeline. It would be very difficult, although Bord Gáis and Questar feel that there is a slight possibility if the South/North pipeline goes as far as Derry. However, it is much more likely that the gas will be supplied to Coolkeeragh via the SNIP pipeline.

313.

When the SNIP eventually fills, additional compression can be added or it can be reinforced and enlarged. The private sector companies and the Department are considering whether it will be cheaper at that stage to strengthen the SNIP or to use a full South/North pipeline.

314.

Coolkeeragh could be ready in time using the SNIP if planning progresses reasonably smoothly. ESBI is pushing it particularly strongly. It is only eight days since we received the figures that we asked for. We are working closely with these companies, but it is very tight.

315.

Ms Morrice: Bearing in mind all the difficulties that you are facing, what percentage of your energy will be derived from renewable sources to help solve your problem?

316.

Mr McGeown: About 1·5% of electricity consumption comes from renewable sources. I think that the UK Government's target is to derive 5% of electricity from renewable sources by 2003, and 10% by 2010. Northern Ireland will be expected to play its part in helping to meet the overall UK target. Several schemes sprang from the former non-fossil fuel obligation (NFFO) regime. The Department plans to issue a consultation paper on renewable sources, probably at the end of April or the beginning of May. The aim is to seek the views of interested parties on how best to develop our renewable energy potential.

317.

Some work has already been done. In 1999 we published an updated assessment of our renewable energy potential which was carried out on behalf of the Department and Northern Ireland Electricity by the Energy Technology Support Unit (ETSU). It demonstrated that by 2010 perhaps 7·5% of our electricity could come from renewable sources. Furthermore, there was a collaborative project with the Department of Public Enterprise in Dublin which led to the publication of a report on offshore wind potential around the island of Ireland. The Committee should have received a copy. It seems that the greatest potential lies off the coast of the Republic, but there is some potential for Northern Ireland.

318.

Ms Morrice: What is the difference?

319.

Mr McGeown: The wind and the depth of the sea are factors. The wind potential off the west coast of Ireland is not particularly great, even though the next land mass is 3,000 miles away. As I said, it depends on the depth of the water - how big would the turbines need to be to touch the seabed? Theoretically it might be possible to source 7% of our electricity from offshore wind.

320.

We will publish a consultation paper to seek the views of interested parties on how we can meet the 10% target. Great Britain, under the Utilities Act 2000, has changed the mechanism used to promote renewable sources and has introduced a "renewables obligation". Each licensed electricity operator in Great Britain will shortly be required to supply a certain amount of its electricity from renewable sources.

321.

Whether Northern Ireland follows that lead or continues with the old NFFO regime will be addressed in the consultation paper, and we will seek views on that. What are the implications of trading renewable sources North/South and east/west? Certain renewable technologies can more or less stand on their own feet, land-based wind, for example; while others, such as energy crops, will require support. What support should be provided; should Government provide it; and how can it be provided?

322.

We will be seeking views on that before making a decision, and the Committee will receive a copy of our consultation paper. This might lead to the need for new legislation, and that is part of a separate exercise on our planned utilities legislation.

323.

Ms Morrice: I am very interested in that and would appreciate being kept closely informed.

324.

Mr Attwood: You said in your opening submission that the long-term generating contracts were a disincentive to the opening up of markets. The Committee has been told of the possibility of bonds to buy out those contracts. Can you give us a detailed update on where the Department and the industry stand with regard to the buying out of those contracts through bonds? How was the market in the North prejudiced by the awarding of long-term contracts when the industry was privatised? These long-term contracts have, after all, had a detrimental effect on the market in the North.

325.

Mr McConnell: That subject would warrant another very long session.

326.

Mr Attwood: When might the bonds be in place to buy out the contracts? Is this idea being floated to cover up or to explain away the embarrassment over long-term contracts being awarded in the first place - contracts which have been so prejudicial to the market and to the development of the industry in the North?

327.

Mr McConnell: When the contracts were signed they were not seen as prejudicial. The deal was not considered a bad one. At the time, some of my predecessors said that they received letters of congratulations for the deal; that it meant there would be no in real terms increase in the price of electricity in Northern Ireland. That electricity elsewhere would go down in real terms was not foreseen.

328.

Mr Attwood: Was a clause inserted into those contracts at the time of privatisation stipulating that even if the price of electricity collapsed it would make no difference to them?

329.

Mr McGeown: The original contracts consisted of two elements - availability payments and fuel payments. The power stations received payments for being available. Every day they told NIE that they had electricity ready to flow as and when NIE needed it, and they got paid for that. If they were dispatched they were called on to provide electricity. They used oil or coal and, in later years, gas. They were paid whatever price the energy had cost that day. That is how the contracts were made up.

330.

Perhaps the efficiencies of the station were higher than we had anticipated at the time of privatisation. However, prices in England and Wales have come down, and that was one of the unexpected factors. The contracts were placed in 1992 and they reflected the sale of the power stations and the money that the companies had to pay for them. They had to borrow money from financial institutions to pay for the power stations, and that had to be reflected in the level of availability payments in the contracts.

331.

If the money received for the power stations had been less, perhaps the level of the availability payments provided under the contracts would subsequently have been less. However, those were the prices that the stations were sold for in 1992. That is the background to these contracts. The contracts for the two main stations, Ballylumford and Kilroot, were obviously long-term. The other two stations, Coolkeeragh and Belfast West, have more or less come to the end of their useful natural life. Their contracts expire in 2004.

332.

Mr McConnell: With the benefit of hindsight, it is quite clear that the power stations were sold for too much. They were too expensive, and the companies taking them on also took on the financial liability of that high charge. That is what we are all paying for at commercial borrowing rates. The idea of the bond is to find out if we can refinance that debt over a longer time and, by backing the bond with legislation, get it at a lower rate of interest.

333.

The Deputy Chairperson: I see this meeting as an appetiser, because these are clearly major issues. I suggest that we have a more substantial meeting with the Department. There are a number of other questions to be asked this morning, but time is against us. We will supply the Department with copies of those questions and we hope to get written responses in the near future. I am sorry, but we must stick to the timetable.

334.

Dr McDonnell: Speaking for myself, I welcome any information, because this is one of the biggest bones of contention that most public representatives deal with.

335.

Mr McConnell: Collectively or individually, we are happy to talk to anyone.

336.

Mr Wells: The companies - the big bulk users - are getting colossal price increases due to these contracts. In this year the price of gas in the open market has gone up, and I would love to spend at least half a day on this at some stage.

337.

Mr McConnell: We are at your disposal.

ADDENDUM TO MINUTES OF EVIDENCE
Department of Enterprise, Trade and Investment

Q. Energy market strategy - progress, consultees and timeframe?

A. The energy market strategy is intended to set the scene for the next decade and beyond. It needs to address all aspects of energy and, as the Minister indicated in his statement to the Assembly on 5 March, its development will emerge from a process which is both collaborative and consultative.

The Department intends that there should be full consultation during the course of the process. The Minister has also indicated that this Committee's report will provide valuable information for shaping the strategy.

It is anticipated that consultation exercises will cover the following areas:

(i) consultants have already been appointed to report on the energy markets in Northern Ireland and the Republic of Ireland, and to make recommendations regarding an all-island energy market. A public seminar on the emerging findings is planned for early June;

(ii) the Regulator has been asked to prepare and publish a consultation paper on opening the market and stimulating competition - this will issue shortly after Easter;

(iii) the Department intends to publish a consultation paper on renewables;

(iv) there will be consultation on the draft strategy and accompanying legislative proposals, and on equality impact assessments.

The Department believes that the December 2001 target is tight but achievable. However, priority will be given to realistic periods for consultation.

Q. By Summer 2001 to appraise private sector proposals received for South-North gas interconnection and for a gas supply to the North West?

A. This PfG action point is on target.

Initial proposals have recently been received from Bord Gais and Questar, an American gas company for a South-North gas interconnector and a gas pipeline to the North West.

These proposals are currently being assessed by DETI and the Gas Regulator.

The South-North pipeline could improve the security of supply of the Northern Ireland gas industry and facilitate the supply of gas to towns on the route of the pipeline.

The pipeline to the North West would provide gas for a new gas fired power station at Coolkeeragh and could also provide gas to Antrim, Ballymena, Ballymoney, Coleraine, Limavady and of course to Londonderry.

However neither project is economically viable and grant support and changes to the gas regulatory regime would be required.

Q. By September 2001, seek to secure NIE/ESB agreement to action to address the conclusions of a joint feasibility study into further interconnection between their networks.

A. This PfG action point is also on target.

Three complementary electricity interconnection projects were supported in the NISPD 1994-1999 with the aim of increasing transfer capacity between the two systems, allowing for trading on an all-Ireland basis, and mutually reinforcing the NIE network in the West of Northern Ireland and the ESB network in the North West of the Republic of Ireland. The 3 projects are all underway and due to be completed in the Autumn of this year. Building on these improvements NIE and ESB are currently engaged in a feasibility study - supported by EU funding - on the need - within the context of the proposed all-island electricity market and the liberalised EU market - for further interconnection between their networks. Outside consultants have been appointed. Various options, including a possible second main interconnector, are being examined.

Q. The Department's written submission refers to the Minister Sir Reg Empey and his counterpart Mrs O'Rourke having a second meeting to discuss an all-island energy market on 8 September 2000. Annex 3 states that the Ministers meet regularly on energy issues. How many meetings have taken place to date specifically on the issue of the all-island energy market?

A. Sir Reg and Mrs O'Rourke met on 7 December 1999 and 8 September 2000 specifically to discuss an all-island energy market. The Ministers also met on 11 February 2000 when the energy markets were also discussed. The Ministers have also been in contact by telephone.

The Ministers will again meet in early June when the initial findings of the consultants carrying out the all-island energy study will be presented at a conference in Belfast.

Officials from DETI Energy Division and the Department of Public Enterprise meet on a monthly basis although this month's meeting did not take place due to the foot and mouth situation.

Q. Is there a detailed timetable available for the full implementation of Vision 2010? Are there any aspects of Vision 2010 that are not progressing as expected?

A. Vision 2010 will effectively be overtaken by the new energy market strategy, and implementation of any legislative proposals associated with it. Key dates for this process are as follows:-

April 2001 the Regulator will publish a consultation paper on market opening and stimulating competition in the energy market.

May 2001 the Department will consult on renewables.

June 2001 emerging findings on an all-island energy strategy will be considered at a major conference.

September 2001 the EU Gas Directive will have been implemented.

Autumn 2001 the Department will consult on a draft strategy and accompanying legislative proposals.

The most disappointing aspects of Vision 2010 have been industry's response to energy efficiency and use of Combined Heat and Power. The Department has sought to redress this by putting in place a comprehensive programme of energy efficiency measures and has held a seminar on Combined Heat and Power.

Q. Action Point 1 refers to the fact that a formal Steering Group, as suggested in Vision 2010, has not been created. Why was it decided not to create a formal Steering Group?

A. The concept of an all-island energy market is being actively considered both at Ministerial and official level. Consultants have been appointed to consider this matter and have publicly invited comments from all interested parties. The consultants' emerging findings will be presented at a major conference in June. Discussions with the Regulator, the energy industry, consumer representatives and social partners are taking place.

There has not been a pressing need for a formal Steering Group to stimulate consideration of an all-island energy market. The suggestion, however, remains an option following completion of the consultancy exercise when the implications of all-island recommendations are being addressed in the context of developing the new energy strategy and for any legislative provisions which may be necessary.

Q. Action Point 4 refers to the conclusion of the Ballylumford buy-down concluded on 6 December 2000. In the context of this arrangement Ballylumford is converting to modern Combined Cycle Gas Technology (CCGT) which should after 2002 result in significant fuel efficiency savings with a consequent downward impact on prices. The Kilroot buy-down is in its final stages. What measures are being proposed as a result of this arrangement to provide cheaper electricity?

A. The Regulator has advised that it is not possible to predict the extent to which the Ballylumford CCGT project will reduce prices below what they otherwise would have been. If fuel prices remain high, prices will be considerably lower and if fuel prices fall savings will reduce proportionately. With the existing technology at Ballylumford and gas prices at 24p per therm the annual fuel bill would be £118m - that bill, assuming the CCGT operated to full capacity, would fall to £68m, an annual saving of £50m. The equivalent figures for gas prices at 16p per therm are £79m and £45m, a saving of £34m.

The other Ballylumford costs are not so vulnerable to change - these costs will in fact increase in the short to medium term to help meet the costs of the buy-out by 2012. Thereafter customers will have a modern efficient CCGT, whose costs have been largely met, whereas they would have had to meet the cost of replacement generation at that date.

The Regulator has undertaken to publish each year a statement on the impact of the changes in prices which are the result of the Ballylumford contract charges.

Turning to Kilroot the planned buy down of existing availability payments by means of a £30m contribution from the Support Fund is expected to be finalised shortly. The taxation issue mentioned in the DETI submission of 31 January 3001 has been resolved satisfactorily. As part of the Regulator's effort to achieve a more radical restructuring of the generation contracts Kilroot have submitted a set of proposals, including conversion to orimulsion, to OFREG. The Regulator has calculated that the full value of the Kilroot proposals could be worth £30m per annum in benefits to NI customers. This is dependent on relative fuel prices and on the ability of Kilroot to sell its entire output.

Finally, it should be added that Ballylumford and Kilroot are both contracted to the NIE Power Procurement Business (PPB) and therefore sell to the franchise (domestic and small business users) market. PPB's generation costs are passed through to customers so any reduction in those costs arising from the Ballylumford and Kilroot proposals will be passed through in full to customers.

Q. Action Point 6 refers to a delay in the preparation of Regulations to implement the Gas Directive in Northern Ireland. Are these Regulations likely to be available to the Committee for consideration in the current inquiry?

A. Due to their very heavy workload, Departmental lawyers have not yet cleared the draft Regulations to bring the Gas Directive into operation in Northern Ireland. However, the draft Regulations should be ready soon and will of course be forwarded to the Committee for consideration. Indeed there will be wide public consultation.

However it is important to note that Northern Ireland currently complies with most of the requirements of the Directive.

The main purpose of the Directive is to gradually open the gas markets in EU Member States to competition. The current requirement is to have 20% market opening, and to increase to 28% by 2003, and to 33% by 2008.

In Northern Ireland 90% of the market is already open to competition so we are way ahead of the requirements.

The Regulations will cover those areas where change to existing legislation is required and will include:

(a) procedures to be followed if licence applications are refused;

(b) unbundling of gas company accounts; and

Q. Action Point 9. Can the Department provide details of funding available to promote research and development in the areas of renewable energy? Can the Department advise how many applications for Fifth Framework funding have been generated in the area of renewable energy in Northern Ireland?

A. Up to the end of December 1999, DETI's Energy Demonstration Scheme assisted renewable energy projects which were not yet commercially proven. The Scheme assisted wind, hydro and biomass gasification projects. The Scheme was funded under the European Regional Development Fund (ERDF) and when a further tranche of funding is received, it is hoped to reintroduce the Scheme.

Currently the main assistance for research and development in renewables is the Department of Trade & Industry's New and Renewables R&D Programme which applies to Great Britain and Northern Ireland.

Under the first round, 3 Northern Ireland projects were grant aided to the extent of almost £2.3 million against project costs totalling £4.2 million.

After the first round, the DETI held a seminar at the end of 2000 to promote take up of the R&D programme.

Under the second round, 6 applications were made by Northern Ireland companies and organisations and the applications are currently being evaluated by DTI.

Fifth Framework Programme

Five successful renewable energy related applications have been made under the Fifth Framework Programme drawing down total funding of £367,424.

The 5 projects all by the University of Ulster are:

COCON: Hybrid System for CO2 conversion by solar energy in a photo-chemical device - £109,370.

Sewage sludge gasification for Combined Heat and Power (CHP) applications - £171,779.

EIWU: Efficient industrial waste to energy utilisation through fuel preparation and advanced Boiler Fluidised Bed combustion - £73,088.

EnerBuild Thematic Network - £3,660.

CLEANSTEER: Steering group for clean electricity and heat production with co-utilisation of biomass and coal and reduced carbon dioxide emissions - £9,527.

The 1st project was submitted by the Centre for the Built Environment. All the remaining projects were submitted by the Northern Ireland Centre for Energy Research and Technology (NICERT), which is one of the 18 leading edge, industrially focussed R&D Centres of Excellence IRTU established under the last tranche of EU Structure Funds.

NICERT's successful participation in FP5 is good for Northern Ireland given its close links with local companies. However, the Industrial Research and Technology Unit (IRTU) is eager to encourage local SMEs in particular to participate more fully in FP5. IRTU's European Directorate, IRTU Europe, therefore hosted an 'Energie Information Day' on 24 January which included speakers from DTI, the UK Energie Helpline and NICERT itself. The event was well received and attended by thirty six delegates, with encouragingly an approximately 50:50 split between delegates from companies and the universities.

Following on from the seminar, the Centre for the Built Environment is looking to submit an FP5 energy related application along with a local SME, Toughglass Limited. IRTU Europe is working closely with the Centre to help maximise the application's chances of success.

Q. Action Point 9. In the drive for sustainable development and a reduction in greenhouse gas emissions new opportunities are arising for industry. The Secretary of State for Trade and Industry has referred to these opportunities in terms of the "Green Industrial Revolution". It is estimated that the value for environmental goods and services will double from its current level of 335 billion dollars by 2010. At a recent Greenpeace conference Stephen Byers went on to comment that, "the renewable energy industry has a potential market worth of up to £1 billion per year by 2010". Does the Department intend to develop a specific strategy to ensure Northern Ireland is able to take maximum advantage of the "Green Industrial Revolution"?

A. Departments in Northern Ireland have been active for some time in promoting the potential market for environmental goods and services. For example, in 1993 the then Departments of Economic Development and the Environment published a report on such opportunities entitled "Growing a Green Economy". This work has been given greater emphasis in recent years as concern about global warming has grown.

Currently a number of Northern Ireland companies are taking advantage of the opportunities. These companies include Harland and Wolff who are involved with off-shore wind and wave equipment, Thermomax with their solar panels, B9 Energy and Rural Generation with combined heat and power applications for biomass.

As recent reports demonstrate the potential market for environmental goods is very significant indeed and it is important that the private and public sectors work together to identify and exploit the new opportunities which are arising. The IDB, LEDU and IRTU are all active in these sectors.

Q. Action Point 10. What efforts are being made by the Department to promote energy efficiency measures in industry?

A. DETI Industrial Research and Technology Unit (IRTU) provides a range of services including: -

n management of Energy Efficiency Best Practice Programme in N Ireland;

n provision of advice and information;

n site specific energy audits by approved consultants;

n design advice, energy efficient design consultancy, on building projects;

n organisation of free energy efficiency seminars;

n provision of free tailored energy efficiency training workshops; and

n interest free loans of up to £30,000 for manufacturing companies and £25,000 for non-manufacturing companies to support energy efficiency measures with simple paybacks of 5 years or less.

The Minister also announced in his statement to the Assembly that IRTU would receive a further £0.9m from the work of the Carbon Trust in Northern Ireland. This will enable research and development to be carried out into new energy efficiency technology in addition to promoting energy efficiency itself. The Carbon Trust was launched on 20 March 2001.

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MINUTES OF EVIDENCE

Wednesday 28 March 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mr Clyde

Mr McClarty

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Prof B Norton ) University of Ulster

338.

The Chairperson: You are very welcome. We have your submission and wish to ask a number of questions. We are very constrained by time, and we must have your submission and our questions completed in half an hour. Please take a few minutes to summarise your submission.

339.

Prof Norton: The earlier delegation was somewhat larger, so I can be more brief. You have received the written evidence, which I shall not go through again.

340.

The crucial part of my evidence is that energy policy in Northern Ireland has been focused on supply rather than demand and on price rather than cost. To explain that in more detail, the focus has been on the production of electricity and the supply of gas rather than on the efficiency with which they are used by the consumer. If one pays attention to the efficiency of end use, including efficiency devices and the insulation of buildings, the amount of energy consumed at the point of end use declines, as does the cost of energy to the end user, irrespective of its price.

341.

The crucial part of the message is that, as part of a coherent strategy, we must be much more focused on (i) end-use efficiency; the efficient use of energy and (ii) the substitution of energy at the point of its distributed end-use by renewable resources. Linked issues include viewing energy as part of joined-up thinking encompassing such issues as urban planning and building regulation rather than the narrow context of production and distribution issues surrounding electricity and gas

342.

The second part of your initial enquiry regarded the distribution of gas. It is essential that the gas network be extended to mid-Ulster (the Craigavon area) and the north-west, both to reduce environmental emissions from the use of other fuels and also, more importantly, to prevent the de-industrialisation of those areas, since energy-intensive industries will move to districts where gas is available.

343.

Finally, there is a need for measures to develop an indigenous renewable-energy industry in Northern Ireland. As I outlined in my written evidence, we already have the base for such an industry. However, there must be pro-active measures to encourage the possibilities of that sector. Rather than reiterate what I have written, I shall stop there.

344.

Dr McDonnell: I do not wish to go too far, but are you suggesting that we are grossly inefficient in our end use?

345.

Prof Norton: One would need to define "grossly", but against international norms, we could certainly achieve efficiency gains across the piece - I shall not go into the technical details - of some 20%, which would consist entirely of commercially-viable initiatives. These are not undertaken; they require a public- information exercise - not only with household energy, but also in the field of industrial energy consumption. Our norms, defined as engine consumption per unit of industrial consumption, are higher. We should need to define "gross" for an answer, but 20% more efficient is the figure I have in mind.

346.

Dr McDonnell: On point 2 of the written evidence, how can incomplete knowledge of the consumer be addressed? Could the demand for more economical and environmentally sensitive energy supply be consumer-led?

347.

Prof Norton: There are examples, particularly in the Netherlands, Germany and Austria, where that has indeed been the case. The greatest per-capita use of solar water heaters in Europe, for example, is not in Greece, as one might guess, but in Austria. The reason is consumer pressure, which evolved during the earlier stages of the environmental movement (the "green" movement), so this is now a major public issue. Solar heaters are used to produce hot water, and that greatest use of those is in Austria (which is not one of the sunniest places in the world) is an example of where consumer pressure has led to the creation of an industry. There are other examples of where that has happened and I see no reason why, with the appropriate drivers, it could not happen in Northern Ireland.

348.

Mr Wells: What is your view of the energy action plan included in the Vision 2010 statement?

349.

Prof Norton: It is too focused on electricity supply and gas supply, rather than energy efficiency. We have two pressures. For reasons of economic development, there is a pressure to seek low energy costs, but this is opposed to the pressure to reduce the emissions of energy use to create environmental sustainability. To reconcile these factors, one needs to ensure that end-use efficiency - the insulation of buildings, process efficiency, et cetera - is as high as possible. This will result in lower energy use and lower energy costs. The focus on supply systems and the distribution of gas is only part of the picture.

350.

Mr Wells: Do you feel that the 2010 document does not address those issues at all?

351.

Prof Norton: Not with any detailed plan. The focus is in other areas.

352.

Mr Attwood: During our earlier evidence session with the Department officials we began to discuss the award of long-term contracts when the industry was privatised. Bonds to buy out those generating contracts to reduce costs are still being discussed. This relates to one of your earlier themes about the difference between price and cost. Are you familiar with that history?

353.

Prof Norton: I am familiar with the history of it.

354.

Mr Attwood: This will impede the development and the cost of the industry in the North over a long period of time. Unless it is corrected, it will always be there. Do you have any observations on what happened in the past or how the Department can exit what has developed over the past number of years through a bond proposal?

355.

Prof Norton: Legislative change would be required to exit this framework. The present framework does not have an exit strategy, and the situation will continue to worsen under the present arrangements. It is in the power of the Government to make legislative changes to effectively regulate the industry in a different way and to impose different obligations on various people. Without legislation - and I follow the minutiae of this issue - people are working within a set of constraints. Fundamentally, Northern Ireland consumers are paying for the costs of privatisation and for the return on investment expected by those who put money into it. One cannot make changes to the contract in that context unless that contract exists in a different legislative framework.

356.

Mr Attwood: If no legislative changes are made to the bond situation, why would the situation get worse?

357.

Prof Norton: It may not get worse. However, if the economy expands while the present situation exists, the circumstances will apply to a larger number of people. As the scale of the economy increases, more activities will be impeded.

358.

Mr Attwood: Is there any indication that the award of these contracts has been a disincentive to economic growth?

359.

Prof Norton: It would be difficult to disaggregate the effect of that from many other factors in the Northern Ireland economy. Among the overwhelming factors in economic growth would be the nature of industrial mix, end productivity and other issues. Energy costs are not the dominant factor for most Northern Ireland industries. Labour costs and labour productivity in the Northern Ireland economy might be a greater factor. However, I could not give you chapter and verse on that; there are others who would have far more expertise.

360.

Mr Neeson: Professor Norton, I would like to discuss the natural gas situation. Do you have any views on the current strategies and levels of infrastructure investment in the gas pipelines, bearing in mind that the situation seems very fluid at present?

361.

Prof Norton: It is very fluid. My view, as expressed in the written evidence, is that there needs to be a greater use of gas in heat-intensive industries in Northern Ireland, as a means of meeting targets that the UK Government has said will be met to reduce CO2 emissions. The only way of doing that in the short term is through the greater use of natural gas. That is one reason.

362.

Another reason is that there are energy intensive industries - and I know this from having talked to the people concerned in the north-west and in mid-Ulster, who are seriously contemplating moving to areas where natural gas is available. Energy is a big part of their costs, and they are not in a competitive position. If you are in a sector that already has problems - for example, textiles, food processing, et cetera - anything that you can do to reduce your costs is a sensible option. In those sectors, it is natural to renew your plant every three or four years, therefore the idea of moving is not a particularly big change.

363.

These are two strong reasons why major infrastructure investment is needed in the form of a full extension of the natural gas system in Northern Ireland - probably underpinned by European Union money.

364.

Mr Neeson: The officials who were here before you stated that it would also be necessary to have a postalisation principle in relation to charges to consumers. Would you go along with that?

365.

Prof Norton: Yes, I would agree with that.

366.

Ms Morrice: I am fascinated by what you said about renewables, the direction that you are taking, and the fact that the strategy plan does not address this properly. I would like you to expand on three points: first, why have Government officials taken so long to wake up to the needs of this area; secondly, do you think that we will be able to reach the target of 10% of supply from renewables by 2010; thirdly, which types of renewables would you advise us to opt for?

367.

Prof Norton: I cannot make any useful comment on why the Government have not picked up on these issues. From a UK perspective, the Northern Ireland energy policy was a subset of a national policy that was dominated by the ready availability of natural gas from the North Sea. That enabled targets for CO2 emissions to be readily met. The so-called "dash for gas" meant that other countries that did not have gas had to seek other strategies to reduce their CO2 emissions and that involved rapid investment in renewables. In the UK gas was used, but the role of gas has now reached a plateau and we also now need to move onto renewables. Because historically, Northern Ireland policy was merely a subset of UK policy, that was perhaps the rationale for the lack of movement, because there was not the same imperative as there was in other countries.

368.

On the issue of the 10% supply through renewables by 2010, you are all aware that I chair the Eco-Energy Trust, which is the trust for electricity consumers with NIE who pay more to have "green" electricity. It is interesting to note that the take-up of that in Northern Ireland is the highest in the UK. Addressing Dr McDonnell's earlier point, this shows that there is interest. People are being asked to pay more in order to have "green" electricity and invest in wind turbines, and there is a greater take-up of that in Northern Ireland than in anywhere else in the UK. So there is evidence of latent demand, consumer interest, and market pressure.

369.

There needs to be a lot more publicity and incentive. We need to get to a position in which "green" electricity is cheaper than "brown" electricity and, if the appropriate regulatory framework existed, one could put the onus for achieving that on the utilities.

370.

I would be sceptical about our chances of achieving a 10% supply by 2010. I think we will fall short of that. However, I might be able to address this point more fully in my response to your next question. At the moment in Northern Ireland renewable energy is mainly focused on wind energy that is linked to the grid. There is also an opportunity for biomass generation into the grid, and it should be explored. There are also opportunities for photovoltaics, which are integrated into buildings and generate electricity directly from solar energy. These can all provide ways of supplying electricity into the grid.

371.

More importantly, there needs to be an encouragement of the decentralised demand-side use of renewable energies. A little-known fact is that an appropriately sized solar water heater in un-sunny Northern Ireland would provide 40% of the annual hot water requirement of a typical dwelling. As long as we can get the economics right there are distributed uses of renewable energy that should be encouraged. We have an indigenous manufacturer of that type of technology in Northern Ireland - Thermomax Ltd in Bangor.

372.

Greater use of renewables is about extending the provision to the grid and, more importantly, taking measures that encourage the demand-side use of renewable energy, particularly in rural areas where grid extensions and development are more difficult.

373.

Mr McClarty: Hydroelectric power accounts for a high percentage of electricity generation in the Republic of Ireland. Do you think that large-scale hydroelectric projects are feasible in Northern Ireland?

374.

Prof Norton: They would not be feasible. The number of sites available is limited and there are more economically viable options, for instance, the wind-energy and biomass options.

375.

The focus has been on large-scale supply into the grid. There is the issue of small-scale hydroelectric production from rivers and streams that could supply electricity to local areas. Decentralised supply is virtually unknown in Northern Ireland, yet we have the type of dispersed geography and resources that favour it. As far as small-scale hydroelectric production is concerned, there is considerable untapped potential. There are very small initial investment costs, and obviously very low levels of production. However, if you are looking at farms, villages, and rural areas then the potential is substantial. The distribution costs are much lower than those of large-scale hydroelectric stations, the latter would be less viable and results in the loss of sites that are often in protected areas such as those of special scientific interest.

376.

Ms Morrice: What about tidal energy?

377.

Prof Norton: Tidal energy would have to be considered carefully. The best tidal reaches would be in areas such as at the mouth of Strangford Lough. One would need to be careful about the impact on the environment, the fisheries and tourism. They are worthy of further investigation.

378.

If we are taking a strategic approach rather than a technological one, we would begin by increasing insulation standards. In new buildings, insulation should be twice the current level, because those buildings will be here for 50 years and during that time, insulation standards will increase. Why not insulate them to the new levels needed and make that impact now. We should start with measures to get the use of renewable energies, such as wind and biomass, into the grid and then look at options that are very site-specific and quite difficult. There has to be a clear strategy and pecking order.

379.

Dr O'Hagan: You referred to solar energy and you mentioned Austria. It is probably very technical but could you briefly tell us how a climate such as ours would be an economically viable resource? Is there any estimate available of the value to the market in trading the ability of the North of Ireland to generate electricity from renewable sources?

380.

Prof Norton: Regarding the first question, it is a technical area and I have written a long textbook on the subject. I would not want to reiterate that. Essentially, there are three ways in which solar energy would be of use in the North, particularly with the climate and energy use in Northern Ireland.

381.

The first is by the design of buildings, such that they are orientated more to the south. When there is more glazing on the south, and less on the north, the building itself is a solar collector. Upwards of 60% of the space heating requirement of a building - rather more, in some cases - could be met by that means. In other words, the heating load would be displaced. The energy is collected during the day and it remains in the building fabric so that the heat load in the evening is lighter. This is known as passive solar design, which involves the design, layout, orientation and insulation of buildings themselves.

382.

The next is the production of hot water through a solar water heater. That is essentially a glazed element - enclosing a plate rather like a radiator but somewhat thinner. It is plated glazing and aqueous antifreeze solution flows through the plate, and essentially produces hot water from the sun as a pre-heat to the water supply. Solar energy comes in two forms: direct sunlight, which is what you get when you sit out in the sun on a sunny day, and diffuse light, which is what we have today - cloudy skies. Solar energy collectors and passive solar design, as described, collect diffuse light. They work under cloudy conditions and that is not appreciated. It is thought that a sunny place is needed to obtain solar energy. In high latitudes there are very long days of diffuse light in summer, and we therefore have more opportunity to displace heating loads than someone in a more southerly latitude would have. That is quite a surprising conclusion.

383.

The final method is photovoltaics. These are technical semi-conductor products which directly convert solar energy to electricity. There have been considerable advances in developing those systems for building facades, and a number of companies now manufacture such products. A building can be cladded in these, and electricity will be generated automatically. The issue, frankly, is their cost by comparison to that of other forms of electricity. At present it is somewhat higher, but technical developments under way mean that it is reducing all the time. As a cladding material it is, in any case, cheaper than a number of other materials. I do not want to go into more detail - I know time is limited - but there is a lot more to it than I have said.

384.

I do not think I can make a useful comment concerning the market. I could calculate an estimate of market turnover, but I do not have the figure to hand.

385.

The Chairperson: I would like to thank you, both for your submission and for your answers to our questions. There may be some need to write to you for some follow-up as we proceed. We have some unanswered questions, because we are very constrained by time, and we will forward those to you. Thank you.

ADDENDUM TO MINUTES OF EVIDENCE
university of ulster

Q. Point 8. What is the practical difference between "including an efficiency factor in the regulated prioritised utilities regulation formula" and "greater efficiency in electricity generating plant"?

A. The latter refers to the technical behaviour of all plant whilst the former means that priority is given to the most efficient plant when deciding at any moment in time which generators supply the grid.

Q. Point 10. The capital cost of electricity is lower with centralised facilities, however, the cost advantage is offset by transmission and distribution costs. Approximately which percentage costs are associated with transmission and distribution?

A. Approximately 40% of cost is associated with transmission and distribution.

Q. Point 12. Have any studies been carried out on the potential for the renewable energy product industry in Northern Ireland?

A. I did an informal unpublished study in 1999 that fed ultimately into the Engineering Panel report for the NIGC/IRTU NI Technology Foresight. The comments in section 12 of my written evidence drew from this work.

Q. Point 13. 'A conservative estimate on transport externalities of £0.09 billion in Northern Ireland'. Could Professor Norton achieve how this figure is calculated?

A. This is an empirical extrapolation of Northern Ireland of UK national figures (see Maddison D, Pearce, D, Johansson, O, Culthorp, E, Litman, T and Verhoef, E (1996) "Blueprint 5: The True Costs of Road Transport" Earthscan, London).

Q. Point 14. What is Professor Norton's view on the Regional Development Strategy 'Shaping Our Future' in this context?

A. 'Shaping Our Future'; if it is to become the agreed policy is certainly a viable framework for detailed implementation. However, there are some potentially worrying signs that real development is taking place despite, rather than because of, the imperatives of "Shaping Our Future". What is required is a consistent strong regulatory/planning system that provides a "level playing field" for developers and obtains a private sector "buy-in" to sustainable development.

Q. Renewable energy presently constitutes 1.9% of energy supply in the Republic of Ireland. This compares to a level of 1.5% in Northern Ireland. Would Professor Norton compare favourably the approaches to promoting renewable energy in Northern Ireland and the Republic of Ireland? What more can be done?

A. It is a fact of climate that the Republic of Ireland has a larger wind energy resource than Northern Ireland and has been able to develop hydroelectric resources.

In Northern Ireland there needs to be detailed (i.e. by renewable energy type and locality) plan to identify how the potential renewable energy resource may be utilised both by centralised (grid-connected) and decentralised (solar hot water, passive solar design) options. There need to be mechanisms in place to ensure that projects proceed without unreasonable delay.

Q. Point 15. Could Professor Norton outline some example of international best practice in energy efficiency measures adopted in design and construction? How can a less conservative design and construction client culture be effectively implemented?

A. There are too many relevant examples of best practice that it would be insidious to highlight any in particular. I would instead wish to refer the committee to two books: (i) A McNicholl and J Owens "Green Design: Sustainable Building for Ireland, 1996, Stationery Office, Dublin, and (ii) S R Hastings (ed) Passive Solar Commercial and Institutional Buildings: A Sourcebook of Examples and Design Insights, 1994, J Wiley and Sons, Chichester.

A less conservative design and construction client culture may be developed via tighter technical regulatory requirements and greater public visibility (via prizes and awards) for successful outcomes.

top

MINUTES OF EVIDENCE

Wednesday 4 April 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mr McClarty

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr H McCracken )

Mr D Burnett ) Northern Ireland Electricity

Mr A McCrea )

386.

The Chairperson: Good morning. You are very welcome.

387.

Mr McCracken: Thank you for giving Northern Ireland Electricity (NIE) the opportunity to give evidence to the Committee.

388.

Mr Burnett, the power planning manager of NIE, has been closely involved in the administration of the generator contracts. Mr McCrea, the environmental manager, is responsible for NIE's eco-tariff, fuel poverty strategy and energy efficiency schemes.

389.

Northern Ireland's problem is now well recognised - the generator contracts agreed at the time of privatisation. The measure of that problem is that generation costs in Northern Ireland are 40% higher than those in Great Britain. That is well documented by NIE and the Office for Regulation of Electricity and Gas (OFREG). If that differential were removed prices to domestic customers could fall by 20%.

390.

However, there are technology and fuel diversity constraints. For as long as I can recall Northern Ireland's electricity costs have only been comparable with those in Great Britain under subsidy arrangements. Therefore what Northern Ireland is facing today is not a new phenomenon. It is a problem that has been increasing in difficulty over the years.

391.

The costs that Northern Ireland faces today under the generator contracts will remain until 2012 when the main contracts are due to expire or until any earlier cancellation date. The recent generator contract restructuring at Ballylumford Power Station has introduced a more efficient and environmentally friendly plant - laudable goals - but it has played a negligible part in bringing down prices. That will not happen until the expiry of the contracts in 2012.

392.

It would cost £500 million to bring the industry's contracts down to competitive levels. NIE's charges have made a major contribution to holding prices in Northern Ireland at least. The graph on page 7 of NIE's written submission shows that since privatisation in 1992 costs have reduced by 41% per unit.

393.

NIE has invested £650 million in improving the network infrastructure in Northern Ireland, and much of that was required to address the infrastructure deficit of the 1970s and 1980s. That deficit has been reflected in many other services in Northern Ireland. There has been no suggestion in Northern Ireland of any constraint on economic growth due to deficits in the electricity infrastructure. NIE intends to ensure that that remains the case.

394.

Market opening has provided the opportunity for the larger customers to contract with alternative suppliers. However the Confederation of British Industry (CBI) states that that is not a cost-effective route and one that has only delivered minimal benefits up to now. Their ability to contract for more cost-effective generations is constrained by the limited amount of uncontracted generation capacity available in Northern Ireland or the Republic of Ireland.

395.

Additional interconnection to the Republic of Ireland would facilitate a closer integration of the markets in the two jurisdictions and it would provide the opportunity for a larger single market with a more competitive dynamic and economy of scale. NIE supports that.

396.

The introduction of the electricity interconnector with Scotland that is due for commissioning this December will provide access to alternative and more competitive generation for the first time. That is the one great hope that NIE has for the near term to bring competitive generation prices into the island of Ireland - not only to Northern Ireland but we can wheel it across the Northern Ireland transmission system and deliver it to the Republic of Ireland as well.

397.

However, the caveat is that further market opening carries the risk of leaving an increasing share of the burden of the present contracts with domestic customers. Therefore, a solution to the high cost of the contracts is required before further market opening can be facilitated.

398.

Renewable energy sources could provide some 7% to 8% of Northern Ireland's electricity needs. This figure comes from the Department of Enterprise, Trade and Investment's report, in which NIE was involved. A caveat to that is that half of that 7% to 8% comes from waste. It is arguable whether waste can always be regarded as a renewable source or not.

399.

In the present circumstances, it is hard to make a case for renewable energy's adding to the burden of cost carried by electricity customers in Northern Ireland. Alternatively, NIE's eco-tariff provides a choice for customers who wish to support green energy without burdening the general body of customers.

400.

The introduction of the climate change levy will almost certainly create a market opportunity for renewables. Our view is that renewables should be encouraged where they can compete with conventional energy sources. However, we feel that energy efficiency initiatives should receive at least as much attention as renewables. Again, an all-Ireland market for trading renewables provides an opportunity to promote their use throughout the island.

401.

With regard to gas, linking the infrastructure of Northern Ireland and the Republic of Ireland would give an increased security of supply with potential diversity in sourcing gas supplies. NIE's view is that an early extension of the gas industry in Northern Ireland based solely on private sector investment is unlikely.

402.

Electricity customers already fund a large portion of the cost of gas connections with Scotland and investments in emissions' abatement via the generator contracts. We advocate no further imposition of costs of this nature on electricity customers, either via postalisation of new gas pipeline costs or the application of further emissions' abatement legislation in Northern Ireland in advance of absolute need.

403.

To sum up, I want to indicate what NIE thinks is a way forward. The Committee members have heard this before. We think the generator contracts can be refinanced over a much longer time. This route will require a legislative underpinning of the buy-out instrument, which would then be repaid by customers via a levy. It would entail buying down today's contracts to competitive levels, thereby giving relief to today's customers and allowing a competitive electricity market to prosper in Northern Ireland.

404.

We also think that interconnection and a larger all-Ireland market will bring opportunities for increased private sector involvement in the energy markets, that is, electricity and gas in the North and the South. We also advocate at least the study of further interconnection between Northern Ireland and Southern Ireland. I am referring there to electricity interconnection.

405.

Dr O'Hagan: The subject of the generator contracts has come up before. Last week we met with officials from the Department. It is very clear to people - and it has been for some time - that, to put it mildly, we got a very bad deal out of that. The public here in the North of Ireland is paying for that now, and it is obviously contributing to the higher costs.

406.

You said in your submission that the level of proceeds received by the British Treasury from the sale of the electricity generators was approximately twice that received from the sale of similar plants in Wales. How did this come about?

407.

Mr McCracken: Presumably, part of that answer must come from the officials themselves. There is no doubt that at the time there would have been a feeling that the proceeds from the sale of the industry should be maximised. I assume that that was Treasury pressure. I can only assume that the Government's advisors at the time also said that sale of the plant at this level was indeed possible.

408.

Perhaps too there was a slight twist to it and maybe it was not well calculated then. There was a view that electricity prices in Northern Ireland should rise to their long-run sustainable level, and this concept was created by those who were advising then. The long-run sustainable level was to equal the cost of new generating plant entering the market. So the supposition was that the prices in the market would rise over time to pay for the investment in that new generating plant. It was a combination of those factors.

409.

Mr McClarty: The approach towards dealing with generator contracts has been a voluntary one. Does NIE have any view on how contracts may be reviewed and generation prices lowered?

410.

Mr McCracken: We have been working on the subject of renegotiating a number of the contracts for quite some time. There were relatively minor amendments to the contracts with Coolkeragh and Belfast West. I do not want to minimise the effort that went into doing that by the power stations and ourselves. It was worthwhile, and amendments to the contracts provided real and tangible benefits to customers. Compared with the totality of the problem that we face they did not, however, make a considerable impact. The main contracts that we need to renegotiate are those associated with Ballylumford and Kilroot and the long-term one for British Gas to supply Ballylumford, which is known as the LTI3 contract. The bulk of the uncompetitive costs lie there.

411.

We have been looking at this for probably four years now. About four years ago there was a proposition from OFREG that if nothing arose from the voluntary approach by the industry, it would feel compelled to recommend a referral to the Monopolies and Mergers Commission (MMC) for these contracts to be examined. I can only assume that OFREG has taken the view that the voluntary approach looked as if it would pay dividends and should be pursued.

412.

So we find ourselves today with the restructuring of one contract at Ballylumford, which I referred to, that will bring new plant into the system. In our view that will lead to the prospect of lower prices in the long run, because this is a new, competitive plant. Unfortunately, it is accompanied by the buyout of the old plant, and when the two are added together there is no benefit in the short-term until the buyout expires.

413.

Turning now to my summary answer, it is possible to create a financial instrument with legislative underpinning that will essentially take 10-year costs and spread them over 30 years. The effect would be to lower costs today - it would probably be quite easy to lower them by 20%. There would then be a burden of additional costs after 2010 by which time they will have disappeared anyway if we do nothing. So the sort of scenarios that we have to live with out until 2010 include the refinancing of the industry and pushing some of the burden into the future, and the future burden is a public-interest matter for the Committee.

414.

My view is that the future can sometimes be left to look after itself. We do not know what level of prosperity there will be in Northern Ireland then. We may be able to afford those costs much better in the future than we are able to do today. Indeed there may be ideas in the future that we do not have today.

415.

Ms Morrice: I am particularly interested in your dossier, Mr McCrea - the eco-tariff for energy efficiency and renewables. First, I appreciate your figure that 7% to 8% of total energy is alternative. Half of that might come from waste, which you cannot really call renewable because it is waste. I also appreciate what you said about the need to give energy efficiency the same attention as renewables. I fully understand the reason for that argument, and I take it on board. You may have seen in 'Strategy 2010' that energy efficiency and renewables are dealt with together under the same recommendation. What are you doing to be more proactive?

416.

Mr McCracken: I feel the strong need to hand this across to my colleague. He has been involved in many schemes, so perhaps he will give you a run through some of the things that we are doing.

417.

Mr McCrea: There are two clear things that we need to do to improve the situation, and I am not talking about NIE but about Northern Ireland in general. There must be clear targets and support for how we get there, because it is widely recognised that the developing technologies still need some sort of assistance.

418.

If we move ahead merrily with a strong renewable strategy there will be additional costs that we obviously want to avoid as much as possible.

419.

The approach we investigated through the eco-tariff was to see if the market would respond to an opportunity to purchase renewables. I must say that, at one stage, the strategy was very positive. We had perhaps the most successful eco-tariff of its kind anywhere in the UK.

420.

Ms Morrice: At a higher price.

421.

Mr McCrea: Yes. The customer makes an additional contribution. The sales of that tariff have not continued at the initial rate, and we must look at ways, with the regulator and everybody concerned, of increasing those sales.

422.

One solution we have moved towards is incorporating it as part of our supply price control, and we have a target to increase the sales of our eco-tariff to 10 times its present level. We have already taken significant steps in that direction. We have placed the two new contracts that we referred to in our document. One is with the private developer B9 Energy Ltd and the other is with Enron, so we hope that in the next five years our sales of the eco-tariff will increase 10 times. We are responding vigorously to our target.

423.

The issue is whether we continue with the technologies we have. The cheapest technology by far at the moment is wind, but obviously there are problems with that and we can only go so far.

424.

Ms Morrice: Why?

425.

Mr McCrea: First of all you are constrained from the planning side. A lot of Northern Ireland -

426.

Ms Morrice: Not with offshore.

427.

Mr McCrea: Offshore has an additional cost. Who would bear that additional cost? Can it come from climate change levy revenues or from some other form of levy? It would put the cost up.

428.

You are quite right that that is the Government's preferred technology, along with energy crops, but again those technologies are more expensive. How do we address that additional expense? That is a problem, especially with the high energy costs that we have at the moment.

429.

It comes back to seeing what targets come out of the utilities legislation. If we know the targets we can put in place a strategy to manage them. Let us see what support we can rustle up to help those emerging technologies develop and compete with existing fossil- fuel technologies.

430.

Mr Neeson: I think I am right in saying that the Monopolies Commission investigated NIE. Do you think there is a need for the generators to be investigated as well?

431.

Mr McCracken: I am not sure it is an experience that I would wish on any one, but as we discussed earlier a decision was taken some time ago to go along a voluntary route. I do not know what the Competition Commission - as it is now known - would suggest that NIE has not already thought of. We have been at this for a long time. There are no easy solutions. If there were, we would have found them before now. I am not so sure that if we step back and give this problem to the Competition Commission for six or nine months - however long it might take - that we would be much further along. That is my view.

432.

Certainly what would happen is that a relatively independent body would thoroughly investigate the background of the contracts and let us see what the real problems are and the other factors that relate to them. I stop short of giving an opinion on whether a solution would emerge that would be any better or quicker to implement than the one that we proposed today.

433.

Mr Neeson: In the 1996-97 annual NIE report you were critical of OFREG's director general. Have things changed since then? Bearing in mind that transmission and distribution price controls will be published in July, have there been ongoing discussions with the present director general on this?

434.

Mr McCracken: Back in 1996-97 a specific set of circumstances lead to our referral to the Monopolies and Mergers Commission and, without revisiting all those circumstances, suffice it to say that we went to the commission and it gave us an answer. That is the answer we have lived with since. In approaching the new price controls we were both very concerned to make sure that the interaction would be as positive and productive as possible. We both recognised that an adversarial approach to this sort of thing probably does not pay dividends for anyone, that is OFREG, ourselves or the customers. I could characterise it by saying that the interaction that we have had so far has been workman-like.

435.

Mr Neeson: So the relationship between you and the director general has improved?

436.

Mr McCracken: I have a very good working relationship with the director general, and we transact a lot of business. Indeed, the work we have done in restructuring the generator contracts to date could not have been done if we had not had a very co-operative working relationship during these industry problems. We both understand acutely that we need to be able to work together very closely and constructively to solve some of the difficult problems the industry is faced with. From my point of view that is happening.

437.

Dr McDonnell: We had a very useful discussion a couple of weeks ago about the ice storm, and I found that very helpful. I want to come back to something that emerged from that, because ultimately two things are driving us. If I were to summarise them into one phrase it would be this: "economic prosperity in the future". Some of us are a bit daunted by the California situation at the moment where supply is not meeting demand and a vast amount of industry is leaving California and moving to other places where there is a supply of inexpensive electricity and other energies.

438.

You outlined the possibility of cross-border interconnectors. Can interconnectors pull the price down? Are they for supply or for emergencies? In other words, would they be used every day, or just in an emergency? Would they add anything to the guarantee of supply? How much of our capacity in Northern Ireland is fully used at the moment and how much of the capacity in the South is fully used? What opportunity would there be for price and security of supply with more interconnectors?

439.

Mr McCracken: I will ask David Burnett to come in on this in a moment. Interconnection is well recognised as a method of lowering the cost of generation between jurisdictions alongside each other. It does this through a number of methods.

440.

First, it provides increased security at lower cost, which simply means that we are required to carry something on the networks called spinning reserve. This means that - because no technology is infallible - when a generating set breaks down, there needs to be spare capacity in the other generating set, that is already spinning and connected to the system, which can be taken up immediately to prevent customers from being disconnected. If you have an interconnected system, the two systems can share the spinning reserve contribution. Therefore, on an interconnected system the total spinning reserve is less than it is with two independent systems.

441.

Secondly, it allows opportunistic trading to take place, and essentially that is what we have been doing for years on the interconnection between Northern Ireland and the Republic of Ireland. Opportunistic trading means that if, at a point in time and for any reason, the costs of generation in Northern Ireland are lower than in the Republic of Ireland, we sell to it and vice versa. There are two organisations - one in the ESB and one in NIE. These agree the comparable prices between the two jurisdictions on an hourly basis, and if there is an opportunity to trade, they trade: we simply add the two prices together and divide by two, and each party takes half the benefit.

442.

There are much larger, longer-term opportunities for reducing the overall amount of capacity that is installed on a system. The amount of generation that is installed on the Republic of Ireland's system is planned and designed on the basis of meeting Republic of Ireland demand. The situation is the same in Northern Ireland.

443.

If you can have all-Ireland planning on the basis that the interconnection between the North and South is electrically strong enough, a bit like the spinning reserve equation, you need less total installed capacity than is required to meet demand in two separate jurisdictions. Conventional capacity may be around £400 per kilowatt. There can be quite a saving. Some calculations have been done which showed that at least 150 megawatts of installated capacity could be reduced or avoided by interconnection.

444.

Mr Burnett: We have tried to get a competitive market going in Northern Ireland. We released some plant and negotiated release from contract so that various sets were available to sell directly to large industry. But, as you have heard from the CBI, it has not worked very well. Gas prices have gone up and are not as low as it was thought they would be. The interconnector with Scotland should bring Great Britain's price level to Northern Ireland, and if there is a bigger market there, new plant should be coming to the South of Ireland, and it should be able to supply, at cheap rates, the eligible market of large industrial customers in Northern Ireland. That should happen in about a year.

445.

Northern Ireland is too small to have any sort of competitive market in electricity. That would give rise to the dominant player's being blamed for putting his hand in.

446.

Dr McDonnell: Does he not put his hand in?

447.

Mr McCracken: We do not put our hand in. We negotiated the release so that the plant would supply directly. They will probably give evidence to the Committee soon, and you can ask them. That market has not worked, possibly because Northern Ireland is too small. Interconnection with the Republic and with Scotland must enable industrialists to shop around. It is hoped that this time next year they will go to Scotland and England to ask the generators for prices. That will be how large industrialists in Northern Ireland will shop around for their electricity.

448.

It is hoped that when the South has more generation available to it and new plants are built, including Viridian, then industrialists in Northern Ireland will be able to go to the South and ask generators for a price and that a proper competitive market for electricity will develop.

449.

Dr McDonnell: How long will it take to get extra interconnectors? I would like to have had time to explore the Scottish interconnector, but we will leave that for now. How long will it take to get interconnectors at Enniskillen, Derry, Strabane or wherever?

450.

Mr McCracken: All the interconnector projects that we are working on are due for commissioning in December 2001. The Scottish interconnector and the upgrading of the three North/South links will provide substantial cross-border interconnection and allow us to provide the opportunity for this market to emerge. I would like the Committee to think about whether further interconnection between the North and South would be economic and should be pursued.

451.

Dr McDonnell: I would like to explore that high voltage interconnection later.

452.

The Chairperson: The Minister of Enterprise, Trade and Investment requires the Committee to make a recommendation regarding the Northern Ireland Consumer Council or the Consumer Committee for Electricity. Does NIE have a position on that?

453.

Mr McCracken: We have replied to the Department's current consultation document. Northern Ireland Electricity feels that from the discussions that the Committee has been having, it should be obvious that complex issues are involved. Those issues are not easy to come to grips with. Our working relationship with the Consumer Committee for Electricity has been productive; there is the right level of tension in the relationship. I advocate - as we did the last time our opinion was asked - that a separate committee be established for energy matters. Our preferred solution is an independent committee to deal with all energy matters in Northern Ireland. That would also mirror the structure of OFREG, which is responsible for gas and electricity.

454.

The Chairperson: Thank you for your submission and your answers to our questions. We may have other written questions for you, as we are currently constrained by time.

ADDENDUM TO MINUTES OF EVIDENCE
NORTHERN IRELAND ELECTRICITY

1 June 2001

Q. Point 34 Proceeds From the Sale of the Generators?

A. NIE believes that there was a desire on the part of the Minister at the time, presumably urged by the Treasury, to maximise the proceeds of the sale. Although the generator sale in NI was much smaller than the sales in GB, the level of receipts received by the Treasury was approximately twice the level in GB on a comparable basis.

The sale proceeds for each Station directly reflected the level of availability payments that would be paid to the new owners over the life of the contract. There were written into the contracts at the time of sale, ie if the government of the day wanted more for the sale, they could simply increase the size of the availability payment in the contract. In essence what the new owner bought was a future stream of income for the life of the contract.

Our understanding is that the level of payment in the contract was set in conjunction with government's advisers and was pitched at the level of what was termed the long-run sustainable price for electricity in NI. Quite how this figure was arrived at is unclear to us but presumably was intended to reflect the cost of future new plant coming on to the system.

NIE was not a participant in the setting of this price or the level of payments included in the contracts.

Q. Point 37 The Ballylumford Buy-Out - should customers bear the levy?

A. The levy was created to pay for the buy-out of the existing contract on the original power station. Buying out the original station was a condition of British Gas proceeding with the building of a new combined cycle gas-fired plant. Indeed the proceeds from the sale of the original station will largely fund the new station.

As to the question of whether customers should pay the levy that enabled the buy-out, customers were already committed to paying for the original station over its life; the levy is not an additional burden. Indeed, the entire basis for the buy-out and replacement station transaction, was that customers would see a benefit. The financial benefit, in the short to medium term is minimal, although there will be environmental gains from a cleaner, more efficient plant.

If the question is whether Treasury should bear some or all of this burden by funding the buy-out, then NIE would certainly support such a step. However it has never been viewed as a likely outcome and certainly not one that the industry ever felt it could rely on to solve the problem.

The original Ballylumford Power Station was sold to British gas as an oil-firing station but with a contract to convert to gas. The gas conversion of the original oil fired station took place between 1994 and 1996, at a cost of £35m. It is a pity that there was not more foresight at the time as this investment has now been rendered largely nugatory with the retirement of the original station.

Q. Point 38 Does NIE have a view on how contracts may be reviewed and generation prices lowered?

A. The voluntary approach to contract restructuring was decided by Ofreg as the most likely route to yield a solution. Whether a referral to the Competition Commission would have produced a better outcome is a moot point. It is not obvious what alternatives the Competition Commission may have come up with against the fact that the generators hold legally binding contracts. They may have found the contracts anti-competitive and asked for their renegotiation, but it is not at all clear that this would have produced a different result from the voluntary approach.

Perhaps the largest flaw in the contracts, apart from the proceeds taken, is the fact that there is no mechanism for the efficiency gains made by the generators to be shared with customers. This is in stark contrast to the regulation of NIE.

As we pointed out in our submission to the Committee, if there is no subsidy available to buy-down the burden of these contracts the only realistic option would appear to be to spread the burden over a longer time period.

The re-financing option and the legislative route necessary to achieve it, is set out in a tri-partite letter to the Chairman of the Committee.

Q. Points 46 and 52 NIE's component of the domestic electricity bill

The Committee asks if the 41% reduction in NIE's component of the domestic electricity price reflects excessively high levels to start with?

A. The NIE component of the final price was similar to the price of the GB companies at the time of NIE's privatisation. This fact was acknowledged by Ofreg. There has been divergence since that time compared with the England and Wales companies. The divergence has been driven mainly by the much higher investment per customer in the NI system. This rapid investment was needed to address a legacy of underfunding and a poorly performing network in NI. The members of the Committee will recognise a similar situation today in NI's other infrastructure and public services.

It should be noted that the divergence in NIE's costs is minimal when comparison is made with the Scottish electricity companies who have had investment programmes per customer, similar to NIE.

Irrespective of these points the level of NIE's charges at the time of privatisation reflected the underlying costs of our operations. The fact that we have been able to reduce our charges to such an extent reflects the efficiency gains the company has made since then, and passed to customers.

In addition, as pointed out in our submission, NIE has invested some £650m in the electricity infrastructure in NI over the same period. The majority of NIE's customers are, today, getting a much superior service at significantly lower cost.

It is a constant disappointment that this good story is overshadowed by the continuing level of generation costs.

Q. Point 49 How does NIE's investment in the network since privatisation compare with companies in GB and RoI?

A. As pointed out in answer to the last question NIE's investment per customer has been consistently at a much higher level than the GB companies.

It should be understood that NIE cannot unilaterally decide its level of investment. Any investment programme has to be sanctioned by Ofreg. Indeed the view of the Director General is that there is no evidence that customers in general are dissatisfied with the quality of their supply.

Our understanding of the ESB's £2.1 billion programme is that it involves substantial reinforcement of the RoI transmission network to meet the very high level of growth (circa 6% pa cf NIE's 2.5% pa) over the last number of years. Indeed such is the problem in several major load centres in Dublin, Cork and elsewhere that there is real concern by government (and the ESB) that it is already a barrier to new inward investment. The transmission network in RoI has not had anything like the investment necessary to cope with the unprecedented economic growth. For example, our own experience in building a power station on the outskirts of Dublin has bee that the constraints on the network around Dublin are such that the system is having difficulty accommodating badly needed new generation.

The other major part of the £2.1 billion programme is the complete refurbishment and reinforcement of the distribution network throughout the west of Ireland. We understand the reliability of the network in these areas is poor and in need of urgent attention.

NIE, since privatisation, has already invested £650 million in the network. Our submission to Ofreg for capital expenditure on the network over the 5 years commencing April 2001 is £290 million. It remains to be seen whether this level of expenditure is allowed.

Q. Points 56 and 115 Regulatory Relationship
How would NIE describe its relationship with the regulator?
What efforts have been made to rebuild the relationship between NIE and OFREG since 1997?
Have dicussions taken place over transmission and distribution price controls to be published in July?

A. NIE's working relationship with the regulator is professional and co-operative. The recent renegotiation with British Gas on the terms of the buy-out and the new contract required a very close working relationship between NIE and Ofreg to secure the best deal for customers. Similarly, for the negotiations with Scottish Power to obtain the best possible deal for NI on the Scottish interconnector contracts.

There is a huge amount of daily contact between the staff in NIE and Ofreg on a wide range of customer and regulatory issues which are conducted in a very co-operative and constructive manner.

The MD, NIE and the DG meet and correspond regularly on issues of strategic importance to the industry in NI. For example, the opening of the competitive market in NI is 2 years ahead of the EU timetable as a result of the two organisations working closely to find ways to advance choice and opportunity for customers.

Inevitably there will be tensions in a relationship between regulated companies and their regulators. We will not always agree on matters.

Ofreg has recently published a revised timetable for concluding discussions on NIE's new price control. The DG now does not envisage completing the work until November 2001. We have been involved in fairly intensive discussion with Ofreg and their advisors since October 2000.

Q. Points 62, 63 and 64 Benefits of an all-Island market and interconnection with GB

A. The building of the Moyle interconnector with Scotland will, for the first time, bring real competition to the generation market in NI. Scotland has a substantial amount of excess generation which should be available at relatively low cost. For example, the average price NIE pays the generators in NI is around 4.0p/kWh, the contract that NIE has entered into with Scottish Power (for circa 7 years) is for electricity supplied at 2.1p/kWh. The cost of the interconnector itself needs to be added to this price, but even so, the cost of electricity landed in NI should be substantially below present generation costs.

The strengthening of the interconnections between NI and RoI (due to complete in December 2001) will enhance the prospects for trading between the two jurisdictions.

At present the benefits of this step are hard to forecast because there is very little spare generating capacity on the Island. This is particularly the case in RoI where, until new generating plant is commissioned, there will be an acute shortage of capacity. We would expect to see the ESB importing across the interconnector with Scotland, through NI, into the RoI.

Q. Point 85 NIE's EcoEnergy Tariff
What has been the participation rate in EcoEnergy tariffs?
Is the EcoEnergy tariff regarded as a success?

A. The tariff was launched in October 1998 and within the first year had attracted around 800 customers. This followed a mailing campaign to 680,000 customers and significant publicity surrounding the launch.

Over the last two years the number of customers has increased to around 1,000, supported by further advertising. As of April 2001, the customer numbers have not risen significantly but the demand for units has increased (to around 2GWh pa). There are two principal drivers which will lead to increased sales over the coming period.

The new NIE Supply price control agreement contains a target in respect of EcoEnergy growth. NIE are obliged to increase sales of EcoEnergy to ten times the April 2000 level (to around 25GWh pa) with 6 GWh pa being sales to domestic customers, by 2005.

The introduction of the Climate Change Levy in April 2001 will act as a stimulus to the small medium sized enterprise commercial market because the use of EcoEnergy will give exemption from the levy. We anticipate this market will grow significantly over the coming period.

EcoEnergy is regarded as very successful. It is probably one of the most successful tariffs in the UK to date.

NIE have signed-up a number of public sector buildings including eleven from the Government estate. One hundred and fifty schools from two Education and Library Boards have signed up in April 2001. This represents a demand of around 20GWh pa. We expect to continue to make good progress in the public sector.

Q. Points 110 and 111 Emissions and the Role of IPRI
Why do NIE view potential further requirements as a threat?

A. NIE's concern is purely for the effect on electricity prices. The contracts with the generators allow them to pass through to customers all costs associated with any new requirements by IPRI.

Q. Do NIE believe that IPRI is acting in bad faith?

A. NIE believe that IPRI may be acting narrowly in asking for further constraints on the generators. There is a need to take the full picture into account and measure the additional cost burden on customers against the value of the reduced level of pollution.

Q. On what basis do NIE form the opinion that current levels of emissions, particularly from power stations with high chimneys, ensure that there is no risk to the surrounding area?

A. NIE have sponsored a number of studies:

Monitoring emissions: IRTU (The Industrial Research and Technology Unit, DETI) consultants have monitored the ambient air in the Carrickfergus area and conclude that pollution form domestic sources (sold fuel room heaters) are the main cause of low levels of SO₂in the area. Pollution from Kilroot is small. Even with this, the pollution levels are well within the EPAQS (Expert Panel on Air Quality, DoE) standards.

Modelling emissions: M&M (Merz & McLellan, engineering consultants) have modelled the trajectory of emissions from the Kilroot chimney around Carrickfergus area. They conclude that the highest 15 minute concentration at ground level down wind of the Kilroot chimney is still within the EPAQ standard and that this occurrence is only under very rare climate conditions.

NIE have purchased the ADMS software used by Government bodies and find that this model shows similar results to those obtained by M&M, above.

We conclude that there is minimal risk in the area surrounding Kilroot power station.

Q. Have NIE considered the potential impact on regions outside the surrounding area and regions in the path of the prevailing south westerly winds, particularly Glasgow?

A. Monitoring acidity: A post graduate student with University of Ulster, Coleraine has been studying acidity in both N Ireland and South West Scotland for the past three years. Her results indicate that pollution levels have been significantly reduced over the past 10 years and that present levels are unlikely to be doing any damage to the environment in those areas.

Modelling acidity: AEA Technology (environmental consultants) have modelled emissions from all point sources and made estimates of atmospheric acidity throughout the UK. These studies show the N Ireland power station emissions contribute only around 10% of the acidity in some areas of South West Scotland and much lower levels elsewhere. The other 90% comes from sources in Scotland, England, Wales and other European countries. The present levels of acidity in South West Scotland are much reduced from the levels of 1990 and are probably doing no damage to the environment.

Effects from Flue Gas Desulpherisation (FGD): The proposal to convert the station to Orimulsion will require FGD to be fitted. It is a concern that this may introduce other pollutants into the Carrickfergus area. The proposed scheme will be fully assessed by IPRI before permission is given to ensure that no local health problems are caused.

Belfast and air temperature inversions: We are aware of this meteorological condition in the Belfast area but believe that it is rare at Kilroot. We believe that Belfast's poor air quality is largely caused by domestic sources (solid fuel room heaters) and transport.

Q. Are NIE aware that our emissions standards, while satisfying European requirements fall below US standards?

A. We recognise that Kilroot might have had to install further emissions abatement (FGD) under more strict regulations. However this would have increased electricity prices.

We are aware of studies, which relate high pollution levels to health problems, and this has led Government and their Expert panels to set ambient air targets at their present levels. Since the power stations in N Ireland are within these targets we do not see that there is any continuance of the relationship. It is widely regarded that low level emissions such as domestic solid fuel use and transport exhaust emissions are the main cause of low level air pollution.

Q. Point 112 NIE Support for a Study into Air Quality Standards

A. NIE has considered sponsoring this type of proposal in the past. We believe it is best carried out by an independent medical unit rather than having any close involvement with NIE. In the past we have concentrated on monitoring and modelling pollution levels and relied on the Expert Panel on Air Quality to cover the medical aspects.

Q. Point 119 Purpose of the Price Control
Should there not be a long-term objective to bring NIE's transmission and distribution price into line with the British average?

A. The purpose of a price control review is to set the level of allowed revenues for the company such that it can meet its investment programme, cover its operating costs and pay its interest, equity and depreciation charges.

The aim of regulation should be to ensure that the monopoly services provided by a utility to its customers are at an efficient level. NI customers will always suffer from the absence of economies of scale. We are the smallest Electricity Company in the UK with a widely dispersed, predominantly rural customer base. The assets employed per customer are correspondingly higher than for other UK companies.

Notwithstanding this fact NIE's charges for its transmission and distribution network are considerably lower than Scottish Hydro's (when the 'hydro benefit' (the cross subsidy from its low cost generation business) is removed).

There is a wide variation around the average for the UK companies, reflecting the unique factors of their service territory and the size of their customer base. For example, Scottish Hydro's transmission and distribution charges are some 58% higher than the GB average and Scottish Power's are 36% higher.

If NI had access to generation prices (which do not depend on service territory etc) similar to GB, then we would not have a price problem in this country.

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MINUTES OF EVIDENCE

Wednesday 4 April 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mr Attwood

Mr McClarty

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr M Aherne ) Electricity Supply Board

Mr P O'Shea )

455.

The Chairperson: Welcome, Gentlemen. I am afraid that we have only half an hour, so if you restrict your presentation to the key points, the Committee can ask questions afterwards.

456.

Mr Aherne: On behalf of the Electricity Supply Board (ESB), I thank the Committee for inviting us to speak. In the interests of brevity we will skip our detailed introdutions. I am Michael Aherne, manager for Northern Ireland business for ESB International Investments, and my colleague is Peter O'Shea, manager for Regulatory Affairs, ESB.

457.

ESB welcomes the opportunity to contribute to the inquiry into energy in Northern Ireland. ESB, through its subsidiary ESB International Investments, is committed to a significant long-term role in Northern Ireland's energy market.

458.

This has been shown by ESB's investment in Coolkeeragh Power station since 1998 and in our strong partnership with the management and staff of Coolkeeragh; and ESB's and Coolkeeragh's development of a new 400-megawatt combined cycle gas turbine (CCGT) power station.

459.

In addition to providing an electricity supply in the north-west, the new power station will act as the anchor customer for the development of a natural gas pipeline and will provide competitively priced electricity in Northern Ireland. ESB is committed to the competitive supply market in its role as the second largest independent supplier. We believe that the two separate energy markets will develop into an integrated all-island energy market fairly quickly. This integration will be driven by market forces but will need to be facilitated by strong co-operation between Governments, regulatory bodies and system operators. This is an entirely sensible development which would also be in line with EU policy. It will lead to greater competition, security of supply and will be of immense benefit to customers.

460.

The Committee's inquiry and the work being carried out by the Department of Enterprise, Trade and Investment and the Department of Public Enterprise play an important part in developing this market. We welcome the opportunity to answer your questions.

461.

Dr McDonnell: My main interest is in ensuring reliable supply at a better price. What steps are necessary to reduce prices in Northern Ireland? What role does interconnection play in maintaining stability, and how would the synergy of an all-island market help maintain supply and cut prices?

462.

Mr Aherne: There are several components to electricity costs - the generation costs, transmission, distribution and supply costs. The regulatory process to monitor and review transmission and distribution costs is under review. However, at the moment the focus is on generation costs.

463.

The question of long-term contracts always arises with regard to generation costs, and it must be addressed. Many states in the EU have had to deal with this matter as the market has opened up. There are two very different views. One is that we buy out the existing contracts in their entirety, which would not offer any extra benefits to customers. Alternatively, we could break the contracts, which would not offer benefits to customers in the long run either, as it would be a disincentive to investment.

464.

The solution lies between the two. The Spanish system might provide a way forward. The Spanish Government studied the market and decided that generators needed 8 pesetas per kilowatt-hour to get in their contracts and that 6 pesetas was a fair market rate. Therefore the government put in place a mechanism whereby the generators took a fair market risk. If the generators who were selling in the market obtained 8 pesetas per kilowatt-hour, they did not receive any remuneration from the government. If they obtained 6 pesetas they were remunerated for two pesetas. If they obtained less than 6, that was their fair market risk. A balance must be struck between payments to the contracted parties and the fair level of risk that they should be expected to take.

465.

Three clear benefits could be gained from strengthening interconnection. It would lead to a greater security of supply and it would enable system planners to plan as a single system. We believe that this would reduce costs and would provide a stronger system for both North and South.

466.

Further interconnection would drive competition and would increase Northern Ireland's electricity share in an all-island market. In a larger market, the price drivers will drive prices down.

467.

Mr Attwood: When its deliberations are concluded, the Committee will have to decide on long-term contracts, and the Department and the Executive will have to take the final decision. Can you send the Committee examples of how other EU member states dealt with this issue? It impedes the development of the energy market and adversely affects energy costs in the North.

468.

Mr Aherne: It is important to look at other examples, and we have been doing that.

469.

Ms Morrice: The Spanish example sounded like the Common Agricultural Policy, with its guaranteed and intervention prices.

470.

Mr Aherne: The contracts are studied for their viability.

471.

Mr Attwood: Would the Spanish model have worked here when contracts were being drawn up eight or nine years ago?

472.

Mr Aherne: The Spanish model could not have worked in 1992 during privatisation in Northern Ireland because there was no electricity market for generators to sell into. This model works where there is a market for electricity generators to sell into. The Spanish model attempted to identify contracts which were unrealistically priced. Rather than remunerate the entire contract value to the generators, it proposed paying them for the element that was out of the market, thus enabling them to compete.

473.

Mr O'Shea: We have not seen these contracts and are unaware of what kind of flexibility they provide. Mr Aherne has given two extreme positions; however, there may be alternatives. In the South of Ireland, there are proposals for a transitional arrangement between now and 2005 for ESB's generating stations to sell under a vesting arrangement to ESB's franchise supply business. This was intended to remove the need for state aid and to deal effectively with any stranding of assets that might arise from the opening up of the market.

474.

Stranding has happened in all jurisdictions, including the United States and the European Union, which have opened up to competition. That is something which we want to look at, and perhaps find answers to. We cannot comment on the flexibility in the contracts.

475.

Mr Attwood: I suspect that there is very little, because to change the contract will require Assembly legislation. That is how inflexible they are. It is important to change the contract by statute to enable the price to come down and to make it worthwhile for the supplier to invest. Could bonds be used?

476.

Mr Aherne: I am familiar with the principle, which suggests extending contracts over a longer time to reduce costs. It has merits. However, we should go further. Rather than say "this is the full cost of the contract and we are leaving the contract in place but over a longer period", the uncompetitive part of the contract should be treated in that manner and competition should be introduced for the generators. It is part of the solution but not the only part.

477.

Mr Neeson: Has the entry of ESB into the Northern Ireland market created more competition? Does it have the potential to create more competition?

478.

Mr Aherne: The opening up of the market and our entry into it has fostered a culture of competition. However, there have been no significant price benefits to customers, primarily because the generation costs feeding into our supply models are very high. More price benefits will be seen, and the price drivers will come from Scotland and from the South via the interconnectors until the Coolkeeragh plant has been commissioned. It will then become the price driver.

479.

We have offered a service to our customers by building long-term partnerships. We intend to be serious competitors in the future and we think that that is of benefit. The real price benefits have yet to come.

480.

Mr Neeson: Your entry into the market has been through your share holdings in Coolkeeragh, and future development there very much depends on the natural gas pipeline to the north-west. Does the Bord Gáis decision to bring in the additional pipeline from Scotland to Dublin complicate matters for you?

481.

Mr Aherne: We do not see a North/South or a South/North pipeline complicating the business case for the pipeline to the north and north-west. We are pleased that Questar BGE has placed a submission before the Department for a pipeline to the north and north-west, and that the Department is giving it serious consideration. Postalisation will be a key determinant and must be addressed urgently. I believe that the Department is serious in its intention to resolve the matter quickly so that the pipeline to the north and north-west can proceed.

482.

We are working on a programme with the Coolkeeragh CCGT in the confidence that the pipeline will be built.

483.

Ms Morrice: Should there be greater competition among the generators?

484.

Mr Aherne: There should be greater competition in the market generally.

485.

Ms Morrice: Let us bypass the generators and go into the area of renewable energy and individual energy supplies for domestic and industrial users. Why can we not squeeze the generators with the big contracts out of the market, not through interconnection but through innovation? I do not mean a revolution; rather something that we are trying to force the United States to do. What would your role be in that and what could we do?

486.

Mr Aherne: Renewable energy has an important role to play in the future of Northern Ireland and we would like to be able to develop renewable energy for our customers. However, it is not enough to say that renewable energy is the solution. No doubt it will play a role in supplying Northern Ireland's energy needs in the future, but there will always be a need for core generation. Meanwhile, the contracts of the generators must be addressed.

487.

Ms Morrice: Can they not be squeezed or bypassed? Is there no alternative source of energy?

488.

Mr Aherne: The generators should be open to market competition, and if renewable energy is competitive, so be it. Cost alone means that we will never be able to replace the entire generation base with renewable energy.

489.

Mr O'Shea: Wind power makes much financial sense.

490.

Ms Morrice: Can we not follow Saudi Arabia's example? Why create problems instead of solutions?

491.

Mr O'Shea: There are technical difficulties with wind power. Notwithstanding those difficulties, market structures must be created that will allow parties to invest and receive a reasonable return on their investments.

492.

Wind power must be generated, transmitted, distributed; we must also ensure that there is sufficient capacity to take the wind power from where it is generated into the system. The wind blows most - but not all - of the time, but primary back-up is still needed. Nevertheless, the economics of wind power are changing; it is a technology for the future.

493.

Mr Aherne: Market structure is important, as the market must be open for players to sell wind power into it.

494.

Mr O'Shea: There is a lot of debate on wind power in Europe at the moment and on how structures can be put in place which allow parties to trade wind products; green certificates, for example.

495.

Ms Morrice: I am impatient.

496.

Mr O'Shea: I accept that.

497.

Mr McClarty: How does ESB view NIE's performance in electricity supply and transmission? Can ESB compete successfully in Northern Ireland?

498.

Mr Aherne: With regard to the transmission system operator, we have a very good professional working relationship in developing our new plant at Coolkeeragh. We see NIE as our competitor in supply, so it might not be appropriate to comment on its performance. However, NIE must look at the need for separating and clearly identifying its functions. I have in mind the system operator and the Power Procurement Business (PPB) functions. At present they are with NIE, but there are conflicts in servicing the franchise and the eligible market. Those roles are under review by the director general. There is a need for further independence of roles.

499.

ESB has been competing internationally for several years. We have been successful so far in our competition efforts in Northern Ireland's supply market and in our new plant at Coolkeeragh. We are very confident that we have a long-term role to play as a competitor in Northern Ireland.

500.

Mr O'Shea: There would be benefits in closer co-operation between the South and the North in the function of the transmission system operator. We think of two separate systems which are interconnected; perhaps we should think of it as a single system when planning the system's needs.

501.

Dr O'Hagan: ESB plans to spend £2.1 billion in the next five years on networking, upgrading, and on refurbishing lines. Is that all for the South or is any of it intended for the North? If so, how much? What are your plans for large-scale investment in the North of Ireland in the future? Does ESB in the South have an eco-tariff like NIE's? How does ESB promote renewable energy? Could we use solar power?

502.

Mr O'Shea: Our intention to spend significant moneys on our networks in the South of Ireland has been well publicised. Over the next five years we will spend £1·5 billion on our distribution system and £0·5 billion on the transmission system.

503.

There is separate licence for green suppliers in the South. When buying green energy one does not need half-hourly metering and bills are determined by profile. How the bill would be profiled rather than metered on a half-hourly basis is a technical matter.

504.

Half-hourly metering to buy green energy could cost several hundred pounds. That would be one barrier. In the South that has been dealt with by a separate licensing regime. ESB has undertaken, with Government, several alternative energy replacement schemes. There have been four to date and there are plans for a fifth. That covers our involvement in renewable energy.

505.

Mr Aherne: We are pursuing two significant investments in Northern Ireland. The first is our new plant with our partners at Coolkeeragh. That will be an investment of £150 million sterling in the new CCGT plant. The second is the build-up of our supply position. We are investing in our operations to build up a customer base. This is linked to our plant development. Our strategy is to build a customer base until the plant has been commissioned. Thereafter, it becomes a single strategy for Northern Ireland.

506.

Dr O'Hagan: What are your views on solar energy?

507.

Mr O'Shea: It has been a while since I looked at the economics of solar energy; I am more familiar with the economics of wind power. When I last studied it, solar energy was still beyond the cost of conventional forms of generation. I can come back to you on that, if you wish.

508.

Dr O'Hagan: That would be useful.

509.

The Chairperson: What is the ESB's view on postalisation?

510.

Mr Aherne: Without postalisation it will be very difficult to extend gas development beyond the existing franchise area. It is an essential component in developing businesses in the regions of Northern Ireland.

511.

The Chairperson: Do you have future plans for further large-scale investment in the North, apart from Coolkeeragh?

512.

Mr Aherne: Our primary focus is on building a Coolkeeragh CCGT plant and on building up our customer base. We will also consider developing renewable energy to offer our customers. This is likely to be a requirement in any case.

513.

The Chairperson: Has research been done on wave energy?

514.

Mr O'Shea: A great deal of research has been done on all forms of renewable energy, but I understand that the cost of wave energy would be beyond the conventional cost of generation. I will come back to you on that. I am not as familiar with solar or wave energy as I am with wind power.

515.

The Chairperson: Thank you for your submission and your answers. We may have other written questions for you. Thank you.

ADDENDUM TO MINUTES OF EVIDENCE
electricity supply board (ESB)

30 April 2001

Q. How have the lack of competition in electricity supply and the lack of competitive generation hindered the progress of economic growth in Northern Ireland?

A. We cannot comment specifically - economic growth is driven by a range of parameters. However to the extent electricity prices have been higher in Northern Ireland than in surrounding jurisdictions, this must act to disincentivise external investment and make internal investment less attractive.

Q. ESB International Investments state that the current high electricity prices need to be addressed.

Could ESB elaborate on appropriate types of reform?

A. The current high prices point to a need for reform. The comment is a relative one i.e. that relative to prices in the Republic of Ireland and Great Britain, prices in Northern Ireland are high. In developing electricity market structures we need to review the individual cost components which go towards making up the final electricity price. These components comprise Generation, Transmission, Distribution and Supply. The arrangements in place in Northern Ireland for Transmission and Distribution pricing are consistent with arrangements in England and Wales and in Republic of Ireland, i.e. a periodic price control review.

It would appear from overview analysis that the generation component is out of step with the surrounding jurisdictions. This would therefore imply that the reform is best directed at the contractual position on existing generation plant. Without detailed understanding of the contracts it would be difficult to comment on how these contracts could be best managed.

Q. ESB has expressed concern over the existing long-term power purchase contracts (Generating Unit Agreements between NIE and the power station).

What changes could be made to such contracts to increase greater competition within the energy market?

A. In making this comment we are referring to the generality of fixed price long-term contracts which are effectively out of the market at present. We are unclear as to the flexibility within these contracts for re-negotiation. However, it is difficult to see how long term, firm, out of market contracts could remain in place with market opening and not lead to stranding somewhere in the supply chain. In the Republic of Ireland, the approach taken is one of setting a target date for completion of market opening, i.e. 2005, and putting in place a vesting contract for the period to 2005. The intention being to price this contract in a manner which removes the need for a transitional levy to deal with stranded costs. Such an arrangement could perhaps apply in Northern Ireland also.

Q. ESB believes that the opening up of the Northern Ireland energy market should be consistent with the Republic of Ireland and Great Britain.

Does ESB believe that this is a realistic target?

A. The statement is aspirational in that there should be relatively few structural barriers in interconnected markets. Clearly Great Britain is 100% opened now which, with the completion of the Moyle interconnector, will bring its own challenges.

Q. How does ESB suggest this can be achieved?

A. This could be achieved through Co-ordinated market opening, north and south.

Q. ESB suggest that the Power Procurement Business (PPB) should focus on the constraints in the current structure of the franchise market which are restricting the competitive market.

Could ESB elaborate upon what they believe these constraints are?

A. This comment relates to the lack of merchant generation in the competitive sector and was made in the context of the future role of the PPB.

Q. Could ESB elaborate as to why it believes the Power Procurement Business is no longer consistent with EU Directives that open up the energy market?

A. There are relatively few single buyer models in the EU and current thinking in Europe would not appear to favour single buyer models.

Q. What will be the potential contribution of the Transmission System Operator (TSO) in the new energy market?

A. We should perhaps consider developing a joint TSO on the island. This is the current approach in Scotland and indeed a Great Britain SO is being considered. This would bring Transmission planning on an all-island basis which would over time result in a single integrated system rather than the current interconnected system. This would help develop pricing convergence on the island.

Q. What does ESB anticipate its future role will be in the energy market?

A. We would seek to be a Generator in both parts of the island and a Supplier in both parts of the island.

Q. What will be its contribution to economic growth in Northern Ireland?

A. The Coolkeeragh project is being developed to provide competitively priced electricity for the Northern Ireland consumer and to the Northern Ireland Industry.

Q. Will ESB play a role in future renewable energy industries in Northern Ireland?

A. The regulatory structures underpinning the renewable market in Europe are being developed and we await such developments with interest. The topical debate at present is around market-based renewables (obligation plus green trading) and NFFO type schemes.

Q. How will ESB contribute to the development of an all-island energy market?

What potential impact could an all-Ireland energy market have on ESB?

A. ESB is currently contributing to electricity markets on an all-island basis. We are the largest new entrant supplier of electricity in Northern Ireland which coupled with our current and planned interest in Coolkeeragh Power Station underpins our significant involvement in the development of the electricity industry in Northern Ireland. Both Governments have outlined intentions to further develop all island energy markets and ESB will provide constructive input into proposals as they emerge from Government.

PETER O'SHEA
Manager, Competition and Deregulation, ESB

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MINUTES OF EVIDENCE

Wednesday 4 April 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mr Clyde

Mr McClarty

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr S Lynch )

Mr G McNeilly ) AES Kilroot

Mr D Elliott )

516.

The Chairperson: Good morning. You are very welcome. We are very much constrained by time. We have read your submission and ask you to summarise it quite sharply, after which we shall ask a number of questions.

517.

Mr Lynch: Thank you for giving us the opportunity to talk to you today. I will begin by summarising our written evidence. We represent AES, a global power company - in fact, we are the largest independent power company in the world. We operate in over 19 countries and since 1992 we have had two businesses in Northern Ireland.

518.

In our written evidence we concentrated on generation prices in Northern Ireland, trying to explain the reasons for the price gap between Northern Ireland and Great Britain and outlining our position in that regard. We summarised what we have done already to try to reduce prices and attempted to outline progress in the present discussions between Northern Ireland Electricity (NIE), the electricity regulator and ourselves. In conclusion, we discussed market development, on the island and between it and Great Britain, also expressing a view on gas pipeline development.

519.

We are happy to answer questions; we recognise how short a period 30 minutes is, but we shall be very happy to return to talk to the Committee or to any of its members on an individual basis.

520.

The Chairperson: We also recognise that 30 minutes is short. However, when we were visiting our sister Committee in Scotland, we found that it gave participants three minutes, which was tight going.

521.

Dr O'Hagan: Perhaps I might turn first to the issue of Orimulsion. Has AES Kilroot considered the environmental and health concerns about burning it? Have you considered the economic viability of converting to gasification to exploit the cost benefits of Orimulsion as a fuel, and will AES Kilroot participate in a public consultation process on the proposed burning of Orimulsion?

522.

Mr Lynch: The answer to all those questions is yes. I will ask Mr Elliott to expand on that in a moment. The Committee needs to understand that at this stage this is just a proposal to burn Orimulsion. If we develop this project, we will have to go through the due process of involving full public consultation, and the public will have to be assured on the environmental and health issues surrounding it. We will not be commencing development until, and if, NIE and the regulator support the proposal under the terms of our contract, or until some other means can be found to support the investment.

523.

Mr Elliott: I will take your question in three parts. We have fully considered the environmental and health concerns with Orimulsion. Until recently, one of the difficulties was that performance data from existing operating plants was not available. The data that has now been made available to us. Data previously used had been extrapolated from other fossil fuel burning plants. It demonstrates that extrapolation has not been exactly right but that with the correct instalment of abatement technology Orimulsion will perform well within the environmental limits. If the proposal goes ahead, all of this will be debated in a public forum.

524.

Gasification is a process that we have looked at, and there are Orimulsion gasification plants currently in operation, primarily and possibly only in Italy. Gasification is a good process, but it is specific to circumstances in that there needs to be a host to make it efficient - a host for the bi-products of the steam, et cetera. An oil refinery environment is an ideal environment for that. Interestingly, the performance data for the gasification plants shows that the discharge of particulate matter of less than 10 microns is greater than from those plants operating on a proposal such as ours.

525.

On the commercial viability side, to make Kilroot into a gasification plant would not entail a conversion of the existing plant, but the building of a whole new power station. Therefore, we believe, first, that there is not a great benefit to Northern Ireland from having a gasification plant for Orimulsion rather than a conventional plant, and the capital cost would be absolutely huge.

526.

With regard to public consultation, there will be a due process. We have already consulted with many public bodies on Orimulsion mainly to ensure that people have facts rather than the wrong perceptions.

527.

Mr McClarty: Has AES Kilroot discussed with the IDB the potential impact of generation prices on inward investment, and has it calculated the potential trade off from lowering generation prices as a means of facilitating inward investment with the potential for new customers?

528.

Mr Lynch: We have not approached the IDB, and it has not approached us. You need to understand that we are not electricity retailers directly interfacing with customers. Under the terms of our contract with NIE, we cannot sell our output to any customer other than NIE. We are wholesale producers of electricity. As such, we have not done that trade-off calculation - we have no incentive to do so.

529.

Ms Morrice: I would like to understand a lot more about this. I noticed that in your submission you talked about the critical factors for project development, one of which is perception. I am aware of the tremendous need to tell the general public and us what you are doing, what the effect of it will be and what advantages there are. Would you mind explaining that to me again please?

530.

Mr Lynch: Are we referring specifically to the Orimulsion proposals?

531.

Ms Morrice: Yes.

532.

Mr Lynch: The evidence suggests first of all economic benefits. An analysis of this was done by the electricity regulator, using London Economics as advisors. That was done in 1998. The report is readily available, and it concludes that there are very clear economic benefits to consumers from converting to Orimulsion.

533.

The real saving comes in the reduction of transportation costs. We have an oil terminal that can handle very large vessels for importing Orimulsion, and we benefit from that on the economy of scale. At the minute our coal importing facilities are quite small, and as such we are limited to much smaller vessels. There is clear economic benefit.

534.

On the environmental side, when one looks at each of the particular emittants, SO₂, NOx, particulate and CO_{2, in all cases the performance, environmentally,} is greatly improved from burning Orimulsion as opposed to coal.

535.

Ms Morrice: How would that compete with something that I am very keen on pursuing, which is alternative forms of energy, wind, solar or river? Why are you looking at Orimulsion rather than at renewables and alternatives?

536.

Mr Lynch: The existing proposal was prompted by a request from our electricity regulator to try to reduce generation prices. So it had to work with our existing set-up or starting point. All we can do is try to lower costs within that investment. Renewable energy would increase prices for us at this point.

537.

Mr Neeson: Mr Lynch, as you know, you are on my back door. As you also know, there was an article in the 'News of the World', followed up by the 'News Letter', on the so-called "corridor of death". Do you wish to make any comment on that article? Committee members have received copies of it.

538.

Mr Lynch: We first became aware that the report was being run when a 'News of the World' journalist contacted us at Kilroot on the Saturday evening. Even at that point we were not aware of the detailed nature of the article. Having read the report, one can only say that it is completely factually incorrect. The report says that emissions from Kilroot from burning residual oil over the last number of years can be directly linked to this problem. Kilroot has not been burning residual oil over the last number of years. Kilroot has been burning coal. We can totally dismiss the report on that fact alone.

539.

Mr Neeson: One of the things that I campaigned for, for a long time, was phase 2 at Kilroot. I know that the machinery is now rusted and so on, but is there any potential for using that space at Kilroot? Secondly, while you are representing Kilroot, is Belfast West still operating?

540.

Mr Lynch: Remarkably, Belfast West is still operating. It is by far the oldest plant on the system. At the time of privatisation it was given short-term contracts from 1992 to 1998 because it was considered that that represented the economic life of that business. The plant is still running today and will probably run for another couple of years. After that it will come up against environmental targets which are quite challenging, and the plant's economic viability beyond that date looks questionable.

541.

We have been delighted that Belfast West has been able to come out of contract over the last couple of years because the contracts were ended. The original project investment was paid off at that point, and we were delighted to be able to enter the emerging market and offer eligible customers prices greatly discounted compared to those of NIE. It has been a nice last couple of years for Belfast West, but unfortunately that situation, because of investment requirements and environmental clean up, is unlikely to continue forever.

542.

Kilroot is a large site, and a lot of infrastructural development is already there in preparation for phase 2. We would like to see in Northern Ireland, and on the island as a whole, opportunities for the lowest cost producers to compete. At the moment, combined cycle gas turbines seem to be the lowest cost option. However, we urge that any decisions on new power plants be left for the market to make. Our position is that if that were facilitated, we would make an independent business decision on whether to develop the Kilroot site further.

543.

Mr Attwood: I would like to return to the issue of long-term contracts and clarify something that you said to Mr McClarty earlier. You were asked if any assessment had been made about varying those contracts - if you had the opportunity to have new business and investment that might enable you to vary the existing long-term contracts. You said that you had not approached the IDB and that it had not approached you about such a proposal. Some people would say that that is rather surprising.

544.

Given that the issue of long-term contracts has been around for nearly 10 years, and that it has been identified as an impediment to energy development and costs in the North over the next number of years, some people would think it surprising that an organisation such as yours has not seen fit to approach the IDB, or that the IDB has not seen fit to approach you, to discuss mechanisms whereby contracts could be varied to enable commercial and private customers to benefit.

545.

Might some people not think it somewhat surprising that that is not under active consideration by your organisation and the IDB?

546.

Mr Lynch: For several years we have been in intensive discussions with the electricity regulator who has been taking the lead in trying to address the contracts issue. We have been very successful in renegotiating the contracts for our Belfast West plant, and we did that on two occasions.

547.

One must realise that the size of the investment in Belfast West was much smaller and as such it was an easier nut to crack. For years, we have been talking with the regulator about Kilroot, trying to find a solution. However, I must say at this juncture that the regulator, ourselves and NIE realise that without the support of the Government there is a limit to what we can do to reduce prices.

548.

Mr Attwood: I will return to that last comment shortly. Despite the fact that you have been in discussions with the regulator for several years, are you telling this Committee that the IDB has not approached you and you have not approached it about creating a new market with new inward investment and new clients, which would enable you to vary the contracts? Are you saying that that has not become a live matter of discussion between you, the regulator and the IDB?

549.

Mr Lynch: No. The discussions we were having with the regulator did not involve our coming out of contract. We were going to remain in contract for a longer period of time. The proposal was that the regulator would remove the cancellation clause in 2010 to allow the contract to run its full term until 2024. In that scenario, NIE would have exclusive rights for the output from those contracts.

550.

Mr Attwood: I know that that is what you were in discussion with the regulator about. I am more concerned that you have not even conceived of discussions with the IDB about lowering generation costs by way of opening the market to new investment and clients. You are saying to the Committee that it has not been discussed with the IDB or with the regulator, even though it has been going on for several years. That is a matter of concern. It would be one way in which your organisation, the regulator and the industry generally could get to grips with the fact that these long-term contracts are prejudicial to the development of the energy market and the industry in the North. That is something that might be worth discussing now and exploring further.

551.

Mr Lynch: The growth in demand for electricity has not been abnormally low. It has stayed at something like 3%, which is quite normal for our type of economy. For the last couple of years our prices have been something like 30% lower than NIE's. We have been servicing two contracts, one with the ESB and other with Energy, which is a branch of Viridian. To my knowledge they have not necessarily been attracting new businesses to Northern Ireland on the strength of those prices.

552.

Mr Attwood: Going back to Belfast West. In your submission, you said that due to the fact that the existing plants in Northern Ireland are relatively old, you need to improve the plant and technology, but that technology limitations can only be addressed by substantial investment. Some people will say that one of the reasons for your not yet having got agreement with the regulator about the long-term contracts is that you are hoping that the Government will provide you with substantial investment to enable you to build a new plant at Kilroot. If the Government were to assist you with capital development, you would be more open minded about varying the terms of the generation contracts. Is that right?

553.

Mr Lynch: No. We are not looking for any Government assistance for any further development at Kilroot. We want the market created and a level playing field to allow the market to make that decision.

554.

What we have seen so far in terms of trying to tackle the problem has been new investment at Ballylumford - and the customer pays for that. In any commodity market the customer ultimately pays, but the customer also gets the benefit and that comes through via lower prices and/or higher quality of service.

555.

Mr Attwood: Given the benefit there has been to your company over 10 years from the long-term contracts, why do you not voluntarily vary the contracts yourselves.

556.

Mr Lynch: When we entered into these investments a generous price was paid to the Treasury. We raised a substantial debt on the basis of that investment. Today most of the debt still remains to be repaid. We cannot reduce our prices voluntarily, because we would then default on that debt repayment.

557.

Mr Attwood: As the regulator is trying to renegotiate the length of the contract, why do you not try to renegotiate the length of your debt repayment?

558.

Mr Lynch: We would renegotiate the debt; that is part of the deal. However, the debt will not go away. It will only get re-profiled over a longer period of time. Essentially, there are only three ways in which to make a substantial improvement to generation costs. First, somebody can write a cheque to put money back into the system. Secondly, if that does not happen, payments can be re-profiled over a longer period of time, which we are prepared to do with our debt holders. The third way is through investment in technology. However, many of our discussions with the regulator have centred on re-profiling the debt.

559.

Dr McDonnell: I want to pick up on the points made near the end of your comments. The bid you made for the power stations was perceived to be much higher than the Government's benchmark. It was understood that you expected particularly high efficiency improvements from the operation of the business. How far have those efficiencies gone? Have any advances been made? Were the anticipated efficiencies successful? Can your targets be met?

560.

Mr Lynch: The expected efficiency gains have essentially been met. As is typical in a project of this nature they were met during its first half. We did that in several different ways. The two key methods we deployed were reorganisation and the introduction of more efficient working techniques.

561.

Dr McDonnell: Have they been met 100% or 120%? Have you exceeded them?

562.

Mr Lynch: We are more or less on target.

563.

Mr Attwood: Will you give us written confirmation of the efficiency targets that were set when the contracts were awarded and how they have been met over the last number of years?

564.

Mr Lynch: The contract did not set targets - that was entirely up to us as a private company. They depended on what we felt we could achieve, and we pitched our bid accordingly.

565.

Mr Attwood: Would you care to share that information with the Committee?

566.

Mr Lynch: One thing that the Committee must realise is that we are a global company competing on a global stage. We engage in this sort of acquisition all the time, and we must be careful not to disadvantage our competitive position.

567.

The Chairperson: Where are the international headquarters of your company?

568.

Mr Lynch: Washington DC.

569.

Mr Attwood: So you are telling the Committee that if your efficiency targets were surpassed four times, you would still not be prepared to share that information even though you are much more efficient than in 1991, much more competitive and therefore in a much more advantageous position than when the contract was awarded 10 years ago.

570.

Mr Lynch: One must be careful. The project has only been going for nine years, and its duration is at least 18 years. The project's cash flows are always at risk, particularly during its second half as plant gets older and maintenance costs increase. One must be careful about making comparisons so early. There is still a long way to go.

571.

Mr Attwood: Making a comparison at the halfway stage is fair.

572.

Mr Lynch: The financing profile of the project means that the cash flows in the second half will be largely used to refinance the debt, as the debt profile is back end loaded.

573.

Ms Morrice: The Committee has to decide for its report on the future of the consumer body for electricity and whether it should be a stand-alone committee or whether it should be part of the Consumer Council. Do you have an opinion on that?

574.

Mr Lynch: Electricity is a big issue in Northern Ireland, and if there is a dedicated, stand-alone committee there is a better chance that its resources could be focused solely on electricity than if it were part of the Consumer Council.

575.

The Chairperson: Thank you for your written submission and for your answers to our questions. The Committee may need to follow up with further written questions to you.

ADDENDUM TO MINUTES OF EVIDENCE
AES KILROOT

Q. Does AES Kilroot have any immediate plans to reduce generation costs?

A. We are continually trying to reduce the generation costs by working with the Regulator and NIE, however without the support of government there is a limit to what can be done.

In 1998 we tables 8 proposals of which the Regulator selected the Orimulsion proposal as providing the most benefit to consumers.

To address the price gap between NI and GB, we must first understand what the cause is. In our opinion, the major influencing factor is that the assets were sold for twice the price, on a per megawatt basis, of those in GB to private investors.

However, even against this background, we have made considerable effort to reduce generation costs by the following means -

1. Contact re-negotiation at Power Station West,

2. High availability at Kilroot and operating above contracted load, thus delaying the need for new investment and reducing the need to run less efficient plants

3. Working with DETI regarding the £30M support fund.

Q. Regeneration of contracts is widely regarded as a prerequisite to the development of the energy market in Northern Ireland.

Does AES Kilroot believe that current contact negotiations can reach a successful conclusion?

A. We believe they can, but only with government support.

We have been working with NIE and the Regulator on the clear understanding that in agreeing to any changes the investors in our project cannot be expropriated in any way.

The cost to the consumer can only be reduced by either,

1. An up-front payment by Government to buy-out or buy-down the existing contracts,

2. Re-profiling of the payments over a longer period, or

3. Investing in technology.

Our proposal to NIE involved re-profiling payments over a longer period of time and conversion to burn orimulsion. The Regulator's advisors concluded that both parts of this proposal produced savings for consumers.

To date NIE have not accepted this proposal on the grounds that they do not want an extended contract period. This issue has not been forced by the Regulator. NIE have proposed an alternative way of implementing our proposal, and this is where Government support is required.

Their proposal is as follows -

The Government must firstly establish legislation to allow them to raise a financial bond, to be used to buy-out or buy-down to an acceptable level, the existing contracts. All consumers will then be levied over the repayment period of the bond.

In addition, if still desirable, further money can be raised in the same way to finance the conversion of Kilroot to Orimulsion, including the installation of FGD.

Q. privatisation objectives

Point 5 of AES Kilroot submission

"Bidders for the power stations were offered long-term contracts with NIE for the sale of electricity generation. Bids were offered based on expected cash flows from operating under the terms of these contracts".

How does AES Kilroots existing cash flows compare with anticipated cash flows at the time of bidding?

A. We invested in Northern Ireland on the clear understanding that we were purchasing unregulated businesses. If we under performed, there would be neither a refund from the government nor a regeneration of the contracts to provide us with financial relief. Likewsie, if we performance better than expected, we would reap the benefits and there would be no profit clawback. In other words, our businesses would not be regulated and we took responsibility for both upside and downside in the business. On this basis, a very large payment was made to the government in 1992." The report from the Audit office "The Privatisation of Northern Ireland Electricity" shows that we paid 26% more than Government's expectation for the contracts. The report also outlines the key assumptions made by Government in arriving at their expectation. It is obvious from this that we expected much higher efficiency gains than Government. A measure of our actual performance to date can be derived from our published accounts.

Cash flows from our businesses are dependent in large part on operational risk. While we have been pleased with out performance to date, we are not even half way through the term of the project. Operational risk will continue to increase as the power stations continue to age.

Furthermore, expectations have been revised subsequent to the acquisitions and, based on these revisions, we refinanced in 1994 and we acquired Tractebel's interests in 2000. The project is now financed such that the debt repayments occur in the second half of the project. This financing was secured on the strength of the existing contracts and the belief that contracts of this type, in the UK are not subject to political interference that would adversely affect the interest of significant foreign investors.

Q. Points 7 and 8

"AES and Tractebel bid much higher than the Government benchmark because they anticipated higher efficiency improvements from operating the businesses".

What progress has been made in achieving these efficient gains?

A. As Above.

Q. Technology

Points 9 and 13

"All four existing plants in Northern Ireland are relatively old and as such have higher operating costs and lower conversation efficiencies than modern plants. These technology limitations can be addressed but substantial investment would be required".

Does AES Kilroot believe that customers will ultimately bear the cost of this substantial investment?

A. In any market the customer will ultimately bear the investment costs, but will also reap the benefit of that investment via lower prices or improved quality.

Q. Achievements to Date

Point 14

".The contracts were re-arranged a second time until 2002, this time freeing up capacity for large customers at prices significantly less than NIE's tariff".

Can AES Kilroot quantify, in percentage terms, exactly what they mean by significantly less?

A. In percentage terms, comparing like with like, the contract renegotiation involving a 60MW generating unit at Belfast West Power Station means that the output from this unit is currently being sold to electricity suppliers at 32% below the equivalent NIE tariff.

It is important to understand how this has been achieved. The most important factor is that Power Station West is approaching the end of its working life and has no debt to service. Secondly, this is a coal-fired plant, and coal has not experienced the dramatic price increase applicable to natural gas. We feel that this second point clearly demonstrates the requirement for fuel diversity.

It is not possible to repeat this process at the Kilroot plant as the investment has not yet been paid off.

Q. Work in Progress

Points 18 and 19d

". the economics of the Orimulsion proposal needs to be updated to reflect new information".

What is this new information?

A. It is a few years since the Regulator's advisors carried out the economic analysis. Since then a few key assumptions have changed and it would be prudent to have the analysis updated. The changes are -

1. The Scottish Interconnector is now rated at 500MW (analysis assumed 250MW),

2. The price of natural gas has significantly increased,

3. The market liberalisation has been accelerated.

We understand the Regulator is having the analysis updated.

Q. What impact might it have on the proposal?

A. We would prefer to wait for the analysis to be rerun, but we would not expect the conclusion to change.

Q. How does AES Kilroot view the plans by the EU Energy Commission to bring forward a proposal to completely open energy markets in the EU by 2005?

A. It is good to give customers choice, although there is a possibility, depending on the timing of this, that the Regulator and NIE will have to address the issue of NIE being left with stranded costs. Elsewhere, where de-regulation has occurred, governments have had to find ways of dealing with utility stranded costs.

We understand that DETI has commissioned a study to assess the effects of full market opening in Northern Ireland and look forward to hearing the findings.

Q. Does AES Kilroot welcome the potential of an all-island energy market and further interconnection with Britain?

A. Yes, we very much welcome this. Increasing the size of the accessible market provides greater scope for competition with reduced infrastructure costs.

N-S interconnection will add more value faster due to the common land mass, however E-W interconnection also has potential.

Q. The recent Daughter Directive put forward by the European Commission proposed new limit values for particulate matter emissions to be met by 1 January 2010. In proposing a limit value for PM10 [i] the Commission expressed an interest in establishing limit value for fractions smaller than PM10 and noted the emerging evidence of stronger associations with health effects at smaller fractions. A review of new scientific information is proposed in 2003.

Have AES Kilroot considered how a change in emission regulations in Europe would impact the price of electricity generation with Orimulsion as the preferred fuel?

A. Our understanding is that the Directive referred to (Council Directive 1999/30/EC) is applicable to ambient air quality standards and not emission limit values from power plants. However, emission limit values are currently being addressed by the European Parliament under the revision of the Large Combustion Plant Directive.

When we were initially considering the proposal we accepted that this would not be a short-term measure and therefore we considered that the emission limit values we should be setting ourselves were values as low as reasonably practicable. Therefore the cost of our proposal is unlikely to change.

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MINUTES OF EVIDENCE

Wednesday 4 April 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mr Clyde

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Ms E Vasquez )

Mr K Hall ) Bitor Europe

Mr J Miles )

576.

The Chairperson: You are very welcome, and we thank you for your submission. Perhaps you could introduce yourselves.

577.

Mr Hall: I am the business development director of Bitor Europe Ltd., and with me is Ms Eugenia Vasquez, who is the managing director, and Mr Jason Miles, who is the business development manager. We all trained as chemical engineers.

578.

Each Orimulsion project has its own merits for development. A combination of factors would make the proposed project at Kilroot a success. These include a reduction in generating costs, which meet the electricity regulator's objectives and those of 'Strategy 2010'. We make an immediate improvement in environmental performance and a diversification of fuel source to comply with the Department of Enterprise, Trade and Investment's policy.

579.

Bitor is proud of its long record of commercial operation and environmental performance in countries with the highest standards of environmental legislation. However, we recognise that the cancellation of the Pembroke and Florida projects might cause you concern and that you might need to be convinced of the choice of Orimulsion as an alternative fuel for Kilroot. The Pembroke and Florida projects received all the required legislative approvals, but Bitor and the generator failed to address properly legitimate local concerns that were often outside the usual legislative requirements.

580.

Its experience has made Bitor introduce significant changes to its project development strategy. It has introduced changes to the product and to corporate policies and now places much more emphasis on the environmental aspects of fuel.

581.

At the request of the US Congress, the United States Environmental Protection Agency (USEPA) carried out a full evaluation of the use of the fuel for power generation and concluded that it was another conventional fuel requiring the same pollution controls as coal and fuel oil. That investigation followed the cancellation of the Florida Power and Light Company project. That means that it has been carried out in the last two years.

582.

The fully integrated package of Orimulsion and flue gas desulphurisation (FGD) offers the best option of all the alternative fuels for Kilroot. At the same time, we are maintaining full fuel diversification at the most reasonable price for the people of Northern Ireland.

583.

Since 1998, when the regulator recommended the project as his preferred choice, Bitor Europe has put tremendous effort into developing the project. Our strategy is to give proactive briefing to all interested parties while evaluating with the generator all aspects of the fuel's performance at the plant.

584.

Our aim was to comply with the regulator's plan to have the Orimulsion plant in operation by 2002. However, delays mean that this is no longer achievable. It is unlikely that Orimulsion will be in operation at Kilroot before 2006, even if planning application activities are initiated before the end of this year. A slippage of one quarter would mean another year of delay, and the economic benefits of the project would be eroded to such a degree that the viability of the regulator's original concept would be threatened.

585.

We have not been able to assess the attitude of the new Administration here, and whether they will consider the project in the same way as the alternatives. We believe that sufficient work has been carried out and that full information is now available. All the major parties have been briefed to enable a conventional planning application to go ahead. This would include a full and open public debate in the framework of a conventional power station planning application.

586.

In advance of this, a local environment forum has been proposed to give bodies such as non-governmental organisations (NGOs) the opportunity to present and discuss their concerns regarding the project. Friends of the Earth (Northern Ireland), the University of Ulster energy research centre, Northern Ireland Environment Link (NIEL), the World Wide Fund for Nature (WWF), the Ulster Wildlife Trust and the Northern Ireland Electricity Committee have all accepted our invitation to participate.

587.

We hope that the Assembly's Enterprise, Trade and Investment Committee has carefully reviewed the submissions on Orimulsion in Kilroot and that it will agree that this project will deliver the necessary benefits - benefits which require no special consideration outside the usual power station planning application.

588.

Time is of the essence, and an early decision is necessary to enable us to facilitate the planning of resources or to take the necessary steps to avoid any potential damage to the image of Orimulsion worldwide.

589.

Mr Clyde: What measures of abatement are necessary other than flue gas desulphurisation for the burning of Orimulsion at Kilroot?

590.

Mr Hall: The installation of flue gas desulphurisation is a significant investment. The properties of the fuel enable many of the other reductions, as well as SO_2, to be made without any modifications. For instance, the 15% reduction in CO₂ is a direct function of the fuel's composition compared to coal. There is a hundred times less ash, and that is a direct result of the fuel's composition. The lower nitrogen content of the fuel means much lower levels of nitrogen oxides. Apart from flue gas desulphurisation, which is a time-consuming investment, the only major modification to the plant would be the processing of the ash into a compact, dust-free form that could be transported as a non-hazardous product for recycling.

591.

Dr McDonnell: Orimulsion was used at power stations in Kent and Cheshire for eight years. Why did the trial stop and why was there no progress beyond the trial stage? Would there be a trial at Kilroot?

592.

Mr Hall: Both those projects were started in the early 1990s when Orimulsion was first commercially developed. That was 10 years ago and they were essentially long-term commercial trials. Technically and environmentally they met all the standards. However, to turn them into commercial projects no different from Kilroot would have required flue gas desulphurisation. To install that, the fuel delivery costs would have had to be of the same order as Kilroot's. However, because methods of transportation to the plant were complicated, similar to those for coal to Kilroot, we had to bring in large ships, in one case to Liverpool. We then had to trans-ship 5000 tonne barges down the Mersey River and the Manchester Ship Canal. That doubled the freight costs.

593.

In Richborough we had to bring ships into Kingsnorth Power Station and then trans-ship even smaller parcels, which more than doubled the freight costs to the power stations. It was simply a question of economics. This project has the same difficulties with coal as we had with Orimulsion. Expensive secondary transportation will prevent FGD being installed, and without FGD the project cannot run its full length and be re-financed. It was purely for economic reasons. Both plants had time left on their environmental permits and could have run for another year or two.

594.

Dr McDonnell: Would a trial be necessary here?

595.

Mr Hall: No. With the data that has been available for commercial operations in the last 10 years, Bitor Europe considers that it would be able to design and install the equipment without any further trial.

596.

Mr Neeson: How has the product changed?

597.

Mr Hall: There have been two major changes. The surfactant has been changed. This is a very small amount of chemical that keeps the bitumen droplets in suspension in the water. It used to be a nonyl phenol exthoxylate (NPE) based chemical that had been associated with oestrogen mimicking in marine organisms. Bitor changed it to an alcohol-based surfactant. Therefore a spill will have no such impact on marine life.

598.

Magnesium was also present in the fuel, but that has also been removed. The magnesium content increased the ash burden from the combustion of the fuel. Those were the two major changes to the formulation of the fuel. Apart from those changes, the fuel is a uniform natural bitumen resource and there is no difference to the water content or the bitumen composition. The small quantity of chemicals keeps it in an emulsified form.

599.

Mr Neeson: I live beside Kilroot Power Station, so the transport will be at my backdoor. What safeguards have been taken to ensure safe transportation of the fuel, bearing in mind that tankers will be carrying 40,000 or 50,000 tonnes of the product?

600.

Mr Hall: Bitor Europe is planning to transport the fuel in 100,000 tonne ships; that is the size of the jetty at the power station. That would require about 12 deliveries a year. Bitor Europe has been proactive - which perhaps it had not been in previous projects - and has been in intensive consultations with the Environment and Heritage Service and the Department of Agriculture and Rural Development. They have collated information on the hydraulic characteristics of Belfast Lough to enable spill modelling to be carried out.

601.

There has also been some marine monitoring by AES Kilroot beside the jetty. That will enable comparisons to be made when AES makes the modifications to the power station.

602.

We jointly commissioned an independent study - or as independent a study as can be done with one's own money. When a study is commissioned its results can be independently considered. The world's expert company in risk analysis is Det Norske Veritas. It certifies many oil platforms in the North Sea. It is like Lloyds of London. Det Norske Veritas carried out an extensive risk analysis on bringing the fuel around the southern part of Ireland and around the north of Ireland into Belfast Lough and on the off-loading operation.

603.

The results of the risk analysis will be used to feed into the most appropriate spill modelling scenario. Some of the marine monitoring being carried out provides the ecological data to enable one to do the spill modelling. Bitor Europe has carried out marine measurements and a risk analysis and has had discussions with the Environment and Heritage Service and the Department of Agriculture and Rural Development about the data required for the spill modelling.

604.

The port of Belfast, the Maritime and Coastguard Agency of the UK, the Environment and Heritage Service, Oil Spill Response Limited of Southampton, which is the world's leading oil spill response company, have all reviewed this risk analysis. The study concludes that there is likely to be a spill of Orimulsion, but not more than once in 200 years, due to the preventative measures that we take in our ships.

605.

I am sure that the same was said about the Sea Empress before she ran aground in Milford Haven, but the possibility of that happening is remote. Nevertheless, we appreciate that spills can happen. However, we take precautions when vetting our ships: we use double hulled vessels and we have our own tanker guidelines. We use independent companies such as BP to vet tankers. This has enabled us to deliver over 35 million tons of fuel in the last 10 years from Venezuela to as far as Japan without a single spill.

606.

Mr Neeson: I welcome your proposed public consultation. Who will initiate it, and when will it start?

607.

Mr Hall: We would like to see the generation contracts resolved, because, as AES said, until they are resolved, no one will spend money on the planning activities. Our bar chart shows that the best outcome is for the Committee to produce a recommendation when it finishes its inquiry in the third quarter of this year that will enable the contracts to be resolved by the end of the fourth quarter. That should allow planning activities to start at the beginning of next year.

608.

If that happens, Orimulsion could be in use in Kilroot by 2006. As soon as the planning activities are initiated, we would activate the environment forum. Part of the planning activities is public consultation. There was public consultation at Florida and at Pembroke, but the main difference now is that we have generated data over the last three years to address the legitimate concerns of interested parties; concerns that may not be covered by existing legislation. For instance, one might find that there is no legislation which deals specifically with very fine particles of vanadium. However, it is a genuine concern. We have used the very detailed, measured data from our operating power plants - data which we did not have three or four years ago - to address these legitimate concerns. We hope that the public consultation, which has already been going on for the last three years, will continue through the planning period of the project.

609.

Ms Morrice: If you were in our position would you undertake such a long, potentially hazardous journey to bring materials from Venezuela to Kilroot? Would it not cost exactly the same to build an offshore marine wind turbine at Kilroot to supply it directly without any problems? In our position, which would you go for? Which would be more sensible?

610.

Mr Hall: "You pays your money and you takes your choice". To replace 520 megawatts of power at Kilroot, one would have to build more than 1,000 offshore wind turbines. Offshore platforms, especially in the fairly rough seas here, would not be cheap.

611.

Ms Morrice: Would a North Sea platform with a transmission line be possible?

612.

Mr Hall: A structure and transmission lines would have to be in place. You have already set a contract that AES Kilroot have bid for. You will have paid for that contract whether the plant runs to 2010 or 2024. You are, in effect, remortgaging the debt and maximising the use of an existing asset.

613.

Even if you had built wind turbines you would still have paid the full price for Kilroot on top of having to build the wind turbines. We are using the existing contract money and utilising the full life of the asset. That also significantly improves the environmental performance.

614.

I have not studied the economics of wind power for Kilroot, but I am fairly sure that it would never be able to compete with our proposal.

615.

Ms Morrice: You are chemical engineers - you are not in the business of alternative energy. That is not the job of a chemical engineer.

616.

Mr Hall: Well, civil engineers are promoting offshore wind power; and mechanical engineers are promoting ultra super critical boilers, because that is mechanical equipment. Chemical engineers are promoting gasification - all as future technologies.

617.

Ms Morrice: The big difference is that wind, solar and wave power is on our doorstep: yours is in Venezuela.

618.

Mr Miles: Denmark is an example of how to promote renewable energy. It uses Orimulsion in its fuels portfolio for the environmental benefits associated with it. It also promotes renewables and creates a market that supports renewable energy by reducing the cost of electricity, improving emissions through the use of Orimulsion and by promoting the use of wind energy.

619.

Mr Hall: Relatively cheap generating costs provide more potential to develop the more expensive generating methods that you suggest. The costs of using just wind or solar power would be much higher. Minimising the generation costs of existing power sources would, as in Denmark, allow greater potential for developing renewables. There have been developments in renewables, specifically wind power. Because people have been allowed to develop them, costs have come down and the technology has improved. This can be best encouraged by minimising present generating costs.

620.

Ms Morrice: Can this only be found in Venezuela?

621.

Ms Vasquez: Yes. It is produced in Venezuela because the bitumen, the main component of the product, is found there. There are other bitumen reserves in Russia and in Canada.

622.

However, the one in Venezuela can be easily and cheaply produced. It can then be offered to the market in competition with coal, for example, at reasonable prices from its production and manufacture.

623.

Ms Morrice: Venezuela is an important oil producer. What percentage of Venezuela's gross domestic product (GDP) would Orimulsion comprise compared to oil?

624.

Ms Vasquez: Venezuela is very dependent on oil. About 70% of the income from the country's exports is in oil production. It represents about 40% of the government's income. The Venezuelan oil industry is also very important worldwide - it probably ranks third after Exxon Mobil and Shell.

625.

Mr Hall: It is a way of diversification for Venezuela. A large bitumen resource should be exploited. Conventional petroleum products come from crude oil, and some petroleum products, boiler fuel, for example, come from bitumen. As it is wise to diversify one's fuel sources, so it is wise to diversify one's product base.

626.

Dr O'Hagan: How clean and green is Orimulsion? Your station in Canada uses Orimulsion and a problem has arisen over plume visibility at certain times of the day when a slight brown colour has been present in the plume. I understand that it is especially noticeable after sunrise and shortly before sunset.

627.

My understanding is that a fine particulate matter - bromine and nitrogen dioxide - are possible causes of this. To address this problem - and I will try to get these words right - a wet electrostatic precipitator was installed to remove sulphur trioxide. Early results show limited success, but further optimisation is ongoing. Can you address concerns that this plume is not due to particulate matter, and can you advise on the progress of the optimisation?

628.

Mr Hall: No one wants to spend $1 million on a wet electrostatic precipitator for the wrong reasons. It will only work on sulphur trioxide (SO₃) and some particulate as a tuning device. A very thorough evaluation was carried out, which enabled the power company to make the investment in a wet electrostatic precipitator.

629.

Like all equipment it requires a commissioning period, but initial results show that the sulphur trioxide was attributed to a problem not of pollution but of visibility. The quantities are parts per million of sulphur trioxide in the flue gas. Compared to sulphur dioxide, which is in the hundreds of parts per million, it is a very small component. Of course, people do not want to live beside a power station chimney with a visible plume.

630.

However, it is only visible at certain times of the day.

631.

Mr Miles: It depends on how one looks at the plume; one side of it is white and the other brown. Our measurement study confirms that it is not particulate matter, and neither is it bromine or nitrogen.

632.

Mr Hall: It is sulphur trioxide and not pollution; it has to do with visibility, and the steps taken to address it have been successful. However, we are waiting for the full results of the trial - not the trial, the commissioning of the equipment. We can let you have them when they become available.

633.

Dr O'Hagan: That would be very useful. When Orimulsion is produced there is a residue of metals which contains large quantities of carcinogenic nickel and vanadium. How does Bitor intend to dispose of these residual metals?

634.

Mr Hall: When we first started marketing the fuel we recognised that we produced a relatively small quantity of ash to coal, about a hundred times less. It has a very fine nature and contained, like coal ash, trace metals. The trace metals in Orimulsion are nickel and vanadium, whereas the trace elements in coal can be selenium, boron, arsenic and quartz, which are just as damaging to human health.

635.

We decided that the relatively high nickel and vanadium content of the ash would make it an ideal feedstock for a metal recovery plant. We developed a joint venture with the Strategic Minerals Corporation of the USA, which is a large vanadium marketing and manufacturing company. We had started to build, but had not completed, our plant when we ran into difficulties in Pembroke and Florida. We built the plant in Harwich, and it takes the ash from the power station in a non-hazardous form.

636.

One of the modifications to the power station will be to convert the very fine ash into a high-density granulated material. We can then transport it in a non-hazardous way, as we do from our Italian and Danish plants. The ash is taken from those countries and is processed at Harwich to produce vanadium and nickel products which we sell in the metals market. We have closed the environmental loop.

637.

Dr O'Hagan: Is the extraction of Orimulsion like the extraction of coal? How is it done? How many people are employed in this in Venezuela?

638.

Ms Vasquez: Even though this material is very viscous and heavy, it can be produced with any oil company's conventional installation. In addition, we have been very careful in how we have developed it because we are operating in a very large savannah. To reduce the use of land, new technology has been used that is completely different to the conventional one. It uses a type of directional drilling so that we can approach very large areas in the reservoir with minimal surface disturbance. This is organised in groups of nine production wells, and one can cover, with no more than one break in the surface, about 300 sq m of the reservoir. That is how it is produced.

639.

The standards of Venezuela's oil companies are very high. That is because the original oil development started with concessions to foreign companies such as Shell Oil and Exxon Mobil, mostly companies from the United States of America. These companies brought their high standards to Venezuela. We have continued them, and Venezuela has a standard oil production comparable to those of the United States of America and here.

640.

Mr Hall: That was an interesting question, because there is no comparison with coal mining. Most internationally traded coal is surface strip-mined. That is why the UK mining industry could not compete. Coal is literally stripped off the surface. Sinking relatively shallow drills directionally, as Ms Vasquez described, minimises the use of surface area and has very little environmental impact compared to coal mining.

641.

The Chairperson: Thank you for your original submission and your answers. You spoke of a study, may we have copies of it?

642.

Mr Hall: We have a summary of recent developments in environmental issues. That is of key importance, because people in Government have not been briefed in detail on these issues. Friends of the Earth have been, but not Government. We would like to leave you a copy. It addresses the important issues of fine particulates and spills; issues which were perhaps not resolved satisfactorily in the two earlier projects.

643.

The Chairperson: Thank you. We may have some further questions which we will write to you about.

addendum to minutes of evidence
bitor europe

Q. In their submission to the DETI Committees Energy Inquiry at Parliament Buildings Stormont, Bitor Europe maintained that their proposal for burning Orimulsion at AES Kilroot included only Flue Gas Desulphurisation as abatement technology.

How does Bitor reconcile this with the abatement technologies employed in other power stations burning Orimulsion (as indicated in the table below taken from Bitor company literature)?

A. The Kilroot plant already has electrostatic precipitators (ESP) and low NOx burners (LNB) for coal operation. The basis of the submission of the Orimulsion Kilroot project section 4 'Improvement of Plant Environmental Performance' was the use of the existing abatement equipment and new Flue Gas Desulphurisation (FGD) to meet EU New Plant Standards. The prediction of the Kilroot plant performance is derived from the operating plant (as highlighted in the quoted table) where conversion of existing coal facilities to Orimulsion has improved the environmental performance, which in the case of Denmark was the reason for the fuel conversion. The existing ESP will have to be up-rated due to the higher liquid fuel capacity of the plant (520 MW) vs coal of 390 MW. It is predicted that this modification to the ESP and the superior properties of Orimulsion ash will further improve environmental performance from those stated in the original submission. Low NO_x burners installed for coal has shown reductions of 30-40 % NO_x when utilised for Orimulsion. The vast bulk of the environmental investment will be in the FGD facilities.

Q. While oil spillages in Belfast Lough have been negligible in recent years, no code of practice exists for a major oil spillage of Orimulsion. Evidence submitted to the enquiry into the proposed use of Orimulsion at Juno Beach, Florida stated that a spill was almost inevitable.

Will a code of practice for a major spillage of Orimulsion specifically for Belfast Lough?

A. As a responsible operator Bitor Europe views prevention of spills as extremely important. For this reason the quality of transportation and shipping operations are recognised and reflected in our company policy and tanker requirement guidelines. Although great emphasis is placed on prevention it is of course recognised that accidents can still occur. It is essential to be prepared for such possibilities. In common with Oil Pollution Preparedness, Response and Co-operation Convention (OPRC) requirements the exposure and potential impacts of possible spills are being evaluated as a part of the Spill Contingency Planning process for Kilroot.

The Risk Assessment, which is the first step in this process, has already been undertaken. This has highlighted the most likely spill scenarios. The next step will be to model the behaviour and impacts of these spills. Preparation for this has already begun and meetings have been held with Environment and Heritage Service (EHS) and Department of Agriculture for Northern Ireland (DANI).

In terms of spill response the strategy has been to develop a good understanding of Orimulsion spill behaviour and to develop tools in terms of detection / monitoring, containment, clean up and spill modelling. Bitor has prepared three separate Spill Manuals covering spill response strategies at sea through to shoreline response and subsequent disposal issues.

In an effort to constantly improve spill response Bitor continues to develop and optimise equipment and strategies. For example, as a result of the work that Bitor has undertaken over the past 10 years numerous deep-skirted booms are now commercially available and equipment has recently been commercialised to enable sub-surface emulsion to be efficiently removed from the water column. Discussions are at an advanced stage with regards to Oil Spill Response Ltd (OSRL), the world's largest spill response company, to include this equipment in their normal stockpile.

Q. In the executive summary of Bitor's submission it is stated that: "The proposal for a full integrated package of Orimulsion and Flue Gas Desulphurisation now seems the only solution that enables the operation of the plant for the full contract length."

Have Bitor Europe considered the economic viability of a gasification plant for the life of the contract?

A. Any Orimulsion project has the option of gasification, however the proposal for a full integrated package of Orimulsion and Flue Gas Desulphurisation is the only solution that enables the operation of the plant for the full contract length and meets the Regulator's objectives.

Bitor Europe actively promotes gasification as an ideal technology for utilising the fuel and has been waiting for the right market factors to enable us to develop a commercial project. Bitor carried out successful technical trials in 1989 at a Texaco plant in California and has a commercial guarantee. There are three commercial plants operating with gasification technology in Europe. They are all in Italy and built next to a refinery complex that enables them to utilise the refinery feedstock of high viscosity oil, utilities and sell products such as steam and hydrogen to the refinery. Even with these advantages they cannot operate without public subsidy.

These plants operate at slightly higher thermal efficiency, lower emissions of SO_x and NO_x, but no lower PMs than our current commercial operating plant. There are considerable developments being carried out on gasification technology to bring down prices and improve efficiency mainly on the gas turbine side and Bitor is looking to develop projects where the factors combine to give a chance of success.

At Kilroot there is no local oil refinery, none of the existing infrastructure could be used and a new greenfield site would have to be developed, which would take about two years longer than an Orimulsion FGD project. It would not meet the Regulator's objectives to reduce the price of electricity now and therefore we do not consider Kilroot as a candidate for this technology and would not wish to develop the project as such.

Q. Orimulsion is not used as a fuel in any power stations in the USA. An application to burn Orimulsion at the Manateepower plant in Juno Beach West Florida was rejected in 1998. The Florida Power and Light Company spent almost five years demonstrating the benefits of this fuel through expert testimony, third party research, evaluation by 13 federal, state and local agencies and formal public hearings. The Governor and Cabinet rejected the proposals based on health evidence and the threat of spillage.

Bitor argue that the application did not proceed for commercial reasons, however how do they accept the view that it is more difficult for power stations in the United States to burn Orimulsion because of the more stringent emission regulations established by the United States Environment Protection Agency.

A. We do not argue the application did not proceed for commercial reasons, it is on the public record that the Orimulsion Project in Florida met all the legislative requirements of both the local and Federal authorities including the US EPA as well as two judicial reviews. The state board of politicians overruled these legislative bodies due to the local perception of the project and unanswered concerns outside of the legislative requirements. The power company had the right of appeal but did not use it due to further delays making the project uneconomic.

Since this project failed, the US Congress commissioned the United States Environmental Protection Agency (USEPA) to carry out a study into the environmental performance of Orimulsion and in 1999 it concluded it was another conventional fuel requiring the same pollution controls as coal and oil.

Countries such as Denmark, Germany, Italy, Japan and Canada where Orimulsion is burnt have amongst the strictest national environmental legislation in the World and in many cases stricter than the U.S.A in terms of airborne pollutants. There are no limitations to the use of Orimulsion in the U.S.A in terms of environmental performance.

Bitor is now concentrating its efforts in developing a number of projects on the Eastern Seaboard of the USA that meet the criteria required to make an Orimulsion project successful. The progress of such projects is conditioned by its own particular circumstances that can be largely operational, strategic or political but not related to difficulties in meeting the US EPA emissions regulations.

Q. The recent Daughter Directive put forward by the European Commission proposed new limits values for particulate matter emissions to be met by 1 January 2010. In proposing a limit value for PM₁₀ the Commission expressed an interest in establishing limit value for fractions smaller than PM₁₀ and noted the emerging evidence of stronger associations with health effects at smaller fractions. A review of new scientific information is proposed in 2003.

The House of Commons Department of Health Committee on the Medical Effects of Air Pollutants concluded that measures of PM_{10 or even PM2.5 are inadequate measures upon which to base the assessment
of toxicological hazard of inhaled particulate pollutants to the respiratory
tract.}

Have Bitor Europe considered how a change in emission regulations in Europe would impact the price of electricity generation with Orimulsion as the preferred fuel?

How does Bitor Europe view the emerging evidence of stronger associations with health effects at smaller fractions?

A. The Daughter Directive does not refer to emissions but to ground level concentrations of particulate matter. Ground level concentrations of PM are made up from all sources of emissions not emissions related to a single plant (and therefore not legislated for as part of plant performance). At Kilroot plant emissions of all PM fractions, as well as NO_x and SO_x, the important precursors to the majority of fine PMs from power stations will be reduced utilising Orimulsion.

Bitor Europe views the environmental benefits gained from the reduction of greenhouse gases, acid gases, all PM fractions, ash disposal and the reduction of the very high electricity prices in Northern Ireland whilst meeting all relevant legislative requirements as why Orimusion is the preferred fuel at Kilroot.

In addition Bitor Europe views the emerging evidence of stronger associations with health effects at smaller fractions as being an additional benefit of the preferred use of Orimulsion at Kilroot. It is a strong reason to hasten the initiation of the project as this is the only way to reduce these pollutants from the plant in the shortest possible time.

Bitor Europe plant data, supported by plant manufacturers performance information shows less PM_2.5 emitted from a Orimulsion fired power station than for a modern coal fired power station meeting EU New Plant Standards. Data collected by the House of Commons Health Committee on the medical effects of Air Pollutants (COMEAP) shows the greatest contribution from power stations to the ground level fine fraction PM_2.5 is from secondary particulates formed by the reaction of NO_x and SO_x emissions with ammonia in the air. The large reduction in SO_x and NO_x using Orimulsion at Kilroot will therefore further reduce the number of PMs of the finest fraction caused by the existing coal emissions.

Recent work by medical researchers has questioned the relevance of standards based on mass concentration, such as PM₁₀, citing particle number concentration or surface area as the most relevant method of evaluating epidemiological effects. However, the Chairman of the UK Government's Expert Panel on Air Quality Standards (EPAQS), Professor Anthony Seaton recently concluded that both these measures were undermined by a lack of data with almost no evidence with respect to particle numbers and sparse evidence with respect to surface area [ii] . Therefore the current standard of measurement using PM_{10 was recommended} for continued control and monitoring of ground level air quality.

Additional information can be found in the Bitor Europe document 'Orimulsion Summary Document - Recent Developments and Environment Issues', 2^{nd April 2001.}

Q. According to Bitor literature Orimulsion ash is inherently fine - 85% less than PM₁ (1 µm). There is concern that the proposed abatement measures will not remove the fine particulate, especially as the measure of emissions standard is PM₁₀.

How does Bitor Europe view this concern?

A. Orimulsion ash is inherently fine due to the very high combustion efficiency of the fuel, which leads to many other environmental benefits over coal. But in the past there has been a very important misconception of the ash data associated with Orimulsion. 95% of the Orimulsion ash is less than 10 µm (PM₁₀) and 70% is less than 1 µm (PM₁) whereas for coal 30% of the ash is less than 10 µm with only 3 % < 1µm, therefore it has been assumed there are more fine particles in Orimulsion ash.

There is a hundred times more coal ash resulting in a higher total emission of fine PM₁₀ (30x) and PM₁(4x) than for Orimulsion_.Further, a low capture efficiency of this fine fraction in coal ESPs led to the extrapolation there would be a low capture efficiency in an Orimulsion ESP and a higher fine PM emission. Therefore Bitor Europe would only view this concern as valid in the light of a misunderstanding of ash size data, historical extrapolated coal performance on fine particles and the absence of any measured Orimulsion size emission data.

Measured plant data now available on PM and ESP manufacturer information shows very high collection efficiency of the fine material in excess of 99%, this is higher than coal on the coal designed plant at Asnaes. As well as a reduction of PM, emissions of SO_x and NO_x the important precursors of fine ground level PM will be reduced with Orimulsion use. We hope this benefit reduce local ground level concentrations where the PM₁₀ limit is relevant, but this is dependent on other sources and variables such as plume dispersion and dilution.

Modern power station stacks are effective in diluting and dispersing emitted flue gases. Coarse mode particles (PM₁₀) are deposited within 10's of kilometres from the emission source whereas fine mode particles (PM_2.5) are deposited within 100's to 1000's of kilometres.

The technical reasons given by the manufacturers for the better performance are the lower inlet ash burden, electrostatic properties of the ash and the narrower size distribution of the PM.

Bitor Europe in conjunction with AES Kilroot has commissioned a ground level PM monitoring facility to enable background levels to be recorded for assessment of the impact of Orimulsion PM on ground level concentrations.

Additional information can be found in the Bitor Europe documents:

'Orimulsion Summary Document - Recent Developments and Environment Issues',2nd April 2001.

'Orimulsion - Particulates and Trace Elements Briefing Paper', April, 2001.

Q. An independent report for the inquiry found that the potential for accidental Orimulsion spills during transportation still exists. The report stated, " spills are likely to occur during dockside Orimulsion transfer operations, as well as in transit, and the potential effects of accidental spills should be thoroughly appreciated".

Does Bitor Europe view the transportation of Orimulsion fuel as a concern?

How do they view the environmental impact of an Orimulsion spillage?

A. The report mentioned is not actually independent. The authors were commissioned by CSX Transportation Inc, a coal transportation company who were opponents of the Orimulsion Project in Florida.

A detailed rebuttal of the points raised in the report was subsequently given by Dr Mark Harwell from the University of Miami and Captain William Holt (an ex U.S Coastguard captain). Both of these expert witnesses appeared in the judicial hearing where their evidence was subject to the full investigative process and found in favour of Orimulsion.

As a responsible operator Bitor Europe views prevention of spills as extremely important. For this reason the quality of transportation and shipping operations are recognised and reflected in our company policy and tanker requirement guidelines.

Thorough Risk Assessments for Kilroot have already been undertaken by an experienced, independent company, Det Norske Veritas (DNV) Technica. The spill risk have been quantified and shown to be very low which is a reflection of the quality of the vessels and operations. DNV state that over the anticipated lifetime of the project (20 years) "there is therefore a good chance that the Orimulsion import operations will not result in any releases of Orimulsion into the water".

Bitor considers all spills as undesirable. As with any spill, regardless of whether it is crude oil, fuel oil or Orimulsion, the precise fate and behaviour will be a function of variables including the size of the spill and prevailing environmental conditions.

In the event of an accidental spill of Orimulsion 30% is water and the natural tendency of the remaining bitumen droplets is to disperse. The advantage of this is that Orimulsion does not form surface slicks as conventional oil does. The devastating impacts of surface oil on coastlines and wildlife are well documented, the most recent significant example in Europe occurred with the Erika off the coast of Brittany.

The bitumen is essentially chemically inert as it contains very few of the water soluble and toxic Benzene Toluene Ethylbenzene(BTEX) and Polycyclic Aromatic Hydrocarbons (PAH) compounds that can abound in crude oils and HFO.

In a recent Risk Assessment study undertaken by the Danish Water Quality Institute (VKI) comparing Orimulsion and fuel oil the following was one of the main conclusions: "For all scenarios, the modelling of the risk to aquatic organsims showed that a spill of HFO results in considerably higher risks over a much greater area than a spill of Orimulsion-400".

We would tend to agree with this view and that offered by previous investigators in the USA. A major study that had been undertaken by the University of Miami was reviewed by the US EPA who stated that they were in agreement with the major conclusion on Environmental Risk Assessment that "a spill of Orimulsion 100 likely poses a similar or lower risk to Tampa Bay biota than does an equivalent spill volume of No. 6 fuel oil."

Q. According to Bitor literature Orimulsion is inherently fine (85% less than PM₁).

There is concern that abatement measures will not remove the fine particles, especially as the measure of emission is PM₁₀. This can be demonstrated by the Powergen Environmental Report (1997).

Normalising the figures to allow comparison shows that Ferrybridge released more PM₁₀s per tonne of burnt fuel. However in examining the normalised figures for nickel and vanadium it is clearly demonstrated that the very fine particulates produced from Orimulsion were not captured by electrostatic precipitators.

The electrostatic precipitators employed as abatement for power stations measure emissions by mass. For this reason experts argue for a full classification of PM₁₀ mixtures in terms of measures of particle count and surface area, as well as mass.

A. Contrary to the statement in Submission 1, the PowerGen Environmental Report (1997) demonstrates that emissions of particulates and trace elements (nickel and vanadium) from Ince power station were captured using the electrostatic precipitator equipment.

The Powergen report states 0.22 million tonnes of Orimulsion was burnt over a three month period. The formulation of Orimulsion used at Ince (now superseded by a new formulation) contained 0.27% ash (97% PM₁₀), 320ppm vanadium and 70ppm nickel respectively.

Using this data and the information provided by PowerGen the following removal efficiencies can be derived for all the components:

Table 1: Ince Data - PowerGen '97

Component (tonnes)	Electrostatic Precipitator Performance
	Inlet	Emission	Efficiency
Dust	600	120	80%
PM10	582	106	82%
Nickel	15	4	75%
Vanadium	70	18	75%

It can therefore be seen that the electrostatic precipitator was effective at removing both PM₁₀ (including fine particles) and nickel and vanadium from the flue gases.

Latest developments in Orimulsion fuel formulation, electrostatic precipitator performance and use of flue gas desulphurisation systems have further reduced emissions of all pollutants discussed above.

Coal ash typically contains approximately 30% PM₁₀. From the PowerGen '97 report it is shown that the characteristics of emitted dust from coal and Orimulsion are similar, 80% of emitted dust from Ferrybridge C (coal) is PM₁₀, whereas for Ince (Orimulsion) 88% is PM₁₀. However, emissions of PM₁₀ from Ince are half those of Ferrybridge. The increased percentage of PM₁₀ particles downstream of the Ferrybridge ESP clearly demonstrates that the removal efficiency for fine particles is lower for coal (this is detailed in numerous reports on coal use), this is not the case for Orimulsion.

When comparing Orimulsion with coal on an equal basis it is important to look at emissions of all elements classed as Hazardous Air Pollutants (HAPs) by the US EPA. Vanadium is not considered a HAP and Bitor Europe is unaware of its classification as a carcinogen.

The data from the PowerGen 1997 Report for Ferrybridge and Ince has been illustrated in Table 2 below to enable direct comparison of the two fuels, assuming 1 million tonnes of each. The data shows that there are higher emissions of classified HAPs from coal than from Orimulsion. As an example, 1 million tonnes of coal from Ferrybridge C emits 3,650 tonnes of hydrogen chloride, an HAP that is corrosive to the eyes, skin and respiratory tract.

Table 2: Ince & Ferrybridge 'C' Data - PowerGen '97

Basis: 1 million tonnes of fuel		Ferrybridge C - Coal	Ince - Orimulsion
Tonnes	Ash Dust PM10 (% PM10 in	152,560 1,174 940 (80%)	2,727 545 482 (88 %)
US EPA Hazardous Air Pollutants		Ferrybridge C	Ince
Kilograms	HC1 HF Arsenic Boron Cadmium Chromiu Copper Lead Mercury Nickel Selenium Uranium Zinc Total Total PCB Dioxins &	3,651,877 65,870 209 6,465 13 658 549 640 41 410 491 15 311 46 1 0.0005	- - - - - 78 37 53 - 17,75 - - - 5 1 0.0002
Other Air Pollutants		Ferrybridge C	Ince
Kilograms	Vanadium	485	81,114

The methodology used in Submission 1 for the calculation of the number of particles of trace metal emitted per tonne of fuel used is incorrect. Not shown in the calculation or referenced is an assumption of mean coal and Orimulsion particle size. Using this average size the Researcher has calculated the number of nickel particles assuming the average diameter of all particles in the fuel.

Mass balance and studies on coal element partitioning in ESPs show that trace elements such as nickel preferentially associate with the fine sub-micron particles, therefore the number of nickel particles from coal will be far higher than calculated. This is without taking into account other HAPs contained in coals that are not mentioned in the submission. The ratio between coal and Orimulsion is therefore more likely to be closer to the quantities (mass) in the fuel and not the number ratio as presented. The partitioning of these elements is a very complex topic and the subject of large volumes of work by bodies such as the International Energy Association.

The simplistic calculations and methodology provided in the Submission cannot be used to demonstrate relative particle removal in an ESP. In terms of data, measured emissions from Orimulsion plant shows that there is less PM_2.5 emitted than a coal plant and therefore the basic assumption of a smaller average particle size is incorrect.

To try and directly relate particle numbers at ground level from emissions generated at the stack without taking into account the stack dispersion and the contribution from other sources is incorrect even if there was any relevant epidemiological data available.

Recent work by medical researchers has questioned the relevance of standards based on mass concentration, such as PM₁₀, citing particle number concentration or surface area as the most relevant method of evaluating epidemiological effects. However, the chairman of the UK Government's Expert Panel on Air Quality Standards (EPAQS), Professor Anthony Seaton recently concluded that both these measures were undermined by a lack of data with almost no evidence with respect to particle numbers and sparse evidence with respect to surface area [iii] . Therefore the current standard of measurement using PM₁₀ was recommended for continued control and monitoring of ground level air quality.

The PM₁₀ limit, particle count and surface area do not refer to emissions at the stack but to ground level concentrations of particulate matter. Ground level concentrations of PM are made up from all sources of emissions not emissions related to a single plant (and therefore not legislated for as part of plant performance). At Kilroot plant emissions of all PM fractions, as well as NO_x and SO_x, the important precursors to the majority of fine PMs from power stations will be reduced utilising Orimulsion.

Additional information can be found in the Bitor Europe documents:

'Orimulsion Summary Document - Recent Developments and Environment Issues', 2^{nd April 2001.}

'Orimulsion - Particulates and Trace Elements Briefing Paper', April 2001.

Q. All the tables shown in submission 2 relate to the health effects of increases in PM₁₀ and PM_2.5 ground level concentration. The important conclusions from these tables are stated as:

n Small increases in particulate matter are related to increases in morbidity and mortality. Severity depends on location.

n The mean PM_{10 levels
in Table 7b are all lower than the 50 µg/m}^{3 permissible standard
for Northern} Ireland

It is important to consider that while the mass of a 1 µm particle of unit density is equivalent to the mass of one thousand 0.1 µm particles, the surface area of one thousand 0.1 µm particles is ten times greater than the single 1 µm particle. Therefore a 10% increase in PM_{10 could represent a very large increase of both the number of the
particles and the surface area of particles, and hence toxicant, presented to
the bronchial and alveolar regions of the lung.}

The electrostatic precipitators employed as abatement for power stations measure emissions by mass. For this reason some experts argue that full classification of PM₁₀ mixtures in terms of measures of particle count and surface area, as well as mass.

A. It is incorrect to directly relate percentage increases in PMs in stack emisions to percentage increases in ground level PM in epidemiological data. The effect of a change in power station emissions cannot be related to local ground level concentrations, without knowledge of the plant contribution to ground levels and dispersion modelling.

The issue of ground level concentrations of PM₁₀ and PM_2.5(particles under 2.5µm) is complex and the contribution to PM mixtures from all emission sources needs to be carefully considered to evaluate their role. Recent measurements in the USA concluded that 60% of PM_2.5consisted of sulphate and nitrate particles formed in the atmosphere from gaseous SO₂ and NO_x emissions [iv] .

Commercial operating data shows that emissions of PM of all sizes from Orimulsion are lower than coal firing. Furthermore emissions of gaseous pollutants such as NOx and SO₂ will be significantly reduced with Orimulsion due to the fuel properties and the installation of flue gas desulphurisation equipment. This has been confirmed by independent measurements of emissions from modern Orimulsion power stations.

European and USA standards for airborne PM_{10 concentrations are summarised below, European standards} being more stringent than current US standards:

Ground level concentration PM10, µg/m³	European Commission	USA Standards
24 hours	50	150
Annual	20	50

However the chairman of the UK Government's Expert Panel on Air Quality Standards (EPAQS), Professor Anthony Seaton recently concluded that both these measures were undermined by a lack of data with almost no evidence with respect to particle numbers and sparse evidence with respect to surface area [v] . Therefore the current standard of measurement using PM₁₀ was recommended for continued control and monitoring of ground level air quality.

Additional information can be found in the Bitor Europe documents:

'Orimulsion Summary Document - Recent Developments and Environment Issues', 2nd April 2001.

'Orimulsion - Particulates and Trace Elements Briefing Paper', April 2001.

Supplementary Question

Q. I live beside Kilroot Power Station, so the transport will be at my backdoor. What safeguards have been taken to ensure the safe transportation of the fuel, bearing in mind tankers will be containing 40,000 or 50,000 tonnes of product?

A. The results of the independent detailed risk assessment carried out by Det Norske Veritas Technica show the spill return period of one spill in 200 years relates to spills of 0.1 tonnes. For larger spills from ships the accident return frequency decreases to one accident in every 100,000 to 1,000,000 years. One of the reasons for this is the very stringent Bitor shipping policy including the requirement that all tankers carrying Orimulsion have to be double hulled.

The Sea Empress that ran aground in Milford Haven was of a single hulled construction. Six months earlier a ship called the Borga with a double bottom run aground at the entrance to the harbour but had not spilled any fuel.

In the Report of Lord Donaldson's inquiry into the prevention of pollution from merchant shipping, Safer Ships Cleaner Seas, May 1994 it said "It is clear that double hulled tankers can help to prevent pollution in low energy collisions or groundings, where only the outer skin is ruptured".

In the Report of the Chief Inspector of Marine Accidents in the grounding and subsequent salvage of the Sea Empress at Milford Haven, Marine Accident Investigation Branch (MAIB), March 1997 it said "Of the three generic types [of tanker] examined the double hull tanker was the only one offering the chance of zero oil loss in a repeat of the Sea Empress accident".

Supplementary Question

Q. I welcome your proposed public consultation. Who will initiate it and when will it start?

A. At present the Kilroot contract payment is scheduled until 2010 which most parties have labelled ' a bad contract' and expensive for the consumer. The Regulator's plan is to use Ormulsion and FGD to enable running of the full contract until 2024, which we believe, will make it a good contract.

The Regulator has told us the cost of not re-financing to 2024 is in the order of £ 12 million direct savings for every year of delay lost to the consumer. This excludes benefits from the very high gas prices at present. The Regulator originally envisaged Kilroot running on Orimulsion in 2002. Due to the difficulty in the Regulator gaining agreement on the contract with AES and NIE, a project planning application cannot be submitted.

Attached are two bar charts, Graph 1 is on the basis of the ETI Energy Inquiry finishing by 3Q 2001 enabling contract agreement between the Regulator, AES and NIE by the end of the year. This would enable Orimulsion to be in operation by mid 2006 assuming a conventional power station application process, which could start straight after the contract agreement. If the contract agreement slips by one quarter it could delay the start of Orimulsion operation by a year due to the hook up of the FGD having to be during a scheduled annual outage which is in the middle of the year at lowest generation demand.

Bitor Europe does not consider it realistic to expect the project planning activities to be initiated without contract agreement. However if activities such as the Environmental Impact Statement (EIS) and Best Practical Environment Option (BPEO) were started before the end of 2Q this year it could allow the project to be bought forward a year to start in 2005. Bitor do not know what AES would require to have the confidence to start these activities ahead of formal contract agreement but maybe this is something the Regulator is aware of.

Supplementary Question

Q. If you were in our position would you undertake such a long hazardous journey to bring materials from Venezuela to Kilroot? Would it not cost exactly the same to build an offshore marine and wind turbine at Kilroot to supply it directly without any problems? In our position which would you go for? Which would be more sensible?

A. In your position it is sensible to consider the use of Orimulsion and FGD at Kilroot because it will enable operation of the plant until 2024 that has to be paid for anyhow.

There will be no difference bringing material from Venezuela rather than the existing sources of imported coal. FGD allows the plant to run its full contract life and will also significantly improving the environment in the shortest possible time.

Therefore if this project were terminated in 2010, whatever technology is utilised to replace Kilroot it will mean the consumer is paying twice for the same power and we strongly believe this route would not be very sensible. There will be no improvement in the environment in the short term.

Excluding issues of cost, from a purely engineering point of view, Kilroot is a base load power station providing about 45% of Northern Ireland's power on a continuous basis. Offshore wind cannot provide guaranteed power on a continuous basis and is used in a complimentary way to base load plant. The Danes who have the finest record in Europe in the use of renewable energy, have developed the renewable industry as a complement to environmentally friendly base load power at a price that encourages technology development and the price of that technology has consequently fallen steadily.

Graph 1 Generating contract agreement 4Q 01

Graph 2 Generating contract agreement 1Q 02

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MINUTES OF EVIDENCE

Wednesday 4 April 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mr Clyde

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr R Sterling )

Mr J Magee ) Coolkeeragh Power Ltd

Mr R Devine )

644.

The Chairperson: Thank you for your submission. Can you summarise and we will concentrate on the questions?

645.

Mr Sterling: We do not really want to say too much in our opening statement. What needed to be said about Coolkeeragh Power Ltd has been said in our submission. This is an unusual little company, being employee-owned. This is the only one of its kind that we have been able to find anywhere in the globe in the power generation industry.

646.

However, despite our relatively small size and our unusual shareholding position, we have made a positive contribution to the industry by portraying energy matters as important for this island and as a driver of economic growth among other things.

647.

You may want to ask questions about our shareholding position. I want to say two things about our contracts. First, as you heard this morning from Mr McCracken from NIE, in 1997-98 we made voluntary amendments to the contracts in agreement with NIE and the regulator.

648.

My second point comes back to the one Ms Morrice made about moving beyond long-term contracts. It is important to recognise that the new Coolkeeragh ESB power station that is being developed will not have any generation contract. This is an at-risk development. We are moving beyond the contract stage to a full, open market position. I am now more than happy to answer any questions.

649.

Dr O'Hagan: What do you think could be done to increase energy interconnection throughout the island of Ireland? What role could Coolkeeragh play in achieving this greater interconnection?

650.

Mr Magee: There is only one interconnector at the moment between Tandragee and Maynooth. Two new interconnectors will come online before the end of this year between Donegal, Strabane and Enniskillen. That is probably the extent of interconnection required with Donegal at the moment because of the configuration and the technical limitations. Furthermore, if we get gas as far as Coolkeragh, there will be an opportunity to interconnect gas supply into Donegal. Who knows where that might lead in the future with the Corrib field coming on line soon?

651.

Ideally, two electrical systems should be interconnected at strong points in the systems. At the moment, the proposed interconnection is probably adequate for the needs of both the north-west and Donegal.

652.

Ms Morrice: I am very interested in the new opportunities that you have been talking about and in the very interesting position with your shareholding. My interest is in renewable and green energy. Are you setting yourself any targets? Do you have a role to play in promoting an environmentally friendly approach?

653.

Mr Sterling: We are the only locally owned generator, so we have a very strong community interest, particularly in the north-west. We have just been recommended for ISO 14001, the environmental standard. We may well be the first generator in Northern Ireland to receive that, so we are very environmentally conscious and aware. We are, however, a very small company. There are considerable strains on our resources in closing down the existing power station, with all the tensions that that brings, and managing the process whereby old plant, old employees almost, are facing the end of their career.

654.

We have taken two serious looks at renewable projects during the time that the company has been there. We made a submission on one of them within our first three years as a private company. We were unsuccessful, but we found that disproportionate management capacity was being put into those projects rather than into one main mission, which was to secure a future, against a very difficult background, for the existing business that we had taken on jointly with the employees.

655.

Ms Morrice: So you looked at two renewable contracts. Did somebody say to you "Will you buy this from me at this price?" Did you look at it and decide that there was too much management?

656.

Mr Sterling: These were investment opportunities. This was a completely new area in renewable power generation that was additional to our existing mainstream generation activities. This would have been a new activity. We were unsuccessful in the first instance on price.

657.

Ms Morrice: Who did you have to bid to?

658.

Mr Sterling: The first one was a bid to NIE under the non-fossil fuel obligation (NFFO) process, when the first or second round of tenders came out in 1994-95. It was a hydro scheme. I would prefer not to divulge anything publicly about the second one, but we examined seriously and expended quite a bit of resources on a renewables opportunity. We might have been interested in going forward with it had it not been for managerial constraints.

659.

Ms Morrice: Who turns you down in these events?

660.

Mr Sterling: In the first instance we were unsuccessful on price; in the second we decided to withdraw. We realised that it would have been counter- productive to our main interest to pursue the second opportunity.

661.

Ms Morrice: I would like to follow this further, but time is against us.

662.

Mr Neeson: As you know, Mr Sterling, this Committee has been very supportive of the development of natural gas pipelines to the north-west. Their success depends very much on a major customer. Complications have arisen from the decision by Bord Gáis to bring a pipeline from Scotland. If there are delays, how will they affect you? Can you explain the process to us?

663.

Mr Sterling: I will take the question on preparing for our close-down first. I commend the Committee for its support for everything that the north and north-west have been attempting to do in gas provision and new electricity generation. The key aspect of preparing for our close-down is the very strong bond that exists between the management of the company and the trades union. It was not always so. We had a baptism of fire when we began the process. There was industrial action in 1992, and we had a financial loss in our first year of trading. The bond was not created until both sides realised that there was substantial potential for them to work together and turn a negative force into a positive one. That has brought us to where we are today, corporately. We have developed our relationship with the ESB and we have a strong bond with the trades unions. The union fully supports our plans to give Coolkeeragh a soft landing to avoid the acrimony and the divisions which could occur between management and employees in the event of a rundown.

664.

With regard to your second point, our contracts with NIE end in 2004. We are on a reducing scale of contracts, and from April 2002 things will be very difficult for us in the last two years. We have contracts, but their value from 2002 will be a fraction of what it would have been in 1992-93 - not that they were particularly attractive at that time. They were not lucrative enough to attract anybody to buy Coolkeeragh, except us. We do face a very difficult time in those two years, but at the end of March 2004 our contracts terminate. We hope that at that point the pipeline and power station development will be well advanced, if not completed. If at that point they are not completed, we will be depending on an arrangement - presumably, with NIE - whereby we will be able to offer NIE some of the existing capacity at Coolkeeragh, perhaps for several months, to take us through until the new power station comes on-stream. That arrangement would, however, have to be put in place. Although Bord Gáis's pipeline decision could be interpreted as a setback, I believe that there is a proposal with the Department for a gas pipeline to the north and north-west which is not dependent upon a South/North gas pipeline.

665.

Mr Neeson: Could you do something similar to what was done in Belfast West? You heard from AES this morning that it kept it going for a few years although its contracts had gone.

666.

Mr Sterling: We have already done that. Coolkeeragh was bought in 1992, and we should have closed five months ago. Our close-down date was 1 November 2000. We have spun that out to 2004 by trading the value of our existing contracts. There is not much more to spin out. Things have reached their limit. Regarding the arrangements for our remaining contracts, they do not go up in line with inflation, and by 2002 their value will have reduced to market rate for the service we offer. That will be very difficult for us against very meagre circumstances.

667.

Mr Attwood: In an earlier answer you said that in 1997-98 there were voluntary amendments to contracts with the agreement of the regulator and NIE. What were they? Were they relevant to the contracts of other generators?

668.

Mr Sterling: No, that arrangement was entirely on our initiative. The background to it was that we were facing potential close-down in 2000, or shortly after, at which point the regulator could have cancelled our contracts at any time. Once we were sorted out with the trades unions in 1994, we set ourselves a joint mission as we were both committed to the success of Coolkeeragh and to establishing a new power station at the site. In 1997 we realised that we were less than three years away from close-down and that there was not sufficient time to enable us to see our ultimate ambitions through, so we had to try to secure more time. We attempted to "narrow" the contracts in relation to their value to us and to stretch them out a little bit longer and, in doing that, to give something back to the customers. That is exactly what we have done. The negotiations with NIE were very robust, and the matter then had to go to the regulator, who endorsed the arrangement as having value to customers.

669.

Mr Attwood: To broaden that out, you will have heard the Committee's concerns about the long-term contracts. Have you any views on how they might best be managed? It seems that the discussions between the regulator and others have run into the sand.

670.

Mr Sterling: Coolkeeragh is not aware of the details of the discussions between the generators and the regulator.

671.

It appears that the Kilroot contracts, as I picked up this morning, are the ones that need the most work done. It is difficult for us to pass judgement. Mr McCracken suggested two solutions this morning: sweat it out to 2010; or a long-term financial buyout that will spread the contract cost over a longer time.

672.

The one thing that is clearly not appropriate is a halfway arrangement whereby half the contracts are bought out and a residual is carried forward. That would still leave us with long-term contracts, and for as long as they exist, there are potential problems. However, greater brains than those at Coolkeeragh Power Ltd have looked at this problem and failed to come up with a solution.

673.

Dr McDonnell: Our main thrust is to ensure we get a reliable and steady supply of electricity, or energy in general, at a reasonable price because that underpins economic development. What benefits do you see when you move to your new station? Will electricity be cheaper? Will there be greater supply?

674.

Mr Sterling: It is a sizeable development. It is similar in size to the installed capacity when Coolkeeragh was built in the early 1960s. The important thing to realise is that it is an at-risk development, as I said in my opening statement. There are no long-term contracts so we must sell the output from the power station. We are depending on the market to buy our output but if we do not sell it we will be in serious financial trouble. Therefore we must charge the lowest price, and that will have the knock-on effect of driving down competitor prices. The expansion of natural gas - which we want to see become widely available in Northern Ireland - will also encourage a drop in prices because it will create energy choice.

675.

Dr McDonnell: How do you see the general economic benefits around you?

676.

Mr Sterling: The north-west is a region that is on the up and up. It is a very different place from what it was a few years ago. We have a science park, the airport and several other exciting developments. A new power station investment in that community will be a massive confidence boost at this key time, as will the introduction of natural gas. For many inward investors a modern power station in a place such as Derry will mark a significant enhancement of the region and encourage a resurgence in investment. I hope that this will lead to an increase in tourism as well.

677.

It is also worth mentioning that a power station that is located on the border will be servicing two markets. Northern Ireland could sell outside the domestic market - not just to the Republic but perhaps to Scotland as well.

678.

The construction jobs associated with a new power station are also significant; there will be 400 jobs in constructing the station alone. That will create many skills enhancement opportunities for small and medium enterprises (SMEs) in the north-west. These firms will not only be able to get involved in the power station, they will also be able to build a skills base that they can transfer to other locations on this island and beyond.

679.

Dr McDonnell: Will employment be more, less or the same at the new station?

680.

Mr Sterling: When we started in 1992 we had 235 employees, most of whom thought they were managing directors because they all owned shares. However, after we sorted that out we gradually brought our numbers down and we now have just under 100 employees excluding senior management. We are busier now producing electricity than we were in 1992.

681.

The new power station will employ 40 people. That is much better than closing down a power station and losing those jobs. Some of the regional enhancements that I talked about will follow in the form of inward investment and pipeline construction jobs. We hope that there will be a wider economic opportunity for people to gain employment in the region.

682.

Mr Devine: We have brought along some copies of a newsletter which we published. It highlights some of the benefits in further detail.

683.

The Chairperson: The new power station will be built without the generating unit agreements. What effect will that have on market competition and economic growth?

684.

Mr Sterling: It will have a substantial effect. This is the first at-risk development in Northern Ireland. When the power station is constructed it will be the most technically advanced. It will also be a substantial size and will bring electricity prices down. We will be competing on an all-island basis, and that competitive market has already started; by 2004 it will have expanded substantially. The Coolkeeragh power station will trade throughout the island, so we will have to compete with prices in the Republic. At present there is a substantial difference between prices in the Republic and prices in Northern Ireland. The output from the new power station at Coolkeeragh will have to compete and will give you some guide towards the way prices are heading.

685.

Mr Neeson: What is the proposed output in megawatts for the new power station?

686.

Mr Sterling: It will be 400 megawatts, which is quite similar to the existing Coolkeeragh power station. However, not all of Coolkeeragh's capacity is used for production as it is on its last legs.

687.

The Chairperson: I would like to thank you for your submission. We may write to you as we evaluate your evidence and compile a report.

ADDENDUM TO MINUTES OF EVIDENCE
coolkeeragh power ltd

In 2004 the old power station at Coolkeeragh will be closed and replaced by a new Gas Fired Power Station.

Q. What social, economic and environmental benefits will the new power station provide to the north west and to Northern Ireland as a whole?

A. The NW region has made substantial progress in recent times, and is a very different place to a few years ago. There are still significant social and economic disadvantages in the region, and a number of areas in the NW are amongst the most deprived in N. Ireland. The availability of natural gas will be a significant enhancement. It will provide competition through wider energy choice, as an alternative to oil, coal and electricity. As a cleaner fuel than coal and oil, it can contribute to a healthier environment through displacement. The availability of gas will also be an important stimulus to new investment.

The new CCGT power station at Coolkeeragh will be the anchor customer for the new NW gas pipeline. Its development will replace the existing oil burning station, and significantly drive down electricity prices here.

The CCGT will bring both direct and indirect benefits. The immediate direct economic benefit will be the 400 or so construction jobs during the build phase of the power station. The pipeline construction will bring additional jobs. The new station itself will also offer between 40 and 50 permanent engineering and technician jobs. Conversely if the CCGT power station is not developed, the old power station will close by 2004 and none of these jobs will be realised.

The CCGT will be in competition with power plants throughout Ireland, and the price of electricity produced must be such that it can compete with electricity in the Republic. N Irelands most modern power station, built 'at risk', will be a major improvement over the prevailing position of long term contracts/limited competition, aging generation plant and high prices. To have the CCGT located in the NW will be very advantageous for the NW, something which the region should be able to leverage for quite a number of years, and which can make a positive contribution to its present TSN designation. It will of course benefit all of N Ireland, particularly if gas price postalisation applies. Very competitive power prices appeal to all consumers - large and small.

The services and supply contracts from the power station alone are estimated to be worth £7 million per annum, which will be of benefit to all of N. Ireland, but mainly the NW. The benefits from the separate natural gas activity will also be considerable, and while they are considered separately under Questions 2 and 6, it should be recognized that without the power station development the gas pipeline and future gas distribution networks will not materialise.

The CCGT and gas infrastructure developments are a major vote of confidence in N. Ireland and the NW region in particular. To have such assets in ones 'back yard' confer much advantage. The CCGT development is a true cross border development involving Coolkeeragh and ESB. As with other recent economic and infrastructural developments in the NW, the combined energy projects will become significant features in an expanding region. They will help rebalance the differentials between the east and the west.

There are many positive signals here from N. Ireland plc to other potential investors. Cross border partnerships can work - a positive, confident message. This augers well for others. There is potential now for great resurgence in the NW, as a sound investment location and tourist destination. But these energy developments are key. The alternative is serious energy imbalance with the east coast, building disadvantage upon disadvantage.

Q. What will be the impact of promoting the expansion of the natural gas network to the north and north west of Northern Ireland?

A. The development of the main transmission pipeline (the spine) is only the start of the process. The real expansion of natural gas will be downstream, into the main towns along the route of the pipeline. Expansion beyond Derry City on to Strabane and/or Letterkenny should be obvious follow on developments. The application and take up of licences for these downstream markets will see a gas supply organisation or organisations similar to Phoenix Natural Gas in Belfast. One would expect to see substantial promotion of natural gas being picked up strongly by the gas supply and installation companies.

The NW area has a strong and vibrant environmental lobby, anxious to protect/improve the regions image. Natural gas is seen to be a 'clean' fuel relative to oil and coal. This environmental contribution from switching from polluting fuels to gas will be significant, as will the contribution to air quality and public health. The image of the region will also be lifted by virtue of the promotion of this new clean fuel, auguring well for tourism and society.

The Group 22 Reports provide comprehensive analysis of the impact of natural gas to the region, in social, economic and environmental terms.

Q. (i) How important were the activities of the lobby group "Group 22" - Gas to the North & North West" on promoting the siting of the new gas fired power station at Coolkeeragh?

(ii) How does Coolkeeragh view the proposed postalisation policy?

A. (i) If we go back to 1996/1997 when Phoenix began profiling itself and promoting natural gas in Northern Ireland, the message to potential customers was to ring a local phone number and get connected to this wonderful new fuel.

This was misleading. What Phoenix did not say was that natural gas was exclusively for only one of our two major cities. These circumstances brought a call for equal treatment for gas to the north and north west, led by Group 22.

The Group 22 lobby is cross-sectoral and cross community. It has strong industryrepresentation as well as representation from eight council areas. Solid evidence was produced by Group 22 in the period 1997/99, which highlighted in significant detail the benefits which natural gas could deliver, as well as the consequences for the region in a "without gas" scenario.

It was obvious from the outset that without a CCGT "anchor load" to help underpin the economics of the gas pipeline, gas expansion to the region was an impossible case to justify. However there was already a power station in the NW, albeit at the end of its economic life, and it was locally owned (by its employees). It therefore had a strong sense of community. Coolkeeragh Power Ltd (CPL) therefore became important to Group 22 and strongly associated with its work.

There were no guarantees of any sort for CPL. However, the fact that Coolkeeragh had a short remaining life (2004) did inject urgency into the campaign, and 2004 became significant to Group 22, and still is. If the CPL site is to close without local replacement by 2004, the chances of developing a new power station in the NW are considered impossible.

Following a process initiated by a directive from Minister Ingram, the Regulator sought in late 1999 to attract interest for an "anchor load". He attracted three consortia, one of them from CPL/ESB. Each consortium submitted proposals for a CCGT development, which were evaluated by OFREG. Ours was deemed to offer best value to customers, as it did not require underpinning generation contracts. The decisions was subsequently endorsed by Minister Empey.

Had one of the other consortia been successful (ie Viridian place or PowerGen plc) we were out of the race and of no interest to Group 22. Group 22 would presumably have been supportive of - and supported by - the successful consortium. In that situation, the new power station would not have been planned for the CPL site, where we plan to build ours. The probable sites for the alternative stations were at locations other than the Coolkeeragh Power site - most probably in an adjacent area over which CPL has not interest or control.

(ii) Franchise customers pay for electricity on a postalised basis - same tariff for everyone regardless of location - postalisation is therefore already happening in the electricity arena. The principle of sharing the infrastructure cost burden equally across all customers has therefore been established. A similar principle should apply in the development of the gas network across the region.

Electricity posalisation was an established feature of the industry prior to privatisation has been retained in the post privatisation period. At the time of privatisation the development of the transmission infrastructure was substantially completed and only minimal further investment in development of new network infrastructure within Northern Ireland has been required. The effect of maintaining the policy of postalisation - as regards development of the internal transmission network in Northern Ireland - has therefore been slight.

The new electricity interconnector between Scotland and N. Ireland which is scheduled to be commissioned in late 2001 will be the most significant network infrastructure development since privatisation. The costs associated with this project will be borne by all electricity customers.

It is vital that a similar policy of postalisation is adopted for gas network development particularly if the objective of establishing a viable natural gas infrastructure in the two major cities of Northern Ireland is to be achieved. In the absence of postalisation of gas network infrastructure costs Northern Ireland will be divided into areas that have either a considerable locational advantage or a considerable locational disadvantage.

The density of industrial and domestic customers is thinner away from the Belfast area. Without postalisation, those areas where the natural gas network already exists will continue to have advantage over those areas presently without natural gas - even after the network is extended to those areas - because the price of gas will be higher. It will be difficult to persuade many industries to locate in those areas where there is a higher gas price. The equity of such an outcome is questionable, particularly as the areas that will lose out - should postalisation not apply - are the most disadvantaged areas of Northern Ireland.

If however tariffs are calculated on a postalised basis then the potential imbalance in energy costs internal to NI between eg generators, large users located close to the existing infrastructure and those remote from it can be avoided. Failure to do so will in effect create a localised perpetuation of the energy cost differential problem that already exists between NI and Britain and NI and the Republic with the areas west of the Belfast Metropolitan area suffering most.

The impact of postalisation should be carefully examined to ensure that the impact on energy costs is minimized and as far as possible that the cost of additional infrastructure is paid for by the increased flow through those parts of the network already in existence - such as the SNIP, which ironically is presently part funded by electricity consumers in those areas without gas provision.

Obviously not every town and village in N. Ireland can expect access to a natural gas supply. But for many towns it will be viable, and certainly the current opportunity to supply the second city should not be lost. Where an acceptable outcome cannot be achieved and further gas network development is undertaken for public policy reasons (eg TSN) - which cannot be judged on purely economic criteria - then the additional infrastructure should receive public subsidy sufficient to bridge the gap and bring about an acceptable energy cost position.

Q. What are the experiences of operating an employee owned power station?

A. Coolkeeragh was offered for sale in 1991 along with the other power stations. It was acquired by a management and employee buyout (MEBO) in April 1992. The MEBO acquired 60% of the equity. There were no other standalone bids.

The new company encountered early HR problems. The power industry is well recognised as a tough industry and certainly within the new privately owned Coolkeeragh there was substantial internal pressure to create a "Cooperative" type of business structure. Difficulties were encountered in these early days which resulted in industrial action before the end of 1992. In its first period of trading the company did not report a trading profit and the Venture Capital (VC) Banks which supported the buy-out (and in return demanded 40% of the equity) became extremely concerned about their investment. At the end of September 1993 the then CEO resigned. Rebuilding VC confidence became a serious issue.

In the months that followed there was a turnaround in the company with the stark realisation that the generation contracts were fully cancellable by November 2000, at which point the company would close down. It was obvious that if the negative pressure within the workforce could be turned into a positive force, things could be different. Both sides therefore agreed in early 1994 that what was most important was the survival of Coolkeeragh and that the management and trade unions would embark upon a shared mission to achieve this. A long journey began by the company in search of a more appropriate partner than the VCs. We eventually got there in 1998 when the VCs were bought out by the MEBO and ESB were invited in. ESBI now hold 40% of the shares.

This new focus on the long term appealed to employees, and allowed us to turn away from negativity. Results began to improve and the unions did not present great obstacle to the introduction of private sector practices, which allowed work in the power station to be done much more effectively by fewer people. It was important to streamline the manning levels such that they were tailored to business needs. This allowed a substantial voluntary severance programme to be undertaken - with a generous redundancy package - starting in 1994.

ESB are very impressed with the prevailing culture at Coolkeeragh, and have taken no hands-on involvement in managing any aspect of the existing company. Employees at Coolkeeragh are treated exceptionally well in their compensation arrangements and the unions recognize this. In addition, the company has taken strides to make sure that personal development and training feature prominently. Coolkeeragh is the only power generator here to be accredited with Investors in People, a remarkable achievement in the face of closedown. The company's present investment in training and personal development are higher than ever, as we seek to ensure that all employees will be able to avail of transitional training arrangement into a new career, whether that be in the new ESB controlled CCGT or in a different industry/sector.

Employee shareholding continues to be a major contributory factor to our success. Employees are stakeholders, and in general have a great sense of commitment. Since turnaround in 1994, it has proven to be a good investment for them. Focus on our mission has also been important. Despite the fact that only 40 staff will be employed in the CCGT, and there will be no automatic transference to the CCGT from the existing station - these new high skilled jobs will be advertised and secured on merit - the presence of natural gas and the wider job opportunities this presents (including the construction jobs), will bring considerable satisfaction to all at Coolkeeragh, not least the trade unions. They know that the alternative is closedown and no new jobs, now new opportunity.

Q. How can the Coolkeeragh Power Station contribute further to reducing energy costs in Northern Ireland?

A. Coolkeeragh has already, through a voluntary contract (GUA) regeneration undertaken during 1997 and 1998, given up considerable value from its existing contracts. In April 1998 Coolkeeragh voluntarily cancelled the GUA on one of its 5 Steam Units (Unit 5), this GUA had a scheduled termination date of 31 March 2002.

Coolkeeragh has also, since April 1998, accepted the principle of an RPI-X reduction in the annual review of the Base Availability Credit (BAC) of its remaining steam GUA's - the first generator to do so. In addition, with effect from April 2002, the BAC of the Coolkeeragh GUA's remaining at that date will reduce to a level equivalent to the market rate for the service we provide, this means a 25% reduction in what Coolkeeragh will earn from that plant compared to what it could have earned under the GUA.

In exchange for these concessions the company received an assurance that - in the period to March 2002 - the Director General of Ofreg would not seek to cancel its remaining GUAs earlier than the termination date of those GUAs and re-profiled the termination dates of 2 of its GUAs.

The value already given up - compared to what Coolkeeragh would have expected to ear had the contracts run full term - is in the region of £8.5 million (equivalent to approx 80% of 1 year's present income from its steam plant or 2 year's pre-tax profits). The re-profiling of the GUAs has provided the additional benefit of higher levels of plant utilization than would have been the case had the contracts not been rescheduled. In other words the level of contracted plant available to the system has been optimized under the re-profiling arrangements.

In view of the concessions already made by Coolkeeragh and the contribution it is already making to reducing costs in Northern Ireland it is not possible to do any more.

Q. Will customers benefit from savings in generation costs?

A. From April 2002 until closedown the payments made by NIE to Coolkeeragh under the remaining GUA's will reduce to a level equivalent to market value for the type of service Coolkeeragh offers to NIE (peaking plant capacity). Given Coolkeeraghs small capacity at that time, this will lead to a modest overall reduction in costs to the consumer but will be a significant (>25%) reduction in Coolkeeragh's income.

Q. The new station at Coolkeeragh will also facilitate a new natural gas pipeline to the North West.

What impact will this have for both the domestic and business consumer in the North West?

A. There will be many positive impacts as a result of a new gas pipeline for the North West and those communities along the pipeline (Antrim, Ballymena, Ballymoney, Coleraine and Limavady) in addition to the low cost electricity that will be produced by the new power station at Coolkeeragh.

The gas pipeline will facilitate the development of a downstream gas market, and thereby provide customer choice. Customer choice creates competition which will drive prices down, as has been demonstrated in the rest of the UK and in other markets worldwide where there is energy choice.

The availability of gas will put businesses and manufacturers on the same energy footing as those areas presently served with a gas supply such as the Greater Belfast are and the Republic of Ireland. It has the potential to be a catalyst for industrial and commercial expansion, increasing competitiveness and increasing economic activity, all of which are positive steps in addressing social exclusion.

The availability of gas will provide opportunities for the development of small Combined Heat & Power (CHP) plants, which are both energy and cost efficient and which lead to a reduction in fuel bills with the associated decrease in emissions.

A pipeline to the North West will provide an opportunity to supply gas to Donegal, Tyrone and potentially beyond, thereby extending the benefit to the entire NE sub-region of which the second city of Northern Ireland is the hub.

Natural gas creates substantially lower emissions than oil and coal. The reduction in emissions in the North and North West region to be served by the new natural gas pipeline is considerable. The Net present value of the reduction in environmental damage costs is estimated to be of the order of £20m over a 25 year period. (This statistic, and further evidence of benefits, can be found in the Group 22 reports.)

Q. What effect has the scaling down of operations had on the company's income, employees and the customer?

A. The reprofiling of GUA's, agreed in 1998 with NIE and the regulator, reduced the number of generating sets under contract and resulted in an immediate, 25% reduction in Coolkeeraghs availability payments from steam generation plant - the main source of income. It meant a disproportionate reduction in relative profitability as our fixed costs - particularly manpower - could not come down proportionately at that time. The trade off for the income reduction was a briefly extended life.

The size of the workforce has been contracting since 1994. From 235 at privatisation in 1992, there are currently about 100 employees. On 1st April 2002 our steam plant income will drop again, to something like 50% of current levels, and current employment levels will also be halved. In our final year i.e. from 1st April 2003 steam, plant income will be further cut, again by 50%.

The other significant change from 1st April 2002 is that the availability payments will be reflective of what the market will be prepared to pay for the services that Coolkeeragh offers (rather than reflective of the true operating costs and inefficiencies associated with operating a 40 year old plant). The last two years of trading between 2002 and 2004 will therefore see levels of business/profitability which are substantially below those which prevailed in the mid nineties. There is therefore no scope for Coolkeeragh to offer further reductions to NIE beyond those already made.

Managing any organisation which is moving to closedown is fraught, and it is particularly important that staff are motivated as much as is possible. Plant also has to perform. The existing power station is more than 40 years old and with equipment of this vintage it does not get any easier to maintain in optimum working condition. Nonetheless, Coolkeeragh has been successful thus far in keeping the plant in good shape and our employees motivated. The company has worked very closely with its trade unions to ensure that there is a complete understanding both of the actions taken and the rationale, and so far that partnership has seen us through a number of potential difficulties. We are confident that we can similarly see our way through the remainder of our obligations to NIE, albeit through a period of continuous reduction both in income and personnel.

All reductions in our GUA's will obviously have benefited NIE and their customers. We are very proud of the relationship that we enjoy with NIE. Despite the fact that we have been competing with Viridian/NIE for a new power station in NW, this has not affected our commitment to our customer nor our day-to-day relationship with them. NIE recognises that at Coolkeeragh we are prepared to go the extra mile in co-operating with them - particularly when there are strains in the system. This is typical of the partnership ethos promoted at Coolkeeragh.

Q. In relation to GUA's, how do Coolkeeragh view attempts to buyout long-term contracts?

A. In our submission to the Committee we have expressed our view that the long-term contracts will not allow full competition in generation to develop.

In saying this we recognise that dismantling the structures created at privatisation will be an extremely complex task. Trying to unravel a situation brought about by the seemingly opposing objectives of maximising the value of the generating industry for sale at privatisation with the equally valid objective of obtaining low cost generation will require innovative and bold action.

Coolkeeragh's contracts (and those at Belfast West), which account for only a small part of the installed generation capacity in NI, will terminate during the next couple of years and are not therefore not deemed to be long-term. The contracts at the other stations will however continue form some time to come - possibly to 2024. These contracts were drawn up by Government and were entered into in good faith by the generators.

In order to break the impediment that the contracts provide to truly competitive generation a mechanism must be found to compensate those generators with long-term contracts for giving up the entitlements they are likely to earn from them. The only apparent or obvious solution to resolving the negative effect that the contracts have on the development of the competitive market is the buy out of the future profit streams of the contracts. This will be expensive, and in the absence of Treasury support, will in effect mortgage the NI consumer for a considerable number of years to come. If however the objective is to have truly competitive market in generation then it may be a price worth paying as the buy-out of the contracts would create such circumstances.

The alternative is to continue along the lines we have at present and to in effect "sweat it out" until 2010 at the earliest. Clearly such an approach will only ensure the maintenance of the presently unsatisfactory status quo.

If a buyout of the contracts is taken forward it is essential to ensure that all the capacity presently under contract is bought out. This is particularly the case if all electricity consumers are to become eligible participants in and beneficiaries of the competitive market. Failure to do this will inevitably lead to "stranded" costs and inefficiencies in the market.

Should a buyout of the contracts proceed it will be necessary to devise a mechanism to ensure that the capacity underlying the bought out contracts remains available to the consumer over the period of time reflected in the buyout compensation paid to the generator. This is necessary to deter generators from receiving compensation for taking a unit out of contract early and then failing to make the unit available to the competitive market.

Q. The new power station will be built without Generating Unit Agreements.

What effect will this have on market competition and economic growth in Northern Ireland?

A. (i) Market competition

This will be the first large scale power station built in the post privatisation era without an underpinning GUA. The new Coolkeeragh ESB CCGT will represent a significant departure from the arrangements created at privatisation when the present industry model - which pays power stations for their availability and not for their output - was established.

The new power station Coolkeeragh will not be underpinned by an availability contract. It will therefore have to compete for its position on the system. This means that in order for this new station to sell its output it will have to produce electricity at the lowest possible cost.

This will have a very positive effect on market competition. The new power station at Coolkeeragh will create a real or true source of competitive generation and will, for a time, set the benchmark price that other generators will have to beat in order to sell their output.

(ii) Economic growth

High electricity prices in Northern Ireland, particularly when compared to those of our near neighbours in the Republic and Britain, have often been cited as a barrier to economic growth. One of the factors identified as a cause of high electricity prices here is the absence of a truly competitive market in electricity generation. Another factor is the age and efficiency of the technology used to generate electricity in Northern Ireland. This is readily illustrated in the fact that no new large scale generation has been constructed in Northern Ireland since the early 1980's and that all the power stations built here since the 2nd World War are still in operation. We know of no other industrialised country where this is the case.

As already mentioned the new Coolkeeragh power station will facilitate the development of a truly competitive market in electricity generation and as such will contribute to a reduction in the cost of electricity to industry. It will therefore impact positively on economic growth for Northern Ireland as a whole. The station will produce low cost electricity as it will use the most efficient technology presently available for large scale electricity generation. Both these factors will help to reduce electricity prices in Northern Ireland and as such will assist in removing this barrier to economic growth.

In addition the new power station will provide the anchor load necessary for the development of a natural gas pipeline to the north & north west of the island and will therefore bring many social, environmental and economic benefits to those parts of Northern Ireland that it will pass through.

Q. What more could be done to increase energy interconnection between Northern Ireland and the Republic of Ireland?

What role could Coolkeeragh Power Limited play in achieving greater interconnection?

A. Electrical interconnection is a complex subject requiring both skill in Network Analysis and experience of Network Operation. As a power station operator Coolkeeragh has only limited experience in this field.

Ideally National Grids should be connected between their High Voltage Grids as in the case with the N/S or Tandragee/Maymooth Interconnector. However the proposed electrical interconnection between Strabane/ Letterkenny and Enniskillen/Ballyshannon is welcome as both the North and South Transmission Systems are relatively weak at these points. We would estimate that the level of interconnection proposed in the west of Northern Ireland should be adequate for the next 10-12 years.

These new developments would be supported by the new CCGT at Coolkeeragh. With the Coolkeeragh CCGT on stream and with increasing market opening on both sides of the Border there will be further opportunities for cross-border electrical and gas interconnection.

There is no gas network in Donegal so the proposed NW pipeline would provide the ideal platform from which to supply this potential market and open up an important cross-border development opportunity.

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MINUTES OF EVIDENCE

Wednesday 4 April 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mr Clyde

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr E Beattie, Energy Specialist

688.

The Chairperson: You are very welcome. The Committee has read your submission and would like to ask you a few questions.

689.

Mr Neeson: In your submission you state that you have examined, on behalf of NIE and others, the potential for gas network extensions in Ireland, North and South. Can you outline your views on the potential for network extensions in Northern Ireland?

690.

Mr Beattie: The price of gas will determine whether there is an extension of the gas network. The cost of a pipeline from Belfast to Coolkeeragh will have to be met either by output cost of regeneration or by smearing the cost over the electricity customer base. If that were to happen, the price of gas and electricity would affect the project's viability.

691.

Mr Neeson: Considering the size of the pipes that would be needed, what is the potential for co-operation and partnership between North and South?

692.

Mr Beattie: There is great potential for sharing network. I welcome Bord Gáis Éireann's (BGE) building another pipeline from Scotland to bring additional capacity into the Irish market. Its present on line capacity is fully booked for new generation and for BGE's own use; only the new pipeline can deliver the additional capacity into the Northern Ireland market. However, Northern Ireland already has adequate capacity for its gas needs, both in the generation and downstream market. BGE would incur additional costs in building an extension into the North. We already have a cost for the Scotland/ Northern Ireland Pipeline (SNIP), which will have to be met by electricity and gas customers. It would be difficult to justify the cost of another pipeline.

693.

Mr Neeson: Do you feel that by providing combined cycle gas turbine generation (CCGT) we are in the danger of putting all our eggs into one basket? You will remember the oil crisis of the 1970s.

694.

Mr Beattie: Of course. The supply of gas may be unending, but it will have to be delivered by undersea pipeline that could take two to three months to repair - and a ship would be needed to repair it. It might be possible to keep reserves of oil at the power station and transfer to gas oil for 30 days. However, this might not be a satisfactory solution.

695.

Mr Attwood: You believe that domestic consumer interests are better protected and represented by the General Consumer Council than by the present committee. Why do you believe that?

696.

Mr Beattie: Thirty-five per cent of the electricity market here was opened up. The contracts were held by the power procurer, David Burnett, on behalf of all customers in Northern Ireland in order to open up the market to the eligible industrial and commercial customers. Contracts had to be renegotiated or restructured. Several had to be transferred to the eligible market. This cost was sold on to other supply companies or to eligible customers at a price below the power procurer's contract price.

697.

The difference between the price at which he sold on and what he had to pay was smeared over the remaining customers in the franchise market. That should not have happened, because if it did not increase the price of electricity to domestic customers, it prevented it being reduced. OFREG or the Electricity Consumer Council should have foreseen that. They did not. I suspect that this was because they were appointed by the regulator. To ensure complete independence in future, that function should be taken from OFREG and given back to the General Consumer Council.

698.

Mr Attwood: The Committee has heard various solutions to the problem of long-term contracts. We can grin and bear it for the remaining years of the contracts or we can extend them to reduce the costs. Alternatively, we can look at European models. Which do you suggest?

699.

Mr Beattie: There are ways of dealing with contracts and stranded assets. However, they should not have been smeared across the domestic market. Renegotiating contracts benefited industrial and commercial customers, and renegotiation should affect them rather than domestic customers.

700.

Dr McDonnell: What can be done in the new generation contracts to prevent the cross-subsidy of the larger users, those with big demand or big contracts? What can be done to prevent the small domestic user from being overcharged in order to discount for the big guy?

701.

Mr Beattie: New contracts will not be with the power procurer who has a responsibility for supplying the domestic or franchise markets, so that should not arise. The question is whether any further tinkering or manipulation of present contracts to open the market further or to maintain the opening of the market will be spread across domestic customers. That should not happen. Whatever does happen in the future, the mistakes of the past should not be repeated.

702.

The output from Coolkeeragh power station will only benefit the commercial and industrial customer base, and a new generation of 400 megawatts at Coolkeeragh power station will not lead to lower electricity costs for the domestic market. Therefore I do not see why the domestic market should pick up any of the costs associated with that power station or with the pipeline to supply it. That has no logic. The costs of the pipeline's postalisation should be borne by the industrial and commercial customers, not domestic customers.

703.

Ms Morrice: Do you agree with the target that has been set for renewable and alternative energy sources with a rise of 10%? Can we reach that at our present rate? Should that target be raised?

704.

Mr Beattie: I support the environmental benefits of green energy. The difficulty in Northern Ireland is that our energy is tied up far into the future by long-term contracts. This prevents the introduction of reasonably priced green energy projects. If there was a way round that without visiting the cost on domestic customers, we should support it.

705.

Ms Morrice: Is there a way round it? I suppose we come back to contracts.

706.

Mr Beattie: The only way round it is with Government support. Long-term contracts lead to high-cost electricity because of the high price that was paid for generating stations at the beginning. Government were the main beneficiary as they obtained the proceeds of the sale. The Government could return some of that money to renegotiate lower priced contracts or to introduce green energy projects.

707.

Ms Morrice: How much would that cost?

708.

Mr Beattie: The understanding at the time was that Northern Ireland would pay twice the UK average for electricity or for generation per megawatt. That gives one an idea of how much must be repaid. However, times have changed, and the amount of money needed to fund green energy might be modest.

709.

Ms Morrice: Therefore the focus would be on increasing funding to subsidise green energy.

710.

Mr Beattie: Yes, and it would have environmental benefits.

711.

Ms Morrice: I assume that the Government would find it difficult to deny us funding, given that the Treasury got the money and is promoting green energy.

712.

Mr Beattie: Absolutely.

713.

Ms Morrice: Should the Northern Ireland Electricity Committee come out from under OFREG? Should it go with the Consumer Council or should it be a standalone organisation? Is there a compromise?

714.

Mr Beattie: It should come out from under OFREG, but the decision on where it goes is the Government's. It seems to fit in neatly with other consumer issues under the General Consumer Council; but other solutions, if there are any, should be considered. My main concern is its present position under OFREG.

715.

Ms Morrice: How does its position under OFREG affect its independence?

716.

Mr Beattie: I do not see how it can claim to be independent when the regulator appoints its chairperson and it is situated in his office building.

717.

Ms Morrice: Does the regulator not act in the interests of the consumer?

718.

Mr Beattie: He is supposed to. However, when the contracts were renegotiated and the cost was smeared over the domestic customer base, no one was looking out for consumers' interests.

719.

The Chairperson: You suggest in your submission that a power station in the east would be preferable to Coolkeeragh. Why has the Electricity Supply Board (ESB) focused on Coolkeeragh?

720.

Mr Beattie: I cannot presume to speak for the ESB. Perhaps because there was already a station on the site, the contracts were about to expire and the value of the station was relatively low. It was an easy route into generation. The possibility of bringing gas there has been examined, but the cost of bringing a gas pipeline to it makes it a less than ideal site. A generating site in the east would not incur such a cost. Logic dictates that the additional costs - probably between £30 and £50 million - would have to be met either by the customers who obtain electricity from the station, the gas customers or through postalisation.

721.

A station in the east would have the same output capacity and the same costs but would not incur the additional pipeline cost. Therefore its output price would be less. As well as that, a station in the east would probably be better located for the new electricity interconnection with Scotland, which will be on stream at the end of the year.

722.

In reference to the existing high voltage interconnection with the Republic of Ireland, Mr Sterling mentioned its proximity to Donegal. However, the load on the system there is small, and the interconnection capacity is probably adequate for it. The load at the station in the Greater Derry area would address that, given that the station is only supplying industrial and commercial load. It cannot supply the domestic market; it is already locked up. The station in Greater Derry certainly deals with a load of less than 400 megawatts.

723.

Mr Neeson: You surprise me, because, since the Good Friday Agreement, we have been trying to create a level playing field in Northern Ireland. To bring a natural gas pipeline to the north-west we must have a major customer, and that can only be a power station. Without such a customer gas will not be supplied to the north-west.

724.

Mr Beattie: What are the consequences of not getting gas to the north-west and of not having a power station there? Gas does not compete with electricity or coal: it competes solely with oil. Oil prices in Northern Ireland are the most competitive in the UK. No large industrial base is clamouring for natural gas in the north-west, or anywhere else.

725.

Gas is for heavy industry, and heavy industry is a relic of the old economy. The new economy in Northern Ireland is seeking high technology, which would use gas for space heating perhaps and electricity for most of its other requirements. It is a labour-intensive and highly skilled industry rather than a heavy one.

726.

I support bringing a gas pipeline to the north-west, or to anywhere else in Northern Ireland. However, at too high a price it would not be warranted, and using a power station is not the best rationale.

727.

In some places people must pay for the pipelines. Rural customers pay a premium for the distance which pipelines and electricity networks must cover. That is not the case for electricity customers in Northern Ireland, although it might happen for gas customers in the future.

728.

In the South of Ireland, ESB makes a distinction between rural and urban customers by standing rural customers a charge. They pay a charge that is 7% higher than the standing charge paid by urban customers. ESB recognises that there is a premium to be paid for distance.

729.

Ms Morrice: Would it be proper for me to ask your advice on Orimulsion?

730.

Mr Beattie: I know that Kilroot is considering it as an option. Provided that it is clean, cost-effective and helps reduce the cost of electricity, it should be given serious consideration. That is, however, an entirely personal view.

731.

The Chairperson: Thank you for your submission and your answers. We might have more questions in the course of our inquiry.

ADDENDUM TO MINUTES OF EVIDENCE
EAMON BEATTIE, ENERGY CONSULTANT

Q. Your submission states that you have examined on behalf of NIE and others, the potential for gas network extensions in Ireland, north and south.

Could you outline your views on the potential for network extension in Northern Ireland?

A. Network extension is driven by economic viability. Gas must be delivered at a price that competes with oil - not necessarily with electricity or coal- therefore it is essential to keep network build cost per customer and per unit, as low as possible. The main cost differential between regions is the gas transportation (Transmission & Distribution) cost. If sufficient gas volumes are flowing, the cost of the network is spread across the delivered unit cost. Density of customers together with the industrial / commercial loads determines this. This unit cost will be lower where the transmission cost is met mainly by a power station demand.

Apart from generation NI has no large energy using industries on the scale needed to support a major pipeline expansion. And it is unlikely that making gas available in an area will attract such industries into the Province since other factors such as road/sea transportation costs to get their product to final market are more relevant. Modern economies, including ours, are moving away from this type of heavy industry. Therefore, the potential for achieving economic network extension is low. Aid of some description will always be needed. Generation can be a 'primer'. But without aid to compensate for added network cost, new generation will be most economic if sited near to existing gas infrastructure.

Q. What potential is there for network supply and co-operation between Northern Ireland and the Republic?

A. All current UK/RoI pipeline capacity has now been allocated. The Republic has approved the building of a new, second, UK to Dublin pipeline. A South - North network extension from this new UK/RoI pipe is possible and thereby could provide loads to the east of NI.

Q. Have you considered what potential would an extension of the gas network have in terms of economic growth in Northern Ireland?

A. Again, this depends on the end price of the gas. Reasonable priced gas could help attract new industry but only if substantially cheaper than oil. Initially, the cost of providing the infrastructure, if supported by government funds, could have a detrimental effect on the economy by diverting funds away from other projects with shorter pay back times. Equally, if the cost of the infrastructure is met by postalisation across electricity customers, resulting in higher costs, it will reduce customers disposable income. The hope must be that in the long run, the benefit outweighs the cost. There is no evidence that the gas network in Belfast has resulted in increased economic growth.

Q. How do you assess the current progress of the gas network extension in Northern Ireland in terms of the speed of progress and in relation to the regional distribution in the supply of gas?

A. In Greater Belfast, there was a slow start, with poor marketing. Recently, the network has been widening out. But customer take-up has been limited -some 25,000 customers after 6 years.

Elsewhere, progress reflects the difficulty of justifying it financially. Attempts to link extensions to new generation are commendable - but highly suspect, since this attempts to dictate, artificially, power station location.

Q. Your submission states that generator contract negotiations, future generation development opportunities and gas network extension policy matters are too important to be left up to regulatory bodies such as the Office for the Regulation of Electricity and Gas (OFREG).

Could you elaborate on why you believe regulatory bodies should not be responsible for such policy matters?

A. Regulation is primarily intended to prevent monopoly abuse and is meant to simulate competitive pressures. That certainly is needed for network operators (NIE and Phoenix). Also, Regulation is needed to protect customers and achieve better service and cost. But there is a distinction to be made between 'regulating' and 'determining' policy.

Regulators should implement policy. But policy needs to be determined by government where accountability is assured.

The issues associated with gas network extensions - directing generation to particular locations, provision of grant aid, cost 'smearing' and postalisation - are properly the responsibility of government, not regulators.

Q. What alternative methods of policy regulation do you suggest would be more appropriate?

I would not be against the principles in the current regulatory framework - provided Ofreg stick to their role, i.e. implementing policy rather than making / dictating it.

Q. Could you elaborate further as to why you believe domestic consumer interests should be protected by the General Consumer Council and not by the Northern Ireland Consumer Committee for Electricity?

A. A transfer would ensure complete independence and provide a further check on the Regulator. The Committee for Electricity, alas, did not prevent the smearing of the additional generation costs that arose from auctioning contracts (to allow market opening) across domestic customers. They are too close to the Regulator who determines approves such arrangements. The responsibility for protecting customer rights, particularly, domestic, would be better placed with the General Council as this keeps the expertise and responsibility for consumer affairs under one body.

Q. Could you explain in more detail how the EU Directive on Electricity Market Opening has proved disadvantageous to domestic customers in terms of the price of electricity?

A. Market opening in Northern Ireland was difficult given the long-term contracts between NIE and generators. The solution was to 'auction off' some of the contracted power, at a lower cost, to new supply companies or large customers. The difference in cost, or 'loss' to NIE that resulted was spread across the domestic customers that NIE has - the so-called 'franchise' market.

Q. In relation to new generation contracts what do you suggest could be done to prevent the cross-subsidy of large electricity users by domestic users?

A. This shouldn't arise with new contracts. But a completely independent consumer watchdog (not within Ofreg) should oversee this).

If Ofreg is contemplating further NIE/Generators contract modifications, then government should make up the cost difference from privatisation sale receipts.

Q. You state that the recent competition, organised by the Office for Regulation, seeking proposals from network developers was seriously flawed, you mention the Coolkeeragh proposal in particular.

Could you elaborate on why you believe this is the case?

A. The gas licence competition developed into one that had as its objective the building of a NW power station. Gas licence applicants were told to assume a gas power station load in their proposal - but were 'directed' to allocate the financial benefits of any gas power station sited elsewhere (such as along a North/South pipeline), to the Northwest pipeline only.

The Director General (Ofreg) announced his preference for a Northwest generation proposal based on an evaluation of the technical aspects only of that project over other proposal locations - he failed to consider the cost implications for electricity customers of that site versus other locations in the east.

Q. Could you elaborate as to why you believe the construction of a gas fired power station in the East of the Province would be more energy cost effective than the construction of a station at Coolkeeragh in the North West?

A. New generation entrants will be supplying electricity only to that portion of the market that has been opened up to competition, or that portion which can be metered cost-effectively - this in reality means some 35% of total demand. This demand arises from the large industrial and commercial customers and the majority of this load lies to the east of the Province.

Generation remote from the load incurs additional pipeline costs and additional 'losses' in the form of energy to move the gas. Also, returning the energy in the form of electricity to the load centre (east) over powerlines, results in additional line losses and use of electricity system costs.

New generation to the east would be better positioned to access the electricity interconnectors to RoI & Scotland and any future gas interconnector to RoI.

Q. Do you disagree with postalisation [vi] ?

A. If applied to new networks in a privatised environment - yes. Costs should be recovered from the ultimate user in proportion to their use of the asset. Industrial and commercial customers are the only ones to benefit from market opening. Therefore they should carry the cost - possibly postalised, but across their tariffs only. The additional costs should not be forced on the domestic customer. Some utilities, like ESB, recognise the need to charge differently for rural and urban supply. Their bi-monthly standing charge to rural customers is 70% higher than that to urban customers.

Q. You state that areas outside Belfast are sparsely populated and will require grants or the manipulation of electricity and gas tariffs to support the high cost of building gas transmission pipelines. You therefore believe that retaining the Coolkeeragh generation facility in the North West is unnecessary.

What cheaper system solutions do you suggest are available to NIE to ensure adequate supplies in the North West?

A. The existing electricity network capacity is more than adequate to ensure proper supplies - and resilience (back-up) - in the NW. Technical correction to compensate for the effects of distance is however, needed. But this would be at relatively small cost. If additional power is needed in the future for the NW or elsewhere in Northern Ireland, then the strengthened interconnection with Scotland and the Republic and possibly generation to the east of Northern Ireland - near the existing gas pipeline - should be more cost effective.

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MINUTES OF EVIDENCE

Wednesday 25 April 2001

Members present:

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mrs Courtney

Mr McClarty

Dr McDonnell

Mr Wells

Witnesses:

Mr D Surplus ) B9 Energy Services Ltd &

Mr M Harper ) B9 Energy Biomass Ltd

732.

The Deputy Chairperson: Good morning, gentlemen. You are very welcome. We are pleased that not only did you give us a written submission but that you are here to give oral evidence as well.

733.

We will start by asking the Committee Members to introduce themselves. Our time is very restricted. Each group of witnesses has been allocated half an hour, with the opportunity to answer remaining questions in writing. Perhaps you could introduce yourselves and make an opening submission.

734.

Mr Harper: My name is Michael Harper, managing director of B9 Energy Services Ltd, and Mr Surplus is our technical director. To keep proceedings brief I shall say only a very few words. We develop renewable energy projects in Northern Ireland and the South, and we believe we have substantial further capacity which can be developed. We are very conscious of the need to meet the cost requirements of customers, and we believe we have made substantial progress in that regard.

735.

Our key issue in the short to medium term concerns the arrangements between Northern Ireland and Great Britain regarding the renewable energy obligation. At the moment we feel Northern Ireland is being penalised and prevented from exporting renewable obligation credits to the market in Great Britain. That is preventing us from subsidising the price of electricity to Northern Ireland consumers. We have given further details of this in our written submissions. For us, it is definitely the key issue facing wind energy in Northern Ireland over the next years.

736.

Mr McClarty: The Secretary of State for Trade and Industry, Stephen Byers, recently commented that the renewable energy industry had a potential market worth up to £1 billion per year by the year 2010. Has B9 calculated the potential market for renewable energy in Northern Ireland over the next 10 to 15 years?

737.

Mr Harper: Yes, to a certain extent. We certainly believe that it is possible to have between 8% and 10% of electricity in Northern Ireland generated from renewable sources in that timescale. If that were the case, it would result in an annual capital investment in renewable projects of £20 million to £30 million between now and 2010. It would result in annual electricity sales by the year 2010 of £17 million to £22 million. It would further involve annual sales of renewable energy or environmental credits of £10 million to £14 million.

738.

These figures stem from projects being built in Northern Ireland to satisfy its electricity requirement. On top of that there would be obvious export potential for the technology, something in which we are involved in the biomass sector - Mr Surplus can add to that. We export our knowledge through investments abroad. We are investing in a project in Canada, and over the last three years we have invested some £20 million with our partners in the Republic of Ireland in projects totalling 25 megawatts.

739.

Mr Surplus: The biomass potential is slightly different to wind energy, about which Mr Harper has been talking. We manufacture the equipment for the technology to convert wood to combined heat and power. We have developed a pilot project, the world's first fully automated plant of its type, at Benburb in south Armagh, and we have now secured an order for a project currently under construction in Surrey called Beddington ZED, the first such commercial order our company has received. According to previous studies by the Department of Economic Development and NIE, there is potential for 160 giga-watt hours per year of electricity derived from biomass in the Province. This is eclipsed by other markets in other parts of Europe and beyond. So we have a fairly ambitious business plan to manufacture units in Northern Ireland and export them worldwide.

740.

Mrs Courtney: You state that the rapid growth of the Republic of Ireland economy means there will be a strong need to buy green electricity and/or carbon dioxide. Is it more profitable to export green electricity to the Republic of Ireland than to supply it to the Northern Ireland market? How successful is the current export business? What future growth is expected?

741.

Mr Harper: In theory, it should be more profitable to export electricity across the interconnector. The pressure on the Republic of Ireland with regard to CO² emission limits is not really being felt yet. We expect to see that emerging in five or 10 years. With regard to the export of hardware or manufactured equipment, we are currently planning for a 300 KW wood fuel gasification plant in Tipperary. We are tendering for a £1 million project with the Electrical Supply Board (ESB) for wood fuel gasification. That export to the South is beginning, but we are not yet feeling and seeing what will happen in the future.

742.

Dr McDonnell: What areas of renewable regeneration are currently most underdeveloped here?

743.

Mr Harper: The range of renewable energy technologies is substantial, therefore there are many underdeveloped areas. Many different technologies exist, and some of those are underdeveloped worldwide because they are still being prototyped and tested. For example, there is potential in wave energy. There are other viable technologies which are not being exploited in Northern Ireland, for example, wood fuel coppice powering Combined Heat and Power (CHP) plants.

744.

Mr Surplus: The previous Government's studies have shown that the potential of biomass is as big as onshore-sited wind turbines in the medium term. While we have seen a fair development of wind farms, to date there has been virtually no biomass uptake. There are several reasons for that, the main one being cost. The technology is more expensive and electricity prices are more expensive than wind. But there is also a lack of political will in the agriculture sector to risk converting the use of farmers' land from food production to energy production.

745.

We are watching closely the state of play in regard to BSE and foot-and-mouth disease. These factors might encourage farmers to take a portion of their land and plant fast growing willow trees on a short-rotation cycle. We could then purchase the wood from them on a 15 or 20-year contract basis. They would gain some certainty in their future income streams, and we could convert that willow biomass into heat and electricity to sell to Northern Ireland Electricity.

746.

We have also had discussions with NIE, and if there was an initiative it would be happy to guarantee a market for such electricity in a nice, structured way - that is the most underdeveloped technology with the biggest potential.

747.

Dr McDonnell: I agree. We have been given the impression that wind power is more expensive and it is not cost-effective. The capital cost of the equipment will take a long time to recover, perhaps beyond the life expectancy of the machine.

748.

We have been told that offshore wind energy is even more expensive to generate. Once or twice, I have picked up on the fact that wave power is prohibitively expensive. To some extent I agree with your comments on the potential of biomass, but are you telling me that biomass energy is just as expensive to generate as wind energy?

749.

Mr Harper: I have not heard your evidence on wind energy, but I think that that is wrong. The world growth in wind energy is increasing at 35% per annum, which is effectively a doubling of installed global wind energy capacity every two to three years. In Northern Ireland we are offering wind energy capacity to suppliers at prices lower than the bulk supply tariff (BST) for this year. Therefore, I take issue with the assertion that wind energy is prohibitively expensive - we believe that it is now commercially competitive. I accept that it is not commercially competitive with a very new large gas-fired power station. However, the difference between wind and gas is that wind produces no carbon dioxide emissions - it is a clean and renewable source of electricity. Another difference is that gas has to be imported into Northern Ireland, whereas the wind is freely flowing. When you take into account environmental certificates and credits, wind energy is commercially competitive.

750.

Mr Attwood: You say that, in terms of commercial competition and environmental desirability, wind is attractive. If that is an accurate analysis of commercial and environmental realities, what are the two or three things that we need to be saying to the Government? How do we get people to accept this as a reality and to develop it?

751.

In your submission to the Committee we noted that DETI had not progressed proposals with the rest of Britain in relation to higher development targets and implementing a renewables obligation. That suggests that there is a lack of interest, expertise and application. How do we get DETI to implement a strategy for meeting targets and renewables obligation? How do we get DETI and, on a broader level, the industry to acknowledge what you claim to be commercial and environmental realities?

752.

Mr Harper: There is a problem with wind energy: we can offer relatively commercial prices, but we require long-term contracts. It is capital intensive, as was pointed out, and we require long-term contracts to justify investing the capital.

753.

Mr Attwood: Could you elaborate on that, because this Committee might be anxious about the concept of long-term contracts?

754.

Mr Harper: Yes, I appreciate that. This Committee, customers and suppliers are anxious about long-term contracts.

755.

Mr Attwood: We are paying for them.

756.

Mr Harper: We are paying for long-term high price contracts, but I am referring to long-term low price contracts. Nonetheless, suppliers and our customers are also anxious about that because even though this year we can offer electricity lower than the BST, the supplier will ask whether in four or five years' time that will still be the case. Therefore, they prefer short-term contracts.

757.

The Government in Westminster, and the devolved administration in Scotland, addressed the issue by obliging the suppliers to take contracts for electricity from renewable energy generators. The Government framed that commitment within a timescale of 30 years, until 2026.

758.

So, there is considerable confidence in the renewable energy industry in England, Wales and Scotland for investing in plant. It is not a fixed-price mechanism because the market has been left to determine the price. The price is simply being stimulated by the Government, in terms of the level of demand that the suppliers are faced with. Suppliers are free to go anywhere in Great Britain to find the best price.

759.

Our criticism is that we missed the opportunity to become involved in that market, so as a Northern Ireland generator, we are not able to trade with, and benefit from, a renewable obligation certificate in the Great Britain market. If we were able to do so, we could effectively subsidise the price of electricity that we sell to Northern Ireland consumers.

760.

As a company, the only way we can benefit from the renewables obligations in Great Britain is to export the electricity, as well as the renewable obligations certificate. That can only be done when the Moyle interconnector is in place. If we do that it obviates the benefit of selling subsidised electricity to the Northern Ireland consumer.

761.

Mr Attwood: You have lost me - there are a lot of concepts and words that I just do not understand. How did Northern Ireland miss out on a renewables obligations?

762.

Mr Harper: I do not know. We gave our submissions on renewables obligations to the Department of Enterprise, Trade and Investment, and we expressed our concerns and views. The Department of Trade and Industry in London told us that it believed that Northern Ireland wanted to do its own thing. I do not know from where precisely in the Department of Enterprise, Trade and Investment that this message came.

763.

We are now working very closely with the departmental officials, and we are lobbying very strongly to create some imaginative arrangements so that Northern Ireland can become part of the renewables obligation in Great Britain. This is a different issue from the question of whether Northern Ireland itself needs an obligation. In our view, it is a useful mechanism, however, even if one is in place, Northern Ireland will still be penalised - it will not be able to compete in the same market as the generators in England, Wales and Scotland.

764.

The other significant problem is that Northern Ireland generators do not have access to the £50 million worth of New Opportunities fund money allocated to offshore wind energy and biomass projects. Nor do they have access to the £39 million worth of capital grants that the Department of Trade and Industry in London is putting into offshore wind energy and biomass projects. That is because a condition to receiving that money is that we must be supplying electricity to a customer in England, Wales or Scotland.

765.

Mr Attwood: Aside from the issue of renewables obligations in the North, why are you not allowed to access the market in Britain?

766.

Mr Harper: It is because of the way the market was structured to prevent European competitors from accessing the GB renewables obligation. For example, Northern Ireland wind energy is treated the same as French hydro-energy.

767.

Mr Attwood: So much for the Union.

768.

Mr Harper: No comment.

769.

Mr Attwood: The 30-year contracts in Scotland -

770.

Mr Harper: The contracts are not 30 years, the programme is for 30 years so that generators can feel capable of investing in projects, and confident in the knowledge that there is going to be an obligation, and therefore a market, in place over the long term. Again, the nature of the contracts will be determined by market conditions, but the confidence that backs up the negotiations is there.

771.

Mr Attwood: Do you think that there was a good deal of resistance based on vested interests? Are you saying that Northern Ireland is not treated as part of the United Kingdom for some purposes - on the energy front - and that, as a result, B9 was unable to access up to £90 million in subsidy? There is no renewables obligation in Northern Ireland; there is no strategy over 30 years whereby it is competitive for generators to make capital investments through the creation of further generation projects. That could not happen by accident, it must have happened by design.

772.

Mr Harper: All of those issues are related to the missed opportunity of working towards a renewable obligation within the same time frame as England, Wales and Scotland. We missed that opportunity. A Utilities Act in Northern Ireland could allow for a renewables obligation in Northern Ireland, but we do not think that that is as significant as being able to compete in the GB market or trade in renewable obligation certificates. I am not competent, and I do not want to ascribe any reason as to why Northern Ireland is in that position. We simply missed an opportunity.

773.

Mr Attwood: Dr McDonnell made the assertion that the Committee was told that Ellentree was too expensive. Did that information come from the Viridian Group Plc or Northern Ireland Electricity?

774.

Dr McDonnell: I am not sure, but it seemed odd.

775.

Mr Harper: Initially, wind-energy installed globally, and in Northern Ireland, was more expensive. Until relatively recently, it was a new and developing technology. It is now expanding dramatically worldwide, and B9 believes that it can offer competitively priced wind energy, especially in Northern Ireland which has a good wind energy resource.

776.

Mr Surplus: There were two main reasons. First, the wind turbines were batch-produced; they are now mass-produced. In addition, the investors wanted a high rate of return because of the perceived risk with this technology. B9 has operated the turbines very well for six years, and there is investor confidence. The rate of return that investors are now demanding has come right down, and there is more confidence in the investment sector. While the price is continuing to drop, it is beginning to shallow off and will bottom out in the next couple of years. The trend now is for the turbines to be much bigger in size.

777.

Mr Wells: What is B9's opinion on the NIE eco-tariff?

778.

Mr Harper: We support it. We supported it from the beginning; we supply electricity to it. I believe that it is the most successful scheme of its kind in the UK. It is one of the few schemes that sells new renewable energy to customers who take it up voluntarily. The supplier - in this case, NIE - is guaranteeing that every unit of renewable energy supplied through the tariff comes from a new project. It is not taken from an ex-non fossil-fuel obligation project or another old project.

779.

It has good points. At the beginning, B9 thought that the premiums that were proposed for the eco-tariff were too high. We thought that the premium could be reduced so that the customer was not paying, at that time, an extra 1.2 p per unit. That has now reduced significantly, and B9 believes that it can be reduced further. At the moment we are offering suppliers in Northern Ireland electricity below the BST.

780.

Admittedly, that operates on long-term contracts, but that means that if the benefit of no climate change levy on the renewable energy is taken into account, there is substantial scope for suppliers to take renewable energy.

781.

Mr Wells: Fifteen per cent of the electric in Stormont will go onto the eco-tariff. The Assembly Commission agonised over this for a long time. There were two problems: first, it was expensive, but are you saying that you can supply it to NIE at a lower price?

782.

Mr Harper: No, I said that we can supply it to NIE at a price which is lower than the BST. I do not know the details of your contract so you will have to tell me. What price premium are you paying?

783.

Mr Wells: The opening gambit was the standard higher premium.

784.

Mr Harper: Six per cent.

785.

Mr Wells: The climate change levy issue also has to be considered. First, the price was 6% higher. Secondly, I was calling for the entire building to be run on the eco-tariff, but we were told that there is no way that the present industry can supply that amount of electricity.

786.

Mr Harper: We can supply that amount and a good deal more - there is no question about that. We have planning approval for enough capacity to supply the equivalent of some 10,000 households - I am sure Stormont would not exceed that capacity - and we are expecting further planning approval to double that in the next month.

787.

Concerning the cost, the published eco-tariff rate for commercial customers is 6%, but when the climate change levy of 0·43p is taken into account, that premium is reduced to approximately 1.5%. We do not consider that to be an excessive additional burden, and we are confident that we can lower that cost even further. That is not the price at which we are selling energy to NIE, but the price at which NIE is selling to customers.

788.

There are obviously issues in regard to the fact that NIE sells most of its electricity as conventional power. It cannot be seen to be offering renewable energy at lower than conventional prices, because everybody would want to avail of it, nobody would want its brown power, therefore what would it do with its brown power? It is obliged to take brown power under the contracts which arose as a result of privatisation.

789.

Mr Wells: Are you saying that if it were decided that this building go 100% green, there would be no problem?

790.

Mr Harper: At the moment, if you came to us as a generator, and asked us if we could supply you 100% green energy, our difficulty would be that you might change your mind by the next year.

791.

Mr Wells: We could enter a long-term contract - three or four years.

792.

Mr Harper: For us, a long term contract is 10-15 years. We could not go to a bank on the basis of a three to four-year contract and say that we want to build a project. That is why the supplier comes in between us as a generator and you as a customer, takes a long-term 10 to 15-year contract, and then sells to you under a one, two or three-year contract.

793.

The difficulty is in balancing the risks between the supplier, ourselves and, to a certain extent, you. It is a question of who should pay for the risk-taking? It is not as simple as saying, "We are generating at this price, therefore that is the price you should get". There are issues based on the interface between us and you as a customer.

794.

The Deputy Chairperson: Mr Surplus, you were talking earlier about willow tree production. Bearing in mind the major crisis in farming at the moment and the great loss of confidence, particularly in regard to livestock, do you think that greater efforts should be made now in Northern Ireland to increase the growth of biomass or, for example, willow trees?

795.

Mr Surplus: Yes, we have noticed the drop in beef subsidies, and BSE has been a potential driver of an initiative towards a bigger uptake in the planting of trees. The Department of Agriculture has various establishment grants available for trees, and these grants have come and gone in recent years. A scheme has been drafted to promote the establishment of willow coppices.

796.

The farmers might not want to take that initiative unless there was a way of converting wood into income. B9 Energy Biomass Ltd has the technology - as do other companies - to convert the wood into heat and power, and we could enter into longer term contracts with NIE to sell the electricity. Therefore, we could offer a guaranteed rate to the farmer of around £30 per tonne of wood produced. That would be a definite step towards energy production and out of the food production arena and its problems.

797.

The climate in Northern Ireland is perfect for willow trees, and a good deal of work has been done on willow biomass in Northern Ireland by Loughrey College and such places. We are at the point where a political shove could get us into something more interesting.

798.

The Deputy Chairperson: Please tell the Committee more about what B9 Energy Services Ltd does.

799.

Mr Harper: B9 Energy Services Ltd comprises three companies. There is a development company that develops wind farms in Northern Ireland, the Republic of Ireland and Canada. Therefore, B9 carries out site investigations, planning studies, gathers consents and approvals and is involved in land owning negotiations, contracts and financing. Our partners construct the project and then B9 Energy Operation and Maintenance Ltd (B9 Energy O&M) undertakes the operation, maintenance and management of the project. The third element of the company is B9 Energy Biomass which researches, designs, manufactures, installs and operates biomass projects such as wood fuel and gasification schemes. We do that in Ireland and for export.

800.

Dr McDonnell: We are all interested in the biomass aspect. What critical mass is required between crops? Surely, two farmers, 25 miles away from one another, should not each be cultivating half an acre of trees. What quality of soil is required? The most obvious place to grow the willow is in a swamp, but the quality of the willow from the swamp would not be very good. How are those matters balanced?

801.

Mr Surplus: The critical mass can be grown within a 12 miles radius of a plant that we would establish. Twelve miles is about the largest transportation distance that would be economically viable. Within that, we are only looking at a proportion of the land being planted.

802.

Dr McDonnell: How many acres of land?

803.

Mr Surplus: I cannot answer that off the top of my head but I will do so at a later date. It is a substantial amount. It is a much less dense energy form than, for instance, wind power - it takes up a greater area of land.

804.

In England there are niches with set-aside land, but that involves cereal production, and Northern Ireland does not have a good deal of such land. With regard to ground conditions, for proper economic yields the willow should be grown less than 100 metres above sea level and have more than 30 inches of rain a year. Therefore, the majority of Northern Ireland is suitable for this. The wetter it is the better, and the willow trees can act as a means of drying out the waterlogged ground.

805.

The Deputy Chairperson: Thank you for your contribution; it was very interesting. The Committee Clerk will forward questions to you that the members did not have time to ask this morning.

ADDENDUM TO MINUTES OF EVIDENCE
B9 ENERGY SERVICES LTD AND B8 ENERGY BIOMASS LTD

Q. Is a target of 7.7% by 2010 reasonable for Northern Ireland?

A. We consider that the target is too low and we are capable of developing more within the same timeframe. The current target of 7.7% assumes that the wind energy potential is capped to 50 MW supplying 160GWh/y or roughly 2.1% of current consumption. This is an artificial constraint and is not justified either by the potential capacity that could be installed or by the constraints imposed by the electrical system in Northern Ireland. It takes no account of technical developments in wind turbine technology, it has assumed Northern Ireland is not connected with either ROI or Scotland and it has assumed that summer night time demand levels should drive the capacity potential for wind energy when this is the least valuable operating period and wind energy developers would be happy to be flexible suring such periods. Though there are likely to be some problems with integrating wind energy onto the grid system we consider that they can be overcome. We note that NIE is proposing to undertake some system studies to investigate the potential for further wind energy capacity and that they are asking the renewable energy generators to fund such studies. We consider that such studies are of a strategic nature and should be funded by Government and NIE not by the renewable energy developers.

Q. How is the NFFO2 Biomass project progressing and are we satisfied with the NFFO arrangements?

a. 50% of biomass plant at Benburb (Phase 1) is now complete and is performing in accordance with the original specification. Phase 2 of the project is (the remaining 50% of the project) now underway with all ordering of equipment complete. Installation should be within next 4-6 months.

b. NFFO has been the only vehicle available in Northern Ireland to stimulate the development of CHP wood gasification technology and B9 Energy Biomass Ltd is very satisfied with its participation in the scheme.

Q. Does B9 believe that the renewal energy generators together could take a more proactive and innovative role in the development of the renewable energy sector?

A. Though there are not many renewable energy generators in Northern Ireland, most are also working either in the rest of the UK or in the Republic of Ireland. As such they can have their views represented to Government through the relevant trade associations that are active in supporting their respective technologies. B9 Energy Services Ltd is active in the British Wind Energy Association as a corporate member and the Irish Wind Energy Association, for which Michael Harper is a vice-Chairman. In addition, he chairs the Offshore Wind Energy Committee. Other members of the company are involved in other committees of the Association. B9 Energy Biomass Ltd is a corporate member of British Biogen - the trade association of the biomass industry. Through both the BWEA and British Biogen, we are members of the Consortium of Renewable Energy Associations which acts as an umbrella organisation for all trade associations involved in renewable energy and which covers renewable energy in Northern Ireland.

Q. Does B9 believe that replicating the recent UK Utilities Act relating to a Renewables Obligation on licesed electricity suppliers is appropriate?

A. We consider that a Renewables Obligation is the most sensible approach for ensuring that adequate supplies of renewable energy are developed to achieve the targets of 5% of supply by 2003 and 10% by 2010. A Renewables Obligation for Northern Ireland represents a form of market-based stimulation for renewable energy that is structured and enabled by Government policy; in effect the Renewables Obligation represents a support framework where price is dictated by market forces and demand is stimulated by Government. Provided that suitable capital grants are made available for small projects utilising higher priced emerging technologies (such as Biomass), then in our view, a Renewables Obligation is the most cost-effective and flexible means of achieving the targets. This is because it does not place a burden uniformly on consumers but encourages, instead, electricity suppliers to source both supplies of renewable energy and customers for renewable energy in such a way as to achieve the best value for the electricity consumer as a whole. We can see very active development taking place in England, Wales and Scotland as a result of the imminent introduction of the Renewables Obligation in those jurisdictions. It has given new impetus to renewable energy developers. By making the GB Renewables Obligations run until 2026, renewable energy developers have the confidence to make investments in long term high capital projects.

Because of the way the GB Renewals Obligation is structured it has created a market in Renewables Obligation Certificates that is limited to the GB and is currently independent and separate from the market that might be created in Northern Ireland were a Renewables Obligation to be introduced into Northern Ireland. In essence, renewable energy generators in Northern Ireland (whose output will count towards the UK national target of 10% by 2010) do not have the ability to trade Renewables Obligation Certificates in GB in the same way that other generators can who are operating in the rest of the UK. Even when the interconnector between Scotland and Northern Ireland is commissioned (end of 2001), it appears from correspondence with your officials that Northern Ireland generators will not be able to sell their electricity within the Northern Ireland market and their Renewables Obligation Certificates within the market currently being established for such in England, Wales and Scotland. However, a renewable energy generator in Scotland, for example, could supply its electricity to a customer in Scotland but its Renewables Obligation Certificate to a licensed supplier in England. Likewise, a renewable energy generator in England could sell its electricity to a customer in England but its Renewables Obligation Certificate to a licensed supplier in Scotland. A Northern Ireland generator, on the other hand, will only be able to sell Renewables Obligation Certificates to a licensed supplier in GB if he is also supplying his electricity to a customer in GB, which is not currently physically possible and in any eventually (even when the interconnector is commissioned) becomes an excessive and unnecessary requirement.

We therefore urge the Committee to support the putting in place of arrangements that enable renewable energy generators in Northern Ireland to be treated as equivalent to generators in the rest of the UK - able to sell their electricity in one administration and their Renewables Obligation Certificates in another. We believe that it would be wholly unacceptable for a renewable energy generator in Northern Ireland, though part of the UK, to be required to operate under the arrangements as set out on page 47 of the Preliminary Consultation document (Annex B, Paragraph 24) headed "International Protocols", which would treat wind energy in Northern Ireland as equivalent to small hydro in France and which would not, in any case, allow for the separate trade of electricity and Renewables Obligation Certificates that we believe is necessary.

Whilst we recognise that the wording of the Utilities Act 200 is unlikely to be amended in the foreseeable future, we believe that there should be scope for amending the Act in parallel with the adoption in Northern Ireland of a Renewables Obligation of its own. This would enable Northern Ireland to take its part alongside Scotland, Wales and England in a single UK wide Renewables Obligation and would therefore create both the best opportunity for Northern Ireland renewable energy developers and the best value renewable energy for electricity customers.

Q. Have B9 ever submitted a Fifth Framework application?

A. In 1999, we submitted a Fifth Framework proposal "Arklowoffshore" to the Commission which involved ourselves, ESB1, Renewable Energy Systems Ltd and Vestas from Denmark - the world's largest wind turbine manufacturer. We were not successful because the Commission could not choose or did not want to choose between the different offshore wind energy proposals submitted for Ireland. Considerable time was put into the proposal which was very comprehensive.

Q. Plantation of willow trees

A. Approximately 70 Hectares of planted short rotation coppice willow is required to provide 100kW of electrical energy for the year. There will also be 100kW of usable heat produced from the CHP station.

top

MINUTES OF EVIDENCE

Wednesday 25 April 2001

Members present:

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mrs Courtney

Mr McClarty

Dr McDonnell

Ms Morrice

Mr Wells

Witnesses:

Mr W Curry )

Mr W Watterson ) Biogas (Ireland)

Dr C Lukehurst )

806.

The Deputy Chairperson: I welcome you and ask you to make your opening submission.

807.

Mr Curry: On my right is Dr Clare Lukehurst, Fellow of the British Institute of Agriculture Consultants, technical adviser 1993-1996 to the Holsworthy Biogas Project. From 1978 to 1987 she was Director of the Countryside Research Unit, Brighton Polytechnic, and from 1988 to 2001 was consultant on renewable energy and rural development of the Ulster Agricultural Organisation Society Limited (UAOS) and from 1994 to the present day has been founder/initiator with the Ulster Agricultural Organisation Society, Fivemiletown & Brookeborough Co-operative Agricultural & Dairy Society Limited and the Fivemiletown Community Development Association of the biogas project.

808.

On my left is William Watterson, BA Honours Business Management Diploma in Agriculture.

809.

He is a farmer liaison officer with Fivemiletown Creamery who has worked extensively in the agricultural sector. He is very capable of dealing with all farm-related matters and has built up extensive knowledge of soil nutrient management to complement the farming needs of the biogas project.

810.

I am Bill Curry, managing director of Fivemiletown Creamery.

811.

The Deputy Chairperson: You are very welcome. Can you tell us something about the biogas project?

812.

Mr Curry: The biogas project was initiated in 1994 with an interest in the control of pollutants from farms in the Blackwater and Erne catchment areas in the Clogher valley. That started the project, but it has since grown to cover much wider environmental and renewable energy issues.

813.

Mr Wells: Is yours the only project of its kind in Northern Ireland?

814.

Mr Curry: Yes. We are the only biogas project in Northern Ireland, perhaps in the whole of Ireland, to have completed a technical feasibility study and to have commissioned PricewaterhouseCoopers to undertake an economic appraisal in readiness to apply for funding to build. Several farmers in north Antrim have expressed an interest in the project and joined us in one of our trips to Denmark to see plants in operation. However, we do not know what progress they have made.

815.

We regard this project as a pilot for Northern Ireland, and the whole of Ireland, for others to follow.

816.

Mr Wells: What value can be placed on the fertiliser produced by the process?

817.

Dr Lukehurst: This is the first time a comparative price has been put on the bio-fertiliser from a biogas plant. Farmers apply manure all year round because of lack of slurry storage; many use splashplate spreaders to project it out over the fields. At present they could get £2·68 worth of nutrients (N, P₂, O₅, K₂O) from their manure. However, lack of storage and the method of spreading - through the air rather than on the ground - means that the farmers only get 54p per tonne worth of nutrient spread. It costs them 69p per tonne to spread it. Therefore, at present they get practically no monetary value. When the biogas plant has been built, a mixture of half farm manure and half food waste - creamery waste, rumen contents from the abattoirs and fats from fat traps - increases the nutrient content and value to £4·42 per tonne. It nearly doubles it.

818.

By changing methods and management, by constructing a tank on the farm to allow proper timing, by spreading with band spreaders, which trickle the fertiliser along the ground so that the ammonia does not evaporate, or with umbilical spreaders, the farmer gets the full £4·42 worth of nutrient.

819.

Mr Wells: How can one put a monetary value on the nutrient?

820.

Dr Lukehurst: There are standards methods. MAFF's Fertiliser Recommendations for Horticultural and Agricultural Crops (RB2O9) identifies the typical nutrient status of farm slurries taking an average for the country. We also take the nutrient value of the wastes brought in from the creameries, meat plants, et cetera, at so many pence per kilogramme of nitrogen, phosphate and potash. We also know from MAFF's RB209, which is used by DARD and by all agricultural consultants generally, how many kilogrammes of nitrogen there are in the various types of slurry. In fact, there are 3·0 kilogrammes of nitrogen in every tonne of slurry produced by farmers; 50% of which should be available if it were stored and spread at ground level at the appropriate times.

821.

One can work out the mass from standard figures. However, that is more difficult to do with food processing waste. I sought advice on the matter from ADAS in the south west of England - that group advises on nutrient status to the environment agency in GB. The environment agency has published a report on the nutrient value of food waste that has been spread to land. Another report containing the nutrient values of food waste that has been spread to land has been done by Northern Ireland and Scottish researchers - I think it is funded by the Department of Agriculture and Rural Development - and is called the Scotland and Northern Ireland Forum for Environmental Research Report (SNIFFER Report). Food processing companies - I will not use their names as they have given us information in confidence - know the nutrient content of their wastes because they spread it on land. I have compiled from three sources an estimate of nutrient content of wastes. No previous work has been done on the matter, and results will be published in a conference paper at the end of the month.

822.

Mr Wells: Is the production of biogas viable without the creamery?

823.

Dr Lukehurst: No.

824.

Mr Wells: In that case, farmers in places such as Kilkeel would be unable to get together to run the process because there is no big unit to generate waste.

825.

Dr Lukehurst: Farm manure contains only 20 cubic metres of methane per tonne. The use solely of manure is not viable because of the capital costs. If you add the food waste to manure, the gas output is increased as there is a higher dry matter content, for example, in the rumen contents it yields up to 25 to 30 cubic metres per tonne. The creamery waste yields 33 cubic metres per tonne, but food waste is worth a lot more.

826.

There is a fish plant beside Kilkeel, and if farmers from the area used their fish waste and manures in a biogas plant instead of spreading it on the fields, the gas content would be boosted and the situation could be made profitable. Biogas production is derived from a combination of food waste - that waste needs to be at least 50% to make it economic - and 50% manure. That manure can be a mix of chicken, pig, cattle and duck slurry.

827.

Mr Attwood: When the Committee finishes its public sessions and writes its report, it will be hard for it to make an informed or definitive judgement about your project if the PricewaterhouseCoopers appraisal has not been published. Are there any indications of the timescale or outcome of its appraisal?

828.

Mr Watterson: Biogas (Ireland) Ltd had a meeting yesterday with PricewaterhouseCoopers on the progress of the economic appraisal. As a result of the restrictions placed on our rural project by the foot-and-mouth crisis, things are behind schedule. We hope that the appraisal will be completed and the report published in approximately six or seven weeks. I am not sure if that fits in with the Committee's schedule for reporting.

829.

PricewaterhouseCoopers is pleased with how the project looks. That group is currently deep in legal and technical areas. The number crunching that is critical to the project is to be examined in more detail. PricewaterhouseCoopers does not see the project surviving without initial capital investment - capital investment is needed to buy the equipment to start the project. It thinks that the project will be viable once there is revenue from electricity sales, potential heat sales and from food waste - the gate fees. However, the report is not yet complete, so those are only preliminary findings. The other thing that it has highlighted is the potential for other investment to develop from this project: the heat sales and the hot water from the project are not fully utilised, and horticulture as an industry could be located in the area. That could perhaps bring jobs to the area at a very economical rate. Approximately 95% of horticultural products are grown outside Northern Ireland at present, so that is an area for development.

830.

PricewaterhouseCoopers considers this as a pilot and a possible demonstration project. We could have a visitor's/educational centre in the local area, and there is potential for income from that as well. We are closely associated with the development association in the Fivemiletown area. They are very active. You will see from your notes that the steering group has two members from the community development association. They see this as a kick-start for other projects that they could develop in the future.

831.

Dr McDonnell: I am intrigued, but I cannot visualise the economics of the situation. What is the minimum critical mass that you would need?

832.

Dr Lukehurst: It depends on the size of the digester. This is not the first of these; there are twenty in Denmark and fifty in Europe as a whole. The approximate minimum output for a commercial operation is half a megawatt. There are four or five of that size in Denmark, and they function very well. We are aiming to have an 80,000 tonne throughput per year, and that would maintain the engine on full power 24 hours a day for 95% of the year. There would also be a second engine so that it would always be running.

833.

Dr McDonnell: How many cattle, pigs or hens will be required to feed that?

834.

Dr Lukehurst: Two thousand cattle would be needed. I cannot remember the precise number of hens, but I can provide all those statistics for you.

835.

Dr McDonnell: Getting that initial critical mass together seems to be the most vital issue.

836.

Mr Curry: We would be taking slurry from farms within a seven-to-10-mile radius of Fivemiletown. There would be 39 farms involved, most of which are dairy farms.

837.

Dr Lukehurst: There are 500 farms within the radius.

838.

Dr McDonnell: Would you draw the slurry in?

839.

Dr Lukehurst: Yes.

840.

Dr McDonnell: Can the gas be burned directly rather than being converted into electricity?

841.

Dr Lukehurst: Yes.

842.

Dr McDonnell: Is it not more cost effective to burn the gas directly rather than turn it into electricity?

843.

Dr Lukehurst: There are no gas-burning installations in Fivemiletown because there is no other gas there. You would have to change everyone over to gas power in order to do that.

844.

Dr McDonnell: What are the economics of those plants in Denmark? Are they profitable?

845.

Dr Lukehurst: The Danes were the first people to do this. They started in 1985 and their economics have improved as they progressed in knowledge, abilities and technology. They have learned from their early mistakes. We are building on 20 years of their experience. We are therefore at the front end, because we do not have to make all the mistakes that they made. Their economics depend partly upon the quality of the management of the plant.

846.

A good manager is necessary. The contracts with farmers and food processors should be reliable and should all be set up at the beginning so that all the deliveries come on the day they are expected - and there is no reason why this cannot be done properly at the beginning. The good Danish plants have done that. The poor Danish plants did not get their contracts set up properly and have allowed themselves to take food waste on a less programmed basis. They always thought that it would come in, but now there are so many plants competing for food waste. They are hauling from northern Germany, and the road hauliers are holding them to ransom.

847.

Dr McDonnell: So it is the regularity.

848.

Dr Lukehurst: It is the regularity and the contracts at the beginning.

849.

Dr McDonnell: I could not see that being possible, but it happens if you get the contracts right. Do you see the project being viable anywhere other than near a creamery?

850.

Dr Lukehurst: Yes.

851.

Dr McDonnell: Where else can you get an infrastructure similar to yours that would work?

852.

Dr Lukehurst: I am actually working on that at the moment, and I have worked on it in Somerset and Devon and Cornwall. You always need to start with a market for hot water. Unless you have a market for hot water, the economics are not good and it cannot be justified. You need a combination of several heat users. That could include a creamery, a secondary school, like Fivemiletown Secondary, which has its own swimming pool and a community swimming pool of some sort. One or two plants may have large hotel users, school heating systems or a business using a lot of hot water. You need that market for hot water first.

853.

You then need to look at the density of the livestock in the area and the distribution of the food wastes within the locality. Food wastes come first and the livestock second because they are always there in the Province. There is room for 10 plants based on the livestock slurry available. There are currently no statistics on organic waste in the Province. The figures from Kirk McClure Morton on the wastes are due in a fortnight. Mrs Patterson cannot do anything until then.

854.

Dr McDonnell: That is very important because when people think of biomass and biogas they immediately tend to think of Denmark, pigs and slurry tanks and nothing more than that. That is where the public mind is. Where in north Antrim was the interest coming from?

855.

Dr Lukehurst: It came from Ballymoney and Ballymena.

856.

The Deputy Chairperson: I introduce Jane Morrice, who has always shown a great interest in regeneration from renewables.

857.

Ms Morrice: This area fascinates me. We are singing from the same hymn sheet - there should be more of the same, and it should be supported. Is there potential for single household or farm initiatives that could work on an individual basis? Could this provide heat and light for a farm or a home?

858.

Mr Curry: There are 600 single units in Germany. It is not a new farm-based technology, but the farm must have a certain mix to be able to gain the benefits from it, but it can be on a single farm.

859.

Ms Morrice: Are you saying that it could never derive all its energy solely from this source?

860.

Mr Curry: Yes.

861.

Dr Lukehurst: There are 600 single units in Bavaria alone. I am going to a conference in June on biogas in Germany. There are almost 800 in total in the whole of Germany and their new electricity laws are now favouring it. The farmer can actually connect to the grid, which is obliged to take the connection. It is the equivalent of four pence per kilowatt-hour in our money.

862.

Ms Morrice: Does surplus production go into the grid?

863.

Dr Lukehurst: Yes. The farmer can get it all into the grid - and the hot water for his house - and he can use all his own manure. Many of those on the farms are "Heath Robinson" type. There are also commercially manufactured plants. The Danes have fully automatic systems for very large pig farms. There is no tradition in Great Britain or Northern Ireland of good quality, on-farm schemes. Generally they have been expensive, with many poorly designed and managed and with little or no back-up servicing. I think there are seven in Northern Ireland - none of which work well.

864.

Ms Morrice: What is the potential for an increase in this area, and how can we achieve that?

865.

Dr Lukehurst: The schemes are very expensive for the farmer without a grant. You should look at the German plants first and assess the situation there. It would be rash for me to make a judgement until I have seen those in Germany. We need to know more about the size of the farms and their capital. Many farms in Northern Ireland are on negative incomes, and they cannot afford anything. There is a farmer in Hampshire, who, with his brother, uses a slurry tanker. They move it around the farm and they keep their houses and dairies going with hot water. One farm has it one week, and another farm has it the next week. You can go from that level of technology to the Danish one, which is the other extreme with full automation.

866.

Ms Morrice: It seems so simple, and I wonder why we have not been doing it for years.

867.

Mrs Courtney: You said that the farmer could not do this without proper grants. You have set this up and only got it fully operational last year. Is Biogas satisfied with the financial and non-financial support received in the development of this initiative? Are you satisfied with your grant allocations?

868.

Mr Curry: This is not in operation yet.

869.

Mrs Courtney: Sorry, I thought you were in operation from November last year.

870.

Mr Curry: It is a project that we have devoted a lot of time to, and it is not in operation yet. The project has received support from INTERREG I and II, Dungannon and Fermanagh District Councils, the Vaughan Trust, and the Blackwater Catchment Scheme. It has also received enormous support from the Industrial Research and Technology Unit (IRTU). All have part-funded the project to date and been very supportive by taking part in the steering group meetings. The scientific veterinary services of the Department of Agriculture and Rural Development have also supported the project. Representatives from that Department have visited Denmark to see the plants in operation.

871.

Earlier this year, Mr Billy Armstrong gave us the opportunity to address the Assembly in the Long Gallery. All political parties have been updated and consulted about the project. The members of the steering group have made an enormous contribution to this project. After the economical appraisal is complete, and we proceed to the next stage, we will be seeking grants from Government Departments and any other relevant bodies. We will need the grant to get the plant up and commissioned.

872.

When it is commissioned - and our figures have been verified by PricewaterhouseCoopers - it will not need any further support.

873.

Dr Lukehurst: The problem with financial support at the moment is that it is stop/go, and you can only go a short distance and then there is nothing for another nine months. You do not know whether you are going to get financial support or not. We can keep a lot going on a voluntary basis, and I am prepared to keep it going whether or not funding is available. You can only go so far on that and, once the economic appraisal is completed, we have no funds available to go to the next critical stage, in order for us to apply for the INTERREG funding.

874.

We need to get a specification for the plant. We have budget costs, but you cannot go to grant application on budget costs. You need a specification. That is likely to cost us in the region of £20,000 to £22,000. We have had an estimate. Once we have got the specification, then we can make the applications for the capital grant and start to raise the private capital and the funding from the other sources.

875.

On capital grant, the Danes' experience is that the first ones were funded at 60%. It has tailed down, and now they are only 20% capital grant-aided. There is a lot of risk at first, even though it is proven technology in Denmark, because everyone is saying that Northern Ireland is different. The meat plants, the creameries and the farmers are all very wary at the start for the first one. You need to give confidence, take away some of the risk with the grant at the beginning and then other grants that follow can be on a sliding scale until the amount goes down to zero.

876.

Mrs Courtney: All things being equal, people want to see a return for their money. If everything goes as you hope it will, when do you think that you will be operational?

877.

Mr Curry: We hope that when the economic appraisal comes through and we start applying for funds and have those funds confirmed, it would take about eighteen months to build the plant.

878.

Dr Lukehurst: It may interest you to know that when it was at the stage that we are in now, Holsworthy, which is under construction now in Devon, was bankrolled and kept going by its local authority, which had made £90,000 available. It was able to keep going until it got its grant. That money was repaid out of the grant. There was a risk, but it was successful. That got Holsworthy out of the problems that we have facing us. We have no one. We have plenty of moral and technical support from the Department of Agriculture and Rural Development, the Department of Environment and the IRTU. That will not get us over the financial hurdles that we are facing.

879.

Mr McClarty: I am conscious of the time involved, so I have one very simple question. Potentially, how many jobs could this initiative create?

880.

Mr Curry: We are initially looking at five jobs in the plant. Other jobs will be attracted in to the area through the visitors' centre, but we cannot put a number on those at the moment. Further on down the line, we see the development of the hot water in horticulture products providing jobs in the rural community to hold people on the land. There could be a fair number of jobs in that area as well, but we are not putting numbers on that at the moment. That is for the second phase, once the plant is built.

881.

Dr Lukehurst: What we can do, and what I am working on with PricewaterhouseCoopers at the moment, is to predict the socio-economic gains from income retention in the locality. We have acquired a model developed by the Fisheries, Agriculture and Agro- Industrial Research (FAIR) programme of the European Commission that has been applied to wood fuel, short rotation coppice, arable crops, perennial crops and forest residues. That was done in Fermanagh. We have been trying to adapt it for biogas. On the evidence that we have got so far, the retained income from displaced oil, from new spending and from displaced electricity amounts to about £800,000 a year. However, one has to be cautious with these figures.

882.

The Deputy Chairperson: The Department of Enterprise, Trade and Investment will shortly begin an investigation in to the use of renewables. I wholeheartedly encourage you to participate in that exercise. The evidence session has been fascinating, and we wish you every success with it. There are some questions that have not been asked, and you will be provided with a copy of those. We would be much obliged if you would respond to them in writing. Thank you very much.

883.

Mr Curry: Thank you very much. We look forward to being able to discuss any other issues.

ADDENDUM TO MINUTES OF EVIDENCE
BIOGAS (IRELAND) LTD

Q. What is the potential to develop the initiative to other communities?

A. Adoption potential depends on four factors in combination:

1. A receptive host community

2. Markets for heat or process steam

3. Quality of the road network in relation to available agri-food/other organic wastes

4. Density of livestock manures within a 5-7 mile radius.

The present response can only be based on the quantities of livestock manure until detailed information on other organic wastes becomes available. The information below is a very cautious estimate. Manure quantities, gas and electricity outputs have been based on the same data as that being used for the Economic Appraisal of the Fivemiletown Biogas Plant. Manure outputs from cattle, pigs and egg laying hens are based on the latest available numbers (DARD, 2000) 'The Agricultural Census in Northern Ireland Results for June 1999'

NB The data below is based ONLY on manure supplies available throughout the year; therefore only 20% of the total year-round cattle manure (i.e. summer availability) has been used in the calculation.

Table 1
Predicted contribution of animal manures for electricity generation in Northern Ireland

County	Manure t/day	VS t/day	m³CH4/day	MWh/day
Antrim	2553	148	30,723	116.44
Armagh	1583	90	19,328	73.25
Down	2356	136	28,389	107.59
Fermanagh	1282	74	14,957	56.69
Londonderry	1826	99	21,529	81.60
Tyrone	2568	152	30,810	116.77
Total	12168	699	145,736	552.34

The animal manures (exc. broiler litter) have the potential to yield a combined heat and power output of about 552 MW hours per day year round using VERY cautious predictions.

The viability of its exploitation depends on co-digestion of the manure with agri-food or other organic wastes. Nevertheless on the face of it the pilot Biogas Plant for Fivemiletown could be replicated at least ten times in the Province.

(i.e. approx. 10-15 MW installed capacity)

Q. Have Biogas (Ireland) Ltd calculated the potential market for biogas?

A. No, this requires market analysis especially the identification of heat users. Access to natural gas distribution networks (proposed) would also need to be taken into account.

Q. Do you agree that the maximum estimated contribution of renewables of 7.6% by 2010 is possible as indicated in NIE's publication 'Renewable Energy in the Millennium'?

A. We do not have the expertise to comment on this conclusion as a whole and therefore confine our observations to the potential from biogas plants. Based on Fivemiletown's pessimistic output, this one plant could yield 9GWh/yr. This virtually fulfils NIE's expectations of 10GWh/yr by 2010. Subject therefore to the findings of the Economic Appraisal for the pilot biogas plant at Fivemiletown being positive, we contend that the NIE's prediction for electricity production from animal wastes is well below the potential level. Furthermore, the NIE prediction appears to take no account of the energy value of wastes (creamery sludges etc.) currently spread to land.

Q. What price can electricity from this source (biogas) be sold?

A. We cannot answer this question at present as discussions with NIE and OFREG are in progress.

We thank you for inviting us to participate in this inquiry and will be pleased to assist in anyway we can.

CLARE T LUKEHURST
Technical Advisor
(Director on behalf of the Board of Biogas (Ireland) Ltd)

top

MINUTES OF EVIDENCE

Wednesday 25 April 2001

Members present:

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mrs Courtney

Mr McClarty

Dr McDonnell

Ms Morrice

Mr Wells

Witnesses:

Mrs J Whiteside )

Mrs M Bell ) General Consumer Council

Mr W Henderson )

884.

The Deputy Chairperson: You are most welcome. You are very familiar to the Committee, so I shall not go through the usual routine, given that our time is restricted. Let us make the best use of it. Mrs Whiteside, would you like to make an opening submission?

885.

Mrs Whiteside: We are once again delighted to have this opportunity to describe the problems of energy costs. I shall make a very brief opening statement in the form of bullet points, and I hope that later in the session I will be able to develop the issues in response to your questions.

886.

The situation is thoroughly depressing, and the more one looks into the topic from a consumer's point of view, the more depressed one feels. People in Northern Ireland pay more in cash terms than United Kingdom consumers generally. In Northern Ireland, incomes are smaller, and the consumer spends a higher proportion on fuel. An estimated 27% of households are in fuel poverty.

887.

The overwhelming problem is electricity prices. Back in 1992, when electricity was privatised, the regulator of the day, Geoffrey Horton, said at the committee's very first meeting that electricity prices would increase at an exorbitant rate after privatisation. He showed us a graph to illustrate this. I asked him what would happen here, by comparison to Great Britain, and he said that prices would fall there. At that time, he could see that the package we were given was flawed, and we are still reaping its ill effects today. Our costs are going up while those in Great Britain are falling. The generator contracts with their stranded costs were a big problem; we pay for availability whether it is needed or not, and that has led to problems with competition.

888.

Gas has been beneficial in the Greater Belfast area. We should like to see those benefits spread as far as possible to the north-west and south of the Province. However, we must learn from the problems we inherited with electricity and ensure the deals struck for gas pipelines and related development carry no hidden problems for consumers. We wish to make sure that the deals we get are good. Those are the broad points we want to make.

889.

Mr McClarty: Usually at the beginning of these sessions each member introduces himself to those giving the presentation. We have met on so many occasions that it seems we know each other already.

890.

I feel that you have your priorities right. Your very first statement concerned the high electricity prices in Northern Ireland. The growing energy cost differential with the rest of the UK is a major threat to Northern Ireland's economic competitiveness. In your opinion, what action is needed to address high energy costs, particularly those of electricity?

891.

Mrs Whiteside: A simplistic and idealistic answer is that the Treasury took too much money from Northern Ireland in 1992. The cost paid to the Treasury per unit of electricity was much higher than in Scotland and England. The people of Northern Ireland got a very raw deal at the time. The simple answer is to argue that we need some repayment to counteract the effects of that raw deal, and that the capital should be used to buy out the generator contracts so that we are not landed with availability payments and can start afresh. I know it sounds like an easy solution and a little idealistic, but that would be the fair solution.

892.

If we go through the price controls and renegotiations of contracts, we can see that the regulator is doing his best as a gentleman who understands the situation. We can support the regulator in what he is trying to do, for he is the expert; he knows what can and cannot be done.

893.

As a consumer representative, it is important to state that although we accept that the high cost of energy is harming industry, any help accorded or measures taken to benefit it should not be at the expense of the domestic customer. We are not arguing that such measures should not be taken. Industry needs help, therefore such measures are necessary, but domestic customers cannot afford to take on the stranded costs - the extra costs of the flawed contract. We must be very careful that measures to help industry do not impact unfairly on the domestic scene.

894.

Mrs Courtney: You are very welcome. I come from the Foyle constituency and I represent the north-west. I am interested in your comments on the gas power station at Coolkeeragh and what it could do for opening up energy in the region. The fact that a licence was applied for yesterday is obviously of great importance, and you were very positive about that. Energy is being talked about a great deal at the moment, and we obviously want something competitive. It is therefore important that we the organisation responsible for monitoring and home energy rating is the best one possible. What organisation would you recommend, and what benefits would it have for energy efficiency?

895.

Mr Henderson: We are relatively fortunate in Northern Ireland, because a large number of people are working very hard on energy and fuel poverty issues. The Housing Executive is our home energy conservation authority, and it brings together people involved in such areas so they can pool their thoughts and examine what must be done. We are lucky, unlike the regions of Great Britain, to have a focused home energy conservation authority with all the relevant people in place. The Housing Executive looks after tenants of its own properties, but it could also have a monitoring role for the private sector, for example, because it has the expertise in this field.

896.

Home energy rating and its monitoring has been a little slapdash in the past, since energy efficiency, in our experience, is a concern of the middle classes. They can avail of the benefits of it and they appreciate the payback on investment.

897.

It is important that that is done. It is entirely different to solving the problems of fuel poverty which requires a different change and the installation of new systems in houses. That is a different thing to energy efficiency. The Housing Executive would be the key home energy conservation authority. We should build on what we already have in Northern Ireland because we are fortunate to have all these different agencies working in that arena.

898.

Ms Morrice: Like the rest of the members, I am interested in green energy. What initiatives do you think there should be to increase the use of renewable energy sources without increasing electricity prices?

899.

Mrs Whiteside: Your last sentence is the vital one - without increasing the prices. Green energy is something that we all want. It is very easy to make arguments in favour of green energy, and nobody has any argument against the idea. The problem is the need to pay for it by increasing the cost of energy. As we all know, that cost is already high. When, for example, wind energy development began it was very expensive. I have noticed a fall in the prices as bigger units are developed, and as more wind energy is developed for Europe as a whole.

900.

On a general scale, Northern Ireland is a small unit and our costs are high. In Northern Ireland it seems to make sense to ask about what has been proved elsewhere. Where have the development costs already been covered? What can we have in Northern Ireland at a cost that is roughly equal to that of producing traditional electricity? We need to try to work out what units have covered their early development costs. In Northern Ireland we cannot afford the expense of making our green energy much more expensive than traditional energy, particularly in the light of the fact that we must pay availability costs for the units that we are not using.

901.

Ms Morrice: Is there potential - idealistic or not - for an eventual role reversal whereby green energy could become the cheapest form of energy? That seems to be the most natural way to go. People keep saying that Ireland could be the Saudi Arabia of wind energy production.

902.

Mrs Whiteside: That is great. We were reading recently that you can now get wind turbines that are much bigger and more economical to run. A single large turbine is much cheaper to run than several small ones. The development is continuing and we will soon be able to benefit from this.

903.

We must be able to get onto a level playing field. We need to get rid of our contracts, start afresh and seek the best solution for Northern Ireland. Then we can focus on the green element and say that that is now the best option for us. We need to get rid of our baggage before we are in a position to say that.

904.

Mrs Bell: In the short term, we need to tackle fuel poverty which affects 27% of households. In the medium to long term we should be looking at the area of sustainable energy. A number of things could be done, particularly if a more focused approach were taken by the Government. Among the possibilities are tax breaks for investments in renewables and a better marketing element so that people are much more aware of what is being done and are assured of a consistent approach. It would also make sense to look at the European countries in which there has been much more development, such as Holland and Germany. Last year, the wind power capacity installed in Germany was equal to twice the amount installed in the UK during the last decade.

905.

Dr McDonnell: We touched briefly on fuel poverty and energy conservation. Moving off the subject of energy production, Northern Ireland has a big problem of cold, damp houses. Aside from knocking down all these houses and rebuilding them, is there anything we can do to reduce energy demands at the domestic level?

906.

Mrs Whiteside: I am sure that you have heard of the Beechmount project. We have received figures linked to that project, in which the heating systems in groups of houses were reconstructed to provide gas central heating.

907.

As Mr Henderson said earlier, there is a problem with energy efficiency and with persuading people to use less energy. There is also the problem of the fuel-poor, living in cold, damp houses. There is no point in persuading those people to use less energy; they already are using less than they need to keep themselves warm. Insulating their houses will increase their comfort level but it will not reduce the amount of energy they use and it will not solve their problems. There is no point in heating an energy-efficient house with a three-bar electric fire. A huge amount of energy would be used and the cost is too great. The fuel-poor need a complete package, which includes efficient forms of heating.

908.

A good deal of work in this area is ongoing, and there was a huge amount of enthusiasm at this year's National Energy Action (NEA) conference, which we have been attending for a long time. This year, there was a new atmosphere of drive and a force of opinion that this problem must be tackled. For the first time, I felt that people actually wanted to do something about it. It is time to move forward and say that the fuel-poor need a package which gives them well-insulated homes with efficient heating systems.

909.

The Beechmount project proved that it is possible to heat a home and provide hot water for approximately £300 per year - just over £6 per week. The people involved in the project used to buy two bags of coal per week in the winter - costing £17 - and at least one bag per week for the rest of the year. We aim to create very large savings for those in the fuel-poor bracket. There is no alternative. Energy efficiency measures alone are not enough; there must be energy efficiency together with efficient heating systems. Coal fires and the bars of an electric fire are not an efficient means of keeping people warm efficiently.

910.

The Willowfield project is similar to the Beechmount project. There are plans to do something with oil-based central heating outside the Greater Belfast area because of the non-availability of gas. Gas is the answer to providing a more efficient form of heating.

911.

Mr Attwood: I was not present for the whole of the previous Committee meeting at which you talked about this issue. We have to at least make a recommendation to the Minister about extending your remit, so that customers will have a one-stop shop for complaints against utilities. The Northern Ireland Consumer Committee for Electricity, which will be giving evidence to the Committee later, also has an interest in this matter. Will you outline your argument for bringing responsibility for electricity to your council?

912.

The Deputy Chairperson: We are dealing with the inquiry into energy. The minutes of the meeting were provided to everyone. The Hansard report was also provided to everyone.

913.

Mr Wells: In Mr Attwood's defence, one of the suggested questions deals with this issue. I am extremely interested to hear the group's views on this matter.

914.

Mr Attwood: I must say, Chairperson, that it is quite clear that the Minister wants the Committee to take the lead on this matter. Given that we have taken evidence but have not yet made a judgement, it is useful to have our minds refreshed.

915.

Mrs Bell: First, everybody agrees that the bodies need to be brought together. It really does not make sense to do otherwise, and Northern Ireland consumers have not been best served by its being split over the last ten years. There is a big picture, and you cannot put things in different packages.

916.

The only point for discussion is the exact way in which we will carry this out. Will we set up an entirely new quango, or will we expand and build on the energy expertise of the General Consumer Council? This is a reasonable point for discussion because we do not claim that there is only one way of doing it or that another approach would not work. We feel it would be best to expand the Council. Why would one set up another quango in a small place like Northern Ireland? What is it about energy - or the electricity element of energy - that is so different that the Chairman, the members and the professional staff could not get their heads around it? They can get their heads around the other subjects that we take on board.

917.

We ought to think about the constituency. What about the consumer? It is very clear from independent research that consumers are baffled by the complications of life, if I could put it like that, and by having a number of different bodies and fragmentation. They want and need a single point of entry.

918.

Finally, in practical terms, building on an existing organisation is the most cost-effective option, because a good deal of the infrastructure does not need to be duplicated. I know the Minister's paper says that money is not to be the sole determinant of this. However, it is true that you will get more for the money you spend if the Consumer Council is expanded, because certain infrastructure costs will be eliminated. There is a management system, a receptionist, and premises all there already.

919.

The Minister, in his paper, also said that he said he would need convincing reasons why the Council could not be expanded or would not have the expertise to deal with everything. Those are the persuasive points.

920.

The Deputy Chairperson: I apologise to Mr Attwood. I did not realise it was one of the listed questions.

921.

Mr Attwood: What is the regulator's view?

922.

Mrs Whiteside: We have read the regulator's paper. The regulator has worked with the Northern Ireland Committee for Electricity since he was appointed. Normally he prefers the development of the status quo. However, he has worked with us on the gas issue, and he has already made it obvious to us that, regardless of the outcome, he would be happy to work with us on the electricity issue.

923.

The General Consumer Council was dealing with electricity before privatisation, and we have dealt with gas, oil and coal ever since we were set up. We have long experience in energy. However, one of the arguments against our doing the electricity job is that it is a very specialised job, and we have so many other things to do that we would not have time to specialise in it. In representing the customer you need to develop expertise to start with. When we talk about representing the customer it is not about what Mrs Whiteside or Mrs M Bell wants. We have to develop an ethos based on customer needs, not our needs.

924.

We have to develop an effective system for working, and this is something that the General Consumer Council has a reputation for having developed over the years. We can then sub-divide into groups that get expertise. If we were looking at energy we would set up an energy division with our expert group. People with energy experience and expertise would be co-opted into a specialist group, which would have all the knowledge and expertise, and it would meet just as often as necessary. We would make sure that we fulfilled any role given to us.

925.

Mrs Bell: As I understand it, the regulator thinks that a single-issue body would bring more focus. That seems to be the nub of it. The focus and the expertise come from having an organisation that is properly resourced and funded. If the necessary resources are invested in something, there will be just as much focus, but there will also be the read across and the correct form of joined-up thinking. He also thinks as a regulator; the General Consumer Council must think about the customers and what suits them best.

926.

Mrs Whiteside: The customer representative must develop a relationship with the supplier that is co-operative when it needs to be, but also stays at arms length because there are times when they will be arguing on opposite sides. There will be times when the customer representative and the supplier will be promoting the same thing. There are times, when gas is concerned, when the customer has been misinformed about the price war between gas and oil. On those occasions the General Consumer Council will stand up firmly and support Phoenix in what it is doing. The customer representative and the supplier will fight it out on opposite sides of the table when looking at how bad installers are. Equally, there are times when the regulator and the General Consumer Council is promoting the same thing, but if the General Consumer Council thinks that the regulator is promoting industry too much, at the expense of the domestic customer, we would be on opposite sides. The customer representative cannot be cosy with either the supplier or the regulator; the representative must be prepared to challenge them. The customer representative will not always be on the same side as either party. Being too cosy with either the regulator or the supplier is not good for the customer.

927.

Mr Wells: The Committee will need the wisdom of Solomon on this matter because there are strong arguments on both sides.

928.

Mrs Whiteside: I agree.

929.

Mr Wells: Both sides were effective in their lobbying of the Committee. In fact, if they are as effective in running electricity they are doing an extremely good job.

930.

Mrs Whiteside: Both the chairmen have done both jobs.

931.

Mr Wells: The point that is made forcibly by other groups is that energy is changing dramatically in Northern Ireland - gas is coming on stream; there are discussions about the Moyle interconnector and the all-Ireland electricity market. There are alternative green sources of energy and conservation, and a whole series of complex and difficult issues. Is it ideal that an organisation that also spends its time dealing with the price of a loaf of bread, a pound of bacon or the price of a bus fare should also have such a major piece of work imposed upon it? Can the General Consumer Council guarantee that energy resources will be ring-fenced? Is it likely that if a trauma in transport policy occurs, the General Consumer Council will need to devote all of its resources to that, the result being that energy will be neglected? How much guarantee can you give the Committee that someone in the General Consumer Council will be entirely focussed on energy, that energy resources will be ring-fenced and not constantly dragged into other issues?

932.

Mrs Whiteside: The General Consumer Council can guarantee that energy will never suffer. A structure will be set up to deal with that. However, more importantly, the General Consumer Council also provides an automatic structural back up for providing information on matters. For example, if the press were unable to contact a spokesperson on Post Office issues during the holiday period, the General Consumer Council would provide them with a general consumer view.

933.

There is a critical mass of staff, therefore people are available to fill in. When a department needs extra help, it is available because of the "floating" staff. A critical mass of staff is important because organisations can provide help where it is needed and there is back-up for holiday times.

934.

If the person answering complaints takes sick, someone else is needed to cover the complaints. Many staff are needed to run a consumer council. Our infrastructure of staff provides the critical mass for the base from which the experts then feed. We have very strong back-up on our council.

935.

Mrs Bell: Essentially, if there is a change, the council must expand and set up a specialised energy division. We are not talking about leaving it impoverished or retaining the status quo, but there has to be either a completely new organisation or an expanded council.

936.

We have already dealt with changing infrastructure in a variety of ways, for example in privatisation and regularisation. While I have been on the council, a town's gas industry closed and a new natural gas industry opened. There has also been both public and private ownership of electricity. There have been huge changes. There is no change on the horizon at the moment that is some sort of step-order difference from what has already gone before.

937.

Finally, in your response to your comment about the price of a loaf. You are talking about the structure of an industry and about wide competition issues. It is that sort of expertise that already exists in the General Consumer Council. Northern Ireland and you, as elected members, will benefit from this joined-up thinking and the read-across from one issue to another.

938.

Ms Morrice: What pro-active work could you do, as a consumer body, in redirecting energy? Obviously your work is for the protection of the consumer, but what role would you have in protecting the environment? Could you be pro-active in, for example, the cost of CO₂ emissions?

939.

Mrs Whiteside: Can you explain what you mean?

940.

Ms Morrice: You are obviously going to protect the consumer from high electricity prices. If energy were within your remit in the new redesigned body, could you be pro-active in promoting greater use of green energy or renewables? What sort of pro-active work could you do in that area?

941.

Mrs Whiteside: You could be pro-active at a lobbying level by trying to persuade people to support schemes and to give grants to help the development of things so that those development costs did not land on the customer. You could persuade people to look outside the "electricity cost box" and look at other ways in which you could develop schemes, possibly like the one we were hearing about before we came in today.

942.

Ms Morrice: Do you see that as an important new role?

943.

Mrs Bell: We did some work on buying a house and one of the things that we recommended was a seller's pack. We said that the home energy rating should be a constituent part of it. In that way we were able do something with energy efficiency and reducing consumption to make sure that it was embedded in another, but very relevant, relevant piece of work.

944.

Ms Morrice: The pro-active side.

945.

The Deputy Chairperson: The clock has beaten us, but there is one issue I want to raise with you and the Electricity Consumers Council. There is nothing I like more on a winter's night than to come in to a coal fire, even though I already have central heating. What future do you see for the solid fuel industry in Northern Ireland?

946.

Mrs Whiteside: It seems that in the future it will exist as a luxury. The number of people using it as their basic fuel is rapidly decreasing, but there will always be a luxury market based on people, like yourselves, who like to come home to a coal fire. You may be buying it from garages or your local supermarket in small bags, but I am sure that it will always be there.

947.

Mrs Bell: In many ways the island of Ireland might mirror what has happened in England, as other fuels, particularly gas, became available. However, there is still a solid fuel industry, a solid fuel association and people are still burning coal. It constitutes about 20% of the market in Northern Ireland, whereas six years ago it took about 60%. However, it will not totally disappear.

948.

The Deputy Chairperson: On behalf of the Committee I thank you for coming. As always, there are unanswered questions, and we would greatly appreciate a written response to them.

addendum to minutes of evidence
general consumer council for northern ireland

Q. You have previously pointed out the dangers of becoming too reliant on oil as it is a very price-volatile fuel. The price of heating oil has recently risen substantially.

What approach do you advocate to opening up the energy market?

A. Our broad approach is that consumers need to have access to as wide a range of fuels as possible. However, we believe it is vital to also have regard to the cost of bringing that extended choice to consumers. We also need to ensure that domestic consumers do not subsidise business, for example, paying for post-privatisation stranded costs or the infrastructure costs of bringing gas to the Northwest and South/South-East.

Q. In your opinion what social benefits would you hope to gain from extending the natural gas option beyond the present licensed area?

A. Natural gas has already made an impact in Greater Belfast in providing choice and access to an alternative and reasonably priced fuel. This has a direct impact in driving down the cost of heat (for example compared to coal) - it can help reduce fuel poverty and free up more disposable household income. A further indirect benefit to consumers' stems from the reduced costs incurred by business and industry. Lower energy bills for them reduces the cost of overheads, enables them to compete more effectively and so provide goods and services to consumers at lower prices than would otherwise be the case.

Q. The new gas-fired power station at Coolkeeragh would entail bringing the gas pipeline across to the North West.

What impact would this have for both domestic and business consumers in the North West?

A. We would reiterate the range of benefits outlined in the response to the above question.

The one note of caution we would sound relates to the price of gas. The last thing Northern Ireland needs is another highly priced fuel, therefore, all of the costs of constructing the pipeline and the infrastructure should be managed in a way that results in a reasonably priced fuel. The costs should be borne fairly (in proportion to future demand) by users, whether domestic, commercial or industrial - and whether inside or outside Northern Ireland. The overall objective must be to reduce costs for Northern Ireland consumers. If that cannot be done, we must question the project.

Q. An additional factor in relation to developing the gas network is the degree of monopoly power accorded to the developer.

What regulations would you like to see in place to replace the disciplines of the market place?

A. The size of the Northern Ireland market is unlikely to attract significant competition. Therefore we would see a continuing need for regulation to ensure that the market does not operate against the consumer interest.

In particular, the regulatory regime must have adequate powers to protect the interests of consumers in the period after they have made the decision to convert to that fuel. In the run up to the decision to award the gas licence (for Greater Belfast) to Phoenix Natural Gas, the Council fought hard for a relatively short period of monopoly supply. Similarly, we took the view that there should be the possibility of a review and price controls after a set period. In both cases these measures were adopted. Since there would clearly be a monopoly for a period of time in any future extension, comparable controls must therefore form a central part of any future network extension.

Q. In your submission, you agreed with the development of an island of Ireland energy market. You also support the Vision 2010 - Energy Action Plan, proposing a joint DETI/ROI Department of Public Enterprise Steering Group.

What political input do you envisage there will be in an established All-Ireland energy body?

A. What we actually said was that we wanted to see further co-ordination with other grid systems where this is capable of delivering savings to Northern Ireland's domestic, commercial and industrial consumers. That must remain the objective.

The first stage - preparation of a report on the energy sectors in Northern Ireland and the Republic of Ireland - is well underway. Thereafter, there will be public seminars and a report to Ministers. Progress may be slow. At the stage of creating an all-island energy body we would expect there to be political representation from the main parties on both sides of the border. However, we also expect consumer interests to be represented. Indeed Vision 2010 specifically mentions including consumer representatives on the steering group to be set up between DETI and the Department of Public Enterprise (ROI).

Q. What more do you believe can be done to encourage choice and competition in energy markets and essential utility services?

A. Choice and competition in gas would improve through an extension of the natural gas network (assuming the cost burden on consumers was not onerous).

We have made clear our reservations about the further opening of the electricity market given the danger of leaving a smaller pool of consumers to foot the bill whilst the large users escape in search of lower costs. Competition should benefit all consumers and not lead to increased costs for particular groups.

Q. Can you suggest how an increase in 'stranded costs' could be avoided?

A. This refers to the extra costs arising from (a) the adverse price effects of the generator contracts and (b) the fact that we are contracted for more capacity than is actually needed.

It is not an increase so much as increased exposure to stranded costs that presents us with a major concern.

Large users opting out of the system could reduce demand, causing the burden of availability payments to fall increasingly on domestic consumers - and, most likely, on those least able to afford it.

This is a problem that affects only Northern Ireland domestic consumers because of the availability costs in the generation contracts.

Our view has been that, for market development in electricity to occur in any meaningful way, stranded costs will have to be taken out of the system altogether. We welcome the Regulator's decision to examine ways in which this issue can best be addressed. One way might be to seek an exemption from the EC Directive, at least temporarily, although this could have a negative effect on industry. However, as we have stated earlier, the final solution to this problem probably involves a complete buy-out of the generator contracts.

WESLEY HENDERSON

top

MINUTES OF EVIDENCE

Wednesday 25 April 2001

Members present:

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mrs Courtney

Mr McClarty

Dr McDonnell

Ms Morrice

Witnesses:

Mrs F Huston ) Northern Ireland Consumer

Mrs A McMinnis ) Committee for Electricity

949.

The Deputy Chairperson: You are very welcome. Could you make the opening statement on your submission.

950.

Mrs Huston: We welcome the invitation from the Committee to discuss some of the points raised in our submission. We also welcome the Committee's inquiry into energy. When I took over this job a year ago and started asking about what interest the Government had in energy, there was not much interest - it was not top of people's agendas. It is interesting and satisfying to see how, in the past year, it is now at the top of people's agendas. Organisations like yours and the Department realise that without electricity and energy very little else happens. So we very much welcome what is happening and look forward to your report.

951.

In preparing for today, I reviewed my committee's submission, which was written about Christmas time, and I was very struck by how quickly things had changed in such a short time and by how much it has moved on. For example, the climate change levy came in from 1 April, and businesses that receive monthly bills will be seeing the effects of that levy in the next few days. Realistically, we have to ask what the average small business in Northern Ireland can do to alleviate the effects of it.

952.

The regulator's review of NIE's transmission and distribution price control is moving on - not at speed, but it is moving on. None of us can be sure yet where that is going. The battle lines are drawn, and the ritualistic exchange of papers and numbers is happening. NIE questions the figures and assumptions that the regulator has come up with, and the regulator continues to produce papers, which appear to suggest that NIE's charges and costs are still unnecessarily high. Where and when will it end?

953.

The price control should be in place by this time next year, so we would really like to see it moving on. When the control is settled, it is very important that a line is drawn in the sand there and the value of asset bases, et cetera, which have been accepted, are kept, because it appears that issues have been reopened, which we thought were settled after the Monopolies and Mergers Commission (MMC) inquiry. We feel that is important, even if we have to accept that it may not be entirely advantageous to the consumer. It takes time, money and resources to go back over old battles that have been fought already.

954.

In our submission, we also flagged the recurrent issue of generation costs and the infamous contracts that everybody talks about. The regulator is issuing a paper on this subject, which may shed some light on how we can progress. I will discuss the generation contracts and what we think might happen.

955.

With regards to competition in the supply of electricity, commercial customers would ask "What competition?" Now that Powergen have withdrawn from the supply market, there is only NIE, and a small supply from the Electricity Supply Board (ESB), within the market. Market opening is not very successful in terms of offering a variety of suppliers. That is something of a downer for all of us.

956.

Realistically, the domestic customer may never see competition in supply of electricity. However, if they do, we have to look at what sort of model such market competition might follow. With competition comes a duty upon those enacting and implementing legislation to ensure that the captive domestic market does not get saddled with the fixed costs of producing electricity. We have to find some vehicle to ensure that costs are shared more fairly.

957.

It is interesting to look at how customers feel about electricity - in particular, domestic customers, because they have a different view from commercial customers. On a day-to-day basis, domestic customers do not really think about electricity at all; it is just there. Even the cost on a day-to-day basis is not a big issue. In real terms, the cost has gone down over the past few years. The standing charge has gone, and the majority of us accept electricity costs as part of our household costs.

958.

Domestic customers get agitated by the price of electricity only when they are made aware that they pay so much more than comparative customers in other parts of the European Union, or when NIE's annual accounts are published and their profits drawn to people's attention. Over the past few months we have strived to raise people's awareness of these issues.

959.

The 9% price rise announced last November - which coincided with your debate - and the blast of publicity it received, made customers unhappy. That was one time when we felt we got a response from customers - they considered that the increase was unacceptable and asked us what was going to be done about it.

960.

The issue of the supply of electricity - that which comes out of the sockets - is rather similar. For the majority of people, electricity is always there. People who live in Belfast tend to associate long-term power cuts with imminent civil unrest, and that type of power cut does not happen nowadays. It is only when there is a disaster, like the storm at the end of February, that people within urban areas become aware of the issue of quality of supply.

961.

For those who live in rural areas outside Belfast things are different, as far as quality is concerned. I am always amazed at the philosophical attitude of my 77-year-old father-in-law, a retired farmer who lives on a hill between Coleraine and Portrush. His power goes off two or three times a month, and he does not even think it is worthy of comment. The irregularities of supply do not seem to particularly annoy people. I am not saying that it is right, but people seem to accept it.

962.

Many people are not willing to pay more to improve the quality of supply because, in general, they are fairly happy with the supply they receive. It is only when we have big problems such as storms that people focus on what is wrong.

963.

NIE has done a great deal of sterling work, building up good day-to-day relationships with their customers, but a lot of that hard work was wiped out in the 48 hours following the February storm. Expectations had been raised among customers by the mailing that had been sent out that said, "Storm preparations, we are ready" and that NIE could deal with the problems. These expectations were not met. NIE have a big job ahead of them in rebuilding customer confidence, and establishing confidence within the Committee again, that they can deal with problems of that scale when they arise.

964.

It is the Consumer Committee's role to raise these larger issues. It also deals with more specialised and focused problems, such as customers with disabilities and the fuel poor and their experiences with the company, and it deals with work on useful energy efficiency measures and some of the day-to-day problems of consumers in contact with NIE. It does what it can to encourage informed debate about electricity, which is very important.

965.

As a Committee, it can regularly point out that the emperor has no clothes but, unfortunately, it neither has the power or the resources to choose a new tailor for him. We have to leave that to people like you and the regulator. From your inquiry we hope that some concrete proposals and new ideas will come out about how we may address the problems of electricity and how it affects customers.

966.

Ms Morrice: I cannot stay for the whole session, so I will go immediately to the issue with which we finished off in the previous inquiry. My question relates to the potential possible future of the Consumer Council for Electricity. Do you agree that the role of any energy watchdog should be more than simply consumer protection oriented? Do you agree that there should be a proactive role, which would allow it to push for renewable and green energies and energy efficiency?

967.

Mrs Huston: That is the job of a fully resourced energy council. Whatever the Committee and the Minister decide, I will be out of a job in about two years. The Northern Ireland Consumer Committee will not exist any more. We could have sat back and let everyone argue about the situation, but the strong view from the committee was that a separate council was the answer, and that is why we have lobbied for that.

968.

An energy council would be bigger than the Northern Ireland Consumer Committee for Electricity as it exists, and it would have a direct, proactive role in all sorts of areas. The committee has views on renewable electricity with which you may not entirely agree, and it is important that accepted views on renewables are challenged.

969.

It would be important for a committee or energy council to have the backing of market research as to what consumers want as far as green power is concerned. It would also be helpful to go and look at how green power is implemented in countries, like Denmark, which have embraced wind power, or at least to have some of the research. Denmark is a small country, and it would be interesting to find out if it is practical to have that transposed into Northern Ireland.

970.

It is one thing to say that we should do all these things, but another thing to remember that there is a base of about 650,000 customers who have to pay for all this, as it is very expensive. There are lots of other issues involved, like market opening, and the EU is driving very hard to have full market opening of electricity supply in Northern Ireland. Someone has to put forward the line of what this is going to cost the consumers. The regulator cannot do that alone, as he has other things to balance. If the market is opened up, and there are those who will still have a monopoly on supplies and will not have competition, there has to be someone who will ask how that is going to affect the consumers - who is going to carry the costs? They would have to make sure that those figures are available in the policy decision-making arena, which I do not think they are at the moment.

971.

Ms Morrice: Then would customers' best interests be better represented within the committee as opposed to the General Consumer Council?

972.

Mrs Huston: I know the General Consumer Council very well, and it does a great job. I do not deny that the job could be done within the General Consumer Council. However, considering the amount of time I spend on this job, which is supposed to be two days per week - if only - I do not see how the General Consumer Council could dedicate enough time and effort to the issue, given the fact that electricity is spreading and interacting with gas. There would still be one chairman on the General Consumer Council, so there are certain practicalities.

973.

If there were, as Mr Wells is suggesting, a transport problem and an energy problem at the same time, there is only one chairman to deal with such matters. The issue must be given the concentration that is required. Therefore, in the Department the people who work on energy do not work on other things - energy is their specialism. They are not dealing with everything within the Department, and that gives them the opportunity to focus on the complexities. It is vital that proper resources are provided.

974.

Mrs Courtney: In your committee's submission, you stated you would reduce the cost of electricity. What is the best method of reducing the cost of electricity while simultaneously improving the Northern Ireland electricity network?

975.

Mrs Huston: Research has tended to show that people are wary of being asked to pay more in exchange for improving their quality of supply. The option thrown at customers is that if they want better supply they will have to pay for it, but people do not want to do that. We have to look at the infrastructure that Northern Ireland Electricity provides.

976.

Part of the work of the current transmission distribution price control is to examine the work that is being done to look after the supply to customers and see whether that is effective in terms of value for money. Part of the big price control will be to look at that. It may suggest areas where money could be better spent to improve supply.

977.

As far as reducing costs is concerned, price control is one area where the regulator looks at how NIE runs its transmission distribution company. The efficiency gains from that do not go back into reducing costs - the people who will benefit most from them are the shareholders.

978.

Another big issue is concerning the generation contracts. As generation costs are very high, should we renegotiate the contracts for Kilroot, thereby reducing costs? The problem with that is that we would be extending the time period of the costs and pushing them ahead. The deal would be that, in exchange for reducing the price at this stage, customers would have to continue to pay for possibly another 25 years. So the problem would just be pushed further back. In 2012 we could be saying that it was terrible that those contracts were ever agreed in the last decade. There could be a problem then.

979.

There is a thought now that we could just put up with the situation as there are only five or six years remaining of the contracts. In 2010 the generators will be very keen to discuss pricing. About 80% of commercial electricity costs come out of generation, so something has to be done about it. Those are the main factors for reducing price and the things that could be looked at.

980.

Mr McClarty: In your opinion, an interest in eco-energy cannot be readily met. Have you considered where the extra supply could come from? Is it appropriate to facilitate the potential increase in demand in eco-energy by increasing the burden of cost on everybody?

981.

Mrs Huston: The limitations of eco-energy are a serious difficulty. One cannot just flick a switch and produce more green power. It takes time to set up windmills, or whatever is going to be used, and they are expensive, although the cost is starting to come down as technology improves.

982.

You have probably seen the report entitled 'Renewable Energy in Northern Ireland', which is an extremely good report that was published in June 1999. Technology has moved on since then, but the report states that there is only capacity for about 7·5% of our power to come from green sources, which is not very much. The obligation in England is to find 10% by the end of the decade.

983.

There are limits to what can be done to produce green power. Technology changes constantly, but at present there are all sorts of reasons why we cannot all suddenly switch over to green electricity. It still costs more, and people are not willing to pay for it. That is why Northern Ireland Electricity has only 1,000 customers on its eco-tariff. People have enough to pay in their electricity bills without adding an extra eco-tariff of about 0.17p per kilowatt-hour.

984.

There is a premium on green power. I thought that the contracts for the production of eco-energy - the non fossil fuel obligation (NFFO) - would be £3.10 per annum per head, but the regulator said that it currently costs £3.70 per annum per head for windmills, et cetera. That is quite a subsidy for every customer in Northern Ireland to pay.

985.

We could choose to go down the green road, but I do not think that the customers will pay more for that. Therefore, we will have to look at some other way of having green power in the system as a top-up. As technology stands, green power cannot make a significant contribution yet to our electricity supply. There are issues about the irregularity of eco-power. NIE has many concerns about how eco-power can be tapped into the system to make it useful. It is problematic.

986.

Mr Attwood: In your submission to the Committee, you recommended that to reduce energy prices there would need to be new price control. Could you elaborate on that because, unless I am mistaken, that is not something that anybody else has suggested.

987.

Mrs Huston: I fear that I have been taken up wrong. I was referring to the price control that is going ahead at present. I could check my text, but I possibly gave the wrong impression. I was talking about the price control that the regulator was embarking on when the submission was being put together.

988.

Considering the money that NIE is extracting from customers, it is interesting that it has a turnover of about £500 million a year with 60% of that going towards generation costs. That leaves NIE with some £200 million trading profit. From that £200 million, NIE makes a profit of £100 million - not a bad return.

989.

The generators who get paid £300 million from NIE are left, after costs, with a profit of £35 million. Therefore, it is more profitable to go into the transmission and supply of electricity than into generation. Those are figures that the Northern Ireland Consumer Committee for Electricity recently received from consultants who are working for the Office for the Regulation of Electricity and Gas (OFREG). That says a lot about price control and where it is heading. Why is it so much more profitable to run a transmission and distribution company than to run a generation plant?

990.

I am sorry if there has been some confusion in the paper.

991.

Dr McDonnell: How do you feel about the use of Orimulsion at Kilroot?

992.

Mrs Huston: That is a solution put forward to solve the problem of the costs of Kilroot. It has been said for quite a while that Kilroot should change power source and that that would reduce costs. In fact, it has been said that customers could make a saving of £11 million per year by converting to Orimulsion.

993.

Before I became chairman of the Northern Ireland Consumer Committee for Electricity, the chairman and two of the committee members went to Denmark to visit power stations that were fired by Orimulsion. They returned remarkably impressed by it. Denmark is a country with a high level of environmental awareness, and the system was extremely clean. The committee members were impressed with the environmental protection in Denmark. Having been fairly sceptical of Orimulsion maybe being a success in Northern Ireland, the committee returned supporting it.

994.

There are many environmental queries on Orimulsion, and I do not think that an environmental impact assessment has been carried out yet. That would need to be done to examine its suitability. For example, what would happen if it went wrong? It is a solution to Kilroot, but I am concerned that the customer would end up paying some special premium, for example, for 25 years, because Kilroot has converted to Orimulsion. If we are to do it, we must make sure that everyone benefits - not just the businesses, but the customers too.

995.

The Deputy Chairperson: I appreciate your open mind on Orimulsion. I have one more question, which I asked the last group. What future do you see for the use of solid fuel by domestic consumers in Northern Ireland?

996.

Mrs Huston: I heard you say yourself how you have a fire in your own house. Although we converted recently from oil to gas, we kept the fire in our living room. The reason was that, when we had oil, it was my husband who looked after it. It was he who would get the tank filled, and twice when we had visitors coming for dinner we ran out of oil just before they arrived. On one occasion it was Christmas Eve - a wonderful time to run out of oil. Now that we have natural gas, that should never happen. However, the great advantage of the coal fire was that the house was not freezing cold. My father-in-law, as I mentioned, was used to living in a cold house, so he did not notice the lack of heat.

997.

There is a role for coal in the domestic situation. People like it and enjoy its atmosphere. Some people still choose to heat their house with it through a central heating system. I cannot see why, but people must have a choice. A friend of mine had her Economy 7 heating removed and coal-fired central heating installed in her house since, peculiarly enough, she believed it would be better for her health.

998.

The coal industry will never suffer too badly while the generation contracts are in place, since it accounts for 40% of the generation, meaning it still has a role to play in Northern Ireland. For all sorts of reasons, I do not see it being a major player any more; it will be more in the background, but people must still have the choice to use it.

999.

The Deputy Chairperson: Once again we have not got through all the questions. If you do not mind, the Committee Clerk will provide you with a list of questions, and we would very much appreciate a written response.

addendum to minutes of evidence
northern ireland consumer committee for electricity (NICCE)

Q. What future role does NICCE believe it should have in the energy field?

A. A new Energy Council would represent the interests of all electricity and gas consumers and would function on an independent basis away from the influences of the Department, OFREG and the energy companies.

It would influence policy decisions on energy matters to improve the circumstances of consumers and take a pro active role in encouraging the development of any major new proposals which would provide higher quality services and greater value for money.

Q. What action would you like to see taken to reduce the disparity between high domestic energy costs here in Northern Ireland and cheaper costs in the rest of the EU?

A. Northern Ireland consumers pay too much for their electricity and competition will not be available, in the foreseeable future, for the domestic consumer. The Committee supported the abolition of standing charges and has been glad to see a reduction, in real terms, of electricity prices. However, prices are still the most expensive in Europe and much requires to be done to improve matters.

The Committee hopes that the current price control for NIE's T&D business which will take effect from 1 April 2002 will bring about a reduction in prices.

We also hope that the powers of the Regulator will be strengthened by the new Utility Bill.

The Committee would like to see a reduction in generation costs without the consumer having to pay in the longer term. If, for example, Kilroot Power Station were to be converted to Orimulsion there would be a saving for the electricity consumer of £11m per year.

The Scottish interconnector will hopefully provide lower cost electricity.

NIE should continue and if necessary increase their energy efficiency programme activity and should provide additional energy efficiency help for consumers. For example, more customers should take up the offer of a free NIE energy efficiency survey of their homes.

The Committee expects that the new keypad metering technology will enable consumers to track their spending on electricity. The Committee is currently negotiating with NIE to try and persuade them that keypad customers should benefit from the Easy Saver Scheme, a reduction of £10 per annum, which direct debit customers currently enjoy. Keypad meter customers will benefit from not having to pay £13 per year, a charge levied on pre payment meter customers.

The Committee will continue to explore other possible ways to help reduce electricity costs.

The Committee also feels that natural gas should be made available to as many areas of the Province as possible.

Q. You state in your submission that the introduction of the Climate Change Levy in April 2001 will have a financial burden for many commercial and industry users here.

In your opinion are there any initiatives that could be implemented to reduce this financial burden?

A. The NI energy sector will be able to meet government 20% reduction target. In fact the installation of Combined Cycle Gas Turbine plant, at Ballylumbford could reduce CO² emissions by 43% per k Wh by 2010.

Government has created the Carbon Trust a UK wide private, non profit making company, funded by the Climate Change Levy and which came into effect in April 2001. It will be influential in further development of energy saving and efficiency proposals which might be of help to industry but the consequences of the Climate Change Levy for the Northern Ireland industry are bleak.

The Government has stated that the Levy will be fiscally neutral; that Treasury will neither gain nor lose from it. This is because there will be 0.3% reduction in employers' National Insurance contributions. However this does not mean that the reduction in National Insurance contributions will directly offset the effect of the Levy and some employers will be financially worse off.

The Committee arranged for the Chamber of Commerce, CBI and the Federation of Small Businesses to meet with Sir Reg Empey to alert him to the problems and he recommended lobbying Westminster MPs. We understand that the First Minister and Deputy First Minister have discussed the problems for businesses here with the Chancellor of the Exchequer and achieved nothing.

There may be a role for the Assembly to play to try and persuade Westminster that NI should be treated as a special case especially as the reduction of CO² emissions here will more than meet the requirements and because higher electricity prices are already crippling industry.

While Green Energy users do not have to pay the tariff, most businesses would find that it would still be more expensive to buy green power and there would also be an availability problem.

Q. What action would you suggest is necessary to make energy efficiency appliances available to all and as you stated, not just to the middle classes?

What initiatives are needed to make renewable energy more attractive to all of society?

A. NIE have used in the past for a limited period of time, a portion of the revenue collected from the £2 per customer levy to fund the supply of energy efficient fridges, at low cost, to the fuel poor. The Committee would support the re-introduction of a similar scheme although we understand that NIE had difficulty with the administration of the earlier scheme.

We are concerned at the fact that manufacturers appear to be taking advantage of consumers by charging more for energy efficient appliances and one wonders why there should be such a difference in prices. We also believe that there is a lack of explanation on appliances of what savings will be achieved.

We feel that renewable energy will only be attractive to everyone when prices are less expensive. In theory if oil prices continued to rise and this put up the price of oil generated electricity, green energy could become cheaper. If more consumers signed up for Eco Energy, however, there is the strong possibility that there would not be enough green energy available to supply them.

Q. What incentives would you suggest to support the expansion of and awareness of renewable energy sources?

In your opinion, what steps would you like to see taken to ensure that Northern Ireland seizes all the opportunities offered by developing renewable energy sources?

A. We understand that while the capital costs for ECO Energy Plant has decreased the availability of sites is limited. We feel that support from the NI Assembly is essential to promote the expansion of and awareness of renewable energy sources. We also believe that NIE should continue to support green energy and to educate the community on its benefits.

The Regulator is very keen to promote green energy and is currently holding a series of ECO Energy Seminars and the Committee fully supports his endeavours.

The Committee is interested in environmental issues and we have met with a member of the Friends of the Earth and at a recent workshop with NIE we had a guest speaker from the Western Regional Energy Agency and Network. We also have a Committee member with a particular interest in the environment. I think the Committee and everyone who is interested in environmental issues, including the NI Assembly need to keep abreast of developments in renewable energy sources so that we can seize all the opportunities offered.

Q. Could you please elaborate on the benefits of strengthening the powers of the Regulator?

A. The Committee realised the limitations of the Regulator's powers when NIE recently announced a tariff increase, without consultation with our Committee or the Regulator.

We hope that the new Utility Bill will strengthen the Regulator's powers in line with his GB counterpart whose main duty is to safeguard the interests of consumers. We also feel that the Regulator requires additional powers to allow him to regulate the generation sector.

In addition to regulating the gas industry the Director General also has a duty to promote the gas industry and this could be perceived as a conflict of interests.

Q. What measures would you suggest are necessary to ensure that the domestic customer will not be saddled with the fixed costs of providing electricity i.e. fixed generation and transmission costs?

A. Stranded costs could be a problem for domestic customers as competition accelerates as these costs could be spread across a smaller customer base. DETI have applied to Brussels for permission to split these costs among all customers i.e. the franchised and non-franchised customer. While the proposal would help the domestic customer, 'eligible' customers would have to continue to pay. A process of dealing with the stranded costs issue is one that has still to be resolved and we understand that the Regulator and the Department are still considering the matter.

In the short term a possible means of helping the situation is to try and use up the available power by trading with the Republic of Ireland and allowing NIE's Power Procurement Business to transfer any spare capacity over to the eligible market. However, it is anticipated that problems will arise when market opening rises above 35% and the Moyle inter connector comes into operation.

No additional transmission charges should arise for the domestic customer from market opening as all suppliers will be using the NIE transmission system.

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MINUTES OF EVIDENCE

Wednesday 2 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mrs Courtney

Mr McClarty

Dr McDonnell

Mr Wells

Witnesses:

Mr R Chadwick ) Antrim Coal Company

Mr D Watt )

1000.

The Chairperson: You are very welcome. I apologise for the 15-minute delay, but we were caught up in Committee business. We have read your submission, and following your presentation we will have some questions for you.

1001.

Mr Wells: In 1988 I was employed on a contract paid for by your predecessors, BP Coal, to examine the environmental impact of lignite extraction at Crumlin. In accordance with Assembly procedures, I declare that interest. It was a long time ago, but I was paid for it.

1002.

Mr Chadwick: I am the Chairman of Excel Mining Pty Ltd, a 50% shareholder and a director in Antrim Coal Company Ltd (ACCL). Mr Watt is the managing director of Glenavy Associates Ltd and is a director - and the other 50% shareholder - of ACCL.

1003.

We have been involved in the Antrim development for the past 15 years as directors of ACCL Initially the development was under the shareholding of BP. More recently it has been with Agipcoal and MIM Holdings Ltd, the Australian mining company. Now Glenavy Associates Ltd and Excel Mining Pty Ltd own the prospects. We have spent about £6·3 million developing the idea and the prospect.

1004.

We are committed to the development, and have been for many years. We believe that there is a real possibility - as a first stage in getting the project under way - of developing a combined heat and power (CHP) energy park. The second stage would be a larger power station, which would supply the grid as well as the energy park.

1005.

With pressurised fluidised bed combusters we can have an environmentally friendly, extremely successful, and proven project to develop and supply CHP. We worked closely with Asia Brown Baverie (ABB), the boiler manufacturers and turbine suppliers, on a feasibility study.

1006.

In spite of the advantages we see for lignite, such as the fact that the cost is appreciably lower than that of imported fuels, we envisage problems in getting a development prospect underway because of the uneven playing field that we have in Northern Ireland. One of the problems is the current pass-through arrangements in power station contracts. For example, lignite could be supplied to existing power stations if the generators had the incentive to move to lower cost fuels.

1007.

From Northern Ireland's point of view, there is a huge advantage in having indigenous fuel because it would not be subject to global economic changes, particularly in the world energy market. Over the past year prices for gas and black coal have more than doubled. An indigenous energy source would stop Northern Ireland being affected by the vagaries of international currency exchange rates, and the energy source is also economical and low-cost.

1008.

We see tremendous advantages for Northern Ireland from a lignite development, and we feel that the development proposal that we have put forward makes excellent economic sense to ourselves and to Northern Ireland. We would like the development to be seriously considered and included in any energy development plan that might be put together for Northern Ireland. Our other main request is for assistance in bringing together a group of high steam and power users to take part in an energy park.

1009.

Mr McClarty: Has the ACCL carried out a complete environmental impact assessment for the proposed mining operation?

1010.

Mr Watt: Mr Wells has already referred to some of the work done in relation to that. The project was prepared for tender in 1987/88 for the supply of a 400 megawatt power station. At that time a comprehensive environmental impact statement was prepared. It included a socio-economic study by Qubis, and the Royal Society for the Protection of Birds (RSPB) looked at wildfowl, and spawning in Lough Neagh. The question of noise was also examined, as were all of the impacts in relation to that type of development.

1011.

No particular problems were raised from an environmental point of view. By the time the work had been done, any issues raised had been addressed to the satisfaction of everybody who commenting, as far as I am aware. There have not been any studies done since then, but the baseline and impacts are no different.

1012.

The only thing that has actually changed is that the RAMSAR area, as it was known then, covering Lough Neagh has actually been converted into an area of special scientific interest (ASSI). When that conversion was made, some trivial changes were made to the boundaries and some parts of the Crumlin river estuary were included. The effect was to take in about 10% of the onshore reserve. The size of that reserve was not a problem with the scale of mining we were looking at then and subsequently.

1013.

Mr Chadwick: Our study takes account of that change.

1014.

Mrs Courtney: Your proposal is to develop a competitive power station in two stages. What progress have you made in attracting significant power and steam users to locate in the energy park, and what size will the park be?

1015.

Mr Watt: We have made relatively little progress in advancing this aspect. To some extent it is a bit of 'chicken and egg' because progress fundamentally depends on attracting interested potential customers and vice versa. We do not see it as a particular problem in relation to electricity.

1016.

Users in the energy park would be supplied with electricity at a discounted price. That would reduce their electricity costs - which they would welcome, presumably. The idea is that the park would also have a connection to the grid. Any surplus or shortfall of electricity would feed into or out of the grid as the case may be. Steam users are much more of an issue as there are not enough large-scale users in Northern Ireland. We would have to encourage potential steam users to come in. We would use some of the steam ourselves in drying processes. Some consumers in Northern Ireland - one in particular - have expressed some interest, but we need more than that to make the project look attractive. It needs to have some firmness in relation to customers for the project to be up and running and bankable.

1017.

Mr Chadwick: Steam usage is important as that will raise the efficiency level of the station so that it will qualify as an efficient CCCP.

1018.

Mr Watt: The efficiencies are actually above 70%, so it is good quality CHP. One of the advantages is that you do not have to pay the climate change levy.

1019.

Mrs Courtney: Do you know the costs of the development of stage one?

1020.

Mr Watt: They are in the report. The basic cost will compete with the existing supply from any source. Of course, you would not have to pay the levy for access to the grid for power and the climate change levy if you were actually in the energy park. It is these savings that provide the basis for the discount.

1021.

Mrs Courtney: What size will the energy park be?

1022.

Mr Watt: The basic plan for CHP is for 65 megawatts of electricity and 95 megawatts of steam. We have seen the power station through ABB; there is one in Germany. Its footprint is about half a hectare - about an acre. The site would need space around it. Therefore it would probably require about three to five acres.

1023.

Mr Chadwick: It really depends on the industry that is attracted to the energy park.

1024.

Mr Watt: The energy park itself would probably have to be 25 hectares to 50 hectares in size.

1025.

Mr Chadwick: The figure for capital costs that we put in the study a year ago was £79 million - now it would be approximately £80 million. That figure does not include the connection to the grid or other service connections. Therefore we could say £90 million to £95 million for stage one, and £370 - £400 million for stage two.

1026.

Mr Neeson: I have taken a particular interest in lignite and I have been to West Germany to see it being used. The most economic way to use it is to have an on-site power station. After reading the environmental impact study, I was concerned about the immediate area and the so-called 'hole in the ground' left behind. How would your company propose to address that?

1027.

Mr Chadwick said that perhaps other power stations in Northern Ireland could use lignite as a fuel. Is that economical, bearing in mind that, a number of years ago, there was an experiment to burn lignite at Belfast West Power Station? Is the use of lignite a realistic proposition?

1028.

Mr Watt: When looking at the issue from a planning point of view, we did not feel that the power station should be located immediately beside the mine. We looked at sites such as Knockmore, south of Lisburn. That site has rail access and it is only about 10 miles from the mine; there would be a rail connection between the two.

1029.

Mr Neeson: For another year anyway.

1030.

Mr Watt: The rail bed is important because even if the railway line were not there, a conveyor or pipeline could be placed on it. We saw that location as being more realistic. If you are looking at CHP, you are dependent on having a surrounding industry, and that is more realistic if you are on the Belfast-Lisburn- Craigavon corridor, rather than at Lough Neagh. For a number of reasons we thought that it would be better to have the site a bit further away - perhaps in Greater Belfast, and, therefore, potentially to be included in the Greater Belfast development plan.

1031.

We looked at the question of supplying Kilroot in some detail and we made a proposal to NIGEN about 10 years ago. There is no problem with costs and technical practicability. You have to put in the ability to handle lignite at the power station and at the mine. There would be a little additional capital investment. If you are going to blend, you need to put in blending equipment. When we supplied lignite into Belfast West Power Station, the operator of the stockpiles did not like it because he did not have the blending facilities. It meant that he could not get the blends that he wanted. However, investment in that is relatively small.

1032.

From NIGEN's point of view as a receiver, the current situation gives it no benefit because fuel cost is a pass-through cost. Although our fuel is cheaper they get less for their electricity to compensate for it. They have no means of compensating themselves for the extra cost that they would have in blending.

1033.

If you are using lignite in a blend, the output of the power station is reduced because of the lower calorific value of the fuel. If they can sell all of the output based on high calorific value fuel then they would miss that extra bit of electricity. If they were to change to gas or oil they would uprate their electricity output.

1034.

Mr Chadwick: Since last year coal costs have increased from 84p per gigajoule - this is delivered to ARA in Rotterdam - to £1·14 per gigajoule. Orimulsion costs are linked to coal costs in normal contracts. I do not know what Kilroot is proposing, but the price is likely to be linked to international coal prices, so the price will be £1·14 per gigajoule. In this study we are proposing that we produce lignite at 52p a gigajoule. We would have to add transport costs but we are comparing with ARA costs.

1035.

Mr Neeson: Is that directly from the mine and without being dried?

1036.

Mr Chadwick: That is the direct mining cost. There are further costs with the additional boiler capacity that is required because you are down-rating boilers and more capital is involved in handling. But the basic fuel cost would decrease from £1·14 for coal to approximately 50p.

1037.

Dr McDonnell: I have some connections with the area, therefore I am aware of your site. You said you have spent £6·3 million already. What have you spent that money on? Have you spent it on acquiring land?

1038.

Mr Chadwick: That figure excludes the cost for land.

1039.

Mr Watt: The total cost was a more than £10 million. We have excluded the cost for land because we have said that it has a neutral effect.

1040.

Dr McDonnell: There was a lot of activity about 10 years ago when you first moved there. What time scale do you envisage if your project suddenly became attractive the morning? How long would it take to get it up and running and to make it attractive?

1041.

Mr Watt: It would probably take at least three years to get stage one up and running.

1042.

It would probably take about five years to get stage two up and running because it is bigger and more involved. That is in part because of construction time, but we must also recognise the planning processes that must be gone through, the environmental impact statements and various other things associated with it.

1043.

Dr McDonnell: Does part of your site run under Lough Neagh?

1044.

Mr Watt: Yes.

1045.

Mr Chadwick: The total reserve runs under Lough Neagh but the proposed proportion to be mined is on-shore and quite a bit back from the edge of the lough.

1046.

Dr McDonnell: I want to raise the issue of an all-island energy market. I am concerned that if you get this operation going and it works well, that suddenly we will have a surplus of electricity. It would appear that our consumer community - for want of a better description - whether industrial or domestic, is too small.

1047.

I am interested in your comments, not just in an all-island context, but in the context of the British Isles and even Western Europe. How do we integrate our market into a larger market? It will only be beneficial if we can make an impact on the wider field. The major impact would be in Northern Ireland, however, you cannot just switch your power station on and off.

1048.

Mr Watt: It is our understanding that in the current circumstances power can flow both ways through an interconnector so, in principle, we could sell in mainland UK. We understood that there was some possibility this could happen with the Moyle interconnectors but there were still some bottlenecks down the line. Nonetheless, it remains a possibility.

1049.

I am not sure whether we are fully up to speed with the actual costs in crossing somebody else's grid. What would NIE charge us for supply of our electricity from the mine to the UK or to the South? Provided that the NIE charges are moderate then, in principle, there is absolutely no reason why we should not do that.

1050.

Mr Chadwick: Fuel costs represent a high percentage of the costs of power generation. If fuel costs are low then generation should be competitive. If the market is competitive, and a company is not restricted on where it can market, then it should be able to provide supply. At present we are constrained because we are excluded because of other people's contracts and are unable to export to Scotland or Southern Ireland because of the wheelage charges and the lack of grid access.

1051.

Mr Wells: Is the concept of selling home fuel viable?

1052.

Mr Watt: We are still looking at that. We are probably spending more time examining that at the moment than we are in examining the issue of power stations. We have made a certain amount of progress in relation to developing lignite as a horticultural product, as a mulch - and we have supplied several hundred tonnes as mulch and it has performed well - and as a soil conditioner. We are also looking at lignite fuel in relation to firelogs, treated and prepared lumps and briquettes.

1053.

Mr Chadwick: Those are all economically viable by-products if you have a mainstream project up and running.

1054.

Mr Watt: Those issues are important. If the project gets up and running, the ancillary benefits will be in job creation in manufacturing and processing. We made provision in stage one for the supply of 700,000 tonnes to the power station, but the mine would be built with the capacity to supply another 100,000 to 200,000 tonnes for local market usage. Each aspect will make its contribution to overheads and therefore help make the electricity steam side of the business more economical.

1055.

Mr Wells: How many jobs would the entire process create if you got your power station and all the ancillary activities?

1056.

Mr Watt: The number of jobs directly relating to the mine and the power station is only a small part of the total. Therefore at stage one there would be 50 to 100 jobs. At stage two there would be 100 to 200 jobs. The peripheral activities in the horticultural area would involve more people than the mine and power station. You would need to at least double that number.

1057.

In the energy park there will be job opportunities offered by inward investors who will be there due to the supply of low cost steam and power. Beyond that one must look at the multiplier effect. In the basic industry we have designed the mines so that all the maintenance work and suppliers of spares would be contracted out. Other companies are being used for those purposes so jobs would be created in peripheral organisations supplying the mine and power station.

1058.

Mr Wells: Your colleagues from Ballymoney have already spoken to the Committee. Are your proposals feasible if they proceed with theirs in Ballymoney? Are the two sets of proposals complementary or exclusive?

1059.

Mr Watt: I do not know. Others may be in a better position to answer that. As regards stage one of our project there is no reason why both could not exist. Therefore there could be a stage one power station development based in Crumlin and something else in Ballymoney. As regards stage two of our plan one must envisage the overall contract situation and what the answer is in relation to exporting power. If you imagine that you will be exporting power then there is no reason why they both could not exist.

1060.

Mr Chadwick: The viability of coal reserves depends on geology and geography. The Crumlin deposit is probably better positioned geographically - it is nearer to the users' market and the grid. From a resource viewpoint it is a lower cost resource, a higher calorific value resource, and a lower ash resource. Therefore we feel that Crumlin has got the benefits and if one or the other had to be chosen it would favour Crumlin.

1061.

The Chairperson: Thank you for your submission and answers to our questions. We may write to you with further questions.

1062.

Mr Chadwick: We look forward to being of assistance. We believe that it is a good resource and that it should be developed, and we hope that it can be developed when we are still around.

ADDENDUM TO MINUTES OF EVIDENCE
ANTRIM COAL COMPANY LTD

Q. Has the Antrim Coal Company carried out a complete Environmental Impact Statement associated with the proposed mining study?

A. A complete Environmental Impact Assessment in regard to the large scale mining of the deposit was carried out prior to the deposit being tendered for supply to a 410MW on-site power station in 1988. This study included a detailed base-line assessment and consideration of all possible or likely impacts. It included for example a socio- economic study prepared by Qubis, studies of flora and vertebrate and invertebrate fauna by the University of Ulster, a survey of wintering wildfowl by the RSPB and a study of spawning sites in the neighbouring part of Lough Neagh.

None of these studies showed any impacts that could not be managed without any particular difficulty.

The impacts of the plans we have considered subsequently would be either similar or less than those considered in 1988 so that although an update of all of this work would be required before large scale mining takes place we do not expect there to be any over-riding problems.

The only significant change that there has been to the site that we are aware of is that the RAMSAR area covering Lough Neagh was converted to an ASSI in 1992. When this happened there were some minor changes made to the boundary of the designated area. Although these changes were on the face of it trivial, they did reduce the mineable on shore lignite reserve by some 10 to 15%. This change was taken account of in our later plans and satisfactorily dealt with. A large part of the Crumlin deposit lies within the ASSI but all of our planning relates to reserves that are on-shore and have no impact on the ASSI.

Q. What progress has ACCL made in attracting significant power and steam consumers to locate in the energy park?

What size is the proposed energy park?

What costs are associated with the development of Stage 1?

A. There is at present no energy park and so far we have made little progress in attracting potentially interested consumers.

We do not see any particular problem in attracting electricity users as electricity would be supplied net of grid connection charges and would consequently be at a very competitive price. The supply would be secure as there would still be a grid connection thereby allowing any surplus to be sold on the open market or shortfall to be made up by buying in.

The main problem for the project is that steam sales are essential both for the economics of the development and in order to reach the high efficiencies necessary for it to be exempt from the climate change levy. We do expect to be able to use some of the steam on our own lignite drying, both for the power station supply and for the local fuel products. However it would still be essential to accomplish the difficult task of attracting at least one major steam user willing to locate to the site and to guarantee off take.

Another alternative for providing steam demand would be for Greater Belfast to make a major commitment to district heating. This would involve a district heating supply pipeline leading from the site located e.g. at Knockmore through Lisburn to the rest of Greater Belfast.

The footprint of the proposed Stage I plant is some 0.5Ha and a site of some 2 to 5 Ha would be required. The over-all park would need to be quite a large at some 25 to 50 Ha. Total output of the plant on CHP would be some 65MW electrical power and some 90 MW of hot water and steam.

The Stage 1 development would cost some £95 million, including about £10 million for the mine.

Q. Has a full feasibility study of Stage 2 been carried out?

What costs are associated with the development of Stage 2?

Under what conditions will this proposal become practicable?

A. There has as yet been only an outline feasibility study of Stage 2.

The capital cost of Stage 2 is some £380 million including about £30 million for the mine.

This project will only become practicable when there are a sufficient number of customers prepared to contract to take power from it or the prospects of finding such customers appear so likely that the project can be financed.

Q. What time scale does ACCL envisage for the development of each stage of their proposal? Does the financial analysis carried out by ACCL indicate a deadline for development?

Stage 1 development can start as soon as sufficient customers have been identified and the project could be in place within three years from then.

The timing of Stage 2 development depends on a number of factors: -.

The UK's proved reserves to production ratio for natural gas halved during the past two decades to reach 7.6 years by 1999. Gas prices, reflecting this tightening of supply have tripled over the past two years. We expect these trends to continue over the next decade and, provided that gas is not further subsidised, to lead to opportunities for Stage 2 development to be in place by 2010.

Assuming that the current EU efforts at opening markets are successful in keeping NIE grid access and wheelage charges at a reasonable level, opportunities for development for export to the UK or Eire may also emerge by then or sooner.

Our financial analysis does not indicate a deadline for development as such. However this project already has a history of shareholders becoming discouraged and withdrawing.

Q. Why is a lignite fired plant at Kilroot not feasible?

A. It is technically feasible for Kilroot to burn lignite on its own or in a lignite/coal blend. However this would involve some investment in modifying burners in the plant and in fuel stocking, drying and blending arrangements. The lower calorific value of lignite compared with coal or orimulsion would also result in some reduction in the rating of the existing boilers.

There is no incentive for Kilroot to use lower priced lignite as under its present contract it would have to pay the costs of conversion and would lose out from the reduced rating but would have no compensating gain from the lower fuel cost.

Q. Is there precedence for using lignite as a fuel in power generation?

A. Lignite is widely used in fuel generation in Germany, Greece and Spain within the EU and in Australia, Canada and the US amongst others elsewhere. Many of the deposits worked in these countries are deeper with thinner seams, higher ash and sulphur and generally much less naturally favoured than the Crumlin deposit.

The Stage 1 power station as proposed is modelled and is almost identical to the recently completed lignite-fired CHP plant at Cottbus in Germany. ACCL has visited this power station and we have used it to as the basis for our cost and performance estimates. The Cottbus power station is located centrally in the town of Cottbus its steam and hot water is used to supply district heating to the town.

Q. Has ACCL estimated the number of jobs the may be associated with Stages 1 and 2?

A. The number of direct jobs involved in Stages 1 and 2 is quite small - perhaps some 50 to 100 in Stage 1 and 100 to 200 in Stage 2. These totals however do not take account of the employment relating to supply to other lignite markets for horticultural and domestic fuel. Serving these markets appears to be labour intensive and on fairly modest assumptions would provide at least another 50 to 100 jobs in Stage 1. The construction would involve significant local jobs in fabrication and in building infrastructure and the inward investment from companies attracted to the energy park would also result in a significant number of jobs. For each direct job created there would be several indirect jobs for suppliers and services.

In total on this basis Stage 1 alone would create several hundred jobs.

Q. Why has the resource not been developed before now?

A. There are a number of reasons for this. The ACCL tender of 1987/88 appeared on the face of it to be competitive but neither it nor any of the other bids made at that time were taken up as the whole process was put on ice pending privatisation.

Following privatisation, the existing power stations operated more efficiently than before and produced more electricity thereby, delaying the need for new capacity until such time as new capacity could, in effect, be provided by a new (subsidised) electrical inter-connector.

Privatisation also provided secure long-term contracts for all existing suppliers and little scope for any further round of bidding. There have been no new entrants into NI power supply since then and new entrants are in any event now being judged on other bases other than the straightforward cost of their power (such as on whether they will provide a domestic gas supply).

Due to these circumstances, although lignite is a competitive indigenous fuel, it has never been given the opportunity to compete. It is difficult to imagine that this would have been allowed to happen in for example Eire, Greece, Finland, Spain or Germany - all of which have successfully developed much less naturally favoured indigenous energy resources.

DAVID WATT

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MINUTES OF EVIDENCE

Wednesday 2 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mrs Courtney

Mr McClarty

Dr McDonnell

Mr Wells

Witnesses:

Mr N Arthur )

Mr J B Quigg ) AuIron Energy Limited

Mr W McClay )

1063.

The Chairperson: Good morning, Gentlemen. I apologise for the delay. Unfortunately, our time is limited, so if you make a short submission we will ask you some questions.

1064.

Mr Arthur: I am managing director and chief executive of AuIron Energy Limited, the parent company of Meekatharra (NI) Limited, which is soon to be renamed Ballymoney Power Limited. Walter McClay is the project director. He has long experience in the electricity industry in Northern Ireland and was formerly an executive director of NIE. He was also on the board of NIE until 1998. Jimmy Quigg has been a director of AuIron Energy Limited since it began in 1986. He was formerly managing director of Alfred McAlpine plc.

1065.

AuIron Energy Limited is a publicly listed company in the United Kingdom, Germany and Australia. Most of our shareholders live in Northern Ireland and in the Republic of Ireland. It has a large pig iron electricity and coal project in Australia. Northern Ireland has a lignite deposit and we propose to construct a lignite-fired power station at the mine site in Ballymoney.

1066.

The mine is the largest single source of indigenous fuel in Northern Ireland. Its coal has one of the world's lowest sulphur contents and can supply a major power station for more than 30 years, which is approximately 30% of the total Northern Ireland requirements. Such a station will be able to provide electricity at a fixed and very competitive price. It will provide many new jobs in Northern Ireland. Most importantly, it will provide the Province with a shield against price hikes in electricity caused by the upward movements in imported oil, gas and coal prices and adverse exchange rate movements. The station will also be competitive for export to the Republic of Ireland. It will give real meaning to the widely accepted concept, which we support, of an all-Ireland energy market.

1067.

While there is an immediate problem regarding prices in the electricity industry, the Committee can deliver considerable benefits to Northern Ireland's consumers by giving priority in its deliberations to seeking out and promoting long-term strategic and sensible business solutions. A matter of concern for the Committee should be the lack of generation diversity in Northern Ireland and the apparent lack of accountability in any party to devise and implement effective solutions. At present 60% of electricity is provided by imported natural gas whereas in the United Kingdom as a whole only 38% was provided by gas in 1999. The price of wholesale gas in the United Kingdom has rocketed in the last year and it will remain high as the gas supply contracts.

1068.

The Committee may not know that the Republic of Ireland will be a net importer of gas in two years, the United Kingdom in three years and the EU in eight years. It is not a recipe for cheap gas.

1069.

Coal prices have virtually doubled in US dollars in the last 18 months, and these rises have yet to be seen in tariffs in Northern Ireland - except for the 9% increase effective from this month. About 60% of last year's price increases have yet to come through. There were further coal price rises last month.

1070.

Natural gas is a welcome new source of fuel for industrial and domestic consumption in Northern Ireland. However, it is our contention that too much of this is used in electricity generation already, and increasing that should be avoided. Northern Ireland should learn from its mistakes. It was dependent on one fuel in the 70s - with dire consequences for electricity prices. The same is happening now because of gas and imported coal.

1071.

The 'Strategy 2010' document recognises the strategic need for the security and diversity of energy supplies, but we have difficulty in identifying who has, or who will accept, responsibility for the delivery of these strategic objectives. The proposal to liberalise the electricity market may not reduce prices in Northern Ireland either. The existing players have a vested interest in repelling all boarders.

1072.

An island of Ireland energy market would help to create a critical mass. However, it has been reported in the Republic that potential market entrants will not make major investments to build new plant unless they can be assured of reasonable returns. In other words, it may be necessary for Government, or the Assembly, to place or underwrite new generation contracts in order to meet the key strategic objectives of diversity, security and price stability. This is one of the recommendations in our written submission. However, we note with great interest that the updated EU directive on the internal market for electricity, which was released in March 2001, says the same thing. It recognises the issues raised by the Californian crisis.

1073.

Mr Wells: What environmental impact would a lignite-powered electricity generating station have in Northern Ireland? Have you looked at the effect it would have on air and water pollution?

1074.

Mr Arthur: We have done extensive environmental studies on all the key potential impacts of a station at Ballymoney, and we used independent expert consultants from here and from the rest of the UK, the Republic and Australia.

1075.

The key air emissions are sulphur, nitrogen and carbon dioxide. Due to the high quality of this coal and the advanced commercial technology that we intend to use, the sulphur and nitrogen emissions will be less than those from the existing system per kilowatt-hour (kWh). It is recognised that lignite had a bad reputation for sulphur dioxide emissions in the eastern bloc countries.

1076.

In fact, our former power station partners ASEA Brown Boverie (ABB) have calculated that the carbon dioxide emissions from the Ballymoney power station will be less than the existing coal-fired stations in Northern Ireland or the Republic. We expect to be in the forefront of complying with EU directives on environmental emissions, and our proposed plant will beat maximum limits for new plant emissions. The present system in Northern Ireland does not.

1077.

Mr Wells: What about other pollutants and water cooling?

1078.

Mr Arthur: We have made extensive provision for retaining water pollution on site with holding dams and water treatment works. In fact, when we made the last reports, our consultants said that our water-borne effluents would be cleaner than the Ballymoney River.

1079.

Dr McDonnell: That is not a surprise. I am interested in your comments on gas price and supply shortfall. The energy market should not merely be all-island but all-UK or all-British Isles and have a European dimension. We must find a mechanism to take advantage of that.

1080.

Would it help to have an umbrella organisation to run it? Some organisations recommend selling surplus electricity to the South and vice versa. Interconnection does not appear to be at the necessary high level.

1081.

If we generate electricity at Ballymoney or have a deficit and cannot get it to or from the South, how do we structure an umbrella organisation to ensure flows and opportunities? Mining in Ballymoney might be a great idea, but what if the demands or outlets do not exist?

1082.

Mr McClay: Northern Ireland is too small to support a competitive market. The Scottish interconnector will help to some extent. We believe that an all-island energy market could improve the situation. However, the structures are different, particularly in the South of Ireland. The Electricity Supply Board (ESB) not only owns the transmission and distribution system there, but virtually all the generation plant. The ESB is also a major partner in the project at Coolkeeragh. Before an all-island energy market can be viable the structures north and south must be compatible.

1083.

The regulators north and south have a role, but they have a territorial remit - they cannot look at the whole island. There could be a role for a body to oversee all-island development. However, we do not want to see another layer of bureaucracy; we want to see something that works. The Belfast Agreement established all-island bodies. Perhaps one of them could deal with this problem rather than form a brand new body. An all-island energy market should be in place and would help the whole island. The interconnection should be reinforced, north and south.

1084.

Mr Quigg: ESB is very dominant in the Republic in generation. If the market is opened up, before you know where you are ESB will be controlling generation at Coolkeeragh; it will be the dominant electricity generator on the whole island. What happens to competition then?

1085.

Mr Arthur: Lack of competition continues.

1086.

Dr McDonnell: It is an interesting concept, leaving the politics aside.

1087.

Mr Arthur: Even leaving the politics aside, the problem remains of having a seamless transmission tariff system both north and south.

1088.

Mr Neeson: I have been following the issue of lignite for many years and have been to Germany to see the operation there. The fuel can only be used by having an on-site power station. Mr Arthur told us about the environmental impact but did not talk about the hole in the ground left when the fuel has been extracted. Can that be addressed? What is the quality of lignite at Ballymoney? How does it compare with that at Crumlin? I am sure that Mr McClay remembers the famous experiment at Belfast West to burn lignite. We were both present on that occasion.

1089.

Mr McClay: Were you also covered in dust?

1090.

Mr Arthur: "A hole in the ground" is a fairly emotive way to describe the scheme. All mining involves digging holes in the ground, and lignite is no different; the same applies to the extraction of black coal and drilling for oil. We have done extensive studies on restoration after mining and published reports for the former Department of Economic Development. Restoration techniques, which are now common practice in the world coal industry, were pioneered in Australia, and we have 30 years' experience of implementing them. Unfortunately, the former National Coal Board in the United Kingdom did not use those techniques, and this was responsible for some awful disasters at mine sites. However, we have set down planning regimes to restore the land progressively and put upgraded farm and woodland in place as part of our environmental strategy. All of this has been sent to the Government in published form.

1091.

When the mine has finished production in 30 years, the hole will become a lake, providing a water supply and amenity for the people of Ballymoney. That too has been published. Ballymoney lignite has the world's lowest sulphur content, lower than that of Crumlin; the exact figure is 0·13%, about a tenth of the average for British coal and about 60% lower than most imported steaming coals. It would be very easy for the power station to comply with sulphur emissions compared to Kilroot, Belfast West or any new power station fuelled by imported coal. I have seen no recent material on the quality of Crumlin coal, but I am aware that the size of the resource at Ballymoney is such that it is more than capable of supplying 30% of Northern Ireland's requirements for a long time at competitive prices.

1092.

Mr Neeson: During the miners' strike, a product called Brico was imported into Northern Ireland - brown coal from Eastern Europe. Do you foresee opportunities for a domestic market for your product?

1093.

Mr Arthur: The production of briquettes has been discussed, and as the sulphur content is low, it is quite feasible to use it in the same way as peat or turf. However, "briquetting" is expensive, and we are examining markets other than power stations for lignite. We have formed an association with a Scottish scientist who has invented environmental clean-up products made from Ballymoney lignite. They will have an extensive application, particularly in the beef and dairy industries. I understand that an EU directive will, in a few years, prevent run-off from farms. It is very interesting that a product that many regarded as environmentally unfriendly is in the forefront of cleaning up rivers and farmland in Northern Ireland and in the rest of the UK.

1094.

Mrs Courtney: Recently there was a severe hike in gas prices everywhere. What initiatives would increase the use of renewable sources of energy while avoiding an increase in prices? What measures are necessary to enable competitive new electricity generating plants obtain finance?

1095.

Mr McClay: AuIron Energy Ltd as a company is not an expert in renewable energy, but I can give you a personal view. Renewable energy can never meet a large percentage of Northern Ireland's electricity demands. Northern Ireland Electricity (NIE) and the former Department of Economic Development (DED) produced a report several years ago that said that renewable energy could never produce more than 10% of the total electricity needs.

1096.

Some form of incentive should be provided. NIE's eco-energy tariff is a very good way of matching so-called green generators with green consumers. Green energy can be bought almost directly from a producer, without affecting the price of electricity for other consumers. Although renewable energy can improve the environment in Northern Ireland, shutting down some of the older and dirtier power stations in the island of Ireland could be of equal or greater benefit.

1097.

Mr Arthur: Finance for new generating plants is a problem. Despite its description, this market is at present completely uncompetitive and will remain so until another competitive generator comes on the scene. However, how do we get new competitive generators in the system?

1098.

There is no open and competitive market in power and no substantial interconnection with other markets. Dr McDonnell mentioned the small interconnectors, and the Scottish interconnector will be in place later this year or early next year, but that is of no real substance in connecting either the Republic's market or Northern Ireland's market to a large open market.

1099.

The prospect of getting finance for a merchant plant is about nil. In accepting that, Government must ensure that long contracts are put in place to allow finance for a power station to be obtained. The new EU Directive proposal also suggests that.

1100.

The finance for a power station in other markets is usually 8 to 15 years. That implies that while the existing vested contracts are in place any new power station must put in place contracts of a minimum of five to eight years. These must be supported, subsidised or guaranteed by the Assembly. That is the only way that it can be done. Otherwise, the price of electricity will continue to rise. You will be able to do nothing about that, except find another job when you are voted out of office.

1101.

Mr McClarty: Mr Arthur, I do not know if you are resident in the UK, but I hope that you are here long enough during the summer to witness your compatriots lose the Ashes.

1102.

Mr Arthur: That is a very provocative and ill-founded statement.

1103.

Mr McClarty: Your submission advised the Committee against looking for "quick fix" initiatives. Can you elaborate?

1104.

Mr McClay: Northern Ireland has a long-term strategic problem. Throwing money at the problem might alleviate it for one, two or three years, but it is not what is required and should be avoided. Long-term solutions are needed.

1105.

The existing generator contracts, mentioned by Mr Arthur, should be cancelled as soon as possible. A wide range of topics must be addressed. They could, for example, be cancelled by 2010 and should not continue any longer than that. There should be an embargo on further gas-fired generation. There is already too much and no more is needed.

1106.

New indigenous fuels should be facilitated, in our own vested interests and in the interests of Northern Ireland. Medium-term contracts could be provided. A long-term fuel diversity strategy, mentioned in 'Vision 2010', is also required, but we do not know who would deliver it. At the minute, the Government can only wait for generators to come forward and can either allow them to build or not to build.

1107.

Mr Arthur: Northern Ireland and increasingly the Republic are both totally dependent on imported fuels for power generation. Strategically, that is not a sensible thing to do when there is an alternative. Japan has been in a similar situation for a long time. The Japanese Government put in place a very far-sighted fuel diversification policy to the effect that no one fuel would be more than 25% of the total fuel mix, and in that 25% there would be at least three sources of fuel.

1108.

The application of such a policy here would reduce the level of gas dependence, which is already too high - as it is in the Republic, which has similar problems. Overdependence on one fuel - oil - happened here in the 1970s. Our present overdependence on gas will increase if current proposals go ahead. To make a major mistake once is forgivable; to make it twice raises serious questions of competence; to make it three times is totally stupid and will never be forgiven by consumers and voters who have had quite enough of high electricity prices. The solution is to open it up, give long-term contracts and get indigenous fuel going in the Province

1109.

The Chairperson: Thank you for your submission and your answers. If we have further questions we will write to you.

addendum to minutes of evidence
auiron energy limited

Q. What would be the environmental impact of introducing a power station fuelled by indigenous lignite coal deposits?

A. In answering this question I think it is important to bear in mind that this station is capable of supplying some 30% of Northern Irelands electricity demand for at least 30 years - so it is a major project.

There are two sets of environmental impacts from any power station development and a number of associated social, strategic and commercial benefits that must be considered as a whole package in order to reach balanced view of "environmental" impacts of such developments.

Airborne emissions from the power station are the first group of issues that usually come to mind in the eyes of the public and media.

For a Ballymoney development, Sulphur emissions are expected to be less per kWh than for any existing coal or oil fired station in Northern Ireland (NI) or the Republic of Ireland (ROI). This is partly due to the fact that the proposed station will use state of the art technology. It is also partly due to the unique advantage of Ballymoney lignite coal having one of the world's lowest sulphur contents at only 0.13%. This enables a Ballymoney power station to meet from day one the current EU new power station emission levels without the need for major Flue Gas Desulphurisation plant.

A similar situation exists for Nitrogen emissions. Currently available commercial technology applied to Ballymoney lignite would result in "NOX" emissions at about half of the maximum allowable under EU legislation.

Regarding Carbon dioxide (CO2) emissions, it is acknowledged that modern (less than 2 years old) gas combined cycle stations (CCGT) have lower CO2 emissions per kWh than for black steaming coal or lignite coal. However, a Ballymoney station would have LOWER CO2 emissions per kWh than the older existing NI stations so a net reduction in NI CO2 would occur if Ballymoney replaced capacity drawn from existing NI (or ROI) stations.

Particulate (i.e. dust) emissions are controllable and the use of modern equipment will permit compliance with EU standards.

The other environmental impacts relate to the operation of the open cast coal mine during its development and operation. We have already completed one environmental impact assessment. The location of the Ballymoney coal resource is such that it will not be visible from the town except from the top of the A26 bypass which forms a natural geographic high barrier. The company has always planned to use the best available restoration techniques that are accepted practice in Australia, the worlds leading coal exporter, but regrettably never applied in older former UK open cast or underground coal mines.

Other environmental impacts of a social nature involve the need to create substantial economic wealth by investment and job creation in the Ballymoney region. Development of a Ballmoney mine will provide a significant number of NI jobs for fuel supply. There are real social and political benefits of Ballymoney that MUST be factored into any development decision.

Q. Is the establishment of an all Ireland energy body necessary to reap the benefits of an 'island of Ireland' electricity market?

A. One disadvantage of the NI system is that it may be too small to facilitate a truly competitive market that will attract new players. The proposed Scottish interconnecter may be of some assistance but this may be limited because it is connected to the GB system by means of a only one single circuit overhead line in Scotland. The position can be improved if there is an integrated larger island of Ireland market which can encourage cross border competition and trading. However, the structures North and South of the border are quite different at present. For example the Electricity Supply Board in the South owns not only the transmission and distribution system but also most of the power stations! ESB are also partners in Coolkeeragh Power. So there is a need to ensure that compatible systems are developed on both parts of the island and that there are no dominant players that could frustrate the development of true competition. Once this is done then it will be necessary to review the ongoing development of the system to ensure that the market operates in a fair and transparent manner. While it could be argued that the respective regulators could undertake this role the difficulty is that their remit only applies to their own jurisdictions. So there may be a role for a body which can look at the island as a whole. However, having said that the existence of such a body could, if not managed properly simply introduce another layer of bureaucracy. The function could simply be addressed as required by one of the cross border bodies set up under the Agreement.

Q. Could you please explain what benefits you hope to gain by your recommendation to promote the publication of data on current generation and interconnector costs?

A. Up until a year or so ago data on generation costs and an annual statement on generation capacity was in the public domain, however with the introduction of the competitive market this data ceased to be available. The existing NI players know the prices; new proponents do not. I think the real question is "why are current costs and plant capacity statements No Longer published if a key objective is to encourage an open and transparent competitive market?"

Q. In your opinion, what initiatives would encourage the use of renewable sources of energy but also avoid an increase in prices?

A. We as a company are not experts in renewable energy; our view is that it can only provide a relatively small proportion of electricity demand. Turning to your question, in the absence of significant subsidies I believe NIE's eco-tariff provides a laudable means of matching so called green consumers with green generators without placing a price burden on all customers. A far better and larger positive impact on the environment would be achieved if that is the noble aim of encouraging renewables, by closing down old inefficient and polluting power stations.

Q. What measures are necessary to enable competitive new electricity generating plants to obtain finance?

A. Under the current regime a generator would have to operate as a Merchant Plant where it would be necessary to complete sales agreements with customers probably on a yearly basis. This means there would an absence of long or medium term contracts that could be used by the developer to secure loans at an attractive rate. So while finance could be available it would be at a higher interest rate than that available if a supply contract was in place. This is not in the customers interest since prices will be higher as a result. If mechanisms, guaranteed by the Assembly, put in place, at least for an initial period of say 5-8 years, where this could equate to the finance term, to facilitate long term contracts for offtake then the cost of finance would be lower as a result. The existing players should be specifically barred from accessing such contracts as their dominance today and into the long term future already represents a playing field significantly tilted against new entrants.

Q. You have recommended in your submission that the committee should concentrate its efforts by seeking long-term strategic solutions, which should be implemented now. Could you please further expand on this statement?

A. There is a number of fundamental long term problems with the existing system.

The biggest problem is the vesting contracts which are Sovereign and this is a matter between the participants. We would recommend that these be cancelled at their earliest cancellation dates. Next is to place an embargo on further gas fired generation in Northern Ireland until the matter of fuel diversity is fully understood.The next step we would recommend is to facilitate new low cost indigenous generation supported as necessary by Assembly (or EU restructuring funds) by guaranteed contracts for so long as the existing players also have preferred contractual positions. Put in place a long term fuel diversification policy that ensures that never again NI is over dependent on a single fuel or over dependent on imported fuels. Over dependence has now happened twice in NI: firstly overdependence on oil in the 1970's and 80's; now overdependence and foreshadowed increase in gas dependence in NI. To make a major mistake once is possibly forgivable; to make it twice is a raises serious questions of competence; to make it three times is just totally stupid and will be unforgivable by consumers and voters who have has enough of high electricity prices here.

Q. What gains would you hope to benefit from fast track planning and what procedures could be put in place to monitor the quality of such planning, ensuring that environmental concerns are fully examined?

A. Our proposals on fast tracking do not imply any lesser consideration of environmental issues of substance. They foreshadow reduced bureaucratic delay and discretion; adoption of tested precedents in other jurisdictions (which faced the same California type problems being faced here) and an Assembly inspired willingness to cut the Gordian knot of the existing mess in the electricity industry. Unless the Assembly does enact and enforce fast track procedures ANY competitive new entrant faces extraordinary delays and may give up so power costs here will continue to increase. What benefit and to whom was served for example by taking 7-8 years for planning approval for the Scottish interconnector (other than delaying the input of more expensive electricity)? The fact that the existing planning process used for the Scottish interconnector inquiry foreclosed consideration of economic matters makes a mockery of consideration of the total social and environmental impact of major developments.

Our concern at the use of 30 year out of date planning processes also applies to general industry. Major investments of any kind in NI face competition for capital in international markets. Investments simply will not come here and those already here facing ever increasing electricity tariffs and bureaucratic inertia will leave.

Q. You claim in your submission that the current electricity generation portfolio in Northern Ireland is already too dependent on gas firing. What measures you would like to see taken to address this issue?

A. Place an embargo on any further gas fired plant. Focus on incentivising indigenous generation from Ballymoney by way of long term contracts while the existing vesting contracts remain extant, fast track planning procedures, open a competitive market integrated with the ROI, publish all electricity bid prices from existing generators until there is an open and competitive market, use EU funds to boost interconnection with ROI.

Q. In your statement, you recommend that the committee avoid short term 'quick fix initiatives'. Could you please elaborate on this?

A. The problems in NI are of a long term strategic nature and they need strategic solutions. What we were getting at was the avoidance of using government funds for short term tariff reductions or similar actions. Put in pace as a national emergency the long term plans now to ensure the problem persists for no longer than necessary.

top

MINUTES OF EVIDENCE

Wednesday 2 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mrs Courtney

Mr McClarty

Dr McDonnell

Mr Wells

Witnesses:

Mr D Staniaszek )

Mr A Biermann ) Energy Saving Trust

Mr G Bell )

1110.

The Chairperson: You are very welcome, Gentlemen. Our time is limited so I will ask you to make a presentation and we will ask you questions.

1111.

Mr Bell: Thank you, Chairman. My name is Gordon Bell and I have worked as Northern Ireland representative for the trust since 1996. I worked on the energy side of the former Department of Economic Development. On my right is Mr A Biermann. He is a policy analyst with us and has a background in the environmental regulation of power stations. On my left is Mr D Staniaszek. He is director of evaluation and information at the trust and has a background in energy efficiency.

1112.

The trust, which is a non-profit distributing company, was set up in 1993 by the Government and the major energy companies. It has a UK-wide remit and its vision is to work through partnerships towards the sustainable and efficient use of energy. Our priorities are to stimulate energy efficiency in UK households and to achieve social, environmental and economic benefits; to create a market for clean fuel vehicles to deliver local and global environmental benefits; to make a difference through energy efficiency programmes targeted at small businesses, schools and business lighting; and to encourage consumers to use credible, renewable energy supplies.

1113.

The trust has received direct funding from the Government since 1995 through the Department of the Environment, Transport and the Regions (DETR). The Government have confirmed that they will provide at least £60 million to fund our programmes in 2001-02; £26 million for energy efficiency programmes and £34 million for transport - the transport budget has more than doubled since last year.

1114.

One of my main roles is to ensure that Northern Ireland gets a proportionate share of this money - we are reasonably effective and usually get more than our share. Since devolution we have set up offices in Edinburgh and Cardiff. One of our other activities is on behalf of the electricity regulator. We oversee NIE's £1·3 million annual expenditure on energy efficiency schemes. This money comes from the £2 a year customer levy.

1115.

Although our work in renewables is important, it forms a very small part of our business. Our main focus is on the domestic and small business energy efficiency market. We included our response to OFREG's consultation paper on renewables in our submission to the Committee because we recognise that renewables fall within the scope of the Committee's inquiry.

1116.

Our message is that energy efficiency is a win-win activity. Energy-efficient houses and businesses will reduce costs and help the environment. Energy efficiency can also tackle fuel poverty.

1117.

Mr Wells: You probably noticed as you approached the building that although the sun is shining brightly all the front lights are lit. It is not unusual to find our floodlights on at noon, so perhaps we cannot cast the first stone. What should the Committee do to raise awareness of energy efficiency and to encourage take-up of energy efficiency measures?

1118.

Mr Bell: There is an administrative issue which we referred to in our submission. In Wales and Scotland the First Ministers have become trustees of the Energy Saving Trust. The Secretary of State for Northern Ireland is still a member of the trust, and his responsibility for energy policy and efficiency has been devolved to the Executive. We would like to see matters tidied up and have representatives from the Northern Ireland Executive on the trust.

1119.

We would like to see energy efficiency being given centre stage in new statements on energy policy from the Department of Enterprise, Trade and Investment. It is very important from a social and environmental point of view that energy efficiency is central to any energy programme.

1120.

Mr Wells: What benefits will the development of renewables bring to rural Northern Ireland?

1121.

Mr Biermann: Through recent technological developments, particularly in the downsizing of generating units, rural renewables have become quite feasible and economic. Biomass could provide an income stream for farmers by offering them a new crop to produce. Building wind turbines on farmland would generate rents, and there would be income from operational maintenance. National Power, which is now Innogy Windpower, estimates that a 30-megawatt wind farm generates about £200,000 per annum for a community. There are benefits for rural communities, although I cannot say how large such benefits would be.

1122.

Another benefit would be security of supply. Recently, Scotland suffered severe storms. Had Scotland had more localised generation instead of having to rely on long, easily damaged transmission lines, electricity supplies would have been restored faster and much discomfort could have been avoided.

1123.

Mr Wells: Bio-diesel seems to be an obvious solution to many of the problems facing Northern Ireland's farmers, yet no one is pushing it. Has the trust considered it?

1124.

Mr Biermann: Yes. Recent studies from Sweden and Germany show that bio-diesel's environmental benefits are questionable. The question of air quality arises, which is obviously not as important in rural areas as in urban areas. Once carbon emissions generated by fertilisation and production have been factored in, I do not think on balance that it is a panacea for this problem. There are other, more environmentally friendly, means.

1125.

Mr Clyde: Can you recommend any further incentives that would lead to a reduction in the number of units of energy consumed?

1126.

Mr Bell: The trust is funding research by NIE into the increase in domestic electricity consumption. We hope that this will highlight areas where initiatives or further incentives are needed. New incentives might not be necessary; we might just have to do more and provide more resources.

1127.

The Northern Ireland Housing Executive has a new heating policy. It will replace all coal-fired systems and all Economy 7 systems over the next 15 years. If the Housing Executive had more resources, this process could be speeded up. Of course, this is a matter for the Department for Social Development.

1128.

The Housing Executive is the home energy conservation authority for Northern Ireland, and it already contributes to some of our schemes. We run a very successful scheme in partnership with Phoenix Gas, Northern Ireland Electricity (NIE) and the Housing Executive to promote energy-efficient natural gas systems. This has proved very beneficial, particularly with regard to fuel poverty. Phoenix Gas produced figures to show that people who were paying £17 a week in the winter for coal now pay £6 a week for a full central heating system. There are significant benefits. We might simply do more of the same.

1129.

I mentioned the £2 a year customer levy earlier. It is £1·20 in Great Britain but is being increased to £3·60 from April 1 2002. The responsibility for setting the levy has moved from the regulator to the Department of the Environment, Transport and the Regions (DETR) under the recent utilities legislation. We know that similar legislation is contemplated in Northern Ireland, so we seek the Committee's support for an increase in the levy from £2 to £3·60 in line with what is happening in Great Britain. That would allow more resources to be put into energy efficiency.

1130.

Mr Biermann: Northern Ireland has a monopoly supplier and price control, and it is easy to envisage the supplier's price control being structured in such a way that it has a negative volume driver. In effect, any further units that it sells will generate less income. It is therefore less interesting for the supplier to push sales instead of pushing energy savings through its sales channels. I am not entirely certain what the end product would be; but I am absolutely certain that a couple of good economists could work something out. Basically, they are rewarded for selling less instead of being rewarded for selling more, which is something one cannot do on the mainland.

1131.

Mr Neeson: Are the Housing Executive and the housing associations doing enough on draughtproofing? What effect will changes in the administration of the domestic energy efficiency scheme (DEES) have? Will they be advantageous? I know that some of the local energy efficiency companies were concerned about the changes.

1132.

Mr Bell: I mentioned in my introduction that we work through partnerships. In co-operation with the Department for Social Development, we have set up a fuel poverty partnership and we recently decided our terms of reference. This parallels a similar UK-wide group that the trust facilitates. Our group is widely representative. It comprises voluntary organisations, energy suppliers, officials from the Department of Enterprise, Trade and Investment, the Department for Social Development and installers' representatives. We also have National Energy Action, which is also to appear before the Committee.

1133.

We received a letter from the Minister asking us to look at setting out criteria for people who were "near benefit". For example, the widow who does not receive income support because she has a £2·50 a week pension. Perhaps we can do something about that. The trust is active in the matter of fuel poverty, and it feels that fuel poverty can only be eradicated when all the various interests are in partnership. We seek to do that with the help of the Department for Social Development.

1134.

Mr Neeson: Is there enough collaboration between the Department of Enterprise, Trade and Investment and the Department for Social Development?

1135.

Mr Bell: Yes. We invited the Department of Enterprise, Trade and Investment into the fuel poverty partnership because of the utilities legislation and the possibility that changes in the legislation would enable the Minister of Enterprise, Trade and Investment, rather than the regulator, to set the levy.

1136.

Mrs Courtney: Your submission doubts a 10% growth target for renewable energy. Can you explain why?

1137.

Mr Biermann: There are problems at the moment; on the mainland with the regulator, and here with regard to network capacity. For example, the most economic sites for wind or for rural generation are usually serviced by rather weak links to the distribution networks. Upgrading these will cost money. It also takes engineering capacity, which might not be available at the moment.

1138.

The report 'Renewable Energy in the Millennium' deals with the absolute capacity in great detail; that is the main constraint on renewable energy. Unless we move to a very actively managed network we will have a problem with the intermittency of renewable generators. Since Northern Ireland is a reasonably small market, that will be difficult. Therefore the constraints are mostly technical.

1139.

At some point we would simply hit economic barriers. However, Northern Ireland should be able to get much more than 10% of renewables into the system at a reasonable cost if the technical barriers were surmounted.

1140.

Mr McClarty: What gains would rural Northern Ireland get from developing renewable electricity?

1141.

Mr Biermann: Rural communities can generate income streams from growing new crops and from renting the land to renewable generators. Security of supply can also be addressed in that way.

1142.

By-products of animal farming can be used to generate electricity; biogas, for example, which could also be used to fuel cars. One small generating plant in Great Britain uses chicken litter to fuel a CHP. There are many possibilities, and since the scale has come down so much one can now have very efficient and cheap generation in the single-figure range - about 5 kilowatts. That is enough to supply a farm. Farmers could become more or less independent if they used the biogas from the pigsty, for example. Many benefits can accrue.

1143.

The long-term changes will affect rural communities much more than an immediate short-term price reduction. In the long term, real sustainable energy efficiency and savings will only come from changing the way in which electricity is generated and consumed. It will not come about by simply reducing the price, which is the line taken by the regulator on the mainland. One must look at the whole system to get renewables into generation and a great deal of energy efficiency into consumption. In the long run, that would reduce the use of energy, making you independent of world market fluctuations in fuel prices. It would negate any short-term gains that were achieved by reducing electricity or gas prices at a moment's notice. We saw that on the mainland, where, according to the regulator 700,000 households were taken out of fuel poverty through reduced prices.

1144.

It is possible that household gas prices will rise steeply soon. Will those 700,000 households fall back into fuel poverty? I do not know and I am not sure whether the regulator knows. Customers would be better off in the long run if they insulated their homes and installed energy-efficient light bulbs.

1145.

Mr Wells: The Energy Saving Trust seeks support for an increase in the levy from £2 to £3·60. Ninety-nine percent of customers are unaware of the levy. It is not a burning issue. Why should we not recommend an increase in the levy to, say, £5 a year to tackle the fuel problem in Northern Ireland? Even with an increase on the levy, it will still be at least 10 to 14 years before the back of the problem has been broken. Is that an option? Can we break parity with Great Britain?

1146.

Mr Staniaszek: We should be careful about ramping up the scale up the programme. We began with a rate of £1 in 1997; it rose to £1·50 in 1999; and it is now £2. We managed that doubling of capacity well. NIE has delivered approximately £30 million worth of lifetime benefit from an expenditure of £3·6 million under the programme. There is real benefit; it is the equivalent of £20 per household, and that is why we advocate growth. Compared to Great Britain, £3·60 is a sensible level. I could look beyond that.

1147.

I hope that we are not ramping up too quickly, because there is discussion in Great Britain about whether there is enough capacity to deliver quickly. We would like to double installation rates, but there might be negative reaction if the qualified installers are not available to fit loft and cavity insulation or if the manufacturers are not available to supply good quality energy-saving light bulbs. I advocate a policy of gradual growth. We could perhaps go to £3·60 in the short term, but we should plan for more sufficient growth in the long term.

1148.

Mr Wells: That would mean employing more people, which is good news. The Assembly was consulted on the first increase, which happened about 18 months ago. Why can you not fix the levy at £3·60 and link it to the retail price index (RPI) rather than having to decide whether to increase it every year?

1149.

Mr Staniaszek: That is a possibility. An RPI increase is constant - it adjusts for price fluctuations. One might decide on £3·60 now and find a rate of £5 in two or three years' time. By taking those two steps now one is building in an escalator. If I may draw a parallel with the renewables obligation in Great Britain, there is a ramped-up growth. The percentage grows each year, and legislation now will set the obligation for the next 25 years. We are building such staged growth in and perhaps we should consider that approach here. OFREG has been actively encouraging a sustainable energy approach, particularly by NIE, and the Energy Saving Trust welcomes that. That approach has lead the way with regard to the Office of Gas and Electricity Markets (OFGEM) in Great Britain.

1150.

There are three main elements to the programme. The levy is the main element and should be our main focus. There should be an incentive to reduce consumption, and Mr Biermann spoke of doing that through the volume driver. There is an incentive for NIE to reduce the average growth rate. However, the regulator was unsure of the cost implications. If customers reduced consumption by a certain amount, NIE would get an incentive payment. The payment could be greater if the Committee supported it.

1151.

The Chairperson: Thank you for your submission and your answers. We might have more questions, if we do we will write to you.

addendum to minutes of evidence
the energy saving trust

Q. What action would you like to see taken to ensure that Northern Ireland plays a major role in the renewables market in the UK and Europe?

A. First, we would like to see a situation in which Northern Ireland and the Republic of Ireland move closer to an integrated energy market. This will create a larger market, and sufficient demand for renewable generators in Northern Ireland, as well as alleviating intermittency problems of renewable generators on the small Northern Ireland system.

We would also like to see the creation of a green corridor in the interconnectors between NI and the Republic.

We believe that a generally positive attitude, as shown in Northern Ireland by all the parties, is going to stimulate the growth of the industry. Most of the smaller players do not have the resources to spend a lot of time in dealing with bureaucracy, so a helpful and open-minded approach by Government Departments will contribute to the growth of the industry. This includes the approach to planning, and the decisions that the Assembly will have to make on the rules and regulations for offshore wind-farms. It may be helpful for embedded generators (renewable and CHP), if strong and weak points in the grid are easily identified. Northern Ireland should adopt the recommendations of the embedded generation working group, where these go beyond current practice in Northern Ireland.

Q. In your submission, you stated that renewable energy in Northern Ireland benefits from good economics, and should be encouraged within the regulatory framework. Could you perhaps expand on this statement, and also perhaps outline how this could be encouraged?

A. Many of the points in answer to question 1 are of a regulatory nature. Further support could come by shifting the trading risk from smaller to larger generators in Northern Ireland. These large generators have long-term, well-remunerated contracts, and can presumably bear the risk of trading more easily than small renewable companies with little capital cover.

With regard to the economics of renewables in Northern Ireland, the NIE/DED report on renewable energy [vii] and the report on off-shore wind [viii] resources in Ireland by the DED and the Irish Ministry for economic development outline the indicative generation prices.

A further encouragement would be a clear and achievable target for different forms of renewable generation. The past has shown that targets focus the mind of those expected to achieve them, and we believe that this would be the case again. They would also provide a clear framework for those working on developing renewables, providing them with security.

Q. What policies/initiatives would you recommend to develop links between the Energy Saving Trust and the Northern Ireland Assembly?

A. (i) Under the Energy Efficiency (Northern Ireland) Order 1999, the Department for Social Development (DSD) has responsibility for energy efficiency in the domestic sector and is therefore the lead department for Energy Saving Trust activities in Northern Ireland. As we pointed out in our written submission the Trust would welcome the Northern Ireland Assembly/Executive as a member of Trust. The present position is that the Secretary of State for Northern Ireland is a member.

(ii) In drawing up future workplans for Trust activities in Northern Ireland we will seek the views of the committee on the content.

(iii) Provide a quarterly brief on EST activities and developments to members.

(iv) We would be prepared to act as advisor to the committee on energy efficiency issues within the competence of the Trust.

Q. You support the idea of 'Green Credits' and suggest that OFREG should lend its support to the government in setting up a Northern Ireland renewables obligation along the lines of the Great Britain obligation. Could you please further explain what you envisage developing?

A. Ideally, Northern Ireland renewables would not have to be physically traded into the UK market. If a system was set up that was compatible to the mainland system for the issuing/redeeming of green renewables certificates, suppliers on the mainland could choose to invest in generation capacity in Northern Ireland, where the framework is more positive than on the mainland, and simply redeem the obligation certificates, without ever trading the electricity across the Irish Sea. This would not lead to capacity problems with the interconnector, and leave the amount of green certificates generated in Northern Ireland unrestricted by physical constraints of the network connection to the mainland.

Q. What incentives would you suggest are necessary to support the expansion of and awareness of renewable energy sources such as wind?

A. It is very important to create more public awareness of the way that energy impacts on the environment, and what everyone can do to mitigate these impacts. To this end, a larger-scale marketing campaign, and educational packages supporting renewables in schools might help. More importantly though, the provision of localised information, about how renewables could benefit a particular area, and what kind of opportunities there are to benefit from them could drive the deployment of smaller scale renewables.

Therefore, an important measure would be to provide renewables advice in the same manner as energy efficiency advice is currently provided by the EEACs [ix] . The EST has developed a project, and secured DTI funding for England and Wales supporting such an expansion of the EEAC network in England and Wales, on a pilot-project basis. We are also involved in an ALTENER project bid in which a Scottish EEAC would learn from the experience of a domestic marketing campaign for solar power in the region of Hannoever, Germany.

Q. Could you please outline the merits of your recommendation for creating a low transaction cost consolidation agency under the auspices of OFREG?

Consolidating electricity from different renewable sources in a single portfolio offers the possibility to deal with larger customers, by providing them with products that follow their demand curve more closely. On the mainland, the larger market may make it possible to have the consolidation provided by trading companies, although even there it is doubtful whether the fees to be paid to the consolidator are not so high that they make it impossible for smaller renewable generators to use the service. In the Northern Ireland market, a public consolidator could also act as a purchaser of last resort, effectively underwriting green electricity sales for a long investment period (say 10 years), giving banks the security needed to invest in a renewables project. Furthermore, referring back to question 8, a consolidation agency would probably have sufficient size to undertake marketing and awareness campaigns, and would be a large enough party in negotiations with major energy suppliers and customers on the mainland.

Q. What action would you like to see taken with regard to equity schemes and less advantages consumers?

This is a difficult question. The most likely avenue would be via the Housing Executive and Housing Association who could provide access to low-cost renewables to their tenants in social housing.

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MINUTES OF EVIDENCE

Wednesday 2 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mrs Courtney

Mr McClarty

Dr McDonnell

Ms Morrice

Mr Wells

Witnesses:

Dr T Jenkins ) Friends of the Earth: England,
Wales and Northern Ireland

Mr J Woods ) Friends of the Earth
Northern Ireland

1152.

Mr Woods: Dr Tim Jenkins is a Sheffield based research co-ordinator working in the Friends of the Earth: England, Wales and Northern Ireland policy and research unit. He specialises in taxation policy and the employment and business impacts of environmental policy measures. He is also on the Environmental Advisory Council for the British Standards Institution.

1153.

I am head of campaign and development for Friends of the Earth, Northern Ireland. We aim to inspire solutions to environmental problems and make life better for people. We have 100,000 members in the UK and 120 staff. We work closely with Earthwatch/ Friends of the Earth Ireland, based in Dublin. I run the Belfast office, working on transport, food and farming, the climate and the regional economy.

1154.

We are very pleased to make a submission to you on energy because we are interested in climate and regional economy issues. Our submission concentrated on energy efficiency and renewables, particularly on wind power.

1155.

We have raised some technical issues and tried to establish that a statutory target should be set for renewables. We have also highlighted some enterprise and employment opportunities from an energy policy based on the sort of principles that we have put forward. We are very happy to take any of your questions.

1156.

Mr McClarty: According to your statement, road transport accounts for 23% of the United Kingdom CO₂ emissions, and cuts must be made. What action do you recommend to ensure that significant reductions are met?

1157.

Dr Jenkins: There are three main ways that CO₂ omissions from transport can be cut. The first is to reduce the average CO₂ omissions from vehicles. It is agreed that fiscal policy measures are best for achieving that. They have been dealt with largely in the last two budgets. The other two ways of achieving it are to shift the mode of transport away from the individual car to public transport, and to reduce the need to travel.

1158.

We have produced a report on the employment impacts of reducing the need to travel and moving to the use of bus and rail. We have found that it will have a positive employment impact. The most effective measures achieve this are to set a clear target, several years hence, that will provide a framework for people to aim at, and to shift spending - one of the main ways of helping this forward.

1159.

In the UK as a whole, spending is biased towards private road transport and we will want to see more of that money reinvested. In actual fact, a lot of the people who were excluded by not having a private car were often unemployed and looking for access to employment. They are now able to benefit. We are also keen to introduce the workplace parking levy, with the revenues reinvested back.

1160.

Strong local economies are very important in lessening the need to travel as a method of reducing CO₂ emissions from transport. We have seen many local economies throughout the UK increasingly lose numbers of services, whether retail, leisure or schools. A stronger local economy reduces the need to travel, particularly in rural areas.

1161.

There are a number of policy measures that should be followed. We are interested in investment in broad band telecommunications as a method of replacing transport with information travel. There are a number of rural areas that are already getting European support for making that investment.

1162.

Finally we want to see regeneration initiatives taking into account the need to reduce the need to travel. Again, there are already a number of good flagship schemes where that has been a major part of the regeneration project.

1163.

Mrs Courtney: At the moment, Kilroot are talking about changing to Orimulsion instead of a coal-fire power station. Do you agree with that? What environmental impact would that have in Northern Ireland?

1164.

Mr Woods: We have been looking at that for some time and we are greatly concerned about the impact of Orimulsion. There was research carried out through a proposal in Pembrokeshire some time ago. Orimulsion has improved somewhat since then, so a lot of our concerns about the particulates are not as great as they were.

1165.

There is a benign impact from the investment in Orimulsion. It would be to reduce carbon dioxide and sulphur dioxide emissions from their current levels because we currently have a coal-fired power station with virtually no technology to clean it. However, although the particulates issue is less of a problem than it was, the threat to marine environment is still a live issue. A spillage in Belfast Lough could have disastrous consequences on the filter feeders there.

1166.

Our main objection to the proposal is that the investment is more expensive than gas, and the only reason for putting it in is to follow a fuel diversity policy. Quite understandably, we do not want to be over-dependent on gas for producing electricity. However, we argue that you get that fuel diversity through investment in renewables, not by importing an unusual fuel from the other side of the world with some dodgy environmental credentials. We believe that 20% of our electricity can be generated from renewables by 2010. That is how we get fuel diversity in Northern Ireland, not through investing in another fossil fuel.

1167.

Mr Neeson: Mr Woods, I am sure you are well aware that the Magheramorne issue is going to raise its head again in the very near future. I hope that we will be able to work together on that again.

1168.

Your submission states that through a "modest investment in energy efficiency", fuel poverty can be eliminated. Could you elaborate on that?

1169.

Dr Jenkins: I suspect that it is the word "modest" that you are particularly interested in. Our view on eradicating fuel poverty through investment in energy efficiency is that the net cost of doing that is low. The main reason is that there are clear spending benefits that follow from making that investment. For example, getting people out of fuel poverty would result in reduced health costs. The number of winter deaths and illnesses connected with fuel poverty would be reduced.

1170.

Secondly, a major programme of investment in energy efficiency would not only make life better for those who are fuel poor, but also generate employment. A local authority in Nottinghamshire ran an energy efficiency scheme in its housing stock in order to deal with fuel poverty. Each job-year created cost £25,700, which is a low figure compared to a lot of other job-creation schemes. Against that, they found that they saved £2·2 million in health costs and a further £2·8 million in reduced unemployment benefit payments. Obviously, there are also knock-on effects from employed people spending more money in the local economy. Taking those things into account, the £25,700 cost-per- job-year was reduced to £9,700. It is a modest net cost and brings social, economic and environmental benefits. That is the point that we are trying to make.

1171.

Dr McDonnell: Your submission says that there is tremendous potential in wind energy, but that much of the potential for that lies as much off the coast of the Republic as of Northern Ireland. How do you feel about an all-Ireland energy body to regulate that type of thing? My sense is that probably we will never get a critical mass to make wind energy an attractive everyday proposition. We can have it as a novelty proposition here and there along the coast, but if it is to reach the level that you suggest, do you think it could be done on an all-Ireland basis? I ask this purely on a business level.

1172.

Mr Woods: I am going to give you a practical answer. It will not be a full one, because, as you know, there is a report being carried out on this at the moment. One of the issues for renewables is having access to markets - the bigger, the better. If the market can be an all-Ireland one - and there is also the interconnector across the Irish Sea - the bigger that market can be, the more potential there will be for developing renewables.

1173.

The offshore side of it is really a big issue. At the moment, most of the offshore potential is in the South, but quite a lot of the expertise lies in the North.

1174.

Dr Jenkins: Without actually saying anything on the benefits of an all-Ireland energy regulatory body, I can say that as things currently stand there are several mechanisms which allow for it to be mainstream rather than a novelty. It has great potential. This month, for the rest of the UK, renewables obligations will come into force. That will obligate suppliers to provide a certain percentage from renewable energy sources. Generators will be able to get a certificate, and they will be able to trade among themselves. It is a very flexible method of supplying renewables.

1175.

Owing to the high energy price in Northern Ireland, installation here might not be an attractive proposition. That will not happen immediately. One alternative, however, is for generators in Northern Ireland to be allowed access to that market. Effectively, investment in renewable energy, such as wind or offshore energy, would mean that they would be able to sell it on that market in the rest of the UK without consumers here paying the cost. They would have the benefit of an increased flexibility in relation to fuel supply in renewables, but consumers throughout Great Britain would pay for it. That important avenue should be investigated.

1176.

Secondly, Mr Woods said that Northern Ireland is very well placed to look at exploitation of its own market and the global market for offshore renewable energy, both wind and wave. Much is being said about cluster development and looking at sectors in a region which can be supported because expertise is there. Together they have a critical mass for forward development and for opening business possibilities. There is clear potential for Northern Ireland to have a cluster round offshore renewables. There is an established marine engineering sector, and both universities have a lot of expertise. Clusters often like to have the linkage between industry and higher education. There are other industries, which could provide components.

1177.

The manufacturing installation and its maintenance are there to be exploited. If Northern Ireland wants to look seriously at the potential for putting money and support into becoming a centre of excellence and exploiting this rapidly growing and substantial market in offshore renewables which stretches beyond Europe, it would be a very positive step.

1178.

Mr Clyde: What benefits would you hope to gain from your suggestion to introduce a quota for electricity suppliers?

1179.

Dr Jenkins: That relates to my point about obligations. Great Britain has moved from the NFFO system to a quota system therefore the electricity supplier is now obligated to buy a certain amount of energy from renewables. In the longer term, we think that that is a good system to have throughout the UK. As things stand, Northern Ireland will be outside that system. We can understand that in the short to medium term the high energy costs here may mean that the quota system should be introduced in due course, if not immediately. The benefit would be that investment in renewables would be increased. It would benefit Northern Ireland to take the lead in getting a cluster development for indigenous renewables. The system of getting renewables into the supply mix is very flexible.

1180.

A half-way house would be that, rather than having the quotas now, a strong lobby could be made for Northern Ireland generators to have access to the market for the quotas that will have to be dealt with by supply companies in Great Britain. The Department of Trade and Industry document comes out this month, and it will provide a significant stimulus to the renewables industry in Northern Ireland, without actually bringing the cost to buyers.

1181.

Mr Wells: The Northern Ireland farming industry is in a dreadful state, and there is so much surplus that there is no reasonable return to be made. Willow biomass and biodiesel have been suggested as alternative crops. There is a large demand, and an assured market for the foreseeable future, and Northern Ireland seems to be ideal for producing both. What is the environmental impact of those alternative energy sources?

1182.

Mr Woods: I was struck by the work of the former Department of Economic Development and NIE on biomass. Its proposals were relatively unambitious. I cannot say we studied it deeply, although there are several projects up and running.

1183.

Dr Jenkins: The two main sources of biomass are forestry and agricultural waste, and we consider both to have environmental benefits. If biomass crops such as willow are grown in vast areas there can be environmental problems. They might affect the water table or be sprayed with pesticides. However, in the short to medium term that is highly unlikely. There would probably be many small willow stands, and that would have a positive environment effect.

1184.

Mr Wells: What about bio-diesel?

1185.

Dr Jenkins: All I know about bio-diesel is that its environmental benefits are now being questioned. The United Kingdom Government are considering bio-diesel as an option under the green fuels challenge, partly because conflicting evidence has been emerging.

1186.

Mr Wells: If we introduce Scandinavian standards of insulation into our building regulations, what impact would that have on energy consumption and on the cost of building a home?

1187.

Dr Jenkins: I do not have the figures. The increased cost that it would undoubtedly bring for the construction of homes has been reduced recently by changes in VAT on energy saving materials. Regulating the energy market should bring benefits to those who invest in a more energy-efficient home - not just in terms of redeemed costs but in other financial mechanisms. However, we have no calculations on their potential impact.

1188.

The building regulations in Scandinavia are the strictest in Europe while ours are far too lax. Whether we ought to hike them immediately to Scandinavian standards, I cannot say. Perhaps it would be better to decide on a SAP rating somewhere between the two.

1189.

With regard to SAP ratings as opposed to new-build, we would like to see a target set for reducing fuel poverty by looking for investment to ensure that no house had a SAP rating of below 30 by 2010. Such a target would provide a good incentive to invest in reducing fuel poverty and energy consumption.

1190.

Mr Woods: We have said that 30% of UK energy is used in houses, and I would expect that to broadly translate to Northern Ireland. A simple package of measures like installing loft insulation and condensing boilers, which is quite a modest investment of between £1,000 and £2,000, could reduce those emissions by 60%. If you take 60% of 30% you are then talking about reducing annual energy use by approximately 17%. This strikes me as being pretty substantial and worth going for.

1191.

The Chairperson: Thank you for your original submission and for the way you dealt with the questions. When we make our deliberations we may have further questions, and we would propose to write to you if we do.

ADDENDUM TO MINUTES OF EVIDENCE
FRIENDS OF THE EARTH (NORTHERN IRELAND)

Q. In your opinion, what action could be taken to increase the power generated by Combined Heat and Power (CHP) schemes in Northern Ireland?

A. The Friends of the Earth submission to the energy inquiry states that all new gas fired power stations should be Combined Heat and Power stations. A simple presumption in favour of CHP plants over conventional plants when awarding contracts would go a long way towards achieving this. Additionally, the inclusion of CHP plants could be made a condition for planning approval for large developments such as hospitals, large housing estates, industrial estates etc.

Currently the Combined Heat and Power Association administer a number of grant and feasibility schemes and there is scope to expand and develop similar programmes in Northern Ireland. The grants cover residential schemes, small scale industrial schemes and converting electrically heated multi-residential buildings.

Q. What financial packages and incentives would you like to see made available to aid the development of 'Lower Watts' housing?

A. Friends of the Earth believe that a combination of incentives and disincentives, a carrot and stick approach, works well. For example heavy users of energy could be penalised while incentives would be used to encourage them to introduce energy efficiency measures. The disincentives must not harm those suffering from fuel poverty though. A province wide energy efficiency programme to insulate inefficient homes would alleviate this problem. Buildings Research Establishment estimate that energy efficiency measures could save 63 M tonnes of CO^{2/year. This amounts to about 40% of the current
total saving more than £2 billion/year.}

Revised building regulations to bring new building stock up to Scandinavian standards of energy efficiency would improve the situation in Northern Ireland.

Q. In your submission, you maintain that enterprise and employment opportunities will be significantly increased with the introduction of energy efficiency programmes. Could you please expand on this view?

A. The Friends of the Earth submission outlines a number of ways in which energy efficiency and investment in renewable forms of energy generation can create jobs. A study by Environmental Resources Ltd for the Association for the Conservation of Energy found that a UK wide energy conservation programme in all sectors would employ 50,000 people for 10 years. This figure doesn't include jobs in energy auditing and recording the current state of building stock. Furthermore, a 1992 study showed that, pound for pound, investment in energy efficiency buys more direct jobs than investment in conventional energy supply - Krier and Goodman, 1992. Energy Efficiency: Opportunities for Employment.

A 1990 study 'Flavin, C and Lenssen, N - Beyond the Petroleum Age', compared the job creation potential of various energy generation methods. It found that coal, including mining, generated 116 jobs/TWh/year while wind, including manufacturing, generated 542 jobs/TWh/year.

It has been estimated that a 3,000 MW combined heat and power programme in the UK involving nine major cities including Belfast would create 7,875 - 12,535 new jobs over 10-15 years. This figure takes into account any potential job loses in conventional generation - Combined Heat and Power Association.

Investment in renewable energy generation at the expense of fossil fuel power in the UK has the potential to create up to 10,300 additional jobs through onshore wind power and 1,000 jobs in solar power.

The UK's first commercial scale wind turbine plant is due to open next year in Scotland creating 100 new jobs. Presently, all new turbines are imported, mostly from Denmark and Germany. However Harland and Wolff are perfectly placed to build and install onshore and offshore wind turbines.

Q. What statutory target would you recommend to be set for energy production levels form renewable sources?

A. We would recommend a target of 20% of electricity generation from renewable sources by 2010. This is based on 10% from on-shore wind, 7% from off-shore wind and just under 3% from other renewables such as bio-mass and small-scale hydro. The justification for these figures is given in more detail in our written evidence. This target is consistent with the recommendation by the House of Commons Environment Select Committee's report in March 2000 and in keeping with the longer term agenda for much more substantial reductions in carbon dioxide set out by the Royal Commission on Environmental Pollution in its Twenty-second Report in June 2000. If Northern Ireland is to contribute its fair share to combating climate change, such a target should be treated as only a first step.

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MINUTES OF EVIDENCE

Wednesday 2 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mrs Courtney

Mr McClarty

Dr McDonnell

Mr Wells

Witnesses:

Ms M McCloskey ) National Energy Action

Miss A Heaney )

1192.

Ms McCloskey: I am the director of National Energy Action (NEA) in Northern Ireland, which is a fuel poverty charity. We have been operating in the North for seven years, working to raise awareness and understanding about the problem of fuel poverty and, more importantly, to propose solutions.

1193.

This is a unique problem specific to our circumstances that need Northern Irish solutions. While we work closely with our sister organisations in Britain, the Republic, Scotland and Wales, there are specific solutions for the North.

1194.

Our presentation will be brief, to allow for discussion, and we are very interested in having a good discussion with the Committee. This is a very important inquiry. The amount of interest generated by the initiative in this sector in Northern Ireland and beyond is welcome. There needs to be more debate and discussion on energy issues. As expertise and interest increases, we will start to get real solutions to some of our problems.

1195.

Miss Heaney: Some of the ponts I will make today are contained in our written submission. However, I will mention some new aspects also. We want the Committee to consider nine points.

1196.

The first point is the resolution of the generation issue, and I am sure that the Committee has already had submissions on that aspect. There are three solutions to this problem. The ideal answer would be to buy out the contracts. However, the cost is estimated at between £200 million and £400 million. Our suggestion would be for Westminster to pay for that.

1197.

Westminster was overseeing the privatisation, and the contracts that were drawn up at the time - and Northern Ireland people have been disadvantaged by that decision. The generators and NIE shareholders could bear some of the burden. The success of Viridian was spring-boarded by the core business and core customer base of NIE. NIE's customers should not be overlooked in this.

1198.

The second suggestion is to re-negotiate the contracts and there is already a proposal on the table. We are concerned that the generators will not go for that option unless there is a positive benefit for them. We suspect that customers would pay for that in the long term.

1199.

The third suggestion is to introduce, sooner rather than later, domestic competition. That would, perhaps, allow a supplier specifically designed to supply low income households to enter the market. That would be of benefit to the people we represent.

1200.

The second point that we want the Committee to consider is increased investment in energy efficiency. There are three ways of doing this. The first would be to increase access to efficient fuels, the most obvious being the gas pipelines. I will not go into that issue; I am sure that you have enough information on the arguments for and against that. The second way would be to increase the use of efficient technologies. At this stage, I will not dwell on that as it comes back to the renewables argument; we will talk about that in more detail later. The third way would be to increase priority for funding for things such as the 'Warm Homes Scheme' and energy efficiency in general, including the industrial and commercial sector, which will again come under the renewables argument.

1201.

That leads me to our third point, which concerns an increase in the energy efficiency levy. I caught some of the Committee's discussion with the Energy Saving Trust on that topic. In Britain, the levy has been raised to £3·60. We agree with Mr Wells in it should be higher. A £5 levy would be reasonable. If it goes to £5 or above, ministerial consent should be sought. It should not be a decision for the regulator. Five pounds per year per customer would give a pot of £3,250,000 approximately for fuel poverty. We want to encourage that.

1202.

Our fourth point would be to encourage the use of renewables. NEA has traditionally said that renewables are not an option for the fuel poor. Until now, they have not been an option because it has been much more expensive to generate electricity from renewable sources. Things are changing. Longer-term contracts, according to NIE, could bring the price down. Global fuel prices - many of which are linked to oil - are rising, and will continue to rise for the foreseeable future. Renewables are therefore becoming a more viable option.

1203.

There are a number of issues that the Committee could take on board. The first would be to increase the proportion of green energy bought by the public sector in Northern Ireland. The public sector currently uses about 5% of Northern Ireland's total energy consumption. An increased demand from that sector could cause a fall in prices. The benefits to the business community of buying green energy in light of the climate change levy (CCL) should also be promoted in tandem with energy efficiency measures for that sector. The marginal cost of using green energy over and above the CCL is worth around 1·7% to businesses, which is quite small for a non-polluting energy source.

1204.

We ask that there is a review of green trading arrangements. There seem to be some problems with regard to top-up and spill onto and off the grid that cause businesses to be confused about the true cost of trading in green energy. We would encourage the development of immature technologies which, in Northern Ireland at the moment, are anything other than wind - although offshore wind power may be included in that. This may mean financial assistance in certain areas. In the community sector, financial and technical assistance would be required but there is an interest from communities in supplying their own non-polluting energy.

1205.

Another issue is the clarification of renewables policy objectives. If the only policy objective is to reduce CO₂ emissions, OFREG has already stated in their consultation document on renewables that it is not the least cost method of reducing CO₂ emissions. Other areas should be explored. There are other objectives under renewables policy but we feel that these need to be clarified. There are many benefits to the positive renewables policy; the security of supply; rural regeneration; the alleviation of fuel poverty in rural areas; the contribution to environmental targets; the increased demand leading to a fall in price, and the diversity of the fuel mix could be improved.

1206.

We are currently very dependent on fossil fuels in Northern Ireland. The expansion of an indigenous renewables energy has wider economic benefits. We could have economic growth without the normally attendant increase in pollution. The less demand for fossil fuel generation then the less investment would be needed for power plants.

1207.

I want to raise a point about carbon tax. NEA is not in favour of carbon tax in general. Taxes tend to be regressive and research indicates that such a tax would have to be set at such a high level in order to change behaviour, especially in the domestic sector, that we could not support that from a fuel poverty perspective.

1208.

There are ways in which it could be made less regressive, and the Dutch small energy users tax is an example of this. However, the insulating of houses and efficient heating systems need to be on a level playing field.

1209.

There are two reasons why NEA supports the development of an all-island market. The first is that an increase in demand from fuel suppliers should, in economic theory, lead to a decrease in the price of fuel. There should be an all-island infrastructure. That would be the main benefit of an all-island market but that does have some considerations. At present, most of the infrastructure is confined to the east of Ireland, and the west needs to be taken into account.

1210.

The North and South also need to be on a level playing field. The climate change levy disadvantages Northern Ireland and redirects any inward investment to the Republic of Ireland. Consumers in the North and South should have similar benefits and protection such as social security assistance. In the Republic, free units of electricity are given during winter months.

1211.

There is also the matter of trading arrangements. That has come to light from information we have recently received regarding the Norfolk to Zeebrugge pipeline. The European Commission is investigating price manipulation in that pipeline because the companies using it vote on which way the gas flows each day. One day in January that caused a 42% price increase in United Kingdom gas prices and cost the public and private sectors £1 billion and forced natural gas prices up by between 5% and 7%. NEA wants to ensure that that does not happen in Ireland.

1212.

NEA would like to see the utilities legislation tailored to Northern Ireland. There should be more protection for low income and other vulnerable customers. The regulator and consumer body would have a primary duty to do that. NEA would like to see, in the Minister's words, a regulator with teeth. There are some things in the regulatory process that the regulator cannot control or force companies to do, such as invest in their distribution systems. That should be changed.

1213.

The principle of transparency and decision-making, including publishing reasons for decisions, should be evident across the decision making process as a model of good practice.

1214.

There should also be a promotion of energy efficiency and cross-subsidy. Cross-subsidy goes back to postalisation. All consumers, regardless of where they are, should pay the same price for their energy. So there would be an element of cross subsidy in that.

1215.

Wider social, environmental and economic policies should be considered when making decisions on energy policy.

1216.

There has been a lot of discussion recently about how energy consumers in Northern Ireland should be represented. The NEA feels that one independent body should represent consumers of all fuels. It should have a dedicated staff, a dedicated committee and dedicated resources. There are four reasons for that. I am sure you all understand the breadth and complexity of energy issues in Northern Ireland. The rate of change in the sector requires a staff and committee that can take that on and has the time to look at it. In a wider economic context the staff and committee of the body should be able to look at the bigger picture.

1217.

Northern Ireland is heading towards an open market. In an open market we may well see more suppliers and therefore there would be a lot more issues to deal with. Therefore NEA feels that an independent body would be best placed to do that.

1218.

NEA would also like the Committee to consider the endorsement of a ministerial taskforce on fuel poverty and participation in that. The Programme for Government has already committed to tackling fuel poverty. The warm homes scheme cannot do that alone. There needs to be action across at least four Departments including Enterprise, Trade and Investment, Health, Social Services and Public Safety, Social Development and Agriculture and Rural Development.

1219.

The taskforce should be time limited and include relevant bodies such as fuel suppliers, generators, consumers, representatives of vulnerable customers and the Civic Forum.

1220.

The taskforce would have four duties. First, to assess fuel poverty in Northern Ireland. Secondly, to draw up and assign responsibility for an action plan. Thirdly, to work towards co-operation on action, and fourthly, to work towards co-operation on funding.

1221.

Finally, we would like the Committee to endorse and support the work of NEA in the eradication of fuel poverty.

1222.

Ms McCloskey: There has been tremendous commitment from the Assembly on the issue of fuel poverty. We welcome that very much. We would like you to continue to work with us on this issue to make sure that fuel poverty is kept at the top of the agenda. As Miss Heaney has said, a number of Departments have responsibility for elements of fuel poverty. That could mean that this issue could slip between the cracks. We would like the Committee to endorse the work of NEA in tackling fuel poverty in the future.

1223.

Mr Wells: Ms McCloskey, you heard the tail end of the discussion about the levy, which is obviously a crucial element in what you are trying to achieve. The basic view was that the capacity is not there. If we increase the levy to £3·60 - let us suppose the Assembly is inclined to make that £5.00 - the capacity is not there to take that money and use it to reduce fuel poverty. Is that your opinion?

1224.

Ms McCloskey: No. There are a couple of reasons why we would not agree with that argument, with no disrespect to the Energy Saving Trust with whom we work very closely. First, we have had an increase in the levy. We have had a higher levy for a longer time than Britain. We have already had the capacity to spend. Secondly, and most significantly, the energy efficiency levy is already completely committed for this current year. If someone identified a need to fund a fuel poverty project in Derry, Fermanagh or Banbridge, there is no money to fund that scheme this year.

1225.

Mr Wells: Even if the money was there, is there the manpower to deliver it?

1226.

Ms McCloskey: Yes. The infrastructure is there, partly through the warm homes initiative that Maurice Morrow, the Minister for Social Development, has created, but also through the capacity of NIE and others to manage projects and get projects off the ground. The capacity is there. Having said that, we would compromise and go for a two-stage increase. If there are concerns and worries about that we would welcome a two-stage increase. The capacity is there and we should bear in mind that there is absolutely no slippage in the system at all this year. The funding is already committed. That gives you an indication that we can move on this levy and spend it quickly.

1227.

Mr Wells: If there was a two-stage increase to £5·00, how long would it take to eradicate fuel poverty in Northern Ireland?

1228.

Ms McCloskey: It could be done within 10 years. Our figures suggest that we need something like £50 million. The warm homes initiative, which I have already referred to, has a budget at the moment of £4·8 million. With that budget, it will take 21 years to eradicate fuel poverty. If you could match that amount through the levy, or increase the commitment from Government, it could be done in a much shorter period of time.

1229.

The Committee should note that in England and Wales there is a legislative imperative on Government to tackle fuel poverty within 10 years. That is outlined in a UK fuel poverty strategy. Unfortunately there is no such imperative in Northern Ireland, and that may be something that the Assembly may wish to debate in the future.

1230.

Mr Clyde: You mentioned a ministerial taskforce on fuel poverty. Can you please expand on your recommendations?

1231.

Ms McCloskey: The responsibility for fuel poverty is shared across Departments. Fuel poverty can be tackled quickly if the resources are in place. We would like to see Ministers endorse the creation of a task force that would bring together civil servants and bodies such as the NEA and those who have attended the Energy Inquiry of the Committee. That task force would pull together resources, information and expertise.

1232.

I will give you one example. If someone suffers a heart attack, they are at risk from the cold. If they live in a cold, draughty house and have gone home to that house after suffering a coronary, their situation will not be improved - in fact they may be more at risk. I am conscious that there is a doctor on the Committee, and I do not want to sound like a medical expert, but the two-week stay in hospital following a coronary costs about £8000. Insulating a house costs £2,500, so as well as giving a patient prescriptions for their pills and an appointment to come back to hospital, why can a discharge sister or a discharge charge nurse not recommend that that patient gets insulation and central heating if they do not have it? We want to see that sort of joined-up approach.

1233.

I could give you other examples. Look at the farmers in Northern Ireland and the terrible time that they are having. On top of everything else that they are suffering, would it not be sensible to try and help them tackle their heating and insulation problems so that the little income that they have is not being used to pay for fuel? Taking it a step further, could we not provide solutions to fuel poverty in rural areas while supporting farmers to develop renewable technologies that could give them a new strand of income? We need to look at the sort of solutions that go across Government.

1234.

We do not want the task force to last forever. We want the task force to be time limited, to come up with good ideas, put them in place and then report on them annually. That is basically the idea.

1235.

Mr Neeson: The General Consumer Council met the Committee last week. Its representatives described solid fuel as a luxury product, but that is the only option for heating that some of the most vulnerable in the poverty trap have, particularly those in rural areas. What can be done to overcome that?

1236.

Ms McCloskey: We are concerned that there are lots of people who are on low income using solid fuel, particularly older and vulnerable householders. Those people can be reluctant to let someone into their house to give them a change of heating, even if they are entitled to that change as they are under the new warm homes initiative. Miss Heaney can tell you about what we have been doing in south and east Belfast.

1237.

Miss Heaney: The South and East Belfast Health and Social Services Trust approached us to draw up a fuel poverty action plan for south and east Belfast and Castlereagh. The idea that home-help resources could be redirected if they did not have to light and maintain 1000 fires every day came from that plan. The trust is now looking at a project that will replace solid fuel heating systems in the area with natural gas when it is available, or with oil in areas in which natural gas is unavailable. The householder can save by changing to a more efficient fuel and a more efficient heating system. There are also savings to be made in other areas, and health trusts have identified that saving on fire lighting and maintenance is one big saving that they could make as those resources could be redirected towards people who need help in other ways.

1238.

Mrs Courtney: You said that, to date, the renegotiation of contracts has failed. What action would you like to see that would address that?

1239.

Miss Heaney: Our ideal solution would be for Westminster to buy out the contracts. We are very suspicious that the customer will end up paying more with renegotiation. The longer that people pay, the more they will pay for credit, so we assume that the situation will be similar for the renegotiation of contracts. Renegotiation of contracts will bring down the annual cost of the burden. We can also see the plus points in the scheme. However, it is not an ideal solution - it would be a last resort for us.

1240.

Ms McCloskey: We believe that Westminster should pay, and when our organisation started talking about that, it sounded like a very high flying kind of "dead on" idea. In fact the sum that is required is large for Northern Ireland, but is very little for Westminster. That should be explored very thoroughly before being put to bed.

1241.

If competition develops and the generation contracts have not been sorted out, NIE might find itself with stranded contracts. Those contracts will still have to be paid regardless of how many customers are on their base. There is a danger that, given the experience in other places, companies new to the market may cherry-pick. This might cover people who pay by direct debit and who are easy customers to service; people who do not have prepayment meters; and those who do not want to pay at the post office every week with a swipe card. NIE might find itself left with expensive contracts and difficult, low-income customers. However, these are the customers about whom we care a great deal.

1242.

We have studied the example of a council in the north-east of England which has sold energy to its tenants. The information is detailed in the 'UK Fuel Poverty Strategy'. The council has become an agent and sold energy to its tenants. It does not make any profit, and this has enabled it to provide cheaper energy. It has also included an energy efficiency element. Why can a similar scheme not be developed for low-income customers in Northern Ireland? Why can Derry City Council not apply for a second-tier supply licence to sell electricity to everyone in its area? Why can Belfast City Council and others not follow suit? Of key importance is that they would not be involved in a profit-making venture. They would not have to service shareholders, so low-income customers would benefit.

1243.

They might also be able to attract other services to make it a much more interesting and attractive package. That is another possible solution.

1244.

The Chairperson: Thank you for your submission and your answers. If we have further questions we will write to you. Thank you again.

ADDENDUM TO MINUTES OF EVIDENCE
NATIONAL ENERGY ACTION (NORTHERN IRELAND)

Q. What gains would you expect to receive from your recommendation to introduce full market liberalisation?

A. Market liberalisation should, at least theoretically, deliver price reductions through increased competition amongst suppliers and through efficiency gains within the industry. NEA Northern Ireland would expect a reduction in the price of electricity if there were a number of suppliers in the domestic market and the commercial/industrial market were opened fully. The result would be two-stranded; cheaper energy supplies may encourage increased inward investment, creating jobs, increased incomes leading to increased spending power and increased tax revenue (direct and indirect). For the fuel poor, a reduction in electricity costs may in many cases be taken in comfort, that is, many households will pay the same total bill but will be able to buy more electricity for the same amount and thus be more comfortable in their homes. For many other fuel poor households who currently heat their homes to adequate temperatures, cash savings can be made when the unit price falls. This leads to increased spending power causing an increase in the money flow to local economies. An additional benefit in both types of fuel poor households is the likely improvement in health and well-being; it is estimated that £30 million is spent each year in Northern Ireland to treat cold-related ill-health, not including treatment for allergies, infections and the mental distress caused by living in cold, damp homes. Any improvement in the health and well being of the fuel poor is likely to result in savings to the Health Service, which can then be directed elsewhere in the sector.

The major barrier to full market liberalisation is currently the generation contracts; it is possible that other suppliers entering the market could 'cherry-pick' the customers who are easier and cheaper to service, that is, those customers who pay by direct debit, do not run up debt, pay on time etc, leaving NIE with a customer base of 'difficult' customers - those on prepayment meters, debtors, late payers, those wanting to pay small amounts frequently. These customers are more likely to be fuel poor and the cost of the generation contracts will have to be spread amongst fewer, poorer customers.

Full market liberalisation may however, solve the problem of high cost generation contracts; in an open market, Northern Ireland Electricity would be competing with a number of other suppliers in trying to retain a large proportion of its current customer base - is it possible that the shareholders may then decide to absorb some of the additional costs in order to have a more competitive price?

It is also possible that new suppliers, knowing Northern Ireland Electricity is somewhat tied to the current price to service the generation contracts, may set their prices artificially high, a small margin below that of Northern Ireland Electricity. This would result in a small reduction in the average unit cost of electricity in Northern Ireland but prices would still be higher than those attainable in a fully competitive market with competition in generation.

A fully open market could also allow the granting of a second-tier supply licence to an organisation wishing to supply cheaper electricity to low-income homes. This organisation could be a local council, Housing Association, not-for-profit company or a well-established community group, which would sell electricity at a cost where the organisation covers its costs and breaks even. A fully competitive market may also encourage the development by existing and new suppliers of social tariffs where customers pay a flat rate based on the average required fuel consumption providing energy in a way which is easier to budget and pay for.

NEA Northern Ireland, whilst agreeing on the need to reduce electricity prices in Northern Ireland, would also point out that falling energy prices are not a sustainable solution to fuel poverty; global energy prices are rising and the longer term trend is in that direction, affecting generation costs. It is in this context that renewable energy will become more competitive.

Q. What benefits would you hope to gain from your recommendation to create an Island-of-Ireland energy market?

A. NEA Northern Ireland would expect to see two major benefits:

n The potential market becomes larger and should deliver price reductions through a more competitive market.

n A larger market with potentially more customers would encourage further development of the energy infrastructure throughout the island.

However, there would be a number of considerations:

n The development of the infrastructure should be on an all-island basis and not confined to the East Coast, as is currently the case. This is especially important in the event of postalisation, otherwise, the west of the island would be heavily penalised.

n A more level playing field regarding the economies of the North and the Republic; the Climate Change Levy (along with other differentials such as Corporation Tax) would, in an all-island market, disadvantage Northern Ireland and encourage the flow of investment south.

n Consumer protection should, as far as possible, be the same for both parts of Ireland. If this were not the case, suppliers would be dealing with two sets of regulations, adding to administration costs.

n NEA Northern Ireland believes that low income consumers, north and south, should have the same rights and benefits, for example, in the Republic people are helped with energy bills through the welfare system but there is no widespread statutory grant for energy efficiency; in Northern Ireland there is a grant for energy efficiency but little statutory help with energy costs. NEA Northern Ireland would advocate equalisation at the highest common denominator.

n Cross-border trading arrangements should also seek to protect the consumer and leave little room for potential price manipulation; the European Commission is currently investigating the Norfolk-Zeebrugge natural gas pipeline - the UKs link to the European Market. The companies using the pipeline vote daily on the direction of flow and it appears that in one day in January, when UK gas demand was high, they voted to export gas from the UK, causing prices on that day to rise by 42%. It is estimated that this incident cost the public and private sectors in excess of £1 billion and that the recent price rises in domestic gas bills of 5 - 7% can be attributed to this. An all-island market must be framed in such a way that this does not happen in Ireland.

Q. Could you suggest incentives to increase investment in energy efficiency, which would stave off increased demand due to economic growth?

A. In NEA NI's view there are three main ways to invest in energy efficiency:

i. Increase access to more efficient fuels

In Northern Ireland this would mean extending the natural gas pipeline both, to the North-West and south to interconnect with the Republic of Ireland. The result would be an increase in investment to those areas such as Ballymena, Ballymoney, Limavady and Derry, creating jobs with the attendant benefits. Although overall demand for energy may rise, it will be more efficient and cleaner helping meet environmental targets. The conversion of Coolkeeragh to natural gas and that of Ballylumford to Combined Cycle Gas Turbine (CCGT) generation will also save substantial amounts of CO2. NEA NI understands that subsidy from the public purse is likely to be a requirement of infrastructure development projects and feels the benefits in social, environmental and economic terms would out-weight the financial cost of subsidy.

ii. Increased use of efficient technologies

There are two strands to this:

Increasing use of efficient technologies using traditional fuels such as natural gas Combined Heat and Power (CHP)

CHP has not been fully utilised in Northern Ireland; the benefits need to be widely promoted, particularly in the industrial/commercial sector. This may require investment in projects which fully demonstrate the benefits, for example, CHP can deliver heating and hot water costs of £2 - £3 per week in Britain however, in the domestic market there appears to be a barrier created by 'bad press' on previous district heating schemes which were technologically inferior. It is likely that communities considering such a scheme would need technological support and expertise, as would the industrial and commercial sector.

Increasing use of efficient technologies using renewable sources.

NEA NI would advocate the use of renewables only where the price is competitive with that of fossil-fuel-generated electricity. It is likely that this will be the case in the foreseeable future and longer-term contracts with renewable generators lead to falling prices and in an environment of rising global fuel prices, causing increases in the price of traditionally generated electricity. An increase in demand for electricity generated from renewable sources is also likely to lead to an decrease in price of green electricity as well as a decrease in demand for fossil-fuel-generated power. NEA NI would see a need for increased investment in less mature technologies such as hydropower or biomass in order that there be diversity of supply in the renewables sector.

iii. Increased installation of energy efficiency measures

With regard to the industrial/commercial sector, in order that demand for traditionally generated electricity is staved off in the event of economic growth, NEA NI sees three main methods:

n Increase the generation of green energy and encouraging companies, where appropriate to consider generating their own green electricity.

n Promotion of energy efficiency. This could take the form of tax rebates or other financial incentives. Energy efficiency measures should also be promoted in tandem with green energy as a method of negating the added costs of the Climate Change Levy (CCL). This in itself may be incentive enough for some bigger energy users.

n Carbon taxes: NEA NI feels carbon taxes should be the last resort in staving energy demand; research shows such taxes would have to be set at a relatively high level in order to change behaviour (particularly in the domestic sector) and as such taxes tend to be regressive, the less well off will be penalised and, as the fuel poor tend to live in less energy efficient homes and use disproportionate amounts of energy, they will be penalised more severely. The Dutch Small Users Energy Tax appears to deal with the regressive nature with rebates and grants for domestic and industrial/commercial customers, however, there was recognition that there needed to be a level playing field in terms of energy efficiency in order that the fuel poor were not further penalised.

Q. What further action is required to combat fuel poverty?

A. NEA Northern Ireland would again re-iterate the need for a fuel poverty task force, cutting across a number of departments:

The Minister for Social Development, together with Ministers for other relevant departments, should determine the establishment of a fuel poverty task force. The role and remit of the task force would be to establish the necessary coordination across government, the private and voluntary sectors in Northern Ireland to eradicate fuel poverty. The remit of the group would also be to identify and promote best practice and policy elsewhere in Europe and further afield. The task force would have representation from all sectors, and would be chaired by a respected public figure. It would have the capacity to recommend policy and action across all relevant parts of Government and the statutory sector, and beyond. The government departments who should be involved in the task force are:

n Department of Social Development in respect of energy efficiency and fuel poverty

n Department of Enterprise, Trade and Investment, in respect of energy policy,

n Department of Health, Social Services and Public Safety, in respect of the health and social impacts of fuel poverty,

n Department of Agriculture and Rural Development in respect of the particular disadvantage experienced by rural communities,

n Department of Further and Higher Education, Training and Employment, in respect of job creation and training,

n Department of Finance and Personnel, in respect of crosscutting financial matters.

NEA NI will be responding to the consultation on the UK Fuel Poverty Strategy by 31 May 2001 and more detail will be available within this response.

Q. In your submission, you have stated that a NFFO programme delivering 10% of Northern Ireland's electricity supply by 2010 would add 10% to the total cost of generation. Is there a viable alternative to promoting the development of renewable sources of energy?

A. This depends very much on the objective in mind; if this is solely to save CO2 emissions, generating green energy is not the least cost solution - as mentioned in the answer to question - the conversion of Ballylumford to CCGT generation will save substantial amounts of CO2, as will the conversion of Coolkeeragh to a gas-fired plant. If however, the objective is to bring cheaper, cleaner, more efficient energy to for example, County Fermanagh, there is little alternative as this part of Northern Ireland is unlikely ever to have a natural gas supply.

In any application of any obligation regarding generation from renewables, the objective must be clear and the obligation structured accordingly.

That said, by stimulating demand for renewables and creating an environment conducive to longer term contracts, the price per unit is likely to fall meaning any obligation would have less of a cost impact or in fact, if demand were stimulated enough, there may be no need for a NFFO or Renewables Order. NEA Northern Ireland also believes that the public sector should be encouraged to buy more green energy than the current target of 15%; the sector currently consumes around 4 - 5% of Northern Ireland's total energy bill and any increase in demand for green energy would help downward pressure on prices and also perhaps stimulate demand for green energy in other sectors.

Whilst NEA Northern Ireland is not expert on environmental funding mechanisms, we would assume that EU funding might be available for further development of green energy, which could finance the development of new technologies including offshore wind generation.

Q. What incentives would you suggest are necessary to develop energy infrastructure particularly on the East Coast in Northern Ireland and in rural areas? In your opinion, does renewable energy have a role to play in developing rural communities?

A. NEA Northern Ireland would question whether much further development is needed on the east coast; three out of four generators are located east of the Bann and the natural gas supply licence currently covers only greater Belfast and Larne.

NEA Northern Ireland would wish to see the natural gas network extended south to interconnect with the republic of Ireland. Other than this, NEA Northern Ireland would wish that the infrastructure be developed elsewhere in Northern Ireland, most obviously, to the North-West. Ideally, other parts of Northern Ireland would also have access to natural gas, for example, County Fermanagh. However, NEA Northern Ireland understands that this is unlikely as servicing small-dispersed communities, such as those in Fermanagh, would be economically unviable, even with massive public investment. It is in this case that NEA NI would advocate the encouragement of an indigenous renewables industry. This would have multiple benefits for rural communities:

n Additional income streams for farmers for example growing willow for CHP or selling electricity generated by wind turbines on farmland.

n Lower energy costs leading to increased spending power as the proportion of household income spent on energy reduces. This releases more money into local economies.

n Supply in some rural areas is unreliable and an indigenous renewable generation would make supply to such areas more secure.

n A cheaper, more secure energy supply would also encourage inward investment into the area, creating jobs, higher incomes etc.

NEA Northern Ireland would, for the extension of the natural gas pipeline, advocate public funding either from domestic or EU monies or a combination of both. We would also suggest that the social dimension, including the opportunity cost to communities and the wider economy of lack of access to natural gas, be quantified and included in any cost-benefit analysis or feasibility study, bearing in mind the long-term financial and economic consequences in terms of social security and health costs etc.

Q. In your submission, you state that the research division of Centrica have been developing a small-scale domestic heat and power generator (DCHP) for use by individual households. Do you have further information on the success of this generator?

A. NEA Northern Ireland has, to date, been unable to obtain further information on this development but will continue to follow this up and provide any new information to the Committee if and when it becomes available.

Q. You suggest in your submission that legislation similar to the Utilities Act 2000 introduced into England and Wales should be adopted in Northern Ireland. In your opinion, what social and economic benefits would Northern Ireland hope to receive as a result of the introduction of a similar Act here?

A. NEA NI sees several benefits socially and economically as a result of utilities legislation:

n Customers would be protected and their rights upheld by a specialist consumer body dealing with all fuels, representing all energy customers. NEA NI wishes to see an independent body with a dedicated committee, staff and resources in order that the committee and staff are able to take account of broader and more complex implication across the sector. This will require building knowledge and expertise, which, in NEA NI's view, can only be possible with a fully independent body with a dedicated committee and staff.

n Vulnerable and low-income customers would have added protection due to a primary duty on the Regulator and consumer representatives to have regard for their circumstances.

n Utilities legislation could tighten up the regulatory environment and give the Regulator 'teeth'. It is NEA NI's understanding that although the Regulator must take account of some costs during the price control process, for example, investment in the distribution network, he has no powers to force the money to be spent; Transco had under invested by around 20% in 1997-98 and as a result forecast investment in the mains network will need to be 50% higher for the next three years the cost of which they want to meet by raising prices. Apparently, the Regulator has no powers of enforcement.

n Decisions, including the reasons as to why the decision was reached, would be made public. NEA NI feels such transparency in decision-making would be good practice across the whole decision making process.

n A dedicated energy committee, along with a combined Regulator would be able to take account of the impact of change in the energy sector would have on wider social, economic and environmental policies and objectives including the eradication of fuel poverty. The interaction of energy and economy is complex, embracing a wide range of issues and such organisations would be better placed to view the 'bigger picture'.

n There would be legislative obligations on energy suppliers, the Regulator and consumer body to promote energy efficiency. In fulfilling this obligation, each of these parties will be forced to see that energy efficiency is the long-term solution to fuel poverty and must be an important factor in attempting to reduce fuel bills.

n Such legislation could allow for cross-subsidy amongst consumers. Generally cross-subsidy was disallowed under private licences and cost-reflective pricing was encouraged, resulting in for example, prepayment meter customers paying more for their electricity to cover the cost of the meter. The reversal of this would allow a smearing of relevant costs across all customers. With regard to postalisation, NEA NI would prefer all customers to pay a flat rate and would be concerned about additional administration costs of postalising prices which, without cross subsidy, would further penalise those customers living away from sources of generation/supply.

n A requirement on the Regulator and consumer body and NEA NI feels, the relevant Departments across the administration, to take account of wider social and economic policies when making decisions would enable a more holistic approach to energy and, in particular, fuel poverty.

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MINUTES OF EVIDENCE

Wednesday 2 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mrs Courtney

Mr McClarty

Dr McDonnell

Mr Wells

Witnesses:

Mr M Campbell ) Worldwide Fund for Nature,
Northern Ireland (WWFNI)

Mr R Marsh ) Worldwide Fund for Nature,
United Kingdom (WWFUK)

1245.

The Chairperson: You are very welcome, Gentlemen. I will ask you to make a short presentation. Unfortunately, our time is limited to 25 minutes. The Committee will then ask questions.

1246.

Mr Campbell: I am Malachy Campbell, policy officer for the Worldwide Fund for Nature in Northern Ireland. My colleague is Russell Marsh, climate change policy officer for WWF UK, who has kindly come over from our headquarters in Surrey. I thank the Committee for this invitation to present evidence.

1247.

WWF Northern Ireland would like to see a shift from the use of fossil fuels towards increasing production from renewable resources. Section 5.1.4 of the Programme for Government says

"We must develop in a way that protects and, where possible, enhances the natural and built environment. .. The concept of sustainable development is the key principle, ensuring that our social and environmental objectives are integrated with the development of our economy."

1248.

In our view, renewable energy sources are the only truly sustainable form of energy development that we can pursue.

1249.

I will highlight what we consider to be the priorities for energy policy in Northern Ireland. The Minister of Enterprise, Trade and Investment and his Department should develop and expand wind power as a priority. We would like to see this being done on an all-island basis. There is huge potential for the development of offshore wind power.

1250.

A target for renewable energy should be set that reflects the United Kingdom's targets and Northern Ireland's renewable potential; a support mechanism for renewables should be introduced to follow on from the Northern Ireland Non-Fossil Fuel Order. It is also important to set targets for reducing greenhouse gas emissions for carbon dioxide, sulphur dioxide and methane. This could be achieved by increasing the contribution from renewables. The two should go hand in hand.

1251.

We advocate increased funding for developing and expanding renewable technology in Northern Ireland. We suggest establishing an environmental audit committee for the Government estate, which might help improve its environmental performance.

1252.

Planning regulations also arise with regard to renewable technologies. The regulations should be reviewed to ensure that barriers to renewable technologies are addressed. Not every wind farm development, for example, will be beneficial to the environment. Some wind farms have been planned for protected upland areas. The environmental impact of wind farms must be addressed. The planning could be done in a positive way to outline those areas that are suitable for development. There should be an integrated public transport network, especially in rural areas.

1253.

Finally, we want peat to cease to be used as a fuel.

1254.

Mrs Courtney: Kilroot Power Station is considering Orimulsion as a fuel oil. Would that be an important contribution for domestic and business users?

1255.

Mr Campbell: We do advocate diversification in the energy sector, but renewables should play an increasing role. We want to see a shift away from fossil fuels, so we do not support the development of Orimulsion. You may be aware of some of the environmental problems with Orimulsion. In 1991 it was referred to in the 'Financial Times' as "the filthiest fuel in the world". There are various problems with the burning of Orimulsion, primarily from emissions. The ash has a very high vanadium and nickel content, both of which are toxic and carcinogenic. Given the environmental problems associated with that fuel, we do not support its use.

1256.

The most likely point of entry for the fuel would be either through Belfast Lough or Larne Lough, and both of these are areas of special scientific interest (ASSIs) and RAMSAR sites. Both are special protection areas (SPAs) for birds. A spill of Orimulsion would pose more problems than usual. It is a heavy oil, and once it has mixed with seawater it is extremely difficult to clean up. Due to the risk to those protected areas, we are opposed to it.

1257.

Mr Neeson: What more could Northern Ireland do to develop renewable energy sources, and who should take on the responsibility?

1258.

Mr Campbell: Subsidy for the market would help. There are policy objectives with regard to obligations on renewables, and the imminent liberalisation of the market to allow trading of renewables, obligations and certificates might also help.

1259.

Mr Marsh: The important thing is to study Northern Ireland's potential for generating renewable energy and set realistic, but challenging, targets to drive forward renewables. Setting targets for achievements is important and often has positive spin-offs.

1260.

The right mechanism must be found; there must be a mechanism underneath the target. It ensures that there is enough renewable regeneration at the right price to meet the target. I concur with the WWF that Northern Ireland has many potential renewables. It should consider whether it wants to follow the example of England, Scotland and Wales in its renewables obligation and whether it wants to allow renewable energy generated in Northern Ireland to be sold to the mainland. That would also work in reverse: renewable energy generated in Great Britain would be sold to Northern Ireland.

1261.

You must look at how you can best drive forward the development of renewables. There are several ways of doing it. You could follow the example of England, Wales and Scotland, although they had problems setting it up; or you could follow the existing non-fossil fuel obligation (NFFO) scheme. There is no reason why you could not introduce a further NFFO scheme to drive forward development of renewables in Northern Ireland.

1262.

First, you must study the potential in Northern Ireland, and then set challenging targets that reflect the United Kingdom's targets for renewables and for CO₂ reduction.

1263.

Dr McDonnell: Why are you so strongly opposed to the use of genetically modified plants for fuel?

1264.

Mr Campbell: I want to address that question from a slightly different angle. Using a native species of biomass would have the greatest benefit for biodiversity. Biomass must be looked at properly, because not all biomass developments are necessarily good. Depending on where they are situated, they could have a negative impact on biodiversity. We advocate what would be most beneficial for biodiversity within the context of biomass development.

1265.

I have with me a position on genetically modified organisms (GMOs). The ecological safety of GMOs has not yet been proven, and that is a problem for us. A great deal of research is still being done on that. WWF is one of the many organisations that support the moratorium on the release of these organisms into the environment. If I may quote:

until ecological interactions are fully researched and safeguards put in place.

1266.

There are too many unanswered questions on their safety. For example, the so-called "genetic pollution" that may occur from genetically modified plants to plants in the wild. I am sure you have heard of the possible creation of "superweeds".

1267.

Biomass would be a good option, but the WWF advocates that native species rather than genetically modified organisms be used. The development of biomass must be carefully addressed.

1268.

Dr McDonnell: Does your opposition to genetic modification stem from environmental concern rather than energy?

1269.

Mr Campbell: Yes. There is a great deal of overlap, but the WWF's chief concern is environmental.

1270.

Mr Clyde: What measures should be put in place to improve energy efficiency in Northern Ireland?

1271.

Mr Campbell: That is a difficult question. Combined heat and power plants have a much greater efficiency, about 70%, compared to other similar developments which may be about 40%. Networks and mechanisms are available to promote and enhance energy efficiency in the Housing Executive, and we support them. We do not get very deeply involved in energy efficiency, but we recognise that it has a major part to play in reducing emissions. Therefore it is important.

1272.

Mr Marsh: There is a major focus on reducing energy prices, particularly in the domestic sector, and that is a problem. Although there is a focus on driving down energy prices, one could argue that that goes against the policy of trying to improve energy efficiency. The cheaper energy becomes, the less likely people are save it. The WWF is concerned that the focus of many policies on energy is to drive down costs to consumers. That is not compatible with trying to improve energy efficiency.

1273.

Mr Wells: A United Kingdom-wide consultation programme is being undertaken on renewable energy, and I am sure that the WWF is submitting its views. Should Northern Ireland replicate what is decided for the rest of the United Kingdom, or are there areas in which we can take the lead? The Assembly should take the lead in the United Kingdom on this matter, but it would be very useful to have a lead from organisations such as WWF on how we go about it.

1274.

Mr Campbell: Northern Ireland should take the lead in such issues. For example, the Minister of Finance and Personnel Minister, Mr Durkan, recently decided to buy 15% green energy.

1275.

Mr Wells: That decision was made by the Assembly Commission, not the Minister.

1276.

Mr Campbell: I stand corrected - the announcement by Mr Durkan in March with regard to the purchase of 15% green energy for Parliament Buildings and other buildings on the Stormont Estate. That is fantastic and it is an example of Northern Ireland taking the lead, but we would like to see other examples of it. We should take the lead in Great Britain, but we should not just replicate everything that is done in England, Wales or Scotland. The circumstances may be slightly different, but we should try to do our best for Northern Ireland's consumers and environment by taking account of those differences.

1277.

Mr Marsh: The 10% target is likened to a 10% obligation on supplies of electricity in England, Scotland and Wales. Various markets will come out of that for renewable energy generators and suppliers in Great Britain and in Europe as the market opens. There will be opportunities for trading electricity from renewable sources across Europe.

1278.

Northern Ireland can seize that opportunity, and it should integrate with other policies in the UK and in Europe. We should link in with the systems being proposed in Great Britain to access those markets. We should make use of the resources in Northern Ireland and get access to a much wider market for them.

1279.

Mr Wells: I actually proposed in the Assembly Commission that we go for 15%. Mark Durkan took our idea and ran with it. That is just a political point. When I made that recommendation in the Commission, I tried to get the entire building put on a 100% eco-tariff and I was told that it would be more expensive. I have since heard that, with long-term contracts, it is now possible to acquire green energy more cheaply than fossil fuels. The contracts at Kilroot and Ballylumford are the only hindrance. Obviously, cheap green energy undermines those contracts. Have you evidence to prove that that is the case here and in Great Britain?

1280.

Mr Marsh: As regards the contracts?

1281.

Mr Wells: The possibility of producing environmentally friendly energy more cheaply than fossil fuels.

1282.

Mr Campbell: The Committee may be aware of a group based in the Republic of Ireland called Eirtricity which supplies wind power. It can undercut brown electricity prices. It definitely can be done. Although why it is not done here, I cannot say.

1283.

Mr Wells: What is the situation on the mainland?

1284.

Mr Marsh: In Great Britain several electricity supply companies now supply so-called green electricity at the price of brown electricity. The climate change levy has enabled businesses to sign contracts with supply companies for green electricity at lower prices. I do not know the exact situation in Northern Ireland, but I can make a phone call from my office in Great Britain and get a company to supply me with green energy for the same price that I pay for brown.

1285.

Mr McClarty: The WFF submission states that Government support in developing and promoting photovoltaic (PV) technology could prove useful. For a layman such as myself, can you explain photovoltaic technology and elucidate quantitatively and qualitatively the level of support this technology requires?

1286.

Mr Campbell: Photovoltaics means solar panels. The Committee may be aware that Tony Blair recently announced a £100 million package for developing and expanding renewable technology, which includes photovoltaics. A target has been set for about 100,000 homes to be fitted with photovoltaic cells to power the house. It is another area of potential development. Wind power and biomass have been mentioned; photovoltaics is another opportunity.

1287.

Mr Marsh: Theoretically, the potential for photovoltaics is infinite because one can fit a solar panel to every single house or building. The WWF is pushing for regulations on house building and is asking developers to fit solar panels on houses. However, solar panels are very expensive because the technology is relatively new. It is expensive to purchase the equipment to generate energy from sunlight. We know that a massive building programme has been proposed in Great Britain and that would be an excellent opportunity to integrate solar PV into many new and existing buildings

1288.

Financial support is needed to reduce the price of solar panels. It is a catch-22 - the only way to reduce the price of solar PV is by producing much more; the only way to produce more is by reducing the price.

1289.

Mr McClarty: I was in Cyprus recently and it seemed that almost every house had a solar panel on its roof. I was told that the installation cost was about £800 per household. Surely that is not particularly expensive?

1290.

Mr Marsh: I am not sure whether you are saying that it was solar PV that generates electricity or solar water heating.

1291.

Mr McClarty: Water heating possibly.

1292.

Mr Marsh: Water heating is a slightly different technology and is slightly cheaper. Installing solar panels on an average three-bedroom house to generate possibly 60% of its electricity would cost between £5,000 and £7,000. That is the problem. It is beyond the reach of the ordinary householder. Encouraging its development requires financial support to reduce the installation costs.

1293.

Mr Wells: You would get a better return in Cyprus than in Cullybackey.

1294.

The Chairperson: Thank you for your submission and your answers. If we have further questions we will write to you.

1295.

Mr Marsh: We will be happy to answer them. Thank you again for the invitation.

addendum to minutes of evidence
worldwide fund for nature

Q. The NIE publication, 'Renewable Energy in the Millennium - the Northern Ireland Potential', estimates that by 2010 the maximum Estimated Contribution of Renewables for Electricity Generation is 7.6%.

Does WWF agree with this estimate?

A. WWF does not agree with this estimate as more recent analyses have shown that renewables could make a much greater contribution.

The following factors suggest the achievable contribution is greater than a 7.6%

n The range of renewable energy options available - including wind power (both onshore and offshore), biomass and solar options

n The huge potential for offshore wind power development (which could offer 7% of the predicted NI consumption alone)

n The decreasing costs of offshore wind power

n The potential for job creation offered by renewable energy technologies (especially those offered by offshore wind)

n The potential (economic and strategic) benefits of an all-island approach to energy, offshore wind power in particular

WWF believes the combined input from all renewables is likely to be much more than the 7.6% quoted in 'Renewable Energy in the Millennium - the Northern Ireland Potential'. Furthermore, WWF would like to see NI striving to match or better the UK Government target for 10% of electricity generated to come from renewable resources.

Renewable options

Renewable resources currently contribute approximately 2% of the total electricity generated in Northern Ireland. Potentially, the different options like solar power (photovoltaics), biomass and wind power (both land based and offshore) together can contribute much more than 7.6%.

Potential for offshore wind power

WWF strongly advocates the use of wind power for which there is huge potential. For example, according to the "Assessment of Offshore Wind Energy Resources in the Republic of Ireland and Northern Ireland" conducted by the Department of Public Enterprise in the Republic of Ireland and the Department of Enterprise, Trade and Investment in Northern Ireland, Section 6.0 Practical Resource, page 108, up to 61.88 TWh/year could be generated by offshore wind power (182% of the predicted consumption by 2005).

However, even using much more conservative estimates of reliance on offshore wind power, if 1.65 MW turbines were set at 500m spacing at least 5km from the coast in no more than 20m of water then they could still generate 32% of the predicted electricity consumption by 2005. In these circumstances 7% of NI predicted consumption could be met by the resource available off the coast of NI.

The decreasing costs of offshore wind power

While offshore wind power has often been regarded as prohibitively expensive, recent improvements in the techniques for foundation construction coupled with the continuing capital cost reduction for wind turbines mean offshore wind power has a bright future. The first offshore wind turbines in the UK already generate electricity at approximately 5p per unit and it is anticipated that this cost will fall further - for example future Danish offshore wind farm projects show projected energy costs of 3.5 - 4 p/kWh. By comparison, brown electricity unit prices are in the range 2.2 - 4.5 p per unit, depending on the type of fuel used, efficiency of the plant etc, though the average price is approximately 3.0 p per unit in Northern Ireland.

Job creation opportunities

Increasing investment in renewables also has a significant potential for job creation, so surpassing the UK Government target of 10% of renewables by 2010 could have significant benefits for the local economy.

The employment opportunities offered by increased investment in offshore wind power is likely to be particularly important for companies like Harland and Wolff which already has offshore engineering experience as it could provide additional opportunities for expansion.

According to the European Commission's 1999 report "Wind energy in Europe - the facts".

"One megawatt of wind power installed creates jobs for 15-19 people under present European market conditions".

Further evidence of the potential for job creation comes from a recent analysis by Greenpeace (1999) which showed that over 30,000 new jobs could be created in the UK if the Government committed to a target of 10% of electricity from offshore wind in the next 10 years.

According to the Danish Wind Turbine Manufacturers Association, more people in Denmark are employed in wind energy than in fishing. Research by the New York State energy Office suggested that wind generates 66% more employment than coal pound for pound, watt for watt.

The potential benefits of an all-island approach to energy, offshore wind power in particular

Considering the imminent liberalisation of market and the role of the Trade and Business Development Body it would appear that integrating the development of offshore wind power an an all-Ireland basis would be beneficial in both economic and strategic terms. WWF Northern Ireland therefore supports the preparation of an energy market strategy for Northern Ireland in an all-island and European context, as outlined in section 5.2.2. of the "Programme for Government".

Q. WWF state that they would like to see the Assembly take a lead on this issue. The Northern Ireland Assembly's next electricity contract guarantees15% of electricity will be supplied from renewable sources. Further the Assembly is committed to investigating the potential to site renewable energy turbines within the Stormont estate and research appropriate energy efficiency measures within parliament buildings.

What other measures does the WWF believe the Assembly should take?

A. WWF would like to take this opportunity to commend the efforts made by the Assembly so far in purchasing green electricity, in particular the work of the Assembly Commission.

The Assembly could go further, and as Mr Jim Wells suggested, possibly take a lead by:

n Increasing the percentage of green electricity, until ultimately Stormont, and the rest of the Government estate is 100% powered by non-polluting renewables. Installing wind turbines on the Stormont estate would definitely be a first for a devolved administration and a very visible commitment to the principle of sustainable development and renewable energy. WWF would encourage the Assembly to pursue this option.

n Setting a minimum target of 10% of the electricity consumed in Northern Ireland to be generated by renewable resources by 2010, in line with UK Government targets. WWF would also like to see a Northern Ireland commitment to increase the supply of renewable energy by 2% every year after 2010. Since the UK has not yet set targets specifically for wind power, Northern Ireland could take a lead by setting clear targets for the generation of electricity from wind.

n Targets for a contemporaneous reduction in greenhouse gas emissions (CO2, SO2, CH4 etc) should also be set, and met by this increasing use of renewable resources.

n Auditing its environmental performance on an ongoing basis. We understand the Commission is addressing green issues and appears to be working well, but establishing an Environmental Audit Committee (EAC) could prove to be beneficial for the future environmental management of the Government estate.

n Setting mandatory targets for all government departments and agencies to procure from sustainable sources - for example by ensuring that the percentage of electricity supply from renewable sources increases yearly and setting targets for continuing improvements in efficiency and financial savings (based on baseline study).

n The Assembly can also help to drive the development of the renewable industry in NI by financially supporting the industry. Policy decisions will also play a vital role. For example, if a supplier obligation is established to follow on from NI-NFFO2, then the scope of any subsequent NI-NFFO should be expanded so as to include provision for offshore wind power development, as this could help the development of the offshore wind energy sector. Similarly, allowing NI companies to trade renewable obligations certificates will help ensure there is an economic market for renewably generated electricity.

n Reviewing planning regulations to ensure barriers to renewable technologies are addressed. WWF would like to see the introduction of a planning process for renewables similar to that used in Denmark for wind energy. Each municipality is expected to identify areas within its boundaries where wind farms can be developed. There are many advantages of such a proactive scheme. For example, development can be directed away from sensitive areas; those with an interest in the development of wind energy get a chance to express their opinion: it can save developers the time and expense of searching for areas on which to develop only to have their proposals rejected at the planning stage and the local community and other interested bodies will be aware of and have agreed to the development of wind energy projects in certain areas. The implementation of such a system in Northern Ireland could go some way towards removing many of the planning problems previously experience by renewable projects.

Q. While the potential for renewable energy sources is very promising they have a finite contribution over the next 25 years, estimated at 12% by 2025.

Does WWF recognise the importance of diversity of fuel supply for energy generation in Northern Ireland?

A. WWF supports the diversification of fuel supply, but only in terms of a shift away from fossil fuels to renewable resources.

However, WWF questions the above definition of renewables as "finite". Renewable resources such as wind power or solar power are effectively an infinite source of energy. Furthermore, renewable energy sources have the potential to meet all of the island's demands, for example, offshore wind power alone could supply up to 182% of the projected demand by 2005, so finite would appear to be an inappropriate description in this context.

The question of diversity of fuel supply for energy generation is important. For example, the shift away from coal and oil towards natural gas has already helped to reduce Northern Ireland's level of CO₂ emissions. However WWF is concerned that the argument for diversification of fuel supply for energy may be used to justify the further exploitation of fossil fuels, be they imported, like Orimulsion, or indigenous like the lignite deposits in County Antrim (as referred to in Appendix One - Additional Information).

As referred to in WWFs oral evidence, Orimulsion has been called "the world's filthiest fuel" by Dobson in the Financial Times 1991.

The main problems with Orimulsion are:

(1) It has a very high sulphur content (around 2.7%).

The average sulphur content of coal mined in the UK is below 2% and that of imported coal is 0.8-1.0%.

(2) The ash produced by the burning of Orimulsion is highly toxic.

This is due to the fact that Orimulsion leaves behind an ash comprising mainly metals. Two of the more substantial components are vanadium and nickel. In the burning process the vanadium is converted into vanadium pentoxide, which is highly poisonous to humans and the nickel products created are also toxic and carcinogenic.

According to figures published by BP Bitor who market and distribute Orimulsion, the ash generated from the combustion of Orimulsion consists of over 95% metal compounds (BP Bitor "Orimulsion and the Environment") and substantial quantities of this metal rich ash are likely to be produced. According to figures published by BP Bitor, the quantity of ash produced by a 500MWe power station burning Orimulsion with a load factor of 66% will typically be around 3,000 tons per year. The safe disposal of such large amounts of this potentially toxic ash is a significant problem that will need to be addressed.

WWF also has concerns regarding the environmental impact of the extraction of Orimulsion in the Orinocho belt in Venezuela and its subsequent transportation half way around the world to Northern Ireland. The potential problems associated with a spill of Orimulsion have already been referred to and are another source of concern.

Q. WWF's submission refers to a system of support to ensure that the less mature - and more expensive - renewable technologies are able to compete in the wholesale electricity market.

Could WWF elaborate on this system?

A. The price for renewable energy is higher than the current market price for electricity and a new support mechanism for renewables must reflect this. For example in GB the supplier obligation has been structured to allow suppliers to pay up to 3p/kWh above the base price of electricity for the renewable electricity needed to meet the obligation.

Whilst this will allow some of the lower cost renewables such as onshore wind, landfill gas to be developed it will not be enough for some of the other technologies such as biomass, offshore wind and solar to be developed. WWF is concerned that in GB the low value given to the obligation will mean that the 10% target will be difficult to reach. This problem can be overcome by raising the value of the obligation (increase the 3p) or by banding the obligation (allocating a higher price to a part of the obligation). However this would cause problems if Northern Ireland were to do this unilaterally and it would make it difficult to fit into the rest of the UK.

Given that a banded obligation is unlikely to be feasible alternative methods of supporting the longer term technologies must be found. The capital grants scheme being designed by DTI is one example as is the proposed solar roof programme.

Q. WWF submission advocates higher fuel taxes if the revenue is spent on providing alternatives and cites "various studies" in support of its proposal.

Does the WWF accept that the cost of fuel in Northern Ireland is particularly sensitive issue for businesses given the comparative fuel prices in the Republic of Ireland?

A. Yes, and not only in terms of fossil fuels. Eirtricity supply electricity generated from wind power in ROI and it is cheaper than brown electricity. This contrasts with the position in Northern Ireland where the green electricity available through NIE's eco-energy tariff is more expensive than brown electricity.

We accept that differing fuel taxes across Europe creates problems and are pushing for harmonisation of fuel tax levels across Europe.

One of the studies that demonstrates the support for the principle of green taxation and reinvestment of the revenue generated into renewable technologies is the opinion poll released at the Greenpeace Business Conference in Autumn 2000. This opinion poll showed that 68% of respondents would be happier paying the (then) current fuel tax so long as some of it was spent on " reducing pollution. by investing in public transport and developing green fuels.

Q. Wind Power is the only technology, sufficiently advanced, to make a significant contribution to energy generation in Northern Ireland in the next ten years. Onshore wind energy carries certain environmental considerations that will govern its potential contribution. The development of offshore wind energy will be determined by the suitability of Northern Ireland's coastline.

How can the limitations of the renewable energy development in Northern Ireland be addressed?

A. There is a range of factors which could limit the development of renewable technologies in Northern Ireland, some of which are beyond the scope of WWF's work and expertise, for example, those issues related to the technical capacity of the electricity supply network to deal with additional and dispersed sources feeding into the grid.

WWF recognises that renewable energy developments are not necessarily environmentally benign and they can have some local impacts. These should be balanced with the benefits in terms of emissions. Projects should be sited sensitively and in areas where they will cause least damage to the environment. The case of the proposed wind farm inside the Ox Mountains candidate Special Area of Conservation (SAC) in County Sligo is an example of an insensitively located and inappropriate wind farm proposal.

There is a need for appropriate and reliable Environmental Impact Assessments (EIA) to be carried out for renewable projects, especially those applying for government support.

The criteria for situating wind turbines offshore could be viewed as limiting factors, for example, installation costs for offshore wind turbines, primarily influenced by sea bed depth and distance offshore, wind speed, shipping lanes, cetacean migration routes and so on. Offshore wind farms often pose a greater number of problems than onshore wind farms and these are often more severe in nature than those on land.

Other limiting factors could include the logistical problems that may arise in relation to integration of energy networks and supply chains and the liberalisation of the energy markets.

Future changes in the level of the CCL may also be regarded as a limiting factor, though the future management of the CCL could prove to be a useful tool with which to support the development of the renewable technologies.

As is the case with other technologies, there will be some limiting factors. Despite this WWF is very keen to see an expansion of the role of renewable resources, especially wind power in the future energy policies of the Government of Northern Ireland.

Q. The WFN submission advocates taxation as a means of encouraging consumers to reduce the impact of their energy use.

What specific measures can be taken in Northern Ireland to promote the development of renewable energy sources?

A. WWF believes that the current focus on reducing energy prices to consumers is not compatible with a policy to reduce energy consumption and increase the demand for renewable energy. Taxation can play a part in encouraging energy efficiency and improving the economics of renewable energy.

The CCL is such an instrument and WWF believes that the level of the CCL should be increased over time to ensure that businesses continue to look at ways of reducing the impact of their energy use. WWF would also support the extension of such a measure across all sectors of the economy.

To promote renewable energy development in Northern Ireland adequate support measures must be introduced that build on the success of the NFFO process. Increasing funding for the development and expansion of the renewable technology sector in NI, (for example through the Carbon Trust), is also important.

top

MINUTES OF EVIDENCE

Wednesday 9 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mrs Courtney

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr S Yeager ) Questar

Mr D Healy ) Bord Gáis

1296.

The Chairperson: You are very welcome. We shall ask questions after your submission.

1297.

Mr Yeager: Thank you. My name is Steve Yeager, and I represent Questar Corporation and Bord Gáis. I have with me Declan Healey from Bord Gáis transmission. I am a private consultant; I retired in November after 25 years with Questar and was contracted back to assist its international development.

1298.

Questar is a fully integrated United States energy company with headquarters in Salt Lake City, Utah, worth approximately £1·5 billion. We are involved in exploration, production, transmission, storage, processing, distribution and retail services. We have over 700,000 customers in our distribution system. We currently have 35,000 km of distribution pipes in the ground and 4,000 km of transmission pipes, primarily in the US. We also do a great deal of drilling and exploration in the US and Canada and have leaseholds on approximately 2,000,000 acres of development land.

1299.

Bord Gáis has about 350,000 customers in the Republic and is currently expanding its network. As discussed earlier, it recently announced it would be building a second interconnector for the Dublin market. Questar was originally involved in Northern Ireland in 1995. At that time we applied to the Government for the licence for the Belfast system which Phoenix ultimately received. We made another submission as Questar in March 1999 for development of the Northern Ireland gas market. At that time we were examining a North/South pipeline.

1300.

We have since updated those applications, and we submitted a project to you for which Bord Gáis and Questar have made application to OFREG. It is basically a pipeline from Belfast to Derry, supplying the Coolkeeragh power station in the Derry area. We believe the pipeline would also make gas available to such towns as Ballymena, Ballymoney and Coleraine en route. We also mention a potential second licence in our application for the reinforcement of the existing Northern Ireland market, and we suggest that it be a South/ North interconnector with the Republic of Ireland.

1301.

As I mentioned previously, there is also the matter of potential distribution to towns and communities en route. OFREG has our application, and we are at present in negotiation with it for the licence. We are also in discussions with the Department of Enterprise, Trade and Investment concerning some of the issues discussed earlier. The line to Derry needs some sort of grant, postalisation or additional mechanism to make it economically feasible and commercially viable. We are also in negotiation with Coolkeeragh and believe we are in the final stages of agreeing to a contract with them. That is the current status with the application we have made, and I shall be more than happy to answer any questions.

1302.

Mr Clyde: Is there sufficient demand in Northern Ireland to develop a second interconnector from Scotland combined with a pipeline from Dublin to Belfast?

1303.

Mr Yeager: Yes, we believe there is. The studies referred to indicate a need for additional gas supplies, primarily in the Republic. The power-generation market north of Dublin is driving the interconnector, and there is sufficient demand for that pipeline. In relation to the line to Derry, for a period gas could be taken off the SNIPS system. At some point, additional gas will also be needed for Northern Ireland, and we suggest that reinforcement should occur through a South/North line. There is presently sufficient demand in the Republic, and that will also be true in Northern Ireland over the next few years.

1304.

Mr Wells: What do you believe could be done to increase energy interconnections between Northern Ireland and the European Union?

1305.

Mr Yeager: Northern Ireland now has interconnections to the United Kingdom for gas and electricity. The United Kingdom is tied into mainland Europe, so there are opportunities for gas or electricity to flow from parts of the European Union through the UK to Northern Ireland. The one country of the European Union that does not have that connection is the Republic of Ireland, which would be a natural candidate as far as security of supply and the opportunity to have an interconnector are concerned. The Republic also has an interconnector to Scotland. The real competition and price occurs in moving low-cost gas or electric supplies across transmission systems to the market.

1306.

Dr McDonnell: You stated in your submission that the development of an all-Ireland energy market would bring many benefits to customers North and South. Is the establishment of an all-Ireland energy body necessary? What form do you see it taking?

1307.

Mr Yeager: I am not sure you need a Government body to oversee an all-island energy market. The island, because of its size and ability to interconnect, is one energy market. You need co-operation and co-ordination between the two Governments to ensure you do not have "pancaking" of cost, or entry and exit charges and different pricing mechanisms that do not allow the free flow of energy.

1308.

Dr McDonnell: Let me rephrase the question. What level of co-operation between the two Governments is necessary? It is not appropriate to leave it entirely to the free market. That co-operation is one of the issues taxing this Committee, so how do we structure it? What mechanisms do we need to put in place?

1309.

Mr Yeager: I am not sure I have a simple answer. First, there must be a gas regulator in the Republic. Right now I believe that the electricity regulator communicates with the regulator in Northern Ireland. At that level they can design the best process for them to co-operate. The Department of Enterprise, Trade and Investment and the Department of Public Enterprise must continue to have that co-ordination, but I do not have a crystal ball.

1310.

Dr McDonnell: What part of the United States does Questar operate in?

1311.

Mr Yeager: It operates in Salt Lake City, Utah - in the Rocky Mountains between Denver and California.

1312.

Mr Neeson: The Committee was committed to the development of a North/South pipeline, and we lobbied Minister O'Rourke on the issue. What is the link between Questar and Bord Gáis? The Committee is absolutely committed to the development of a gas pipeline to the north-west. How realistic and hopeful are you of achieving that? How far on are the negotiations with Coolkeeragh Power Ltd, who will obviously be your anchor partner? How dependent is the development of the natural gas pipeline to the north-west on the development of the natural gas pipeline from South to North?

1313.

Mr Yeager: Questar and Bord Gáis have a memorandum of understanding and a contract to pursue the application made to the Office for the Regulation of Electricity and Gas (OFREG). There is currently no financial obligation or interest between us; the partnership is founded strictly on a memorandum of understanding and will move to a contractual basis; it is constantly evolving.

1314.

When you are dealing with a project lacking commercial viability to some degree, you can work through the issues of long-term contracts with a company such as Coolkeeragh Power Ltd. However, as previously mentioned, the project will obviously rely on some sort of funding mechanism to assist that. That is well known and was used in prior cases such as SNIPS. Grant aid must occur in the development of a new gas industry, especially in rural communities. We therefore have that question in our negotiations and discussions with the Government.

1315.

You asked whether the north-west pipeline depends on the South/North interconnector. That is not the case. We are currently seeking a licence for the north-west pipeline, and we anticipate being able to take gas from the current transmission interconnector to Belfast.

1316.

Mr Neeson: Therefore, if you are to commit yourselves to the north-west project, you must do a deal with Premier Transmission Ltd?

1317.

Mr Yeager: That is correct.

1318.

Mr Healy: We have included the South/North pipeline in our licence application, so we are looking for two licences.

1319.

Ms Morrice: Am I right in thinking that you need either a grant or postalisation?

1320.

Mr Yeager: It depends on the size of the grant. Without getting into the details of the information, we have provided all our financial modelling and work we have done on commercial viability - or lack thereof - to the Government.

1321.

Through working with them, I know that they are now analysing all the information and data we have provided to determine the level of grand-aid and/or postalisation necessary and how that might affect current gas and electric customers in the North. I am not yet privy to the completed work, but we have provided them with all the information they need to reach a conclusion and answer that question.

1322.

Ms Morrice: Have you asked for a specific percentage in grant aid?

1323.

Mr Yeager: We have not done so at this point. We want the Government to verify all the data and information we have given them, and we are expecting to hear back. Coolkeeragh has been involved in helping us as it has more experience than we of the electrical side of the business. It has been examining how it may affect us. A number of us are examining what the subsidy - if you want to call it that - might be. However, I cannot give you a firm figure today.

1324.

Ms Morrice: I want to draw a parallel with the building of roads. In effect, you are building a road for gas to travel along. The Government pay for road-building projects. However, because your company will profit from the project, it is important that you invest your own capital. I want to understand postalisation in that context, since the gas will obviously cross the border. While we can understand postalisation in administrative terms in Northern Ireland, how could it work outside Northern Ireland and beyond the border? Would similar prices be required?

1325.

Mr Yeager: There are two ways to look at that. If it goes as far as the border, the question whether the price is included in the project will depend on whoever pays for the pipeline. If it is included in the project, should that cost be postalised in the North, or should the pricing mechanism change in the Republic for that piece of pipeline? An advantage of working with Bord Gáis is that we can get through some of those issues. It is an excellent question, however, and one that I cannot fully answer for you today.

1326.

Ms Morrice: I assume postalisation needs a Government subsidy of some sort. Will you be asking the Irish Government to subsidise you as well?

1327.

Mr Yeager: I cannot speak for Bord Gáis and their shareholders, but we need to discuss arrangements of that type.

1328.

Mrs Courtney: I met Steve Yeager and Declan Healy in Derry a few days ago with Coolkeeragh Power Ltd and the City Council. We are very keen to see this matter progress. At the moment your application is for the licence to build the gas pipeline. How quickly do you need a response to that licence application? Premier Transmission Ltd said that the proposed power station in Derry was to be anchored with a long-term power purchase arrangement. When that arrangement was no longer on offer, they did not consider the power station to be commercially or economically viable. What are your views? Do you also need that long-term power purchase arrangement?

1329.

Mr Yeager: Yes. It is absolutely essential that we have some form of long-term contract with Coolkeeragh. That is why we are working so closely with them. There are time constraints on the project, since Coolkeeragh Power Ltd must be in involved in the operation on certain dates. The dates we have been given fall in the first quarter of 2004. In our projection, the gas line must be in place and delivering gas by mid November. We have put together a programme we believe can meet those technical construction requirements. Our technical programme does not incorporate the time frame associated with funding mechanisms. However, if approvals are in place and funding is available, it is technically possible for us to meet the time constraints that the ESB and Coolkeeragh have placed on the particular project. The Government and OFREG are also aware of those dates.

1330.

Mrs Courtney: I have one more question about postalisation and the amount of grant required to make the scheme economically viable. Ms Morrice might have the answer. What percentage would need to be subsidised?

1331.

Mr Yeager: We used 35% in some of the modelling we did with EU grants, since that figure had been used in the past. We have provided all that information to the Department of Enterprise, Trade and Investment so it can carry out an analysis and, if additional funding is required, it can decide what mechanism would be appropriate and what the above-grant might be.

1332.

Dr O'Hagan: What are your views on security of supply on the island of Ireland and on the proposed extent of the Corrib Field in particular?

1333.

Mr Yeager: Security of supply is very important, and the island lacks that. We have examined more mature gas systems throughout the world, and our situation is quite unique. All the countries we have examined have been most keen to ensure they have multiple pipelines so they are able to provide the product to customers and businesses if there is damage to one.

1334.

From our perspective, it is very important for the island, on both sides of the border, to have reinforcement ensuring security of supply. One way to do that would be to develop the South/North pipeline so you have access to the supply. The interconnection would also offer additional potential supplies of gas to the island. Currently, the gas is coming primarily from the UK and Europe through one of the other interconnectors.

1335.

I believe that Marathon Oil Company is developing the Kinsale field south of Cork for gas storage. Enterprise Oil Ltd, Statoil Ltd and others are also developing off the west coast in the Corrib Field, down to the Porcupine Basin, and recently off Donegal. If you had a network built for security of supply, and you had the interconnection, Corrib and Kinsale gas in storage could potentially reach the market in addition to that coming from the EU. Security of supply is good for the existing customer base, but it will also create interconnection, allowing more gas opportunity for those acquiring it.

1336.

The Chairperson: I examined the maps you submitted showing the distribution of gas in Ireland and the proposed links, and it matched a copy of a map sent by the Department here. It reminded me of the rail network in Ireland, for apart from the loop from Derry to Belfast there is a big blank in the north-west. Have you any thoughts or plans for routes from Dublin through Monaghan, Omagh, Strabane, Letterkenny, and Derry?

1337.

Mr Healy: With our ring main, the second interconnector, and the associated additional capacity that will become available, we are actively looking into the development of areas that do not currently get gas. Commercial sensitivity is associated with these developments, but we are examining a number of options, and have not excluded any possibility thus far.

1338.

The Chairperson: Such a development also came to mind because of the recent exploration licence in the Cavan/Fermanagh area that might procure gas. Have you had any general thoughts about that?

1339.

Mr Healy: Yes.

1340.

Mr Yeager: Our primary focus at the moment, however, is on getting the most efficient transmission pipeline to Derry and Coolkeeragh while ensuring it is close enough to distribute to communities along the route. There are other areas of interest, though.

1341.

Ms Morrice: I asked you about the potential for postalisation on the Irish side of the border. I am interested in Bord Gáis's response.

1342.

Mr Healy: The mechanism in place in the Republic is based on a draft directive provided by the regulator, who at the moment is the Minister. The Brattle Report mentioned has proposals in it that take cognisance of the situation in Ireland, and its basic recommendations include postalisation. It breaks it down to what is termed an "Irish entry, postalised exit". There are two charges; you pay for getting your gas into the system and for getting it out. Payment is calculated according to where the gas is put in. If you choose to take gas from the Corrib Field, you must pay a certain price, and if you take your gas from the interconnector it will be another price. If it came through the Scotland to Northern Ireland pipeline (SNIP) a third price could apply, assuming there is an all-Ireland market. However, if the postalisation exit charge is to apply for the entire island, as it will everywhere in the South, all customers would pay the same exit fee. An understanding of the competitive nature associated with the different fields and different supplies has been taken into account.

1343.

Ms Morrice: How could that work in an all-Ireland context? You could not regulate if the gas were taken with Northern Ireland as the entry point?

1344.

Mr Healy: I am not sure I understand the question.

1345.

Ms Morrice: The prices for getting in and out are different. How could you regulate the prices for entering Northern Ireland and going to the South?

1346.

Mr Healy: We do not regulate it; the regulator does. The regulatory regimes north and south of the border could support the operation of an all-Ireland market on the premise of postalisation.

1347.

Mr Yeager: That has not been ferreted out. It comes back to the question you raised; you need some sort of sole regulator or Ministry to do that. The first step is to get the regulators talking and understanding what is in the best interest of the island, potentially moving forward with all-island postalisation. It could go to that. I am not speaking for Bord Gáis on that issue, but if you carry it far enough. that may be where you end up. The Bord Gáis system is basically postalised now, but it is the only owner in the Republic.

1348.

The Chairperson: Thank you for your submission and for the way you dealt with the questions. We have follow-up written questions we should like to send to you.

1349.

Mr Yeager: We shall be happy to respond. Thank you very much.

ADDENDUM TO MINUTES OF EVIDENCE
BORD GÁIS

Q. In your submission you claim that if both electricity and gas supply are to be interconnected on an all-Ireland basis, the integrated operation of both utility networks will produce additional benefits. Could you please elaborate on this point?

A. Benefits would include:

n Significant enhancement of security of supply.

n Improved network operational efficiencies.

n Greater optimisation of infrastructure developments.

n Improvements in flexibility of energy trading.

n Increased competition with associated cost savings to customers.

Q. The growing energy cost differential with Great Britain and the Republic of Ireland is a major threat to Northern Ireland's economic competitiveness. Your proposal for the province involves two transmission pipelines, a cross border pipeline and a pipeline from Belfast to Derry. Will this development sufficiently counteract Northern Ireland's problem of high-energy prices?

A. The DETI are currently reviewing our submission and assessing the impact of our proposals on the electricity & gas customers. We are confident that our proposals will have a positive impact on Northern Ireland's problem of high energy prices.

Q. In you opinion what social and economic benefits would you hope to gain from extending the natural gas option beyond the presently licenced area?

A. Questar-BGE experience is such that the extension of the gas network brings a number of benefits, such as:

n Increased industrial growth & a rise in employment numbers.

n Natural gas is the most environmentally friendly of all fossil fuels and requires no refining and minimal processing before use. Comprising more than 95% pure methane, natural gas emits significantly less carbon dioxide than other fuels: up to 30% less than oil and 50% less than coal, for the same energy input.

n Allowing the gas network to expand will assist in reducing urban congestion as more areas of Northern Ireland will become suitable for industrial development.

Q. In your appraisal of Alternative Proposed Arrangements for Meeting the Projected Demands for Natural Gas in the island of Ireland you examined three options. Could you please outline these options and the findings of the investigation?

The three options considered were:

n Paralleling the existing BGE Interconnector together with a South-North pipeline.

n Paralleling the existing BGE Interconnector together with SNIPS reinforcement.

n Paralleling the existing SNIPS Interconnector together with a North-South link line.

The lowest cost option for importing gas into Ireland and providing a South-North link proves to be paralleling the existing BGE Interconnector together with a South-North pipeline. The option of paralleling the existing SNIPS Interconnector together with a North-South link line is more expensive than paralleling the existing BGE Interconnector together with a South-North pipeline.

Paralleling the existing BGE Interconnector together with SNIPS reinforcement without a South-North pipeline does not offer the benefits of security of supply nor facilitate the development of an all-island market.

The finding were borne out by the independent Shannon-McManus study.

Q. Could you please explain further you recommendation that the future development of an all-Ireland gas supply network should be undertaken on a phased incremental basis? What benefits would you hope to gain from this approach?

Phased development is efficient in that it ensures that capital expenditure is only incurred as and when required, thereby ensuring that costs to users are kept as low as possible. This approach will ensure the development of an efficient gas network.

top

MINUTES OF EVIDENCE

Wednesday 9 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mrs Courtney

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr T L de Winne,
Company Secretary ) Biofuels Northern Ireland Ltd

1350.

The Chairperson: Good morning.

1351.

Mr de Winne: Good morning. Biofuels Northern Ireland Ltd is a newly formed company that will manufacture and distribute a recently discovered fuel in the United Kingdom. I am an environmental activist, otherwise known as a troublemaker, and I make no apology for that. I am here against my better judgement - originally I was not going to come. I have seen many reports and consultations that have ended up in many other reports, and the majority of them are sitting on library shelves unread, unnoticed and certainly without having had any action taken regarding their recommendations.

1352.

In parallel with this consultation, we have the Department of Enterprise, Trade and Investment's energy future taskforce, which is run by John McMullan.

1353.

The Department of Trade and Industry decided to go its own way and impose a solution on Northern Ireland. That Department got John McMullan to form a Northern Ireland foresight group. The group held a meeting on 11 December 2000, which I attended. The usual people were there, and the usual things were said. We are still waiting for the report, and that group was doing the same thing as we are this afternoon.

1354.

The Energy Division of the Department of Enterprise, Trade and Investment is conducting an all-Ireland energy market survey. The Institute of Practitioners in Advertising (IPA) consultants who were brought in to do the task - no doubt at great expense - will have their conference on 6-7 June, where they will be examining the same subject that we are now.

1355.

As for 'Vision 2010', does someone know something that I do not? What will happen in 2011? Nothing. Why are we looking only 10 years hence? The foresight group looks to 2040. We shall probably still all be here in 10 years. In 2040 we shall not be here, but our children will be. I am an activist because, although my children may not inherit the earth, they will inherit half a bio-diesel factory on Queen's Island. I consider I have done a damn sight more than most for the environment.

1356.

In tandem with the Northern Ireland foresight group, there is that of the Department of Trade and Industry, which is called the Cleaner Vehicles Taskforce. That body is an alternative fuels group. It issued a 267-page report in January 2000 dismissing alternative fuels in two paragraphs. I and others made representations to Her Majesty's Government. I went to see the Chief Secretary to the Treasury, Stephen Timms MP, in October, and as a result of that meeting, the Department of the Environment, Transport and the Regions and the Department of Trade and Industry issued the Green Fuels Challenge. In December, those Departments held a joint conference in London, as a result of which bio-diesel - which is what we were pushing for - got a 20-pence-per-litre tax break with effect from next April. I was a bit cheesed off, for I have enough tanks in Belfast to start making bio-diesel today - which I am doing.

1357.

None of those groups are reporting to the Sustainable Development Commission, which was appointed by the Prime Minister. Brian Hanna of Belfast City Council is the representative from Northern Ireland. Have any members here spoken to Mr Hanna about sustainability? Is there anyone here from the Ministry of Agriculture, Fisheries and Food, or the Agriculture and Rural Development Committee?

1358.

The Chairperson: This is not the Agriculture and Rural Development Committee.

1359.

Mr de Winne: I am aware of that, but are there any members here from that Committee? They are number one in the energy field, as we shall see. I asked to be sent a copy of the 'Vision 2010' energy action plan. I scanned through it and found that about 30% of it was jargon, buzzwords, in-phrases, hype or spin - it was lacking in its objective of communication. The document should have been rejected, and it should have been written in plain English. Twenty per cent of it is concerned with the economic complexities that will benefit commerce, but not the taxpayers of Northern Ireland about whom we are talking. Ten percent of the document was framed on good reason, and 30% was related to gas.

1360.

I surfed the Internet to find information about gas, but I found nothing on the Department of Enterprise, Trade and Investment's site. I found a site from the United States Energy Information Administration that featured the 'International Energy Annual 1999'. That journal says that proven reserves in the UK work out at 8·2 years' supply.

1361.

We have eight years' gas supply left, so why is there always such a preoccupation with it? We in Northern Ireland are importing the gas to use, but there is only eight years' supply left. Check with the Department of Trade and Industry; I did. I sent an email to the Department and asked, "Is this right?" The following morning I was concerned, and I rang the Department of Trade and Industry's statistics section, once again asking if it was right? "Oh, yes. That is right," said the other person, "We gave them the figures; there are eight years' worth of proven reserves left." I can give you the figures if you want, but I shall not waste your time. I then received an email reply from the Department of Trade and Investment's oil and gas directorate. We have eight years' proven supply in the UK at the current rate of consumption, 12 years if you take into account probables, 16 years if you take into account possibles, 18 years if you add on potentials, and we think that there are 26 years' supply left yet undiscovered, but which might exist. Is that the sort of scenario on which we should be basing a sustainable economy?

1362.

The three essentials of a sustainable economy are people, money and energy. In Northern Ireland we have many good people. We have money coming out of our ears. If we can afford £150 million for Coolkeeragh, £200 million for the development of the centre of Belfast, and heaven knows what for the D5 development, there is money that can be used, but it must be used properly.

1363.

The Chairperson: Could I stop you for a second? We are very constrained by time.

1364.

Mr de Winne: I am trying to rush the presentation.

1365.

The Chairperson: We have a number of questions we should like to ask you. If you eat into your time, we shall not have a chance to do so.

1366.

Mr de Winne: I am sorry. I did not receive a brief stating exactly why you wanted me to come here, so I have prepared a presentation.

1367.

The Chairperson: Could you summarise your presentation? We shall have no time to ask you any questions, and we should like to be able to do so.

1368.

Mr de Winne: I shall summarise. As pointed out, energy should essentially be from renewable sources. We have plenty of scope for that in the Province, but we do not have the competence and the will to activate that potential. I want to refer to NFFO1 and NFFO2 (non-fossil fuels obligations). The results on NFFO2 are deplorable, for only 18% of the projected energy capacity was achieved. Eighteen percent is a terrible result. Ninety-four percent of the target was achieved on NFFO1.

1369.

The main difference is that on NFFO1 the rate being paid was 6p per kilowatt-hour, while on NFFO2 it was 4p per hour. It was no longer economically viable. As the gentleman before me said, they need a boost, not necessarily in capital grants, but certainly in assistance with paying the overdraft necessary for private ventures.

1370.

We have a great deal of potential in the Province, whose contribution could be enormous, the greatest potential being in tidal barrage. In the last report on renewable energy resources in Northern Ireland, that was glossed over. It stated that there is no short-term potential for energy from tidal barrage schemes in Northern Ireland. I disagree strongly with that, for we have Lough Foyle, Strangford Lough and Carlingford Lough. The energy potential of tidal barrage is 800,000 megawatts of generation capacity. At the moment, our installed capacity is 1,400 megawatts. There is ample energy if we have the will to find it.

1371.

Incidentally, legislation is what would be required to equip houses with solar energy. Energy conservation is already legislated for, but there are no grants available. You can get a grant retrospectively for putting in loft insulation, but for new buildings there is no additional cash. It will have to be imposed on developers before you will get solar heating or heat recovery systems with heat pumps. Everything in this area was done 20, 30 or 40 years ago.

1372.

Mr Clyde: How do you view proposals to set up combined heat and power plants to burn lignite?

1373.

Mr de Winne: Technically that is feasible, but seen objectively you are reverting to fossil fuels, of which there is a finite supply. Environmentally, it means taking out a large area of ground - opencast mining along the whole length of Lough Neagh and down into County Tyrone. Lignite itself is a very dirty fuel, midway between peat and coal. The energy content is somewhere around 6-7 kilowatt-hours per kilogram. There is a great deal of residual matter, and the emissions would contain a large quantity of sulphur. It would be better to go to gasworks. In environmental terms, there is the enormous amount of ground that would have to be dug out to get the lignite, which is interspersed with layers of clay. I do not look on it as a viable project as far as Northern Ireland is concerned.

1374.

Mr Wells: Let us move on to another unusual fuel, namely, Orimulsion. There is a proposal to convert Kilroot to Orimulsion. What are your views on that proposal?

1375.

Mr de Winne: I am not a technical expert on emulsions, but I have looked at them with regard to transport fuels, and they are quite viable. They reduce the heat of combustion, but that heat is reduced by the conversion of water, which is suspended in the fuel, to steam.

1376.

In transport engines it works very well indeed, since it keeps the cylinder head cool and gives you an extra thrust down the length of the piston travel. I am not certain what it does in turbines, but I can imagine the same result; I consider it quite feasible.

1377.

This is a technical resource, but the necessary surfactant that keeps the water emulsified in the oil fuel is missing. I do not think that we have got one that is sufficiently effective to stop the water separating out. I can be corrected on that.

1378.

Ms Morrice: One argument about the launch into the renewable energy area is security of supply. To counter that argument, you must look at the different types. Obviously we could look at them all in renewable and non-renewable terms. I want to talk about fossil fuels. Which ones are acceptable as a source of diversity while we are transforming to 100% renewable sources of energy?

1379.

Mr de Winne: I said to my wife the other day that the oil is running out, and she said I have been saying that for 30 years. I am still waiting to be proved wrong. We have limited supplies of gas, oil and coal; we shall have to revert to renewable sources. Diversity is 100% necessary. Ecologists object and say it will all lead to monoculture, and they are absolutely right. Other ecologists say it will destroy the environment, but I argue that the situation can be treated sympathetically.

1380.

The ratio within the renewables field is reasonably and fairly laid down in the Department of Economic Development/Northern Ireland Electricity report published in June 1999 called 'Renewable Energy in the Millennium: The Northern Ireland Potential'. That is, roughly speaking, 60 megawatts available from land-based wind. We have achieved 25% of that already. I believe there is more than that.

1381.

There is no limit to offshore wind, but it has considerable expense and technological obstructions. You must build an island before you put a windmill on top - or a sewage plant, come to that. I should rather go for reed beds onshore, allowing the solid waste to set. I should even go so far as to burn it in a pyrolysis plant to produce the electricity, or go for anaerobic digestion and produce methane, which is a very valuable fuel.

1382.

Biomass has 27 megawatts of potential. I argue with that figure, for since 1939 - believe it or not - we have lost 400,000 acres of land. If you check your Northern Ireland statistics for the year 1939, and then check the figures for 1975 and today, you will find we have lost 180,000 hectares of land under cultivation. If you bring that land, which is mainly lying idle, back under cultivation, you will find that approximately 50 megawatts can be attributable to biomass.

1383.

There are another five megawatts from biogas and 64 potential megawatts from energy derived from waste. There are six megawatts from hydropower - again, I question that figure, for I believe there is more, bearing in mind that 150 years ago we had something like 3,500 water mills in Ulster - the old province of Ulster, not the current six counties.

1384.

Tidal barrage has the biggest promise - some 800,000 megawatts. The Committee is looking at international co-operation. Carlingford and Foyle, two of the biggest schemes, cross the border. Split the costs and the proceeds with the ESB, and you are still left with 400,000 megawatts, which is some 25 times our existing capacity. The potential is absolutely immense.

1385.

Ecologists complain that it will ruin the environment; that is absolute rubbish. Go up and have a look at La Rance. La Rance is a tidal barrage in Brittany, which was set up using concrete caissons. They made a bit of a bodge of it when they built the place. They simply dumped them there, put a turbine in the middle and said they could produce electricity. A more sympathetic way of doing it would be to take a leaf out of the books of the Dutch, who are very well versed in building polder dams. Those are built up gradually, and the environment adapts itself to the new configuration.

1386.

Even at La Rance, the environment in the dam itself had improved within three years, and there was a wider diversity of pisciculture in the dam than before it was put there. The environment within the dam is protected against extra-high tides and neap tides. It was eventually deemed to be environmentally beneficial, as well as generating a great deal of electricity.

1387.

Mrs Courtney: I have one or two simple questions. You talked about progress on renewable energy in the Republic of Ireland. How do you feel they have done compared with Northern Ireland? What do you feel would be a reasonable and viable timetable for phasing renewable energy into Northern Ireland?

1388.

Mr de Winne: I must admit that I have not studied the South all that much. What I do know is that the contacts I have in the field there are just as frustrated as we are in the North. They are suffering from bureaucratic incompetence, the dragging of heels and wanting reports - and they are as far behind as the UK. However, there is much stronger green interest in the South - and I am not just talking about the flag. There is more interest in the environment there, but they are still fighting in a bowl of porridge.

1389.

The time scale will depend on whom you put on the job. The segregation and splitting of responsibilities between Departments - for there are usually three or four involved - will always be a hindrance. I recommend that energy be under one Department and one person. Under the present regime it could take ages. We have taken eight years to complete a fraction of the NFFO scheme, mainly because of bureaucracy. If we wish to wait for another year or eight years that is fine.

1390.

I have done something about it. I latched onto bio-diesel two years ago and found that the Treasury had imposed the same tax as on ultra-low sulphur diesel - at that time it was standard diesel. I decided to do something about it and made a positive nuisance of myself across the water with the Department of the Environment, Transport, and the Regions, the Department of Trade and Industry, Her Majesty's Customs and Excise and the Treasury. I was invited to see the Treasury Secretary - mainly to shut me up. That is why I was involved in the green fuels process, and that is why the Chancellor made his 20p reduction in tax.

1391.

I produce bio-diesel, and the important thing is that last year it did not exist. I can run my car better than with petro-diesel. I made it myself from used vegetable oil. I have not asked for travelling expenses, but if you have any spare oil in the canteen I shall take some with me.

1392.

I have a plant in the Titanic Quarter of Belfast. It is only a pilot operation, for we cannot make it commercially until the tax break next April. However, we are producing bio-diesel, which will be used. I have carried out trials with Translink. They were very gracious. They loaned me a 22-year-old bus that had done over 4,000,000 miles, and we achieved a 41% reduction in particulate emissions - smoke. They were overjoyed with it, and they are now looking at introducing a 20% mix of bio-diesel into all their fuel in Northern Ireland. Logistically, it would probably be better if we introduced it into Citybus.

1393.

This is what I mean by saying that I am an unreasonable person. A reasonable person adapts himself to society - according to George Bernard Shaw, if my memory serves me correctly. An unreasonable person adapts society to himself. I recognised what a valuable fuel bio-diesel is. It is a renewable energy resource, and it compensates for the fact that the Government have no sustainable transport fuel policy. They did not have one then, and they do not have one now. I did something about that, and I am doing something about it now. Please follow suit.

1394.

Dr O'Hagan: How does the process work?

1395.

Mr de Winne: Beautifully - I shall describe the process I went through. The farmer sowed rapeseed and harvested the crop. The seed was taken off and pressed to make rapeseed oil. The oil was processed to take out the tocopherols and other valuable products, declared fit for human consumption, put into a can and sold to a restaurant down at a breaker's yard at Balloo, Bangor.

1396.

I took it from him when he had finished cooking chips and so on. The oil went into a vat and was boiled to be anhydrous, or totally water-free. It was then allowed to react with a catalyst, which is just caustic soda - the processing is the secret - and methanol. Thereafter it was split into two parts, one being the glycerol - the heavy waxes and other substances one does not want gumming up one's engine. The bio-diesel came out and had to be washed, treated, neutralised and put into this Coke bottle made from what is known as PET, making it quite clear so one can see how pure the fuel is.

1397.

The advantages of the process are that it involves the recycling of what would be a waste product, and at last the wonderful British Government have woken up to the importance of recycling. Had I not taken the used oil it would have been put back into the human food chain via cattle feed with the possibility that the BSE prion would go from hamburgers made from beef into the fat and then the animal feed and back into the human food chain. That revolting thought has finally been recognised. We turn it into bio-diesel, and that is the plus side.

1398.

The negative aspect is that the process requires methanol, which I can currently buy from ICI, who make it from fossil fuels, or - at an enormous cost - I can get bio-ethanol made from sugarcane in Brazil, where 45% of road transport runs on it. I was in Brazil working for Shorts when those involved approached the World Bank for the loan.

1399.

Within three years, I should like to see someone in Northern Ireland producing 800 tonnes of bio-ethanol a year for me. I could then use that to make bio-diesel in a totally renewable fashion. I am using methanol, but I should prefer not to. It is only a fraction of the energy required to power the average motor vehicle. Therefore I should like bio-ethanol or bio-methanol to be high on the agenda.

1400.

The Chairperson: Thank you for your submission. The Committee may have some follow-up questions on which it will write to you.

addendum to minutes of evidence
BIOFUELS NORTHERN IRELAND LTD

Q. What benefits would be gained from your recommendation to establish a dedicated body to implement measures to increase renewable energy throughout Northern Ireland?

A.The proposal was to establish a dedicated body to control all aspects of energy in Northern Ireland.

Northern Ireland has no energy security whatsoever, having virtually no existing energy resources to call upon. The oak, birch and fir forests are gone; the Coalisland, Tyrone and Annagher coal seams worked out and only the environmentally embarrassing lignite of Lough Neagh and small portions of peat remain.

A balance, therefore, has to be drawn between the need to import energy - whilst it is made available to us - and the need to achieve maximum self-sufficiency. This has proved impossible, from the existing administrative structure.

Energy, and this includes all petroleum fuels, electricity, renewable and gas, is fragmented between all of the Northern Ireland departments. Under another hat comes the essential factor of energy conservation, and the disorder which exists in the grant aid system is simply horrific! This is why nothing much is happening.

Despite Mr Blair's promise of a "joined-up government", lack of inter-departmental co-operation is still rife, caused by the hierarchical structure. Communication must first go up, then across, then down the pecking order. Too many impediments, and too much temptation to exercise inter-departmental rivalry, territorialism and misplaced authority. Too many people who don't know that they are talking about, nor the ramifications of their decisions - if they make any.

Energy - the life-blood of our economy - is suffering from maladministration. A proactive state of mind does not exist - it is too easy to escape responsibility.

Targets for energy generation from renewables have been set. To date, the progress has been sadly lacking. Whose responsibility is this? Answer - nobody. Everybody can shrug off the responsibility to somebody else. Accountability is required.

A single body, covering all aspects of both imported energy and the generation from all available renewable resources, together with conservation and the capability of allocating available financial resources would have the advantages of concentration of purpose, stability and continuity, giving it the ability to build up staff experience and attract expertise.

Given a dedicated body, achievable targets would be set, finances allocated, schedules drawn up and kept to, proactive steps taken to involve third parties and, where necessary, liaison with other departments undertaken. Project managers would be given area responsibilities, budgets and personal targets to achieve; responsibility would be placed upon individual shoulders, not collectively.

In fact, it all sounds suspiciously like running an efficient business.

Q. Your submission states that the DED/NIE document Renewable Energy in the Millennium will require a dedicated body to implement the measures. Could you expand this point and indicate possible membership of the body?

A. Energy considerations are currently undertaken by a number of different departments - DARD (Renewables), Finance and DETI (IRTU and Energy Branch).

This fragmentation has resulted in a disjointed approach to the problem of achieving energy security within Northern Ireland and consequential inefficiency in actually achieving progress.

I cited the example of the NI NFFO 1 and 2 schemes, where results were woefully short of targets, particularly for NFFO 2. The increased complexity of bids requirements and administration, as well as the reduced price paid for the electricity produced acted as discouragement.

Further investigation - unless it has been done and not made known - would be useful in order to determine the inhibiting factors, so avoiding future mistakes.

An economy depends on three essential factors - people, money and energy. We do not have any existing fossil energy resources in Northern Ireland - we are totally dependent on imported energy. Therefore, our future economy will depend on the degree of self-sufficiency we are to achieve. The generation of energy from existing resources is therefore of paramount importance, and these resources and the efforts to harness them will require a co-ordinated administration, not the hotch-potch departmentalisation which currently exists.

The objective should be simple - maximise the generation of energy from existing resources within the allocated budget.

The remit should cover the areas of energy conservation, building control (both new building and retrofits), transport (vehicles per se; traffic control and transport efficiency), electricity supply from fossil fuels, gas supply from fossil fuels, energy from renewables energy from waste and internal financial allocation and cost accounting.

It should from a sector of the governmental administrative structure, with its own Minister, using staff and resources re-allocation from other departments currently dealing with energy and aspects of energy.

This is the "dedicated body" - not another ad hoc advisory panel, resented by many and heeded by few. This is what happens now.

Q. Could you please expand on your work with the European Business Council for a Sustainable Energy Future?

A. e5 stands for Energy, Environment, Economy, Employment and Efficiency.

It is a group of European businesses, set up in 1996 to lobby for environmentally based progress. Based in The Netherlands, it is a centralised source of information and representation at Brussels. Membership includes AEG, Calor Gas Refrigeration, Danfoss, Deutsche Telekom, etc, but the UK is under-represented.

The e5 Sustainable Energy Charter may be found on www.e5.org/pages/sec.htm.

I was invited to become an honorary member last year (despite the fact that financials considerations preclude my physical presence - I am totally self-funded) as advisor on transport environmental and energy matters. This is done by electronic mail.

Q. You state that the DTI Foresight group looks forward forty years not just nine and that this is a wasteful use of resources. Could you please expand on this?

A. Two bodies of people, both considering the same subject but not telling each other the results of their studies is wasteful of resources. The references is to "connection between the two initiatives", not the timespan.

Q. The DED/NIE document 'Renewable Energy in the Millennium - the Northern Ireland Potential' sets a target of energy generation from renewable sources of 7.6% by 2010. Do you consider this target sufficiently ambitious?

A. Based on achievement of objectives over the past eight years since the inception of NFFO 1 and the 1¼% progress to date (as against the 7.6%) renewables target set nine years hence), this is a quite hopeless task.

In this context, the full biodiesel production capacity of Biofuels Northern Ireland Ltd is anticipated to be reached in mid-2004. When this is achieves, transport fuel equivalent to 50,000 MwHE (50 gwHE) will be produced annually.

This amounts to 8.7% of the 2010 target figure, as opposed to the 16.4% achieved by the combined forces of all NI government departments over the past eight years.

It will be achieved despite being rejected for financial assistance from LEDU, IDB, DETI and IRTU, and then being turned down for industrial accommodation only a week before the Mackie site was purchased by IDB in the high hopes that somebody could be found to occupy it. A more commercially realistic approach is required by government agencies, and better use made of the slender financial resources available. I say that as a long-suffering taxpayer.

Timescale

I did not response to this point, due to the fact that there are currently too many non-technical and non-financial obstacles in the way. For example, the Vision 2010 report was written two years ago; the Renewable Energy in the Millennium the same. Then there will be this report, then consideration by the Assembly, then a summary of actions, followed by further consultations - all are valid excuses for not doing very much.

Given the time lag imposed by the existing bureaucracy (nothing has followed the 1996 NI NFFO 2 scheme), I can't see much happening within the next three years.

However, given the dynamics of a fresh approach, a re-organised infrastructure (with a three month deadline, unlike the pathetically organised LEDU/IDB merger), allocation of finance and a commercial approach, things could be moving in time for planting next year.

And the right people, of course.

Kind regards

TERRY DE WINNE

addendum to minutes of evidence
BIOFUELS NORTHERN IRELAND LTD

Supplementary Answer

With regret, I do not appear to have fully answered Jane Morrice's question with regard to fossil fuels. I would like to add the following to my response:-

As regards fossil fuels, I have already indicated that our gas supply is severely limited. It is also dependent on the willingness of suppliers to export their own dwindling resources. It cannot, therefore, be considered as forming part of our energy security.

As regards oil, estimates stand at 80 years proven supply at today's consumption rate, or 40 years at the current global rate of increase of 2% per annum. This does not take into account the desire of OPEC to maintain income by restricting supplies, which is inevitable and has already been executed.

However, we have become an oil-based economy and there is no short term alternative, particularly as regards transport.

In the mid-term, we have to go back to the future. All our old gasworks have been demolished, and yet these were an efficient means of extracting the last ounce of benefit, from what is potentially a highly polluting energy resource. More modern, and therefore cleaner, plant have been developed, capable of producing smokeless fuel, liquid fuels for transport (which China heavily depends on), heating gas and a valuable range of chemical by-products.

It is far from an ideal solution but, pending full implementation of a coherent renewables programme, it is a cost effective and realistic option, with reserves extending to a possible 300 years' supply.

TERRY DE WINNE

top

MINUTES OF EVIDENCE

Wednesday 9 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mrs Courtney

Ms Morrice

Dr A McDonnell

Dr O'Hagan

Mr Wells

Witnesses:

Mr I Murray, Director ) Royal Institution of

Mr R Scott, Member ) Chartered Surveyors

1401.

The Chairperson: You are very welcome. You may make a short summary of your written submission before Members pose their questions. We are constrained by time and Committee rules.

1402.

Mr Murray: I thank the Committee for inviting us here today. I am the director of the Royal Institution of Chartered Surveyors (RICS). Prior to taking up my current position, I worked in the agriculture sector for 30 years, the last 15 of which I was the chief executive of the Ulster Agricultural Organisation Society. I was one of the instigators of the Fivemiletown biogas project which you heard about on 24 April, and I was involved in several biomass studies.

1403.

The purpose of the RICS is not to promote any individual project, but to put forward policies that we believe to be in the public interest, hence our presence here today. The promotion and support of renewable energy is urgently required. Electricity prices in Northern Ireland are exceptionally high, and we import all our fossil fuels to generate it. We also believe that our green image is being damaged by the increasing pollution of our inland waterways, which do so much to enhance our environment and tourism industry. Concerns were recently expressed thrugh the media about the Foyle and Bann systems, in addition to the Erne and the Blackwater systems.

1404.

The rural economy is in crisis therefore farmers, and others employed in the countryside, need to find alternative sources of income. A balanced and properly researched approach to renewable energy systems could create that income while at the same time benefiting the environment and the economy of the whole of the North of Ireland by reducing the outflow of money spent on fossil fuels, reducing energy costs, and revitalising our waterways and countryside.

1405.

Mr Scott: Good morning; thank you for inviting me here. I am from a land management background, therefore I am not an expert on energy policy or the details of bioenergy. I am, however, very aware of the real problem faced by the rural economy - the agriculture and tourism sectors - as highlighted recently. There is potential in trying to reutilise resources through some form of energy production. I have experience of establishing a wind farm at Bessy Bell in west Tyrone; I have also been involved in a small biomass project.

1406.

Two things are happening at the moment. First, a rapidly increasing amount of timber is being cut down in Northern Ireland's forests. A considerable residue resource is available which could pump-prime a biomass energy system. Secondly, some excellent research work has been undertaken by the Department of Agriculture at Castle Archdale and Loughgall. If you have not already done so, I hope that you will talk to Malcolm Dawson who is internationally recognised for his work on those projects.

1407.

Dr O'Hagan: Nobody could disagree with what you have said in your submission and your additional document, including the section on the environmental waste management process of anaerobic digestion and its benefits. You highlighted the agricultural, environmental, economic and commercial benefits of this process, therefore why is it not gaining greater currency in society? Why is the issue of renewable energy and resources not being taken more seriously by the Government, policy makers and others ? What types of incentives are necessary to do this? On a wider issue, what will be the impact of President Bush's recent decision to scrap, more or less entirely, the Kyoto treaty?

1408.

Mr Scott: One hopes that this was not President Bush's last word on the subject. The comparatively low price of oil is perhaps holding back the development of such alternative energy sources. There is no doubt that nothing is more convenient than lifting the telephone and ordering more oil. Frankly, my experience of making a biomass central-heating plant work has shown me that huge effort is required. However, the trend for fossil fuels is at a rising price. There is increasing awareness of the problems caused by CO₂ emissions, et cetera. Frankly, the process is taking time, but I feel that there will be increased interest in the alternatives as the price of oil rises.

1409.

Dr O'Hagan: So economics will ultimately decide.

1410.

Mr Scott: Indeed. The market always wins.

1411.

Mrs Courtney: You rightly mentioned in your initial submission that the rural economy of Northern Ireland is in crisis. What gains would you expect for rural Northern Ireland from the development of renewable electricity? What action would you like to see being taken to ensure that Northern Ireland plays a major role in the UK and European renewable energy markets?

1412.

Mr Murray: Biogas and biomass development will benefit rural Northern Ireland, partly through job creation and also through alternative land use. There has been a definite decline in agriculture, and land could be used to grow biomass as a crop. The use of biogas through anaerobic digestion makes efficient use of waste such as slurry, and the by-product is odourless. River pollution would be almost completely eliminated. Food wastes which are not being utilised at present and which, in some cases, are dumped in the countryside could also be put to more efficient use. We should find ourselves with an improving environment; it would encourage tourism, and we would promote what we call "technical tourism" - people coming to see those innovative concepts in the countryside.

1413.

Mrs Courtney: You mentioned that these projects could help the farmer to gain alternative means of income. We recently met representatives of the biomass and biofuels industries. It would obviously cost quite a lot to set up such a project in the countryside therefore a farmer would probably not be able to undertake such a scheme independently. To make this activity viable, a grant system will be needed. Would you recommend that funding be made more readily available?

1414.

Mr Scott: Yes, I am afraid I would. You can appreciate, from a farmer's perspective, that if he receives money, either from the sale of cattle or sheep or through subsidies, he at least has some sort of income from his land. If he turns his land over to energy crops, he will have to wait four years or so before there is a return, therefore he would need to have a financial incentive or help to tide him over. It is basically a "chicken and egg" situation, whereby farmers will not be willing to take the plunge and cover their land with willows if they are not confident that there will be a market for the product. You will not find someone ready to invest in a processing plant until he is reasonably confident of the raw material to service it. The two elements must work concurrently.

1415.

There is one scheme in which John Gilliland has been successful in developing an on-farm energy system. That success is getting more publicity and there is more awareness of what he has achieved. It is a relatively small-scale operation, and it is not, by any means, the solution to Northern Ireland's energy problem. Although it could make a significant contribution to an alternative energy strategy, it would have to be pump-primed.

1416.

Ms Morrice: I congratulate you on the tremendous work that you are doing to push this issue forward. You cover a wide range of areas, and it is valuable to look at the different methods of alternative renewable energy.

1417.

We have examined the energy potential in farming, biomass, construction, solar power, planning, offshore wind energy, areas that we have looked at. Have you considered the energy producing potential of sewage? In North Down, we are about to spend £25 million on a new sewage disposal plant. There are huge arguments, ongoing for years, over where that plant should be put, because nobody wants it in their backyard. What is the potential of locating the new sewage plant offshore, using the human waste to generate energy, and putting a wind platform on top as well? You have mentioned techno-tourism - everyone would come to see that. What is your opinion?

1418.

Mr Murray: They certainly would come to see it, but I do not imagine that the sea fishermen would appreciate such a project. I am not an authority on energy; it is not my background. Our role is to promote policy on the adoption of renewable energies.

1419.

There is a scheme in the docklands of London, which the Committee may wish to see, in which human sewage is used. I am unsure about the complete basis of it, but I have visited the plant. However, the Northern Ireland Centre for Energy Research and Technology at the University of Ulster will be able to put the Committee in contact with that plant.

1420.

It is a massive plant, which takes in huge volumes of human sewage from London and creates energy. The sewage is compressed and then incinerated, and the water purified. It is said that the water in London may have been through the sewerage system seven times before it is drunk. That may be a system that this Committee would like to investigate.

1421.

Ms Morrice: Is it true that, since animal slurry can be turned into energy, there should be no reason why the same cannot be possible with human sewage?

1422.

Mr Murray: Absolutely not. In Herning in Denmark, which is known as the Green City, they avail of domestic waste and, to a degree, human sewage. When I worked on the Fivemiletown project, we did not think that the concept of putting sewage into a biogas plant, then putting it on land, would be very popular. However, human sewage is put directly on the land in some places.

1423.

Ms Morrice: On the question of alternative sources of energy, what would be needed to encourage people to build south facing houses with built-in solar panels? How could we promote this concept?

1424.

Mr Murray: It would probably boil down to offering some form of financial incentive. I am not a scientist, but with regard to wind and wave energy, we have some of the highest winds in western Europe, and extraordinary currents in places like Strangford Lough, so there must be a technology that can be developed to utilise these sources.

1425.

Ms Morrice: It is a great opportunity for us.

1426.

Mr Scott: We need to focus on the natural advantages of Northern Ireland and those are wind and water, rather than solar energy. Energy crops have potential - we can grow these materials so much faster than most other areas in Europe. Solar power would come lower in my list for obvious reasons, yet on a cloudy day solar panels can raise the ambient temperature, even in Northern Ireland. I suspect that the economics of solar power are not as viable as they would be in relation to wind.

1427.

Mr Neeson: The discussion about the Fivemiletown project was fascinating, and I hope that it does get off the ground and becomes a success. For me, the most impressive section in your brochure on provision is that which deals with waste management. In east Antrim, where I come from, the idea of using Magheramorne as a landfill site is once again raising its head. How viable is the concept of using waste as energy? To what extent will this require the co-operation of the district councils, particularly in regard to the separation of waste, et cetera?

1428.

Mr Murray: The idea of converting waste to energy is very viable, especially the conversion of waste through anaerobic digestion. Initial finance would be needed to construct the plant. Thereafter, the plants are sustainable and the gate fees would also be lower than the cost of landfill tax. People will be encouraged to deliver that type of waste to the biogas plant.

1429.

With regard to separating domestic waste, there is a mindset that anything and everything should go into the bin, which will then emptied. This attitude will have to change. In some parts of the Continent each house has three waste bins, each of which is collected on a different week. District councils will most certainly have to examine the need for segregating waste. Obviously there will be considerable additional costs, and I would have to leave that to you, the politicians, to decide how best that might be done. I am certain that it will happen.

1430.

Mr Neeson: In the document you refer to "a number of plants". Northern Ireland is such a small area that, if we were to be commercially successful in this field, the only viable option would be to create one plant to service the whole region.

1431.

Mr Murray: In Denmark, which I have visited four times, the policy seems to be to have a number of smaller plants, rather than one large plant. That is probably based on the concept of using these plants for district heating - my colleague is interested in that idea. Sadly, Northern Ireland lacks district-heating schemes. The operation of such a plant in a small rural town offers the opportunity to provide district-heating schemes to its new housing developments or even existing developments.

1432.

Mr Scott: That is the case. District heating systems operate on a small scale and must be local. Energy crops, forest and sawmill residues are hauled in as fuel, and it is not ideal to haul these low-grade bulky products over too large a distance. The Scandinavian countries have done very well in developing these small plants. My colleague and I have seen them in operation in Denmark and Finland, and the growing forest estate of Northern Ireland creates the potential for having similar plants here. The dynamics are changing and if that coincides with increased energy costs, there would be potential for a localised venture.

1433.

I agree with you that Northern Ireland would need only one incinerator for domestic waste, and the economics and the technology are such that there would need to be a fairly major investment in such a plant. The conversion of forest residues and biomass into energy would be a much smaller operation.

1434.

Mr Clyde: Would it be viable to cultivate willows on district council-owned land, which has formerly been used as a landfill site, and is therefore not suitable for agricultural use? Could this land be used to site a unit, similar to that at Enniskillen College of Agriculture, where energy could be generated and used to heat swimming pools or fuel leisure centres?

1435.

Mr Scott: Yes, however I am not sure what you mean by "viable". It would be viable to run a district heating system, through which water is heated and piped to the local swimming pool, office central heating systems, or wherever it is required. I am not sure about the viability of gasification, which has been tested by Enniskillen College of Agriculture. They have been converting willow into electricity to heat the college, but they have had many problems. I am not sure how well the technology there has developed. It should be kept simple - put the hot water into a pipe and pump it round - that is very straightforward.

1436.

The Chairperson: Thank you for your submission and for answering the questions. We may ask for written answers to further questions.

addendum to minutes of evidence
ROYAL INSTITUTE OF CHARTERED SURVEYORS IN NI

Q. In Northern Ireland building regulations include energy efficiency standards. Should these be raised, for example to similar levels of building regulations mandated in Scandinavia?

What impact would this have for both the construction industry and domestic energy consumers in Northern Ireland?

A. If Northern Ireland Building regulations sought to increase energy efficiency standards to Scandinavian levels it would have a major impact on the construction industry and the rural economy because the method of house construction would have to change i.e., houses would have to be of timber construction rather than the conventional concrete block or brick currently used.

This would require a greater outflow of money arising from the need to import much larger volumes of construction quality timber and would at the same time impact on the rural economy in terms of the local manufacture of cement, concrete products, and bricks which utilise local natural resources.

Currently new build accounts for only 1% of housing so to improve energy efficiency the other 99% should be targeted with a greater implementation and endorsement of the Standard Assessment Procedure or SAP rating by those involved in the industry. Basically every house should have a SAP rating. SAP ranges from 0-100 and in Northern Ireland the range is 55-75 whereas in Sweden the range is 80-90.

Q. In you submission, you state that there is tremendous potential to develop sources of renewable energy in the province. You gave the example of the anaerobic digestion of agriculture slurries and food processing wastes. Could you briefly outline the main points of each and their merits and disadvantages?

A. In the submission reference to agriculture slurries and food processing wastes should not be read as two different raw materials. It is necessary to have a blend of both for the system to maximise gas production while at the same time having the correct moisture content to allow the pumping mechanism to function properly. I believe the merits to be well documented in the submission. The only possible disadvantage could be the increase in heavy vehicle movements and the exhaust gases produced. This could be overcome in the future if the lorries were in fact fuelled by compressed bio-gas.

Q. You also recommended the gasification of either forest residues, after felling, or biomass crops specifically grown for the purpose of renewable energy production. Again, could you please outline what you perceive to be the major advantages and disadvantages?

A. This question was fully covered by Mr Scott but he did wish to emphasise that he was not specifically recommending gasification as there had been a number of problems associated with this process. He had a preference for simpler systems i.e. direct combustion and was also strongly in favour of district heating systems.

Q. What incentives would you suggest are necessary to support the expansion of and awareness of renewable energy sources?

A. In order to raise awareness it is a case of utilising the best possible experts to address suitably located conferences on all the various renewable options. These experts should also be given the opportunity to address MLA's and relevant Government departments.

Regarding incentives to expand renewable energy sources this is an area that needs researching. Currently wind is the major renewable in use but consideration should be given to others including bio-mass and bio-gas. The type of incentive will vary depending on the renewal source e.g. a bio-gas plant may need grant assistance towards the cost of construction whereas to expand bio-mass production will require an annual production grant payable to farmers for at least 3-4 years after planting. An added incentive adopted by the environmentally conscious Scandinavians is to tax fossil fuels.

Q. In your opinion, what measures are necessary to enable renewable power plants to obtain construction finance?

A. For renewable energy plants to obtain construction finance they must be able to demonstrate; Long-term Contract for sales of energy; Long-term contracts for the supply of raw materials e.g. waste or bio-mass; Efficient Operation; Financial Sustainability and benefit to the environment.

Q. What action would you like to see taken to ensure that Northern Ireland plays a major role in the renewables market in the UK and in Europe?

A. Northern Ireland is on the Western sea board of the European Union and as a result has some of the strongest winds, roughest seas, and tidal falls/rises which all offer the opportunity to be harnessed to produce energy. Its proximity to the Gulf Stream also gives climatic conditions for timber growth rates well in excess of those achieved on mainland Europe making it ideal for both bio-mass production and availability of forest residues. It also has available large volumes of agricultural slurries and food processing waste which are ideal for anaerobic digestion.

These attributes therefore make Northern Ireland an ideal place to lead research into these forms of renewable energy and to further encourage energy from both wind and Anaerobic digestion where the technology has been well proven elsewhere.

Support for the Fivemiletown bio-gas project and the construction of a demonstration CHP project in the West of the province would also contribute greatly to raising awareness.

Q. In your opinion, what gains would you expect for rural Northern Ireland from developing renewable electricity in Northern Ireland?

A. In our opinion we would hope that Northern Ireland main gain would be energy and in particular electricity at prices equal to or lower than those in the rest of Europe which would result in a major boost for industry.

The use of renewables would also improve our balance of payments with a reduced outflow for the purchase of fossil fuels and greatly enhance our "green and clean" image thus increasing tourism.

The introduction of energy crops could offer alternative enterprises to our traditional grass based/food production oriented and hard pressed agricultural economy.

Q. What action would you like to see taken by the Committee to raise awareness of energy efficiency and encourage take up of energy efficiency measures?

A. Raising awareness of energy efficiency and the uptake of measures should be actioned by the relevant Government department with the Construction Service (DFP) promoting greater application of the SAP's rating to residential property and IRTU or its successor (DETI) promoting efficiency within industry.

Q. What organisation or body would you recommend be responsible to undertake targeted marketing campaigns aimed at increasing the acceptance of renewable energy in public institutions?

A. The new agency which will incorporate IDB, LEDU and IRTU would, in our opinion, be the appropriate body to fulfil this role.

A. In our submission we referred to renewable energy programmes as opposed to energy efficiency programmes. We believe increased employment will arise in a number of ways.

Firstly employment will be created through the plant construction processes, secondly plant operatives and management will be required, thirdly greater levels of employment will be required in the planting, harvesting and processing of bio-mass and forest residues and finally if the ultimate aim of lower energy prices is achieved the Northern Ireland industry will be more competitive and therefore expand with the textile industry in particular returning to its former glory.

An additional employment opportunity would be "technology-tourism" but this would only be achieved with urgent action that allowed Northern Ireland to lead the renewables field with innovative and forward thinking projects.

ADDENDUM TO MINUTES OF EVIDENCE
PREMIER POWER LIMITED

16 May 2001

Q. In your Submission, you refer to the agreement reached with NIE which incorporates many of the potential sources of price reductions identified by the Director General in his report "tackling the high cost of generation". What reductions are you specifically referring to?

Could you please explain what the merits are of a financial 'buy out' of existing contracts?

A. The agreement reached with NIE included the following:

n a lump sum buy out of the forecast profit associated with the long term contracts at Ballylumford. Because BG received this lump sum "up front" they were willing to accept much less than what the potential profit would have been up to year 2010, even when the interest charges associated with financing the lump sum is included. In this way the cost of the long term contracts to the consumer are reduced;

n construction of a £200m combined cycle gas turbine power station which replaces 600 mega watts of the existing plant. The new power station is much more efficient than the old and indeed would use approximately 40% less fuel, a saving of about £30m per annum (a further saving which is passed through to the consumer via NIE). Although rises in gas prices have increases gas based electricity prices it has also increased the savings provided by the new power station, and

n two 120 megawatt machines at Ballylumford released to supply the "eligible" market from May 2000. The cost of power from the machines would be less than NIE's Bulk Supply Tariff and consequently should offer savings to the Industrial & commercial customers and facilitate the introduction of a competitive market.

The DG had asked for proposals which tackled the legacy of the long term contracts, introduced high efficiency new technology and assisted the establishment of the competition market. The agreement reached between Premier Power and NIE met all the DG's requirements.

Q. Could you please explain your opinion on the current "buy out" arrangements associated with the contract at Ballylumford?

A. In our opinion the financing of the "buy out" arrangements could be improved by legislation which enables the cost to be recovered directly from customers, separate from the rest of NIE's business. This provides more security on loan repayments for the lenders and therefore the interest rate could be reduced and the term of the loan extended - more savings for the consumer.

Q. You claim in your statement that further potential savings may be achievable if the contract price for gas used by Ballylumford Power Station is reduced from its current price under the contract to a "spot" market price and also financed as part of any legislative "buy out" arrangements. Could you please elaborate on this suggestion?

A. In a similar way to the contract Buy Out at Ballylumford, Centrica, the gas supplier, may accept less returns from their supply contract if there is an up front payment instead of relying on recovering that income over the term of the contract. This could provide savings to the consumer, depending on the cost of financing, in the form of a reduced gas price over the contract term.

Q. According to your submission, the current interim settlement arrangements discourage new entrants to supply electricity because independent generators are exposed to higher costs than plants contracted to the NIE. What action would you like to see taken to address this issue?

A. We would like to see a review of the market arrangements with the objective of ensuring that generators have equal costs whether they are all contracted to NIE or operated independently. The review should also focus on alignment of the arrangements with interconnected systems to ensure that a generator in an interconnected system is not advantaged over one in the NI system.

Q. Could you briefly outline the main points of the 'Settlement Agreements' which according to your submission, will ensure the PPLs (Premier Power Limited) independent generation and new entrant generators can not only compete effectively on a clear and level playing field, but also offer consistent and market reflective pricing?

A. The main changes in order of magnitude are:

n Generators should be adequately compensated for providing services that benefit all system users, for example two shifting (the process of taking a machine off the system overnight when the load is lower and returning it to service in the morning).

n All generators require a certain level of outages each year to maintain reliability and efficiency, matters which are fundamental to a maintanance of low power prices. For those outages, generators should have access to substitute power at cost.

n For accepted technical reasons, it is impossible to precisely match power production to prior nominations, there should be a practical tolerance band introduced where no cost is incurred by the generator.

Q. Is the establishment of an all Ireland energy body necessary to reap the benefits of an 'Island of Ireland' electricity market?

A. We believe there should be intimate co-operation on an all Ireland basis with regard to energy market development. We would not be prescriptive on the form this co-operation should take.

Q. In your opinion, what measures are necessary to ensure that all ancillary services (e.g. spinning reserves) are open to free competition?

A. We believe that each ancillary service should be clearly identified, priced and open to competition under the prevailing market arrangements.

Q. What incentives would you suggest are necessary to establish more cost reflective transmission and generation location signalling?

A. A new customer or generator should be encouraged to re-use any spare transmission system capacity, instead of locating in an area that would require investment in new transmission capacity.

For further information or clarification please contact:

PADDY LARKIN
Business Planning Manager
Premier Power Limited

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MINUTES OF EVIDENCE

Wednesday 9 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mrs Courtney

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr P Dixon,
Chief Executive Officer ) Phoenix Natural Gas

Mr N Shaw,
Vice President Ireland ) UK Downstream
BG Group plc.

1482.

The Chairperson: You are very welcome. Could you summarise your submission before members ask their questions.

1483.

Mr Dixon: Phoenix Natural Gas is a private energy company. It was set up in 1996 and has a licence to make gas available in the Greater Belfast area.

1484.

Other than the £15 million grant awarded by the European Regional Development Fund (ERDF) to build the main transmission lines to Belfast, our shareholders, at their own risk, fund the investment with over £190 million. If gas does not flow through the pipelines, no revenue can be generated to repay the investment.

1485.

Phoenix currently has on its payroll over 600 people. One hundred and fifty of these support the sale, connection and maintenance of gas to new and existing customers, and one-third of the 450 is constructing the new gas network.

1486.

Phoenix announced last week that McNicholl's Constructions had been awarded a new £100 million contract to continue the expansion of gas across the Greater Belfast area. All these jobs are local; they have a long-term nature and are totally dependent on the continued success of converting homes and businesses to gas power.

1487.

The Phoenix investment has fuelled significant employment across a wide skills base. We estimate that the new natural gas industry in Northern Ireland now employs over 2000 people, with over 400 local companies actively involved in delivering gas solutions to home owners and businesses. Many of these are new jobs and we are re-training people to provide them with new skills. More importantly, we are creating new opportunities for young people, employees in the construction sector and areas where employment is needed most.

1488.

The domestic natural gas customer has enjoyed significant energy bill savings coupled with a commitment to keep prices stable until the end of October 2003. The average domestic gas customer spends around £7·50 per week on central heating, hot water and at least one other product, such as a fire or a cooker. However, it is the most vulnerable customers - the fuel poor - who are arguably benefiting the most. The recent Beechmount initiative in west Belfast, which has been extended to Willowfield in east Belfast, is delivering running costs averaging just over £6 per week. We welcome the strong support of the Housing Executive, with which we work closely to ensure that its tenants, many of whom live in areas of social deprivation, put fuel poverty permanently in the past, as quickly as possible.

1489.

In the industrial and commercial sector, there has been an estimated total saving of over £6 million in the past year alone. The availability of natural gas improved the attractiveness of the region as a target for inward investment by energy-dependent businesses. It creates opportunities for prosperity that did not exist before. In recognition of that, the Government have sought an exemption of the climate change levy (CCL) for Northern Ireland. The European Commission is currently considering this, and we await their decision.

1490.

We are all aware of Belfast's poor reputation for air quality. The introduction of gas to the area has already removed 4,000 tonnes of sulphur and 106,000 tonnes of carbon dioxide annually from the air that we breathe. That level of sulphur dioxide would pollute a volume of air 1km deep that would reach from Belfast to Coleraine in the north and to Enniskillen in the west.

1491.

The real challenge for Phoenix Natural Gas is in its growth targets. We forecast that our customer base will increase by 15,000 new customers this year, bringing the total to 35,000. It must rise to 50,000 by the end of 2002. There is no certainty to this growth, and without it there will be no increase in revenue. There are no parachutes for that private investment. Sufficient regulations are already enshrined in the Phoenix Natural Gas licence to protect customers. As with all legislation, there must be a balance between commercial freedom, growth and customer protection. The current arrangements amply meet those requirements, whether in the area of levels of customer service, price, social obligations or the installation of gas into homes or businesses.

1492.

In recognition of this, gas safety and the robustness of the industry are our primary focus. To this end, we have created and implemented many leading edge initiatives, such as our qualified installer and retailer network, our "dial before you dig" policy and our Safety Sam initiative, which has been presented to over 25,000 school children. That, alongside our professional relationships with the enforcing agencies such as the Health and Safety Commission (HSC) and the Confederation for the Registration of Gas Installers (CORGI), amply demonstrates our commitment to safety. Natural gas underpins a modern society. This year alone it will act as a significant stimulus to the local economy. Phoenix Natural Gas and its new customers will spend around £70 million laying new pipes and converting houses to natural gas.

1493.

In closing, we, in Phoenix Natural Gas, have been heartened by the very positive support that we have received, and continue to receive, from the Department of Enterprise, Trade and Investment. The value of that to the international investor should not be underestimated. We are well on our way to delivering a state-of-the-art energy network, which will stimulate competition, as we have already seen. It will strengthen the economic backbone of the Northern Ireland economy while targeting social need in the process.

1494.

Dr O'Hagan: I have questions involving energy efficiency and natural gas. What action would you like the Committee, the Department and the Assembly to take to raise awareness of energy efficiency, and to encourage energy efficiency measures to be taken? My second question relates more to my constituency. The Craigavon area would probably have been one of the first to benefit from the North-South gas pipeline, if it had gone ahead. Are there any plans to extend your grid outside the Greater Belfast area to include the Craigavon area?

1495.

Mr Dixon: First, let us look at what can be done to promote energy efficiency. The Housing Executive is publishing the findings of a house condition survey this year. It would be very useful if the Committee were to scrutinise these findings, and create policies to implement the recommendations of the report. That is a cornerstone for energy efficiency.

1496.

In addition, the pilot schemes at Beechmount and Willowfield, illustrate that such simple tasks as changing from an electric cooker to gas, can result in significant savings. The installation of a gas fire can eliminate fuel poverty immediately. People can enjoy heat and comfort at a price that they can control.

1497.

More visible support needs to be shown for the excellent work of the Energy Savings Trust (EST). We support the EST in every scheme that it carries out. We do that for a commercial reason: it pays us dividends. A commitment to giving the right advice on energy efficiency is enshrined in our licence, and that is why our staff is trained to City and Guilds level. We need to work on a micro level.

1498.

Mr Shaw: The EST is a very important body. It has been given additional funds by the Government, and is seen to be the key organisation in driving improvements in energy efficiency across the United Kingdom. It will be useful for the Committee to understand its role. As far as expansion is concerned, Phoenix Natural Gas has a defined legal licence area, outside of which it is not permitted to operate. The licence area, which was defined in 1996, was the focus of a good deal of public scrutiny and discussion. It was concentrated on Greater Belfast because that area was regarded as having the biggest market. Any application by Phoenix Gas to extend its current licence area may be considered in the future.

1499.

The issue over the last year has been the fact that Phoenix Natural Gas is a very young company in which a good deal of capital has been invested. I represent the BG Group's shareholding in Phoenix Natural Gas, and we wanted the company to concentrate on building its volumes in Greater Belfast.

1500.

Mr Dixon referred in his introduction to targets that have been set. Phoenix Natural Gas has performed fantastically in the last year; it is now really delivering the customer numbers in its licence area. I want that to continue, and perhaps we can then look at how the network can be extended. At present, the effort is quite rightly focused on delivering the numbers. The company has a very ambitious growth plan.

1501.

Mr Dixon: On a personal level, I support the use of gas - I am a gas man - therefore, I want to see gas being available everywhere. As Mr Shaw said, this depends on the creation of the right conditions.

1502.

Mrs Courtney: Mr Dixon, you will know that we launched a campaign in Derry to get gas to the north-west. Obviously the benefits of gas are considerable, and we recognised that from the beginning. There is a disparity between high domestic energy costs in Northern Ireland and cheaper costs in the rest of the EU. What action would you like the Assembly or the regulator to take?

1503.

Mr Dixon: Energy prices in Northern Ireland will always be under pressure, because of economies of scale. Great Britain has a gas network that is, in some cases, over 50 years old - it is mature, and it has been paid for. On the other hand, we have to pay to get the gas to Northern Ireland, in the first place, from the national transmission system in Great Britain.

1504.

Secondly, we have a brand new infrastructure, and we have quite a small customer base to cover. There will always be a price to pay for introducing a new fuel. However, the costs must be weighed up against what the new fuel contributes to the economy, and the way in which it benefits the customers. People focus on the price of fuels, but when we are installing gas products in homes and business premises for the first time, we find that our customers are moving towards more energy-efficient products. There has been a 25% to 30% improvement in the efficiency of central heating systems in the domestic sector, and that offsets the additional cost.

1505.

However, cost is only one aspect to be considered. Phoenix Natural Gas, the General Consumer Council (GCC) and the Office for the Regulation of Electricity and Gas (OFREG) have been surprised to note that energy consumption in the domestic, industrial and commercial sectors of Northern Ireland is significantly lower than in the rest of Great Britain. This remains to be the case, even when climate differences and other factors are taken into account.

1506.

Ms Morrice: Your presentation was very compelling and indicative of your socially responsible attitude to energy savings. I have to ask the question that my constituents would ask, which might be outside the specific energy remit. You mentioned the "dial before you dig" policy; does this mean that you telephone the Road Service to let them know that you are about to dig so that you can work together to make sure that the road is properly re-surfaced after you have finished?

1507.

Mr Dixon: There has been a recent problem which was reported by the press. We were disappointed by the Road Service's approach - we work very closely with it and other enforcement agencies, and we have an excellent safety record. I went to see Gregory Campbell on the day after the very visible press coverage of the issue, which dated back to 12 months earlier. We discussed ways in which the matter could be progressed.

1508.

Every company has guidelines within which to work, and we believe that we adhere to those. We were prosecuted following that incident because, although we had met the guidelines, we had not adhered to the letter of the law contained in the New Roads and Streetworks Act 1991. It is very difficult for any utility, including the Water Service, NIE, BT and us, to adhere strictly to the law. We felt slightly let down because we had operated within the guidelines.

1509.

On the "dial before you dig" policy, we had empty gas pipes under the road for a long time. Many utilities and construction employees still think that the pipes are empty therefore they will strike the mains supply when digging. We offer a free service as part of which we provide maps and information CDs to detail our whole network. If someone telephones us and says that they are about to dig a hole, we go out and mark out where our pipes are on the road in order to prevent workers from hitting the pipes and damaging our network because that costs us and them money.

1510.

More importantly, we are trying to avoid causing the customer any inconvenience. The "dial before you dig" scheme has reduced the strikes in our network by about 70% in the last 12 months, therefore it has been a successful initiative. Our main aim now is to work more closely with the Roads Service in order to overcome some of the teething problems. As a road user, I understand that digging up the roads causes people much difficulty. Drivers do not like having to wait in queues, especially in warm weather.

1511.

This year alone, Phoenix Natural Gas will be installing 270 to 280 kilometres of pipe in the ground, connecting 15,000 new customers. With an infrastructure of this size, it is inevitable that there will be problems, but our key aim is to overcome these issues. It is also important to review processes, in cases where there have been lapses, for example, where the road has not been restored to its proper state.

1512.

Ms Morrice: We are often called upon to demonstrate joined-up Government, but joined-up industry and Government is just as important. Many people tell me that roads are dug up one day, but work does not take place again until six weeks later. There seems to be a lack of co-ordination in this respect.

1513.

Mr Dixon: Yes, absolutely. It is a problem, because different demands drive different requirements. However, we are the first utility to have joined-up utility work. Recently, on a number of new developments, we have been able to dig one trench to accommodate ourselves, as well as electricity and water. That sounds like it could be done all the time, but it is quite difficult. We have excellent relationships with NIE and BT. Where possible, we foster that in order to overcome problems. It is never going to be easy for the people on the opposite end when we dig up the road.

1514.

Ms Morrice: But you will try?

1515.

Mr Dixon: We try every day. Maybe if we had all our customers now we might not try as hard. We have 25,000 customers and, by the end of this year, we aim to have 35,000. If we upset a lot of people along the way, the likelihood of us hitting that target is much reduced. There is a commercial reason for us to try and reduce the pain caused by digging up the roads.

1516.

Mr Neeson: You mentioned the savings in Northern Ireland. How do natural gas prices in Northern Ireland compare to those in the rest of the United Kingdom and the Republic of Ireland? In view of recent events, how do you see the natural gas industry developing on the island of Ireland?

1517.

Mr Dixon: Natural gas is more expensive in Northern Ireland than in Great Britain, because you have a new system and you have had to bring gas here. In Great Britain there is a mature industry which is being paid for over many years. In Northern Ireland you have a very small industry, which has to be paid for.

1518.

You have to look at price against what people are paying. People in Northern Ireland are using significantly less energy in the form of gas for central heating and hot water than in Great Britain. That is anywhere between 20% and 30%. That is significant. Also, homes here are well insulated, which increases the benefit. Altogether, people are actually paying about the same. They cancel each other out.

1519.

Mr Shaw: Let us take a very long-term view. Gas is an underpinning of most modern economies. It is a relatively new product here. In time, that will grow. Phoenix will deliver in Belfast. There are some issues that have to be resolved, and we have talked about them. It is also growing in the Republic. It is still a relatively young fuel there as well, although not as young as it is here. It will grow. Whether there will be a truly competitive, integrated all-Ireland market is an open question.

1520.

There are quite a few hurdles to be crossed. That is a vision. As you know, the Government here and the Government in the South have employed a firm of consultants to look at the barriers to that happening. They are presenting their conclusions on 6 and 7 June. It will be quite interesting to see what they have concluded is necessary to make this happen. It will happen. It is a question of when.

1521.

The Chairperson: Time has caught up with us. We have more questions, which we would like you to respond to in writing, so that we can use them in our deliberations. Thank you.

ADDENDUM TO MINUTES OF EVIDENCE
phoenix natural gas

Q. Could you please elaborate on the domestic form of natural gas CHP that according to your submission is currently being developed and aims to target the market within two years?

A. The Minigen system basically takes CHP technology into the home. A module, little bigger than a conventional gas boiler, creates - heat, hot water and electric for the home needs. It also has the ability to spill electric into the local grid. It is feasible that this technology will be ready for the market in two years. In a nutshell, if available, it will have the potential to deliver lower electricity bills for domestic consumers.

Q. What incentives would you recommend are necessary to lower average energy consumption?

A. Apart from well-insulated homes, central heating systems should be designed and installed to a high specification, including the use of energy efficient controls. Further, ensuring that energy efficient boilers are installed - such as combi boilers, condensing boilers (these boilers and systems can be at least 30% more efficient than oil boilers) and where possible, installing boilers in the house rather than outside. In a nutshell promote the Energy Savings Trust message to every homeowner, tenant and landlord.

Q. Could you elaborate on Phoenix's licensing regime and the customer protection that this provides?

A. Phoenix has a licence to make gas available to the majority of households and businesses in the greater Belfast area. The availability of gas has been accelerated to meet demand with areas such as Bangor and Newtownards getting gas at least 5 years ahead of schedule.

The customer protection within the License includes;

Phoenix has a duty to promote:-

n Energy efficiency

n Provide special services for the elderly, blind and deaf (Minicom System and maintain an Energycare Register)

n Provide a 24 hour emergency service

n Liaise with General Consumer Council (independent body representing interests of gas consumers)

n Consult with the Regulator and the GCC on domestic gas selling prices

n Agree and Publish Standards of Customer Service

- Telephone answering

- Customer correspondence

- Customer Complaints

- Requests for Connection

- Restoration of Supply due to Failure

- Meter reading.

Q. In your opinion, what can be done to increase energy interconnections between Northern Ireland and other grid systems such as those in the Republic of Ireland, Great Britain and the European Union?

A. The Northern Ireland gas network is already connected to both Great Britain, via the Scotland to Northern Ireland Pipeline and to Europe, via the UK-Belgium interconnector. Currently there is no link to the network in the Republic of Ireland. A South-North pipeline between the Republic of Ireland and Northern Ireland would connect all three networks. There needs to be sufficient energy load between the two locations to make the project commercially viable. Any shortfall in projected revenues for any such development would require EU funding and support from both the UK and Irish Government in terms of funding or regulatory agreement.

Q. According to your submission, natural gas has the best safety record of all fuels. What, in your opinion, can be done to ensure that this high level of safety is maintained and increased?

A. Further government support for the T&EA and CITB for the funding for the re-training and ongoing skills enhancement of plumbers and qualified and accredited gas installers. In addition, Corgi and the HSE play a key statutory role as the enforcing agencies in ensuring that standards are met and maintained. Both these organisations would benefit from an increase in on the ground manpower and therefore direct financial support would assist them in delivering this.

In addition, gas has brought regulation, in terms of installation standards, which are enshrined in law to an industry that previously had none - anyone can install an oil boiler in anyone's home or business. This gap in the oil sector should be bridged urgently.

Q. What incentives would you like to see the Assembly take to encourage the development of a network of local businesses in order to exploit the opportunities of this new fuel?

A. Phoenix has already encouraged over 400 companies to make the most of the gas opportunity. We estimate that customers converting to gas this year will spend around £40 million in doing so. We would ask the Committee to recognise the Gas Industry as a significant future employer and treat it like the Technology and Manufacturing industries, ensuring that new and existing companies involved in it attract funds for growth, expansion, training and investment.

Q. In your opinion, what social and economic benefits would you hope to gain from extending the natural gas option beyond the present licensed area?

A. The availability of natural gas in the Greater Belfast area has stimulated significant competition in the local energy market for all sectors of the market.

In addition, it has delivered significant ongoing energy savings for industrial, commercial and domestic customers. It is proven that the availability of natural gas attracts energy dependant industries to the region it also delivers stable energy prices for all users. The introduction of natural gas has also injected a significant amount of cash into the local economy with over £70 million being spent by Phoenix and its customers this year alone to make gas available and make the change over to gas.

The gas industry, to date, has created around 2,000 local jobs in approximately 400 companies.

In addition, the environment has benefited. The introduction of gas to the area has already removed 4,000 tonnes of sulphur and 106,000 tonnes of carbon dioxide annually. This level of sulphur dioxide would pollute a volume of air, one kilometre deep, which would reach from Belfast north to Coleraine and west to Enniskillen.

But the biggest social benefit is that gas has the potential to eradicate fuel poverty. This is already being delivered in Greater Belfast. A significant step towards this is the gas only policy adopted by the NIHE, the initiatives being piloted in both Beechmount and Willowfield and the delivery of the government's new Warm Homes initiative.

Q. What justifications do you have for your suggestion to further extend the Climate Change Levy exemption beyond 2006 to 2010 for the gas industry?

The primary objective of the Climate Change Levy is to reduce carbon dioxide emissions. The switch to natural gas, the cleanest fossil fuel, from other fossil fuels delivers emission savings consistent with the objective of the climate change levy. Perversely, the addition of the Climate Change Levy to natural gas, while not being applied to oil products, which produce much higher emissions, would deliver the opposite result to that which the Climate Change Levy is aiming to achieve.

Thus, the extension of the Climate Change Levy exemption with the express intention of increasing the use of natural gas would facilitate the delivery of the primary objective of the Climate Change Levy itself.

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MINUTES OF EVIDENCE

Wednesday 9 May 2001

Members present:

Mr P Doherty (Chairperson)

Mr Neeson (Deputy Chairperson)

Mr Clyde

Mrs Courtney

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr N Shaw, Chairman ) Premier Transmission Ltd

Mr J Rooney,
Deputy Chairman ) KeySpan Energy

1522.

The Chairperson: Good morning, I apologise for the delay. Could you summarise your submission, after which we will ask some questions. We are constrained by time, so we shall have to shorten this session by five minutes.

1523.

Mr Shaw: Thank you for inviting us to give evidence. We represent Premier Transmission Ltd (PTL), which comprises two shareholders, BG Group and KeySpan Energy.

1524.

I am chairman of PTL, and Jim Rooney is the deputy chairman of KeySpan Energy. PTL runs the Scotland-Northern Ireland pipeline. It has operated successfully for five years, and it is the key that enabled the investment that brought gas to Northern Ireland. PTL has two customers - Premier Power Ltd and Phoenix Natural Gas.

1525.

In 1999 and 2000, PTL was proactive in attempting to expand the north-west and Dublin network, but it has withdrawn from those projects. That is a slight update from the evidence that PTL submitted. There are several reasons why PTL has withdrawn, and I shall not elaborate, as I am sure the Committee will wish to discuss them.

1526.

PTL has followed development of the expansion with considerable interest. Representatives from us have told the Government and the regulator that they are both ready and keen to work with others who may be interested in building pipelines to facilitate network expansion. They are particularly keen to discuss connection arrangements and "postalisation" - how tariffs will be charged across the Province. However, PTL has two primary concerns in those discussions.

1527.

Our first concern is that our existing customers - Phoenix Natural Gas and Premier Power Ltd - are not disadvantaged. It is important that any discussions about postalisation do not inconvenience existing customers regarding price or competitive position. The second concern is that there be no fundamental change to PTL's economics. PTL invested capital based on a set of terms and conditions in our licence, and we should not like to see those change through diminished investment value.

1528.

Mr Wells: How can you lower average energy consumption in Northern Ireland?

1529.

Mr Shaw: PTL is a pipeline company that brings gas to the power station and to Phoenix, so it must serve its customers in accordance with their requirements. It is therefore driven by the demands of the customer. It is difficult for PTL to influence average energy consumption in Northern Ireland.

1530.

Mr Wells: Is it in your interest to ensure that the maximum amount of gas goes through the pipeline?

1531.

Mr Shaw: There is an interest due to how the regulatory regime works - the amount of gas flowing through the pipeline influences the price decrease, since PTL has fixed costs. As throughput increases, prices will fall.

1532.

Mr Wells: Why did PTL withdraw its proposal to build a North/South gas pipeline?

1533.

Mr Rooney: It became uneconomical. We had organised the project on a strictly commercial basis without the need for any grant aid. The project was dependent on connecting significant new loads in the Republic, and at that point the pipeline would go through areas of Northern Ireland where an additional gas service might be made available. We thought that we had a set of economics we were comfortable with, and our initial conversation with customers in the Republic suggested that they felt the same.

1534.

Then we were thrown a couple of curve balls in Dublin. There was a great deal of uncertainty because of the lack of an independent regulator in the Republic, and that meant the customers and we were unable to commit to commercial terms. Most importantly, there was the introduction - or suggestion of an introduction - of a levy on new direct customers from pipelines that might come into the Republic. That had the effect of raising our costs by 20% to 25% and rendered the project uneconomic from an investment and customer standpoint.

1535.

Basically the shareholders, BG Group plc and KeySpan Energy, came to the opinion that the market in the Republic was not ready for the introduction of a new competitive pipeline. At that point Premier Transmission Ltd had committed £1·4 million to moving forward with engineering to stay on schedule. We could not justify spending our shareholders' money at that level and suspended activity. Essentially we took ourselves out of the running, since the Government were committed to ensuring that the new capacity was available by 2002. That is why we withdrew.

1536.

Mr Wells: Do you think that the project is dead in the water?

1537.

Mr Rooney: Our proposal is dead in the water since, as we understand it, the Republic has authorised Bord Gáis to build a second interconnector. The economics of that are inferior to our proposal, but the interconnector will bring the necessary additional capacity to the Republic. There is no need for yet more pipeline capacity southward to the Republic.

1538.

Mr Wells: Are you more or less saying that the project will not happen under the present economic regime, no matter what company examines it now?

1539.

Mr Rooney: No. We shall not invest in building a pipeline from the North to the South without customers, and there are no customers who will sign up with us under the set of economics dealt us by Dublin, particularly where the public service levy is concerned.

1540.

Mr Shaw: Our primary marketing effort on the pipeline proposal was focused on a mechanism called an "open season." We publicly advertised the terms and conditions detailing when the pipeline would be built and so forth. We targeted three new power stations being built. We saw those as what we call the "anchor load". A big load at the end of the pipeline can make the economics work, for the distribution load will come more gradually.

1541.

British Petroleum (BP), a substantial energy company, promoted one of those power stations. We spent some time negotiating with BP and saw it as one of our top customers. That company has withdrawn from the project to build the power station because the regulatory regime on electricity is so unclear. When our customers disappeared, it meant we would not build a pipeline speculatively. We needed those customers to be signed up as "anchor load" - that is the only way in which a private-sector pipeline can be justified economically.

1542.

Mr Rooney: We organised our project and promoted our economics without the need for grant aid. It was a strictly commercial proposition. We did that because it was made clear to us that the grant aid available in the North of Ireland - given the allocation issues in Brussels - would have to be targeted to the north-west, where it would be needed. We took that message to heart in proceeding as we did.

1543.

Mr Wells: I shall not ask you about the north- west, for another member of the Committee is keen to target you on that point.

1544.

Dr McDonnell: You have ruled out the North/ South pipeline. What incentives are required to construct a supply line to the north-west?

1545.

Mr Shaw: We applied to build that pipeline. The fundamental incentives were similar. For example, there was to be a new power station built at Coolkeeragh or a repowering of the existing station there. Our submission for the project was made on the same terms and conditions as the existing investment. The offer depended on a long-term power contract being in place - the power purchase agreement (PPA) - so that the promoters of the power station at Coolkeeragh would be guaranteed to be able to sell their power.

1546.

With the opening of the market and the introduction of competition, that changed fundamentally. Instead of having a long-term contract at the power station, which could then guarantee demand on the pipeline, the power station went from being a contracted power plant to a merchant plant, where the levels of offtake and demand would be very different and uncertain.

1547.

The key incentive that could have made the project work was having a long-term power contract in place, which could then provide backing for the long-term gas contract. That disappeared at the beginning of 2000. In our view, that was the necessary and fundamental incentive. The economics then depend on a judgement about the likely risk of a merchant power plant, combined with the level of available grant. The more grant available, the more economic the pipeline becomes.

1548.

Mr Rooney: We tried to approach the promoter of the power plant, the Electricity Supply Board (ESB), to seek commercial assurances in the absence of those power purchase agreements. Those were guarantees from ESB that it would put a certain amount of gas through the pipeline, on a ship-or-pay basis, to ensure we recovered our capital.

1549.

It was equally important that our existing gas and electric customers in Northern Ireland were not affected by higher prices because of the failure of the plant to perform as projected. ESB politely told us that it was not in a position to offer those guarantees. We said at that point that, in their absence, we were not even willing to go to our boards to seek capital.

1550.

We have made it clear that we are looking forward to co-operating with someone who may propose a pipeline to the north-west. We shall co-operate both in physical connections with our pipeline, and as Mr Shaw said, shall participate in discussions about tariffs with the two caveats that he mentioned - that we protect our existing gas and electric customers and do not disadvantage our own set of economics.

1551.

Mr Neeson: You are aware of the commitment of this Committee, and the Minister, towards the development of a North/South pipeline. Mr Shaw has met the Chairman and myself on a number of occasions. Do you feel the decision to build a second pipeline into the Republic was political?

1552.

Mr Shaw: Reliving history is very complicated. There were many influences, of which politics was one, but possibly not the only one. Everyone knows there is a shortage of gas and gas capacity in the South; the economy is growing very quickly, and new power generation is required.

1553.

We set out very publicly what we aimed to do. You participated in some of the discussions. We wished to construct the pipeline to be available in 2002. We saw that as the key date for the availability of new capacity. The entire supply and demand analysis suggested that it would be ready in 2002-03.

1554.

To construct the pipeline for 2002 was always going to be quite an aggressive timetable. We therefore set out fairly clearly that we needed customers signed for around October. Mr Rooney said earlier that we had started to spend some money ahead of that, but we needed signed customers before October. When we did not get them, we could not continue spending the money on a speculative basis.

1555.

We felt we needed to take a break, but we did not withdraw. We said we could not achieve the targets by 2002. We have to use 2003 because there is so much uncertainty. Then there was suddenly a great deal of focus on 2002, and the Government got very worried that there would be an energy crisis. I was concerned about that, for I have always felt that the one thing about supply and demand forecasts is that they will be wrong. I felt that it was not likely that there would be such a crisis as portrayed in 2002, particularly as there are also instruments one could use to manage demand.

1556.

However, the Government felt that there was going to be a security-of-supply crisis in 2002. We declared publicly - because we tried to do as much as we could publicly - that we could not achieve the targets before 2003. The other thing that was going on at the time was the development of the Corrib Field, which was another important source of supply, and that seemed to be slipping for a variety of reasons. Therefore the only solution to the 2002 "energy crisis" was a second interconnector.

1557.

Mr Rooney: By nature it was a political decision, for it was taken at Cabinet level. I should not ascribe other motives -

1558.

Mr Neeson: I think we are in agreement.

1559.

Ms Morrice: I want to look at price. I have noticed that both of you mentioned the importance of protecting your customers, but I should like to unravel that. What does protecting your customers mean? Does it mean keeping the prices high so that they will always get the same price? How can you reconcile the concept of protecting your customers with what the consumer wants, namely, cheaper electricity?

1560.

Mr Shaw: One of the concerns we have had is that if you put more capital in - which is what would be required - leading to more transmission pipelines going either to the north-west or North to South without much demand on them - you end up with a greater spread of capital. If you do not have a consequent increase in volume, you can end up with prices rising, for you have more investment to be paid for without any substantial increase in throughput. That was part of what we were arguing, for we believe we could invest in our own pipelines to increase the capacity incrementally; as the volume increased, the price would fall.

1561.

By "consumer protection", we meant that we envisage a situation where the price of using our pipeline will fall as the volume passing through it increases. However, if you have too many pipelines and the volume falls, prices will go up. We do not want a situation where we end up having to spread costs around and prices rise.

1562.

Mr Rooney: If we were in a situation where our pipeline simply continued to charge its customers - Premier Power and Phoenix Natural Gas - the present rates, their prices would stay the same and, as their demand increased, their unit price would fall. We do not make more money as more gas goes through our pipeline. This whole debate arises because of the concept of postalisation, which has been broadly discussed before your Committee and with the Government. Postalisation arises from the desire for everyone in Northern Ireland to pay the same price - just as you do with a postage stamp when you mail a letter. When that happens, the capital recovery issues that Nigel Shaw brought up arise. If the new capital cannot recover its own costs as efficiently as we recover ours, an inherent subsidy must come from our customers and us for the benefit of the new customers. Belfast gas and electric customers will have to pay more if the demands on new pipes are not as they should be.

1563.

Ms Morrice: Am I not right in saying that you have very high grant-aid support of 75% for the Scotland-Northern Ireland line?

1564.

Mr Rooney: No. The correct figure is 35%.

1565.

Ms Morrice: So it is 35% European-funded.

1566.

Mr Rooney: The project would not have gone forward without that grant. We simply would not have been able to proceed. The price of gas delivered would not have been competitive with oil and would not have allowed the Premier Power plant to switch to natural gas. It would not have enabled Phoenix Natural Gas to begin its market penetration. As owners of Phoenix, we are not here to testify to that. It has been a competitive challenge - let me put it that way.

1567.

Ms Morrice: You talked about the North/South pipeline, saying you were going to go in there without any grant aid. Why would you not have been eligible for an INTEREG grant from Europe, for example? Why did you not apply for that?

1568.

Mr Rooney: As we understand the principles, grant aid is available for projects that would only be commercial with it. We felt - and as I said our guidance was - that the grant aid would be needed for the north-west, since the inherent economics of that project were much thinner. If we could organise a project without grant aid, that would be seen as a favourable development. We felt that such grant aid as might be available for the North/South pipeline should be targeted on what are called "above-ground installations" which allow distribution systems to be spawned from the main transmission line. That was our concept of how grant aid should be used in a North/South context - not for the basic line itself.

1569.

Ms Morrice: You talked about the economics and the regulatory system in the South. How could Board Gáis have got over that hurdle when they were building their line and you could not?

1570.

Mr Rooney: If by "building a line" you mean the second interconnector, they were simply proposing a set of economics based on some quite favourable projections. They were not in a position to guarantee those economics for 20 years. This could be a very complicated discussion about how financial pro-forma arrangements are put together, but they said their demand would allow them to recover what were essentially larger costs than our system would allow.

1571.

Ms Morrice: They were more prepared to take the risk.

1572.

Mr Rooney: They were going to offload the risk onto their consumers if those projections did not come about. Over the 20-year period, with the rates that we were charging, we were going to take a commercial risk ourselves.

1573.

Mr Shaw: As I understand it, they have not published their tariffs.

1574.

Mr Rooney: Yes, and that was one of the problems.

1575.

Mrs Courtney: I understand now that there was an economic reason for your decision not to go for the north-west. In your original submission you said something about structural objects rendering it difficult for customers to make an informed decision about the North/South gas pipeline. Could you explain in a little more detail the Brattle Group's recommendations on new pipeline authorisation and third-party access tariffs?

1576.

Mr Shaw: Brattle Group was looking at how to structure gas transportation tariffs under the European Union's liberalisation and open-access initiatives. Brattle is a consultancy firm commissioned by the Irish government. It wrote a report for them, and the Government have not yet made a decision. In a sense, what was created was really uncertainty. We have all touched on two big issues, one of them being what the actual structure of tariffs would be. Would the whole of the Republic be fully postalised? What should we charge for bringing gas to the Republic? In other words, the issue was the offshore tariff versus the onshore tariff. Those things make quite a difference, and that affects people's economics. There is a big debate about that, and as yet it is unresolved.

1577.

The other debate was about postalisation. How is a postalised price actually created? The west of Ireland, using a much more expansive transmission system, pays the same prices as Dublin. One way of dealing with that was to impose the public service levy on our pipeline. In that case too, no decision has been taken, but it has created uncertainty. We are talking about 0·8 pence per therm, an increase of 25%. Those were the principle uncertainties created by Brattle Group.

1578.

The Chairperson: Thank you for dealing with the questions and for your original submission. There may be further questions as we move into deliberation. We propose to write to you enclosing those and asking you to respond. Today ends our public sessions, and given elections and the time we need to move into deliberations, there may be a slight time lapse before we get back to you.

1579.

Mr Rooney: Thank you for the opportunity.

ADDENDUM TO MINUTES OF EVIDENCE
PREMIER TRANSMISSION LIMITED

Q. In your opinion, what effect does the delay in implementing gas market liberalisation have on the gas industry?

A. Any delay in the liberalisation of the gas market reduces the opportunity for effective competition, the lack of a Regulator for rent tariff structure, PSL on new entrants to the market, and the dominant position of the incumbent monopoly all make the Irish energy market extremely challenging to enter.

Q. In your submission, you state that originally the proposed power station in Derry was to be anchored with a long-term power purchase arrangement. This is no longer on offer and you conclude that the pipeline is unlikely to be commercially or financially viable. What action would you like to see taken to address this situation?

A. It there is to be a commercially and economically viable pipeline it will require someone in the commercial chain to provide either guarantees to underwrite the investment a pipeline owner/operator would make. This would be required to avoid the risk of "standing the asset" if others in the commercial chain proved incapable of meeting there financial obligations. In normal circumstances this would involve guarantee from users and or require financial assistance to minimise the pipeline owner/operators risk. These guarantees could be in the form of parent Company Guarantees, Ship or Pay Contracts, and or Government grants.

Q. What action would you like to see taken to reduce the disparity between high domestic energy costs here in Northern Ireland and cheaper costs in the rest of the EU?

A. Disparity between energy prices in NI compared with the rest of the EU is as a result of many complex and interrelated factors including the level and form of competition, the geographically isolated and size of the NI market, the structure of the Electricity industry after privatisation, and the effect of exchange rate movements.

Q. What can be done to increase energy interconnections between Northern Ireland and other grid systems such as those in the Republic of Ireland, Great Britain and the European Union?

A. There already is interconnection in the electricity market between North and South and soon to be interconnection between Scotland and NI with the Moyle interconnector. In the gas market again interconnection exists between GB and Northern and Southern Ireland and may potentially occur between North and South. These interconnections only make sense if they are economically justified and that the NI consumer does not pay for the "benefit" of interconnection. As long as the cost of the fuel plus the cost of interconnection is less than the cost of supplying the existing fuel then interconnection will happen.

Q. What can be done to encourage choice and competition in energy markets and essential utility services?

A. There is a wide choice of fuels in NI and a high level of competition between fuels oil, coal, gas, etc. This choice and the competition which comes with choice can only flourish if the economic basis of this choice is there and there are no structural or other barriers to entry.

Q. What measures would you suggest are necessary to ensure that the domestic customer will not be saddled with the fixed costs of providing electricity ie fixed generation and transmission costs?

A. Electricity costs can be attributed approximately to the following 30% for fuel used to generate the power (tends to be high because of the old technology used in N Ireland 30% efficient compared to 50% in modern power plants), 30% to pay the power station operators for fuel conversion (this is higher than the rest of the UK due to the much higher power station purchase price here at privatisation) and 40% to pay NIE to transport and supply the power to the consumer (gap between NI costs in this area and GB costs has widened considerably since privatisation). Significant progress has been made in reducing the level of costs in the Electricity market with the buying down of contracts and the introduction of new modern CCGT technology at Ballylumford, the encouragement of additional gas fired generation using CCGT technology could reduce the cost per unit of gas transportation and increase the efficiency and so reduce the price of generating. However this would only be the case if the projects were "viable in their own right" and benefits were not outweighed by stranded costs that say NIE might have in such a circumstance.

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MINUTES OF EVIDENCE

Wednesday 20 June 2001

Members present:

Mr Neeson (Deputy Chairperson)

Mr Attwood

Mr Clyde

Mr McClarty

Dr McDonnell

Ms Morrice

Dr O'Hagan

Mr Wells

Witnesses:

Mr D McIldoon ) Office for the

Mr J Hutchinson ) Regulation of Electricity

Mr K Shiels ) and Gas (OFREG)

1580.

The Deputy Chairperson: Our inquiry into energy has attracted a great deal of interest across Northern Ireland and beyond. We are delighted that you are here to contribute. We have been looking at several papers from your office and have found them very helpful.

1581.

Mr McIldoon: May I introduce my colleagues. Mr James Hutchinson is the head of the competitive electricity market section of OFREG. He is responsible for developing the market in Northern Ireland for cross- border trading, for the development of the all-Ireland market and for trading on interconnectors. His paper on interconnector trading was published recently.

1582.

Mr Kevin Shiels is the head of the gas section. He is responsible for regulating Phoenix Gas and for the negotiations on gas licence extensions. To give you an idea of their responsibilities, Mr Shiels heads a section that has only one full-time member of staff; Mr Hutchinson is in the same situation. OFREG is a very under-resourced organisation.

1583.

I thank the Committee for the opportunity to give evidence. The Committee's initiative in examining Northern Ireland's energy sector and in holding those of us who work in it accountable for our actions is extremely important.

1584.

That we have an energy problem is not news. Our electricity prices are the highest in Europe net of tax. Generation, transmission and distribution costs have diverged markedly from the trend elsewhere. Natural gas is new and undeveloped; at best, it is accessible to half the population. Generator efficiencies are very low; renewables and combined heat and power are under-represented in our generation portfolios; competition in supply is poor; and exposure to fuel-price volatility is excessive.

1585.

Despite these problems the industry has been highly profitable since privatisation. Customers have suffered the pain while others have enjoyed very rich pickings. Make no mistake about it: our electricity industry is run in the interests of those to whom it was sold - it is not being run in the interests of the community.

1586.

Overpriced long-term contracts have protected the generators. An overgenerous price control from the Department of Economic Development at the time of privatisation and an indulgent Monopolies and Mergers Commission on the last price control have protected NIE.

1587.

Some parts of the industry have recognised and accepted the need to change. Ballylumford and Coolkeeragh have been radical and creative while successfully protecting their shareholders' interests. Kilroot and NIE have adamantly insisted on extracting every penny from the Northern Ireland electricity consumer that they feel they are legally entitled to.

1588.

A key player in the industry, and the one party that has the scope to drive change, is NIE. However, NIE put an armlock on change as far as it could. I would dearly like us to be able to take pride in our electricity utility. NIE is run by Viridian and in the early days NIE was difficult about almost everything. That has progressively changed, I am glad to say. The NIE board - later the Viridian board - has co-operated with me increasingly in opening markets to competition, promoting energy efficiency, tackling fuel poverty and in improving services to its consumers.

1589.

The tragedy is that in the most critical area - electricity tariffs - the Viridian board has consistently put its own short-term commercial interests before the public interest of reducing electricity prices. As the Committee will recall, it took me to court because I tried to secure a mere 2% reduction in prices. As well as trying to maximise its take from customers by every means in its power, Viridian has imposed substantial costs on them to protect itself from what it perceives to be risk. This means that Northern Ireland's electricity bill is several million pounds higher a year than it need be. I could give examples.

1590.

Moreover, Viridian has established several successful new ventures on the strength of its electricity business. I admire the initiative shown by Viridian's board; however, I would like to see some recognition that Northern Ireland's hard-pressed electricity customers made it all possible. The Viridian board does not acknowledge that its resistance to change is the greatest obstacle to every effort to reduce electricity costs.

1591.

It could be argued that this is a commercial reality and a logical outcome of the industry's governance and ownership structure. However, it is only a reality for a board that refuses to take a long-term view of its relationship with its host community. I have repeatedly signalled to NIE that I am interested in a route to lower prices that does not involve conflict. I have said that I particularly want to hear its proposals on how to stop and reverse the divergence in transmission and distribution costs, which has opened up by approximately 43% since privatisation. It has increased from 15% to 58%. I have had no response.

1592.

Before Easter, I put proposals to NIE for reducing the costs to customers of the Scottish interconnector. I have had no meaningful response to that either. Viridian has never shown the least inclination to map out for Northern Ireland a route to the type of price relativities with Great Britain that we enjoyed before privatisation. Perhaps it believes that the political will to impose change does not exist and that it can defend its present privileged position indefinitely.

1593.

However, if it does not produce proposals, I shall put forward my own in the summer. If I do not struggle against the present arrangement with all the means at my disposal - which are not many - I shall fail in my statutory duty to protect customers.

1594.

Wiping the slate clean and starting again will not get us out of our energy mess. Local control and accountability must be established quickly. In association with the many useful steps that have been taken in recent years, three principle measures would largely solve our problem: refinancing the electricity industry and separating the ownership of assets and obligations from operations; removing NIE's sales monopoly of 65% of the market to open it fully; and extending the gas network to district towns. Those will be developed as I answer your questions.

1595.

Energy is big business, and because of its strategic importance to every aspect of life it needs a legislative framework. Given the governmental structure, the Committee's conclusions will determine whether we can extricate ourselves from the quagmire into which others have led us.

1596.

The Deputy Chairperson: Perhaps we can look at the under-resourcing of OFREG another time.

1597.

Mr Wells: The Committee is used to fairly woolly submissions, but you are obviously not trying to hide anything. How unreasonable are the profits being made by suppliers and generators? By how much are we overcharged? How much above the norm is the return to Viridian's and generators' shareholders?

1598.

Mr McIldoon: I want to step back from the profit issue. The overwhelmingly bad thing about our industry is its high cost. It is overpriced because there are too many inefficient costs in it. We must drive those inefficient costs out of the industry.

1599.

Our generation works at 30% efficiency - it should be in the mid-40s. Our transmission and distribution costs have diverged markedly from those in Great Britain. In 1992 it cost 15% more to move a unit of electricity through our wires than it did on average in Great Britain: it now costs 58% more to move a kilowatt-hour of electricity through our wires. We have a very inefficient industry. An efficient industry would not have the same problem with profit level.

1600.

Profits are a legitimate reward for providing goods and services at competitive prices. The objection to profits is not that they are high; it is that they are not justified by the quality of service. The generators' profits are protected by the overpriced long-term contracts. That is an element of excess profit. The Treasury took out part of that surplus when it sold the contracts for twice the price of similar contracts in Great Britain.

1601.

The supply businesses that sell electricity to customers do not make much profit. They are competitive. NIE's supply business is well regulated. It makes a good profit; but it deserves to.

1602.

NIE's biggest failing is in transmission and distribution, where it makes extraordinary profits. If NIE matched the efficiency gains of transmission and distribution businesses in the rest of the British Isles, customers in Northern Ireland would be about £40 million a year better off.

1603.

Mr Wells: That is a very helpful figure. You said that NIE still controls 65% of the market. With the bulk tariff this year we found that competitors do not have the capacity. That is not NIE's problem. Companies such as Powergen and ESB do not have the capacity this year to provide a competitive bulk tariff to match the NIE subsidiary Energia. Therefore can it really be blamed for charging such prices when there is no competitive structure in the Province?

1604.

Mr McIldoon: The bulk supply tariff is sold to the 65% of the market that nobody else can sell to anyway. Anybody should be allowed to sell into that market; it would mean that they would be able to buy from the generators who are contracted from NIE.

1605.

Mr Wells: If the 35% is not adequate competition, what will happen when it tries to sell into the less lucrative 65% market, much of which is domestic and commercial, shops and offices for example? If we cannot get the bigger supply right, what chance do we have of getting adequate competition in that field?

1606.

Mr McIldoon: Suppliers will be able to buy from Scotland as we shall have interconnection with it from next year. They will also be able to buy from independent generators in Northern Ireland. The market this year was destroyed by the doubling or trebling of gas prices, which affected the independent generators in Northern Ireland. Their inefficiency left them exposed. The primary independent station in Northern Ireland is Ballylumford, which is 30% efficient; that means that one gets nine units of electricity out of one therm of gas. In a modern gas station one can get 15 units of electricity out of one therm, so it would not be nearly so exposed to the volatility in the price of gas.

1607.

Suppliers could have supplied the full market had they wanted. Powergen left because it did not have the stomach for this kind of market. Its suppliers - those who sell to customers -cannot make a great deal of money. NIE does not make its money by selling electricity from the generation station to customers but by passing the electricity through its wires.

1608.

My complaint about NIE is twofold. First, its wires cost far too much. It has not made the efficiency gains that similar companies in Great Britain have, and that is where my £40 million comes from. Secondly, it has done nothing to change the generation contracts. Although it does not actually make money out of the generation contracts it passes the generation costs through. Those contracts are overpriced, and NIE is not interested in changing them because it can recover all the money from its customers. The customers are captive. If the contracts were changed, NIE would fear not being able to recover all its money. It would face what are called "stranded costs". It is to protect NIE from risk that those contracts have not been changed. Therefore they are a block to changing generation costs and to reducing transmission and distribution costs - and those are 95% of customers' costs.

1609.

Mr Wells: What progress, if any, has been made on renegotiating the contract with Applied Energy Services (AES) at Kilroot?

1610.

Mr McIldoon: Not a great deal. There are three options for changing the Kilroot contract. The first is that NIE and AES negotiate a change in the contract, as Ballylumford did. I understand that AES is prepared to do that; NIE is not because it feels that it would be exposed to risk. NIE is blocking that option.

1611.

The second option would be to open the market fully, exposing NIE's existing contract to risk and obliging it to negotiate a better one. The third option would be my mounting a legal challenge to the contract to set it aside.

1612.

Mr Wells: Apart from legal action do you have power to intervene?

1613.

Mr McIldoon: None of those courses of action guarantees success; each has risks. My preferred course of action would be for the Government to open up the market fully, obliging contract holders to renegotiate. Otherwise, somebody will get hurt by the contract, which would no longer be aligned with the new market conditions. That is my preferred line.

1614.

If that does not happen and the market does not open, I have a choice of saying to NIE "You may be in breach of your economic purchasing obligation, in which case I am going to try to make you change the contract as I did with Ballylumford" or of saying to AES "This contract is no longer in the public interest, and I am going to challenge it through the Competition Commission".

1615.

Both those routes are fraught with difficulties. There is no guarantee that the outcome would be a clean, efficient station that delivers low-cost electricity. It might; but I cannot guarantee the outcome of either approach. My answer is convoluted, but the situation is complicated.

1616.

Mr Wells: Your answer contained some useful points.

1617.

Mr Attwood: It is clear that you regard a legal challenge as a last resort. Will NIE and AES renegotiate rather than open the market fully?

1618.

Mr McIldoon: They will not renegotiate unless the Government apply pressure. The present contract suits them both because AES, which gets the money, and NIE, which passes the bill through to the customers, are not exposed to any risk. Both parties are happy, while customers suffer high prices.

1619.

To get lower prices for customers the structure of the contracts must be changed. Parties will resist change unless they are given guarantees that they will not be exposed to additional risk and will not be worse off. I cannot give those guarantees; only Government can.

1620.

Mr Attwood: The Committee and the Government could decide that pressure on NIE and AES to renegotiate should be increased. Should the market not be opened anyway? Even if NIE and AES agreed to renegotiate in the interests of the consumer, the markets should be opened.

1621.

Mr McIldoon: It is possible to square all the circles on Kilroot. It is possible to do a deal that does not expose NIE to additional risk, does not take from AES what it got when it bought the station, that reduces customers' prices and that maintains fuel diversity in Northern Ireland so that we are not entirely dependent on gas-fired power stations for the next 25 years. That point is important. Such a deal is possible.

1622.

Change could involve risk to both parties, so they will not move of their own volition - they will have to be pushed. OFREG can do certain things but not as much as Government. It is a matter of knocking heads together.

1623.

Mr Attwood: Although you were careful to acknowledge that NIE had shifted on some matters you also said that it had offered no response on the costs of the Scottish interconnector and transmission and distribution. Does that reflect the relationship between NIE and OFREG?

1624.

Mr McIldoon: The relationship between NIE and OFREG is operationally very good. I admire most people who work in NIE for combining loyalty to their company with being dedicated public servants. Many are clever and creative and have done excellent things recently, particularly in parts of NIE. Its supply business and transmission system operator business are examples. Those are particularly effective. People in the transmission business are doing a great deal of work on how the market has been opened. The interconnector people are excellent.

1625.

My argument is not with NIE or its staff but with the philosophy of the Viridian board. Although it could have provided the industry with leadership it failed to do so. I also dislike its attitude to money. It is as simple as that. The board takes every penny that it possibly can without exposing itself to risk. That has not changed over the years; if anything, it is getting worse.

1626.

Dr McDonnell: You suggested that Kilroot could convert to Orimulsion, and I see that as a key to reducing prices. How do you view the environmental and health concerns surrounding Orimulsion? Although it seems to have many benefits it also seems to have a downside on which we need reassurance.

1627.

Mr McIldoon: I do not have a brief for Orimulsion, but it has been given a bad name. It is Government policy - until there is a change of Government policy - that we have fuel diversity. That means that we need fuels other than gas, and the most cost-effective fuel is Orimulsion.

1628.

Orimulsion is delivered in ships, and ships can get wrecked at sea. I believe that there has never been an Orimulsion spill at sea. The European Union's recent publication on security of supply cited 77 tankers being lost at sea while delivering oil to the European Union in the last five or six years. Sixty were over 20 years old, so it seems that old tankers are particularly at risk. The rules have since changed. Orimulsion is always carried in double-hulled ships and not in ships more than 10 years old. There is a great deal of concern about safety and how the fuel is transported. Northern Ireland used to be completely dependent on oil tankers, and I do not recall a case - there might have been one - of a spill when oil was being delivered to our power stations.

1629.

Various inspectorates are looking at how Orimulsion is handled in power stations. Early flue gas desulphurisation would reduce Northern Ireland's SO₂emissions, which produce acid rain, to about 5,000 tons a year. In 1990 we produced between 60,000 and 70,000 tons of SO_{2 a year. That is a major environmental} gain. Orimulsion produces less CO₂ than the equivalent amount of coal. Heavy metals are extracted and recycled and landfill is avoided because there is no ash. Environmentally, it is better than other fossil fuels - if used properly. The only possible risk is of its getting into the environment. That means that it must be handled very carefully, as it has been in all the stations where it has been used. "Give a dog a bad name and hang him", and that is what has happened to Orimulsion.

1630.

The Deputy Chairperson: The Committee has been dealing with the extension of the natural gas pipeline and is getting very mixed messages. Dublin has decided to bring in the extra interconnector from Scotland, and that has ruled out the North/South pipeline. The Department's permanent secretary is in Dublin today for discussions on the pipeline. We are hearing mixed messages about the commitment of the Questar Corporation to providing the gas pipeline. We know that time is running out at Coolkeeragh. How do matters stand on the natural gas pipelines?

1631.

Mr McIldoon: We have received applications to build a pipeline from Belfast to connect with the Bord Gáis Éireann system near Gormanston. We have also received an application from Questar and Bord Gáis Éireann to build a pipeline from the Phoenix system to Coolkeeragh power station.

1632.

When I was first invited to the Committee I requested to be excused because the meeting coincided with an important meeting in Cork. We have had lengthy discussions about how a licence might be granted and have reached substantial agreement on most issues. One or two issues must be resolved and, inevitably, they concern money. I shall be in Dublin on Friday with an officer from the Department of Enterprise, Trade and Investment to resume that discussion. It may be premature to say that we shall come to a satisfactory conclusion, but we have hopes.

1633.

The first leg would be to build the pipeline to the power station at Coolkeeragh; that would enable a downstream gas industry to be built in those towns in the north-west. The consortium building it would be keen to connect our system with the Republic's.

1634.

That would be very positive for ensuring security of supply, servicing towns such as Newry and Craigavon and for developing a competitive market to work across the island. That should follow on one or two years after the first pipeline has been built. If the first pipeline to Coolkeeragh is not built, the North/South pipeline may not be built because there would be no need for additional capacity. It would be reassurance, but it would be a very expensive insurance policy.

1635.

The Deputy Chairperson: How serious are these bids? This has dragged on and on, and Coolkeeragh needs answers quickly. Will the pipeline be built within a specified time?

1636.

Mr McIldoon: Three basic issues are outstanding. One is the rate of return allowed in the pipeline. Rates of return in utilities are falling in Great Britain and in the Republic and even across Europe. I noticed that the Portuguese regulator was offering a 4·5% real rate of return for his electricity utility, and we are discussing that. Pipeline investment is for the long term: those building a pipeline want to know whether they will get a return on their money over 20 years. I have made it clear, with the Minister's support, that Northern Ireland would be loath to get involved in an overpriced, long-term contract again - we must get the price right. Therefore the rate of return is critical.

1637.

The second critical factor is the European regional development fund (ERDF) or other public source of grant. That is important to the pipeline operators because it shows how much support and confidence they have from Government in Northern Ireland. It is also important to the banks financing it because it shows public confidence in the project and it will affect the rate at which the rest of the financing can be done. Departments are discussing whether they will be able to grant-aid the pipeline and, if so, to what extent.

1638.

The third factor is postalisation. That term immediately and unreasonably makes it a mystery. Postalisation simply means that power station owners anywhere along the gas pipeline must be confident that they can buy gas at the same price as other owners on it. Otherwise they could be undercut by unfair competition from an owner closer to the pipeline mouth. There is widespread agreement that postalisation is desirable and deliverable.

1639.

We are close to a final decision on all three matters. If they all fall into line, the Coolkeeragh pipeline should be built first followed by one to Gormanston shortly after.

1640.

The Deputy Chairperson: How long will that take?

1641.

Mr McIldoon: The decisions will have to be made in the next few weeks because Coolkeeragh is our one firm proposal for another power station. We are losing a great deal of power station capacity. Belfast West power station is old and inefficient. It has served the community well but it is on its last legs and is due to close in two or three years. It could only stay open with a great deal of investment and environmental clean-up. Coolkeeragh is also inefficient and could only survive with similar new investment. It is an oil-fired station, and oil is very expensive. When those power stations close, along with one third of the old capacity at Ballylumford, Northern Ireland will have a serious shortage of capacity. If we do not proceed with the Coolkeeragh station quickly we shall have great difficulty in keeping the lights on. People do not seem to understand that yet. We need a third power station.

1642.

Ms Morrice: I want to talk about prices again, as you have put the ball in our court.

1643.

You said that Viridian does not believe that there is the political will to propose change, and that the board does not acknowledge that its resistance to change is the single most important obstacle to a reduction in electricity prices. You are batting it to us because I think what you are saying is that we are not shouting loudly enough, we are not generating the political will to exercise pressure on Viridian to change. We have been looking at the potential for another price increase which would bring the increase over the past six years to about 20%. What power do we have as politicians, not just to call for price reductions or price freezing, but to insist that reductions be implemented?

1644.

Mr McIldoon: I understand that the Department of Enterprise, Trade and Investment will produce an energy strategy by the end of the year. That strategy will obviously be informed and influenced by the deliberations of this Committee. I assume that the energy strategy will set out a strategic framework for the industry in order to establish what the Government want to achieve. The Assembly has the power to pass legislation and I think that the Minister is committed to producing legislation which will be enacted in the next couple of years.

1645.

The ball is at your feet. Once the Government make it clear that the industry will develop in a certain way in the future, the companies will co-operate, even before the legislation takes effect. The Government must set out the framework. In England, Ministers have become heavily involved in determining the evolution of the energy sector in Great Britain. The theory of privatisation was that the Government should step back, but Government can only do that when they have created a framework that works and delivers the outcomes that the community wants. We have not reached that stage here yet. Once the Assembly, this Committee and Ministers make up their minds about what they want to do, everything will fall into place quite quickly.

1646.

Ms Morrice: So the Government should call for a reduction in electricity prices; that would be a natural step to take. Does Viridian have to comply with that or do we have to establish a strategy that opens up the market in order to arrive at a reduction? What is stopping us?

1647.

Mr McIldoon: Viridian is an independent company and many of the costs that are reflected in its prices are costs that the company passes on such as the generation costs. To simply call on them to reduce prices would be totally ineffective and quite inappropriate. However, I would expect the Government to make up their mind on how they want to structure the industry. For example, does the Government want the assets to be refinanced by a long-term customer bond and separated, as they have been with Welsh Water, from the operation of the physical assets? Do they want to open the market fully, and how do they want to treat the problem of stranded costs? Do they want to say to those people who signed the contract, "Those are your contracts - you have had years to change them and customers are not going to bail you out"? The Government need to make those kind of strategic decisions, and once they have been made, others will follow.

1648.

Ms Morrice: I would like more detail on opening up the market in order to move away from the monopoly position. Why can that not happen at the stroke of a pen? If that is the solution, why are we not taking that action?

1649.

Mr McIldoon: Legislation is not required to open up the market. The Minister has progressively opened the market. You should not open up the market at the stroke of a pen without deciding what will happen next. You should take that action only in a certain context and think the consequences through so that you know what other measures you need to put in place. However, the decision to open the market could be made very quickly, and to the best of my knowledge that will not require legislation.

1650.

Ms Morrice: Will that result in a reduction in prices because of increased competition?

1651.

Mr McIldoon: Opening the market will ultimately lead to lower prices because it would involve stripping out much inefficiency. However, that would not deal with NIE's high transmission and distribution costs. That is a separate issue that would require separate action.

1652.

Ms Morrice: Do you think that opening the markets and putting the structures in place would be a start because competition would inevitably result in reduced prices?

1653.

Mr McIldoon: That will follow.

1654.

Ms Morrice: The renewable industry is an area in which the Committee and you share an interest. In the European marketplace there are innovative schemes for state aid to support renewable industry. Is Northern Ireland taking advantage of those schemes?

1655.

Mr McIldoon: I do not know to what extent Northern Ireland is taking advantage of those European aids. It is up to each member state to decide how it wants to support renewables or whether it wants to support them. The European Union has targets concerning renewables for each member state. Northern Ireland has not developed any, but the Department of Enterprise, Trade and Investment is committed to producing a paper on renewables in the future.

1656.

OFREG's role is to carry out Government policy, not to make policy. We do have some renewable trading in Northern Ireland. On Friday James Hutchinson will chair the first meeting of a group that will look at ways to remove existing obstacles to renewables trading. Renewables could be stimulated by ordinary market mechanisms. Measures such as the welcome decision made by the Government to buy some of its electricity from renewable sources provide a market for renewables.

1657.

Ms Morrice: What about more support for renewables from the Government, such as aid to renewable energies. My hobby horse is the possibility of Harland & Wolff creating offshore wind energy platforms. That has huge potential.

1658.

Mr McIldoon: I should not be trespassing into that area because it is not a matter for OFREG. We can comment, but we are not experts and we should not be too categorical about which technologies will or will not work. There are experts in that area and I am sure that the Committee is consulting with them.

1659.

OFREG's role is limited to ensuring that there are no obstacles to the trading of renewables, and if there are obstacles we will remove them. That is already happening and we have removed many obstacles.

1660.

As for subsidy for renewables, due to NFFO (non-fossil fuel obligation) electricity prices are higher because customers are forced to buy renewable electricity whether they like it or not. That is a cost - or a tax - on electricity customers. The alternative is for Government to find other mechanisms, which the tax payer supports, such as grant-aid programmes, that will not impact on electricity prices. Since my duty is to protect customers as far as possible, I would prefer it if the tax payer supported the renewable sector rather than have the electricity customer supporting the renewable sector.

1661.

Clear thinking is needed on the policy objective. Is it to save CO²? If that is the case, is the most cost-effective way of saving CO² being employed, or is energy efficiency more cost-effective? Is the objective to develop clear, renewable technologies - such as biomass - in which Northern Ireland might have an advantage? If it is, it is a Government responsibility, not OFREG's. I do not see why that cost should be imposed on electricity customers. That is a decision for Government.

1662.

It is commendable if the objective is to support the rural economy by developing additional sources of income for farmers and others in the rural community. However, the Government would have to decide whether they wanted to do that out of general taxation or whether they wanted electricity customers to do it.

1663.

Mr McClarty: OFREG states that it does not foresee Northern Ireland being an exporter of renewable electricity in the medium term because Scotland and the Republic of Ireland have greater comparative advantage in the relevant technologies. Does OFREG believe that Northern Ireland can catch up with the Republic of Ireland and Scotland, and if so, how long will that process take? Has Northern Ireland maximised every opportunity to accelerate that process?

1664.

Mr McIldoon: When I said that Scotland and the Republic have comparative advantages, I was referring to the fact that they have the advantage of Atlantic coastlines with their accompanying high winds and waves. Wind is the most highly developed and cost-effective renewable technology, onshore or offshore. The Department of Enterprise, Trade and Investment commissioned studies on renewable resources in Northern Ireland, but found that they were quite limited. Nature has ordained that Scotland and the Republic have Atlantic coastlines and we do not, and there is nothing that we can do about that.

1665.

We are currently exporting renewable electricity to the Irish Republic. In the short term we are an exporter, but in the longer term we will not be able to produce enough electricity for us to be a net exporter to the Republic or Scotland. There are technologies which Northern Ireland could specialise in. For years Northern Ireland has had an advantage over other countries in biomass. The Department of Agriculture carried out a lot work on biomass, but not a great deal has been done about it since. It is an expensive technology, but there are people interested in developing it. If this could be an area of expertise for Northern Ireland, it would be a shame if the Government did not try to develop that. However, if you look at the total output of 8,000 gigawatt hours a year that Northern Ireland consumes, I cannot see us reaching a point where a quarter of that is produced from renewables in Northern Ireland and we are also exporting over and above that. We are likely to be a net importer of renewables because markets should work in that way. If the Republic or Scotland can produce it cheaper than us, we should buy it from them rather than try to make it ourselves at a higher cost.

1666.

Dr O'Hagan: I want to pick up on fuel poverty and how it should be tackled effectively. How will market liberalisation benefit the fuel poor?

1667.

Mr McIldoon: That is a good question because market liberalisation could work in the opposite direction. I have asked Dr Brenda Boardman, who is the leading United Kingdom authority on these matters, to write a paper on how we can protect the fuel poor if the market is opened. That paper will be ready in the autumn. We want to ensure that if the market opens, it does not worsen the position of the least-well-off section of the community.

1668.

Dr O'Hagan: On the same theme, what role could the energy efficiency levy have in tackling fuel poverty? What are your plans on the levy increase?

1669.

Mr McIldoon: The levy is pegged at £2 per customer in 2000 prices. It will rise by inflation and the number of customers. There was an argument some years ago as to whether regulators were entitled to raise levies of this sort or whether it became taxation. The view was that if it was de minimus it was OK. However, when it reached a certain level it became taxation and people like myself, therefore, who are not elected and do not have the authority, should not be doing that type of thing.

1670.

Northern Ireland may wish to follow the direction of Great Britain, where the Secretary of State now has the power, under the Utilities Act 2000, to tell the regulator to impose a higher levy, and the levy will be £3·60 on gas and £3·60 on electricity. Therefore, it will be substantially higher next year than our levy. If it is thought desirable that we should move in that direction - before the legislation is introduced which will give the Minister the power to make me do it - to respect the convention that I should not do things that go beyond my powers, I would require the Minister or the Assembly to tell me that that is what they want.

1671.

If I am told that that is what people want, that is what I will do, but I am not proposing to change the levy at this stage. The levy is useful in helping to tackle fuel poverty but frankly it is only £1·3 million per year for a problem that has been calculated as needing some £30 million per year spent on it over the next 10 years. It is a very small contribution.

1672.

Dr O'Hagan: In your submission you referred to the issue of the development of an all-Ireland electricity market. At a recent conference it was stated that not only would the ESB be privatised but that from the winter of 2002 the South of Ireland could possibly be facing severe blackouts because of its incapacity to generate electricity. Is that information correct and how does that impact on the development of an all-Ireland electricity market? How can both parts of the island help one another?

1673.

Mr McIldoon: Up to now both parts of the island have been able to help each other with interconnector trading, and that has been positive. The problem that has arisen in Northern Ireland since privatisation and in the Republic since the internal market electricity (IME) directive opened the markets is that there has been limited new investment in generation, although some is currently under construction. When electricity was a state-owned utility it was easy to look at demand and capacity and build another power station if there was going to be a shortfall. Sometimes the wrong decision may have been made, but the decision-making process was simple. Now the decision-making process is enormously complicated because it is up to private individuals or companies to decide if they want to make an investment, and they may hesitate. In the Republic a number of potential investors have been turned away by the lack of clarity about what the trading rules are and so on. Therefore the Republic faces a shortage of generation capacity which will be alleviated next year when the NIE station at Huntstown and a new station built by a partnership of ESB and Statoil come on stream. What happens after that is unclear.

1674.

When an all-Ireland market was first talked about it looked as if it would be of great benefit to Northern Ireland. If the Republic does not have sufficient generation capacity, there is a danger in an all-Ireland market that our electricity could be sold to the Republic even if we had insufficient capacity, and we would lose out. A framework needs to be created in both parts of Ireland to ensure that there is enough generation capacity to keep the lights on everywhere. At present that is not available.

1675.

The Department of Enterprise, Trade and Investment, and the Department of Public Enterprise in the Republic, have commissioned consultants to report on how an all-Ireland market might develop. The critical stage comes after that. What will the two Departments do with those reports? Will they simply say that that is very interesting and leave it to the market, or will they create an environment where there is sufficient generation capacity in Northern Ireland and the Republic to provide us with the power we need? We are better off in Northern Ireland in this respect. We are actively ensuring that there are enough new power stations. The Ballylumford project is proceeding, the Scottish interconnector will be here at the end of the year. We have schemes for Coolkeeragh and Kilroot. If those were implemented, our position would be fairly good.

1676.

The Republic does not have the same impetus and direction in managing new generation capacity as does Northern Ireland, inadequate though our efforts may seem.

1677.

Dr O'Hagan: You are highly critical of the industry and privatisation, and of the subsequent cost to the customer. How do we change this? The onus is on all of us. You are possibly reluctant to get into an ideological argument about privatisation, but how do we ensure that it is not a profit-driven industry, rather a customer-driven industry?

1678.

Mr McIldoon: The Government in Great Britain were faced with similar issues. They introduced the Utilities Act, where the primary duty of a regulator was changed to being that of looking after the interests of customers rather than of merely ensuring that the companies could finance themselves. The system here is much worse than in Great Britain, so Government need to take a more robust line as to what sort of industry they want. It is not enough to say that you want to operate in the interest of customers. You have to set out a structure that will make it operate in the interest of customers.

1679.

The serious issue is to ensure that NIE transmission and distribution is managed on behalf of customers in Northern Ireland and is not settled behind closed doors by people in London who are not accountable to anybody. There is no logical reason why this should be so. The guys in NIE are as good as the guys anywhere else. There is no reason why they cannot run their system as efficiently and at as low a cost as people in other parts of the United Kingdom. That can be done by legislation. If there is a clear indication from Government of a will to ensure that that legislation will pass, it will solve our problem. Over time the opening of the market would deliver benefits regarding generation.

1680.

The way the industry is financed needs to change. Currently it is financed by investors who put in money and look for a return on their equity. It is low-risk investment, as the risk is borne by customers. There is no logical reason why it cannot be debt finance.

1681.

You asked why we are paying so much to finance the industry. We are paying about 60% to 70% more to finance the industry than we need to. The industry is capital-intensive and probably has £1 billion worth of assets. We are paying 6% to 7% in real terms to finance that. Welsh Water has been refinanced at about 4% in real terms. You need equity where there is risk because the shareholders make their money but they take a risk. Where there is no risk, equity is not needed; it can be done with bank finance. Government ought to be asking for these changes.

1682.

As for privatisation, one of the pups we were sold about the costs of financing the industry was that the tax payer would no longer have to finance it. However, the tax payer and the electricity customer are one and the same person. If something is in the public sector and there is no risk, it can be financed at a low cost. If something is in the private sector, there is perceived risk, and a high cost is paid. The cost of financing the industry is considerably higher than it was when the customers owned NIE.

1683.

Dr O'Hagan: Do you think there is a reluctance to adopt renewable energy?

1684.

Mr McIldoon: People are keen on renewables at a philosophical level. They like the concept: it is clean, it is local, oil is not being bought from untrustworthy people or gas is not being bought from Russia. Attractive security issues are associated with it. The problem is that at the moment it costs more. The customers' response is that if it costs more and they are already paying too much, they are not prepared to pay any more. It is 6% dearer than the normal tariff, and people are not buying it because they are not prepared to pay that 6%. By international comparison, NIE has a successful tariff for people who want to buy renewable electricity. But only some 1,000 to 1,200 people in Northern Ireland are buying renewable electricity under that tariff.

1685.

Dr O'Hagan: Renewables may have a higher initial cost, but could they reduce costs in the long term?

1686.

Mr McIldoon: I have suggested to NIE that a structure should be set up whereby you could buy a stake in a windmill. You pay £1,000 now, and because you have a stake in the windmill you are given low-cost electricity instead of a dividend. Viewed over a 10-to-15-year period, that would be an attractive financial proposition. That has not been set up, but the group set up to examine renewable trading may well provide the impetus to develop such a market. There are long-term benefits, and if fuel prices and carbon taxation continue to rise, renewables could become much more attractive.

1687.

The development of renewables is associated with risk, which means capital cost is higher - it is a vicious circle. The Government could look at ways to reduce the costs of renewables, an issue that will no doubt be examined in the DETI consultation paper. It is vital to get the costs down in this sector, as in other sectors.

1688.

I will revert for a moment to your question about fuel poverty. One of the most important steps that we have taken to deal with fuel poverty is to ensure that the gas extensions proceed. The scheme in Beechmount in west Belfast, and the identical scheme in Willowfield, which is not quite as advanced, show that efficient gas-fired central heating with good insulation is the most important contribution that could be made to reducing fuel poverty. Many people are much better off. To deny people in the district towns of Northern Ireland access to that opportunity condemns them to living with fuel poverty, or otherwise society must pay for solutions to fuel poverty that are more expensive than gas. If the gas pipelines are not extended, it will be difficult to tackle fuel poverty.

1689.

Mr Wells: There was strong support for the previous increase in the levy to tackle fuel poverty. My understanding is that if it were increased to £5, for example, and index linked, the problem could be eliminated over a 10-to-12-year period. How could this be achieved?

1690.

I detect tremendous cross-party support for this idea in the Assembly because many of our constituents are suffering. Five pounds a year will not make a big difference to most of us. Would an Assembly resolution be enough to raise the levy? If there were unanimous party support, what mechanism would be needed to implement an increase in the fuel levy? Everyone is happy with the idea, but we do not know how to implement it.

1691.

Mr McIldoon: An Assembly resolution would be such an impressive mandate that a regulator who did not act upon it would be an incredibly foolish person.

1692.

Mr Wells: So a resolution would give you sufficient cover to proceed?

1693.

Mr McIldoon: Yes.

1694.

The Deputy Chairperson: At the time of the removal of the nuclear levy in Great Britain, the Treasury awarded £60 million to the Department of Economic Development in compensation. Do you know what happened to that money?

1695.

Mr McIldoon: I do not have it. Of the £60 million, £5 million was set aside by Lord Dubs for triggering the schemes in Willowfield and Beechmount. It was poured into energy efficiency as a means of tackling fuel poverty. Baroness Denton used £15 million as a direct subsidy to customers. That leaves £40 million.

1696.

Ten million pounds has gone into Ballylumford, making it cheaper than it otherwise would have been. The Minister has decided to contribute the remainder to buying down the Kilroot contract so it will cost less than it has to date.

1697.

The Deputy Chairperson: At least some money has gone toward buying out the generation contract

1698.

I thank Mr McIldoon and his colleagues for this stimulating exercise. Committee members will visit Denmark in September to look at aspects of generation there. We may need to put written questions to you on other issues, and we would be obliged if you would answer those.

1699.

Mr McIldoon: Thank you for this opportunity. I will respond to any further requests for views or information. I will respond in writing to the questions you have given me which I have not covered today.

ADDENDUM TO MINUTES OF EVIDENCE
OFFICE FOR THE REGULATION OF ELECTRICITY AND GAS

Q. Under what conditions would the Regulator consider withdrawing the contract in 2010?

A. The Kilroot contract runs to 2024 but the Regulator can cancel the contract in 2010. The presumption has always been that the contract will be cancelled in 2010 and AES are understood to be planning to have fully recovered the capital cost of the station by 2010.

If the contract still exists in its present form - a point to which I will return below - in 2010 the Regulator will face a relatively straightforward choice. If the cost of continuing to buy power from Kilroot under the existing contract is cheaper than buying from an alternative source of power or from Kilroot at market prices then the Regulator of the day would be unlikely to cancel the contract. If there were cheaper alternatives then the probability must be that the contract would be cancelled.

However, I do not believe that the present contract will survive in its present form until 2010.

The Kilroot plant has a potentially useful economic life of 20-30 years. It does not make sense for customers to pay for the full cost of the station in the period to 2010 creating thereby the possibility that the station owners will recover their capital over again in the following ten to twenty years.

The Kilroot contract must be either renegotiated so that the price falls and customers don't pay for the station twice over or customers must be freed from their obligations under the contract and the two parties to the contract, NIE and AES, left to recover in the market place over the next quarter century such revenues as they can.

Q. It has been suggested in previous submissions to the Committee that it may not be appropriate that generator contract negotiations, future generation development opportunities and gas network extension policy matters are too important to be left up to regulatory bodies such as Ofreg. How would Ofreg respond?

A. I would have a great deal of sympathy with the sentiments behind this question. Ofreg has long favoured a clear energy policy framework set by Government in which Ofreg would have its allotted tasks and others would have theirs and all would have behind them the power of Government, the authority of the Legislature and the political will of Northern Ireland's elected representatives. It is my hope that such will be the outcome of the DETI Committee's investigation and DETI's energy policy statement.

Unfortunately Ofreg has had to operate in a policy vacuum where decisions were not being made and where vested commercial interests were exploiting customers with total impunity.

The three issues which the question raises are however different. With regard to contract renegotiations the answer is clear. It should not be Ofreg's job to renegotiate these. I asked NIE to renegotiate the contracts in 1996 but they quickly lost interest. If Ofreg had not taken an active part absolutely nothing would have happened.

Ofreg has succeeded in improving for the benefit of customers the Power Station West and Coolkeeragh contracts, the Ballylumford contract, the Scottish Interconnector agreement and also in reducing the impact of the NFFO contracts. But in all these matters more could have been achieved sooner by NIE taking the lead and with government taking a less passive role.

As far as gas pipelines are concerned Ofreg was specifically asked by the then Minister, Adam Ingram, to seek bids for gas pipelines from interested parties. However inadequately, the exercise was carried out at every stage at the Minister's instigation with Ofreg reporting to DED and then DETI on progress.

Ofreg does not have a role in future generation development opportunities. It is up to the private sector to come forward with such opportunities as it choses. Ofreg is however obliged - as are others - to take a view on the impact of the proposals. To date, while there have been many tentative proposals for new generation, there has only been one firm proposal where the proposers have clearly indicated their resolve, been prepared to take market risk and engaged with Ofreg and other public agencies with a view to overcoming the obstacles to the project proceeding. That project is the Coolkeeragh CCGT proposal.

But Ofreg co-operates fully with enquiries from prospective generators and over the years has responded to queries from a number of prospective power station developers with a wide variety of projects in terms of scale, technology and primary fuel.

Q. Do you believe that customers' interests are best served within the General Consumer Council or within an expanded NIGCC?

A. There appears to be a general consensus to which Ofreg would subscribe that electricity and gas should be handled by a single consumer body. Before deciding where to house that body it is essential to be clear about the policy objective and consequently the attributes and capabilities that an effective consumer body should have.

The Ofreg view would be that the consumer body should:

(a) be totally independent - of the industry, of Government and of the Regulator;

(b) be resourced so that it can develop the expertise to "take on" the industry and where it feels it needs to - Government and the Regulator;

(d) be focussed and not distracted by the range of other consumer issues - i.e., be a consumer representative body and not a consumer advice body.

The DETI Committee will not need persuading that energy - and in particular electricity - involves complex issues which can only be mastered by people committing a lot of time to them. It is Ofreg's view that as a general proposition consumers would not be effectively represented on electricity and gas by people fully engaged in general consumer issues and that the existing relationship between the Department and the GCC - which may be perfectly satisfactory for general consumer issues - would not provide sufficient clear and unequivocal guarantees of independence in future. Provided the consumer body has the characteristics listed (a) to (d) above, the issue of its location becomes secondary.

Q. In Ofreg's paper "Stimulating Renewable Generation in NI" there are two factors considered critical to the development of the renewable energy market in NI: - the cost of capital and "top up and spill". Could Ofreg expand on how these key factors may best be addressed?

A. The Trading Renewables Implementation Group (TRIG) will look at both these issues. Top up and spill can be addressed within the regulatory framework if it is considered to be an important issue. TRIG will also be able to comment on the cost of capital. This problem could be partly alleviated by a framework for renewables offering greater certainty about their future sales. Long term contracts to supply the public sector would reduce the cost of capital and hence the cost renewable of electricity to the public sector. Other possibilities which exist might include:

n a loan facility with a special fund set up by the EIB or a commercial bank;

n a revolving fund with a low rate of interest;

n a levy on customers to guarantee the loan interest payments and capital redemption. The levy would only be a net cost to customers if a renewable generator defaulted and there would be an overall benefit in renewable electricity being more competitive. It is assumed that the DETI consultation paper on renewables will consider these and other options.

Q. Ofreg's submission refers to the need for rural energy strategies to harness local resources to the renewable energy market in Northern Ireland.

Should Government funding be directed towards the most promising renewable energy technologies or should the more under-developed technologies be given greater support to develop?

A. Ofreg will seek to ensure that the electricity industry implements the Government's renewable energy strategies in the least cost way. This means that technologies should be subject to a total impact economic appraisal. For example, while wind is the cheapest renewable technology it is not despatchable. A more expensive technology which can be despatched and is not dependent on the vagaries of the weather may impose lower costs on customers. While of less direct concern to customers for Government there is also the local economic impact to be taken into account. Some technologies will add to wealth creation in Northern Ireland and in particular in rural areas. Policy making should be informed by all the relevant information.

Finally, policy should take account of two distinct time periods. The first is the period to around 2025 when the carbon content of electricity could and should be halved. The second period is from 2025-2050 when total carbon reductions across the whole economy of 60% will be required. In this second period electricity will have to be produced with, on average, perhaps 10 to 20% of the present C0₂ component.

The next quarter century should be used as a chrysalis within which to grow the low carbon electricity industry. This should include teaching society through demonstration and pilot projects about currently unfamiliar technologies such as photovoltaics so that after 2010 these technologies will be well understood and widely adopted as their prices fall.

Q What more can be done to tackle fuel poverty?

A. Fuel poverty is a problem of both buildings and people. It is important therefore to cure the fuel poverty problem of a household in such a way that a subsequent household moving into that dwelling cannot fall into fuel poverty. In other words fuel poverty should over time become something which physically is inaccessible to any but the most perversely determined. This requires a mixture of approaches. The most important is to ensure that existing dwellings of low income households are well insulated, equipped with efficient central heating with heat controls and that electrical appliances are efficient. It is a war of attrition which must be fought dwelling by dwelling. Logically this requires the extension of the gas network to bring in as many of the larger areas of settlement as economically practicable.

While funding can come from levies on customers and DSD's budget, it is desirable that the funding should be reflective of a full cost benefit analysis of the benefits of eliminating fuel poverty. If this shows that there are significant health gains then it is at least arguable that for a period health service funding should be directed to eliminating fuel poverty.

For the longer run, just as fuel poverty should be retrofitted out of existing dwellings it should be "designed out" of new housing. This implies raising the standards of insulation and incorporating new technologies such as domestic combined heat and power - by which the gas boiler produces some of the house's electricity supply and photovoltaics by which the building itself generates electricity when the capital cost is sunk in the overall cost of the house and the electricity supply is "free" to the tenant at the time of use.

A Northern Ireland fuel poverty strategy is needed to pull all the components of a programme together and assemble the funding.

Q. To enjoy economic prosperity Northern Ireland requires energy on terms as favourable as other regions of the European Union.

Are we exploiting all available sources of European funding for the development of the energy market?

Are any more sources of funding likely to become available?

Can anything be done to increase the amount of funding available for the development of the energy market?

A. Northern Ireland has in the past been passive and has in consequence always been at the receiving end of the other people's energy decisions. What we should be doing is seeking to create the sort of fiscal, economic and environmental context which works for us. This goes therefore well beyond ensuring that we tap into every available source of funding, important though this is. To do this with any prospect of success we need to engage with key decision makers in the Commission and we would do so with greater prospect of success if we did so with allies from other regions which face similar problems.

With the growing urgency of the global environmental crisis new funding mechanisms for projects will become available from both EU and UK sources. It is important that NI is able to avail of new funding measures such as the Carbon Trust as well as being aware of shifting policy parameters - for example, the current desire in GB to move gas market penetration from 80% to 90% makes proposals in Northern Ireland to extend the gas pipelines and move from 50% to 65%/70% market availability look very unambitious.

Q. Ofreg's submission refers to the industry's efficiency gains since privatisation. Unfortunately, in contrast to what happened in GB, most of the efficiency gains had been harvested by shareholders.

How has this been possible and how may rapid change be brought about?

Can these efficiency gains be quantified?

A. In GB efficiency gains in generation are transferred to customers via competition. In Northern Ireland the long term contracts ensured that the efficiency gains - which were substantial - for example Kilroot employs fewer than 100 people now compared to 350 at privatisation - all went to shareholders.

In Transmission & Distribution price controls should result in efficiency gains being passed to customers. In GB this happened. The price for transporting a Kilowatt hour of electricity between fell from 1.97p in 1992/93 to 1.279p in 2001/02 - that is to 65% of the 1992 price. In Northern Ireland the price fell by 12%. In GB the gain was consistent across all regions of England and Wales. In Scotland the gain was less but at privatisation Scottish prices were below those in England and Wales - a position difficult to reconcile with their quantity of capital investment per KWh.

Customers in Northern Ireland will only be able to benefit from productivity gains when NIE's T&D business's protection from challenging regulation is ended and generators are exposed to real competition.

It is possible to place a value on the productivity gains which either have been or could have been made by the electricity supply industry in Northern Ireland by comparing the fall in generation costs and T&D costs which have occurred in GB and NI. The average cost of moving a unit of electricity through an electricity network varies from one region to another since it is affected by factors such as the density of population, line length, cost of the investment in infrastructure, proportion of overhead wires etc. Not surprisingly, the cost has been higher in Northern Ireland than the GB average. In 1992 it was 15% higher. It is now 58%. If Northern Ireland's improvements had followed the GB figures and the 15% differential had been maintained, customers would have paid £45m less for T&D last year.

The cost of generation in GB has also fallen. As measured by pool prices (uplifted to 2000/01 price base) until this year it has fallen by 35% since 1992/93. Applied to NI's generation costs of 4.6 per unit (2000/01 prices) in 1992/93 a similar percentage reduction would have resulted in prices in Northern Ireland of 3p now in current prices. Another measure of the productivity gains made by generators in Northern Ireland, even with the existing antiquated technology can be obtained by comparing the labour force, availability and output of the power stations now and at privatisation. The workforce has fallen from 1247 at privatisation to 504 and the gigawatt hours sold have increased from 6210 to 7700. This means that the electricity output per worker has increased by 306% since privatisation. The productivity gains which have been passed to customers have been limited to those relating to the cost dilution effect of demand growth i.e. about 15%. All the remaining productivity gains have been retained by the owners.

Q. The submission by Ofreg (Page 7) Supply & Competition beyond the region) comments that " before the all-Ireland market in electricity develops, both the Government of the Republic of Ireland and the Northern Ireland Executive need to consider what they want a more integrated energy market to deliver, and the institutional market needed to deliver it. Leaving things to chance would be irresponsible".

Does Ofreg consider that sufficient progress is being made by Governments, North and South?

A. A good start has been made by the two Departments by commissioning consultants and engaging with all the key actors in the energy sector. The critical stage will be the post report stage. Will the focus be on product or process? By product I mean prices realistically benchmarked against other places, improved environmental impact, reduction in fuel poverty, diversity of energy sources.

The danger that I foresee is that the island will be prescribed a process which will be blind - such as open all markets, stand back and hope for the best. This would be a recipe for repeating the disasters of Northern Ireland's electricity privatisation.

It is imperative that the two administrations decide on the outcomes they want or would find tolerable and design the market and other institutional frameworks which will deliver those outcomes and which have a correction procedure if they are failing to deliver them.

Q. Does Ofreg believe that the three costs in the NI energy market which contribute to high prices are being adequately addressed by the Department?

A. It would be unfair to come to a conclusion at this stage. The Department has yet to produce its energy strategy, let alone the legislation which will give effect to the strategy. Clearly, in formulating its strategy and legislation the Department will be heavily influenced by the views of the DETI Committee.

Q. Is the Customer Bond an option that is likely to be adopted?

A. The evidence in support of this approach is becoming more compelling and the Ofreg view is that it is an important element of the strategy needed to take us out of the current morass without losses. The decision on whether to go down this road will depend entirely on the views o the Committee and the Department.

Q. The Ofreg submission discussed risk and the cost of capital .... "Customers pay a financing cost which is about 60% - 70% above public sector cost of capital". How can this be justified and precisely how did it come about?

A. Customers pay in their NIE tariff a rate of return and a depreciation charge for NIE's assets. Currently this is 7% real plus a 3% depreciation charge. They also pay the availability charge for the generators and for the Gas pipeline. The availability payments incorporate the rate of return the generators sought which is, in each case, above 8% real though these rates of return are not explicit. The achieved rates of return are even higher.

The public sector borrowing rate, i.e., gilts would be about 4% real. Since there is little risk in owning the T&D assets or generating sets with long term contracts there is no reason why these assets should not be predominately or fully debt financed. This is what has now happened with Welsh Water.

For privatisation to deliver lower prices the calculation was simple. The efficiency gains which an aggressive private sector management could achieve had to be larger than the combination of the higher cost of capital and the return to shareholders. A little reflection would show that this could never be the case in the long run. In NIE's case it has not even applied in the short run. One possible way out of this impasse might be to separate the ownership of assets from operations which would drive down the cost of capital and focus private sector management's abilities on that part of the total costs i.e., running costs - where it is presumed to have expertise.

Q. The Ofreg submission discusses industry governance within Northern Ireland (page 10). "... Electricity customers have paid a very high price for ill-informed decisions made outside Northern Ireland... The Northern Ireland energy market is radically different from the market in Great Britain and Competition Commission... Has demonstrably not acted in the interests of customers in Northern Ireland, having cost them about £9m per annum over the last five years. If uncorrected it will cost hundreds of millions over the next 35 years".

Have Northern Ireland any opportunity for financial redress?

A. NIE's T&D business is again subject to periodic review and all these questions going back to privatisation can be re-opened. Nothing in regulatory practice protects unjustified or improperly acquired gains from an earlier period. NIE will - if it finds Ofreg's proposals unacceptable - be able to refer the matter to the Competition Commission. If this happens it does place the Competition Commission in the awkward position of being judge in its own case since part of the present problem is the price control imposed by the MMC (the Competition Commission before it was renamed).

An appeal by NIE to the Competition Commission would be for one reason only - to raise prices. It would therefore be hostile to the interests of Northern Ireland's consumers. However, the key issue here is accountability. The Competition Commission is not accountable to Parliament, Ministers, the PAC, consumers or the press. It is not under any obligation in carrying out its functions to respect differences between the Assembly's view of how utilities should be regulated here and the view in England and Wales. If NIE refers the next Ofreg price control to the Competition Commission and if the Commission again - in secret and without any accountability - agrees with NIE to raise electricity prices in Northern Ireland or keep them at a higher level than they need be, nothing can be done about this until the Assembly passes new legislation which establishes genuine public accountability in these matters. By the summer of 2002 we should have the evidence to definitely answer this question one way or the other.

Q. Ofreg submission - 'Progress for the provision of gas throughout Northern Ireland' (page 11). Considering the potential for the provision of gas throughout Northern Ireland, Ofreg's submission states that, "A fully developed natural gas network - excluding generation - save 760,000 tonnes of C0₂ per annum. The value of this should be returned to gas customers in the form of power prices. Mechanisms need to be constructed to ensure that this happens".

Can Ofreg elucidate further how these mechanisms may be set up?

A. There is growing evidence that both the UK and ROI will rely on increased use of natural gas to both reduce C0₂ emissions and combat fuel poverty. Natural gas currently accounts for 41% of primary fuel consumption in GB. In ROI it is 21% but is expected to rise to 37% by 2010. In GB aspirations to increase gas market penetration from 80% to 90% have moved higher up the policy agenda. The C0₂ emissions which countries save in excess of their obligation under the Kyoto obligation will have a financial value and will be capable of being traded. The trading mechanisms have not been decided and while the concept is widely supported in principle, it is not yet clear how C0₂ savers can "cash" their C0₂ reductions

Northern Ireland as an undeveloped market for natural gas has opportunities for C0₂ savings beyond the average for UK regions. Not only can savings be gained by fuel switching but the greater efficiency with which Northern Ireland will use natural gas should result in a lower consumption here than in GB from the same energy service. This will initially be because we will use more efficient boilers with temperature controls in well-insulated households. This gas efficiency gain may be further increased when domestic combined heat and power plants (DCHP) come on to the market in the next couple of years. This would raise efficiency levels to even higher levels and produce about 1 kW of electricity for the house as well as heat and hot water. The development of gas markets here with leading edge technology would enable us to both reduce total fuel bills, combat poverty effectively and reduce C0₂ emissions.

Ofreg's view is that the C0₂emissions which consumers in Northern Ireland save should be allocated a value which will be credited to customers in Northern Ireland. This should offset the cost of our energy infrastructure and offset the extra cost of peripherality. DETI, DOE, DFP and OFMDFM should be "plugged in" to discussions on carbon trading but should be taking the initiative in developing a NI carbon trading inter-departmental working group to ensure that NI is in on the ground floor when UK and EU start to design trading mechanisms in earnest. The Assembly could trigger action on this.

Q. The discussions continues: "Northern Ireland needs to seek alliances with other emergent gas regions".

Can Ofreg provide examples of other emergent gas regions?

A. Within the EU countries which have new natural gas industries include Portugal and Greece. Natural gas is also new to the province of Connaught in the ROI. Ofreg has begun a dialogue with the Portugese and would be happy to share the results with the committee. To be really effective in lobbying EU institutions, action at political level is however essential.

Northern Ireland has little to lose and potentially much to gain by seeking to persuade the Commission that emergent gas regions - which, by coincidence, also tend to be at the end of the supply chain for fossil fuels and to have above average potential in renewables - can contribute to the EU's C0₂ targets disproportionately if they are given additional help in the form of favourable energy taxation regimes and grant aid to develop infrastructure and accelerate the growth of renewables.

Q. What further measures can the Northern Ireland Assembly take to ensure its contribution to the development of the renewable energy market is maximised?

A. The Assembly's interest in renewables has already borne fruit in the very welcome decision to purchase 8% of the public sector's electricity from renewables. Ofreg has argued that public sector purchases are the most cost effective way in which Northern Ireland as a whole can buy renewable electricity. This is because, unlike domestic customers, the public sector would otherwise pay Climate Change Levy (CCL) and this increases the affordability of renewable electricity for the public sector. Secondly the public sector, unlike the private sector, offers a secure long term customer base. A public sector electricity procurement officer should be able to obtain a contract for ten years for renewable electricity on the best possible terms and possibly on better terms than fossil fuel. Accordingly, Ofreg would recommend 10% annual increases in renewable procurement for the public sector at least until the 50% threshold is reached. The Assembly itself might wish to go to a higher percentage.

As a legislature, the Assembly can influence the development of the renewables market directly and indirectly. Ofreg is currently seeking to remove obstacles to renewable trading through the Trading Renewables Implementation Group (TRIG). Ofreg would be happy to provide the DETI Committee with progress reports on the work of TRIG and relate to the Group the views of the DETI Committee. This should add focus and urgency to the Group's deliberations.

Secondly, as the legislature, the Assembly will in due course be able to require electricity consumers, suppliers and producers to meet such obligations in respect of renewables as seem to the Assembly appropriate to Northern Ireland's renewable resources potential and financial capability.

The Assembly might take note of the fact that renewables policy in Northern Ireland has always been a "bolt on/me too" policy copied from elsewhere. It has never been properly integrated into a policy framework which takes into account the policy areas of:

n developing renewable technologies;

n enhancing the rural economy;

n security of energy supplies;

n C0₂ reduction;

n combating fuel poverty;

n protecting regional competitiveness.

The Assembly might therefore test policy against the extent to which all of the above policy objectives are met by renewables policy.

Finally, Northern Ireland has not always been as active as it could have been in securing EU funding. While such funding is normally additional it may require local funding to match the EU contributions. EU funds have been useful in the past in starting worthwhile initiatives. The Assembly might require an annual report from the Department on the range of EU energy funding programmes available, the efforts made to secure funding from them and the success of those efforts.

Q. Could Ofreg elucidate the most suitable funding mechanisms to provide renewable generators with access to low cost capital?

A. Ofreg has already had discussions with the European Investment Bank (EIB) about the possibility of establishing a capital fund which could finance renewables at a low rate of interest. The EIB was sympathetic and the Ofreg view is that this should be followed up.

There are innumerable permutations which could be devised and there is no single right answer. However a fund of say £20m could be set up. Applications could be sought and scrutinised by a body such as IRTU. Loans could be issued for ten years at a rate of interest close to gilts. The fund could revolve in that as 10% of the capital was repaid each year this would be available for further lending. The fund could be indemnified against defaulting and could grow each year by £0.75m by a levy of about £1 per customer. A scheme of this sort could bring forward at low cost about 50MWs of renewables over 10 years. However, if it worked there is no reason why the fund should not be increased in size especially as the banks become confident that they as lenders would not be exposed to the risk of bad debt.

If this shaved 2% per annum off the financing cost of renewable investment and if Northern Ireland requires £150m of renewable investment by 2010 then the savings to customers should be £3m per annum. The £1 levy would, under this proposal, also be a loan and in due course repaid to consumers.

[i] Particulate Matter (diameter <10um).

[ii] ENDS Report 304, "Prospects for PM2.5 standard up in the air", May 2000

[iii] ENDS Report 304, "Prospects for PM2.5 standard up in the air", May 2000

[iv] US EPA, Office of Air Quality Planning & Standards, "PM2.5 Composition and Sources", 16th June 1997

[v] ENDS Report 304, "Prospects for PM2.5 standard up in the air", May 2000

[vi] Postalisation is defined as the charging mechanism whereby customers are charged at a similar rate, irrespective of location within Northern Ireland. Thus an electricity or gas customer in Coleraine would pay the same charges as a customer in Belfast of Newry.

[vii] NIE/DED Renewable Energy in the Millennium.

[viii] Assessment of Offshore Wind Energy Resources in Republic of Ireland and Northern Ireland

[ix] The Trust's network of 50 Energy Efficiency Advice Centres throughout the UK