COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT

OFFICIAL REPORT
(Hansard)

Strategic Energy Framework

18 September 2008

Members present for all or part of the proceedings:
Mr Mark Durkan (Chairperson)
Ms Jennifer McCann (Deputy Chairperson)
Mr Paul Butler
Mr Simon Hamilton
Dr Alasdair McDonnell
Mr Alan McFarland
Mr Sean Neeson
Mr Robin Newton
Mr Jim Wells

Witnesses:
Mrs Jenny Pyper )
Mr Paul Dolaghan ) Department of Enterprise, Trade and Investment
Mr Malachy McKernan )

The Chairperson (Mr Durkan):
I remind everyone that this session is being recorded by Hansard. Members who ask questions about price rises and such should be mindful of that, and mindful that those who answer the questions will also have to be mindful of that.

Mrs Jenny Pyper (Department of Enterprise, Trade and Investment):
Thank you, Chairman. It has never been timelier for the Committee to turn its mind to matters concerning strategic energy policy. That has been clear over the past couple of weeks. Members have seen a copy of last year’s evaluation of the strategic energy framework, as well as a summary paper. I will give an introduction to that and then answer questions.

I remind Committee members of where recent energy policy came from. The first milestone was the privatisation of Northern Ireland Electricity (NIE) in 1992, which established the electricity market structure that was in place until last year. Essentially, that consisted of bilateral contracts between NIE and two of the generating stations, with independent generation at Coolkeeragh, and the Moyle interconnector with Scotland. The basic structure of the market was bilateral contracts.

We saw a further milestone in 1996, when Phoenix Natural Gas entered the market with the introduction of natural gas into the greater Belfast area. Landmark legislation was introduced when the Energy ( Northern Ireland) Order 2003 was put in place. That established the Northern Ireland Authority for Energy Regulation, as it was known at that time. Since then, it has also taken on water responsibilities. In addition, it established the Renewables Obligation in 2003, which we will deal with in this session.

The first real strategy document on energy policy that had, for some time, been published by the Department was, in 2004, the strategic energy framework, or, as it came to be known, SEF 2004. That attempted to set out priorities for energy policy for up to, approximately, five years. There was a look ahead to some areas that we knew would be developing beyond 2010.

The strategic energy framework drew on the UK Energy White Paper 2003; however, it attempted to tailor for Northern Ireland the policy-drivers from Europe and from wider UK policy. That document preceded another strategic energy document, the ‘All-Island Energy Market – A Development Framework’, which set out areas for co-operation between the Republic of Ireland and Northern Ireland on energy policy matters.

Essentially, there were two strategic documents in 2004; however, the focus is on the strategic energy framework. The evaluation highlights some key developments since 2004: the expansion of the gas network since Bord Gáis Éireann (BGE) and Firmus Energy entered in 2004; mutualisation of the Scotland/Northern Ireland gas pipeline; and a massive growth in renewables. Large-scale renewables have grown by some 60% since the Renewables Obligation (Amendment) Order ( Northern Ireland) 2007 came into force. Moreover, we have seen the creation of a new market structure — the single electricity market, which was established in 2007. The priorities in the strategic energy framework were stated as competition that was hugely important for Northern Ireland, to supply security and to improve our position regarding sustainable energy.

I should have started with reliability, because keeping the lights on is what everyone expects the Government to do. People take it for granted that whenever the lights are switched on, the electricity will flow and it will flow at peak times when there is a bumper ‘Eastenders’ or ‘Coronation Street’, or when there is a major sporting fixture. Ensuring that demand for electricity is met in the short and longer term is essentially what reliability is about. Furthermore, and fundamentally, the strategic energy framework highlighted the cost issue and recognition of the cost burden on consumers, with a clear determination to address those issues.

Since the strategic energy framework was published, we have seen cost convergence with GB and the Republic of Ireland, until the most recent increases, which are the focus of considerable concern.

The Committee will want to discuss the evaluation and the existing framework. To set the scene: it was always our intention to review the strategic energy framework after the SEM (single electricity market), simply because the new market had changed the entire context for the document. Furthermore, it seemed only right and proper that having moved from direct rule into a devolved Administration, we would have a new framework to reflect the priorities of the Assembly. The evaluation confined itself to the priorities, gave us some pointers and re-affirmed the four priorities that we had identified as the basis for taking forward a new strategic document.

We are about to engage with all key stakeholders in a process on the priorities for a new strategic energy framework in light of the changing global context. In 2004, climate change and carbon emissions were not issues that were being widely talked about. Those issues have accelerated up the agenda as this Committee has acknowledged in previous dialogue. The global price of fossil fuels has changed hugely over the past year. There are drivers from Europe on taking measures to improve competition at European level, and — I hesitate to say — to strengthen the independence and the scope of the powers of independent regulators across Europe.

There have been changes in the UK approach to nuclear energy. There has also been extensive dialogue, as well as co-operation, with the Republic of Ireland on shared energy interests and concerns.

In that context, we recognise the need to get out and engage in such fundamental areas as energy infrastructure, grid reinforcement, further interconnection, and the extent of the gas market. In that respect, we must work closely with a number of other Departments, particularly in relation to a regional development strategy and the new regional economic strategy. Infrastructure and planning are fundamental and should not just take account of new roads and so on, but new energy infrastructure. Alongside infrastructure, is the issue of how much we go for and who pays for it.

The future generation mix for Northern Ireland must be examined, and clear targets must be set in order to send signals to industry about investment and the intent of policy. Those signals will show that we have clear drivers as to how much scope there is for wind energy, wave or tidal energy, geothermal energy, or combined heat and power. We must examine what needs to be done to facilitate a greater use of renewables, and how we can balance environmental needs with the cost implications of the targeted generation mix.

Energy efficiency is an imperative in respect of demand-side management. How do we reduce electricity consumption without compromising economic growth? How do we improve business energy efficiency? What can we do about household energy efficiency? In addition, Europe wants us to look at other areas, such as road transport use. Clearly, we have competition, and that has been mentioned. How can we facilitate competition in such a small market, with only 750,000 consumers? The entire island market is only the size of Greater Manchester, so how can we have an impact on competition and what are the regulatory levers to help us deal with that?

The Committee has talked about maintaining the security and the reliability of supply. What is the impact of that on consumer costs, and particularly on fuel poverty? How can we address that in a meaningful, systemic way — not just in the short term, but through the long-term driving-down of prices and addressing of social concerns? Those questions highlight the fact that energy policy is cross-cutting and involves almost every other Department.

Clearly the Department of Enterprise, Trade and Investment (DETI) must take the lead; however, the Department of Agriculture and Rural Development (DARD) has a major role to play, particularly regarding bio-energy in the rural community. The Department of the Environment (DOE) has the lead role in climate change and emissions; the Department of Finance and Personnel (DFP) provides drivers for the Government estate and the public sector; and the Department for Social Development (DSD) takes the lead in fuel poverty. A huge range of other stakeholders is involved: the NI Energy regulator, the Consumer Council, the Northern Ireland Energy Agency, the Carbon Trust, Action Renewables, and the Energy Savings Trust. There is a huge population out there with — often diverse — views about energy policy.

Energy policy is a balancing act; everything is interrelated, movement on one area has an impact elsewhere. Cost is a fundamental concern throughout all areas, and we are now moving forward in working with the regulator and with the Consumer Council. I have had some dialogue with Eleanor Gill of the Consumer Council about the need to involve stakeholder groups, as part of a scoping exercise over a couple of months to inform a consultation paper that we propose to bring forward. We want to have direct engagement with the Committee as part of that scoping exercise, and we want the Committee’s views and input in preparing any draft consultation paper.

As to the timing of that engagement, Chairman, we want some scenario planning and stakeholder work to take place before Christmas, with a view to bringing forward a draft consultation paper for consideration early in the new year. Hopefully, that consultation paper could go out for full statutory consultation in early spring, with the creation of a revised strategic energy framework before the summer. That is a very challenging timescale and I accept the Committee’s concerns that clarity is needed. We must send a clear signal about our targets and our future energy policy.

Before that timetable is progressed, the Department is keen to hear the Committee’s views, both on the review and on the way forward.

The Chairperson:
Members should note that the letter from the Minister, received yesterday, deals with the issues of the review, and makes particular reference to the current strategic energy framework, its revision, and to the consultation and evaluation, now under way, for next year.

Dr McDonnell:
I would like to discuss two issues. First, has the single electricity market produced much benefit? It may be premature to ask that question, but there may be a risk that the single electricity market is introduced and that nothing more is done. We have to work hands-on at making that market succeed.

Secondly, how can there be an improvement in the mix of different types of generation, particularly through the use of renewables? In another place, last week, I took part in a very interesting discussion about renewables, attended by John Gilliland and a representative from the forestry section of the Department of Agriculture and Regional Development. It strikes me that the issue of renewables has not been wrapped up or adequately managed, because a lot of renewable resources seem to be squandered.

How can we ensure that there is a cross-cutting agenda, one that runs not just through DETI but through DARD and other Departments and organisations? Just as aspects of the single electricity market are not joined up, so that may be the case with the renewables policy, even in-house.

Mr Neeson:
Having spoken to some of the generators, they do not believe that the single electricity market provides a level playing field, compared to the generators in the Republic, although it is early days yet. Another issue is that one of the main aims of the strategic plan is to build competitive energy markets. I am not convinced that that has been achieved. For example, domestic consumers have no choice from whom they can purchase electricity, yet commercial consumers do have a choice. For example, in my constituency office, I purchase electricity from Airtricity. I, therefore, have a choice; the domestic consumer does not. If the strategic plan is to be achieved, there must be real competition, and the single electricity market could have brought that about. By the same token, it is worthwhile examining the possibility of developing a single gas market on the island of Ireland.

Mrs Pyper:
As far as the single electricity market is concerned, it is, as was acknowledged, still early days. The feedback from the industry and from the regulators, both North and South, acknowledges that the trading systems are working well, and, with the operational controls, have bedded in. A huge amount of technical work had to be done to get the single electricity market to work, and, so far, it is working well.

The single electricity market committee is composed of representatives from the two regulatory bodies, North and South, and two independent members, both of whom, as it happens, are Spanish and hugely experienced in Europe. The committee has taken some major decisions, and seems to be working well. It benefits greatly from the wider regulatory experience of the two independent members.

Market dominance by the Electricity Supply Board (ESB) was a major concern, and a target set to reduce that to fewer than 40% remains well on track. Recently, we saw two ESB generation plants sold and the arrival of a new operator in the Spanish company, Endesa. A market player from outside the British Isles is very welcome.

The Department sees strong indications that the market is producing changes. Before it went live, 26 companies participated. That has increased to 38, and six more are expected to enter the market at the end of the year. Those are signs of success in attempts to create a bigger market that will encourage competition and the involvement of new players. That interest now exists, and other players are bidding to take up opportunities that ESB is being pushed to divest. There is evidence that competition has been stimulated at what, I stress, is the wholesale level. It remains a wholesale market. DETI officials see signs of competition at wholesale level, from which we take comfort.

Regarding the point about the SEM not being a level playing field, some industry players complained to the SEM committee about how things were working. Those complaints were heard and some adjustments were made. That is not to say that there is not more work to be done. Obviously, every industry player will protect its own interests and argue for the best deal that the SEM committee can consider.

To return to the issue of improving the mix, particularly concerning renewables, the number of players in energy policy highlights the point made by members. We must have a joined-up policy in relation to renewable energy sustainables. For example, even energy efficiency is spread across a range of Departments, as part of the carve-up when Departments were created.

A real opportunity exists to achieve Assembly consensus on how such policies are taken forward. In my five years in energy policy, the Department has had six Ministers. There is now a real opportunity to win agreement on what our targets and priorities ought to be.

The Minister plans to establish an interdepartmental group, specifically on sustainable energy. That group will bring together the various strands in order to formulate a coherent plan on how best to join up and take forward sustainable energy activities. The group will try to achieve consensus, despite the fact that the Departments involved have differing responsibilities and separate Ministers, who have their own priorities. That paper will be brought forward soon and fed into the overall strategic energy framework, which is in the purview of this Committee.

Dr McDonnell:
Where does responsibility lie for bringing all that together? Is it clearly in DETI, or is it just hanging out there, somewhere?

Mrs Pyper:
That is a good question. We believe that DETI leads on energy. Therefore, Arlene Foster is the Minister responsible.

Dr McDonnell:
That is fine, but it had to be clarified because no one seems quite sure.

Mrs Pyper:
There is potential for confusion, given the role of the Office of the First Minister and deputy First Minister (OFMDFM) in relation to the Sustainable Development Commission. We are not suggesting that that interdepartmental group should have a remit as wide as that. It will be charged specifically with trying to pull together and to co-ordinate strands of departmental sustainable-energy activity in order to ensure that it heads in a single direction, at the same time as contributing to the wider sustainable development effort.

The Chairperson:
The Committee has expressed its opinion in that regard, over the Department of Agriculture and Rural Development’s role in relation to land use, renewable energy and other issues. We recognised significant contributions from other Departments, but were certain that DETI must take a clear, working lead.

Mr Butler:
I have a specific question about the gas market, a subject that Sean mentioned earlier. I know that Phoenix Natural Gas has raised its prices but compared with oil and electricity, gas is still cheaper. Will you update the Committee on the situation? Does Phoenix have a monopoly on domestic customers? Firmus Energy deals with business customers, but it does not seem to be involved in the domestic market. I know that there has been talk about opening up the gas market to competition, but is that being prioritised?

Ms J McCann:
Jenny, in previous meetings, you mentioned the issue of an all-island market, and I have two questions about that. We discussed how living on an island means that renewable energy is available in the form of wind and waves. You mentioned that responsibility for an all-island energy market lies with a joint ministerial group. Is that right? How do you see that being driven forward, and whose responsibility is it to oversee that group?

Also, your team does not have sufficient drive to develop renewables, particularly wind and waves for the sustainable energy market. Given the current situation, we need to widen the sources of available energy.

I am particularly interested in how you envisage the idea of an all-island energy market being pushed forward and the role that your team has to play in that.

Mrs Pyper:
When Phoenix first entered the market, to give it time to build its customer base — as is consistent with European practice — it was allowed to hold the licence for all customers in a defined area. That further enabled the company to recover its investment in installing pipes, and so on. That licence area was confined to Phoenix until last year, when it was opened up for competition, and other companies are now allowed to enter the market and supply gas in the Belfast area. Limited competition has been provided by new companies coming into play, and there has been nothing to inhibit them from doing so since January 2008.

When Firmus Energy won the licence to supply gas to the 10 towns of the north-west and to the South/North natural gas pipeline, it, too, was granted time to recover its investment, and it is allowed to have what Mr Butler described as a monopoly. For a certain time, to allow it to build up its market, Firmus Energy has the sole licence to supply. The company is allowed to supply both business and domestic consumers; however, Firmus and Phoenix employ very different strategies and approaches to the markets.

Phoenix concentrates on supplying door to door, every house in every street, whereas Firmus uses a different business model, because it covers much larger areas in which the population is more dispersed. Therefore, it tends to supply areas that have large pockets of population, such as housing estates or industrial estates, and it uses that model to drive its strategy. Firmus Energy’s licence area will continue to be protected for a period to enable it to recover its investment.

However, competitors that could previously be supplied only by Phoenix are coming into the area, and alternative suppliers are now available.

The Chairperson:
Just to remind members, Phoenix communicated, in a letter to the Committee and in a presentation, its interest in the 10-towns market being opened up to it ahead of the designated period. The company made the point that it had experience in adapting houses whereas Firmus, as Jenny indicated, has a different business model and is not particularly interested in conversions, but in newbuild. Members may further recall that the regulator, at a previous Committee meeting, indicated that he took a dim view, so to speak, of opening up the market ahead of the designated period.

Mrs Pyper:
The regulator’s view was that Phoenix had had its time and its monopoly position, which had been pre-agreed for Firmus, too.

The Chairperson:
Phoenix’s point was that it could do it without competing, and with customers that Firmus did not want, which is a fair point.

Mrs Pyper:
That is a healthy pressure, and it is valuable that there is dialogue and that Phoenix wants to push in and ensure that the gas market is extended as far as possible. The Department supports that broad objective.

From previous briefings, the Committee is aware that the Department has looked at several areas with regard to renewable energy on an all-island basis, simply to get the benefit of economies of scale and scope in looking for opportunities where there are shared interests.

The most significant piece of work was the electricity grid study report, which suggested that on the island, there was the potential to go to 42% of renewables in the generation mix as an upper level. The technical study suggested that anything beyond that could not be delivered, or was not capable of being maintained stably in the system. That work is ongoing on a joint basis, drilling down and looking at what that 42% would mean for cost. Wind power was most of the 42%, which is a huge resource, and that point has been made about tidal and wave power, and, my colleagues in the Geological Survey say, potentially geothermal, too. Therefore, there is a range of technologies worth studying, in addition to wind.

The grid study was clear that wind energy is the cheapest in cost implications for consumers. Elsewhere, technologies are evolving, particularly in the area of tidal power, where they are still at the demonstration and pre-commercial stage. It is great that we have the Marine Current Turbines Limited project working in Strangford Lough —

Dr McDonnell:
Jim Shannon has been all wired up since you switched that on.

Mrs Pyper:
That project is testing the technology in a most sensitive environment, so if it can prove itself in Strangford Lough, that will be a huge boost in proving the technology.

There is also potential for renewable energy off the north coast, whether for off-shore wind farms or tidal energy, particularly around Rathlin Island. The Department has been liaising with the industry for a long time on how best to develop the market for marine and tidal resources, and is proceeding with a strategic environmental assessment, which is seen as a prerequisite before proceeding to commercial deployment of marine technologies. Tenders are being sought for that process, which takes about 12 months to complete. The Department is, however, in dialogue with several key players, who are interested but prepared to wait for the process to work through because the technology is still pre-commercial.

We liaise closely with Irish colleagues as to how we set and agree targets. All our energy policies are driven by the energy targets that we expect to be set on renewables by the European Union. I have briefed the Committee before on the challenging targets that Europe wants to see. One of the key things for the strategic energy framework will be to get consensus on what Northern Ireland’s contribution will be, and what we should set as the Northern Ireland target for 2020. The Scots have set an ambitious target: they aim to generate 50% of their electricity from renewables by that date. The Irish Government have set a target of 33%. We have a technical report, which tells us that 42% is possible. For our consultation, we may propose that the target be approximately 30%; however, we may be able to go beyond that.

The key issue is what that means for the deployment of wind farms and for the grid reinforcement that is needed to carry that. We are working with our colleagues in the South on that. There are sensitive issues there, including building the grid and obtaining consent and planning permission for it. The more that we look at those issues on a shared basis, the better our understanding will be of the likely implications, because the grid is already connected.

Much work is being done, but it will be for the new strategic energy framework to look at the potential cost implications and benefits for consumers in Northern Ireland, while learning from and looking at how that is being done in the Republic of Ireland.

The Chairperson:
The next item on the agenda may well take us into the issue of gearing the market for renewable energy.

Mr Hamilton:
My questions are about gas, and the openness of the market to competition and extending choice. I agree with some of the comments that the Chairman made about the two different licence areas. I appreciate why they were established in that way: that was right and proper. Different business models are being opened, however, and it would be a useful start in the Firmus Energy licence area for those domestic customers for whom gas is not available — either through Firmus Energy or thorough the opening of the market to wider competition — to have that option, giving them a wider choice. That leads to the question of reliability and competition, and the extension of the market beyond the current two licence areas. What is the Department doing to extend pipelines into parts of Northern Ireland that are not currently connected? That would extend people’s choice and offer greater reliability.

Mr McFarland:
The prospect of geothermal and wave energy is very exciting. However, we still put fingers in our ears and hum over the issue of nuclear energy. Everyone else across Europe and the world suggests that nuclear is the only long-term option.

I want to talk about last Sunday’s article —

The Chairperson:
To say “everyone else” slightly overstates that point.

Mr McFarland:
I am talking about other countries, not about here.

Did members read ‘The Sunday Telegraph’ article on wind power last week? It said that wind power was:

“one of the greatest deceptions of our time”,

“one of the most expensive ways of generating electricity yet devised”

and that wind power was:

“hopelessly unreliable”.

The article drives a coach and horses through the logic of covering Northern Ireland with wind farms — which is the current plan. It was devastating to read. We need a bit more reality in this debate.

We talked about the ambition of the 40% target. These wind powers are being built to create 30 megawatts and, in reality, only about 25% of the energy that they claim to produce is produced. We need a wee bit of reality. We based our plan on building lots of wind farms everywhere. Can we have a comment on that?

The Chairperson:
Some of those issues relate more directly to the next item and the possible changes in the NIRO. The article to which Mr McFarland referred challenges the subsidy scheme; and it is skewing matters. Maybe Jenny Pyper will address that issue. However, I want Mr McFarland to talk first on the NIRO item, as it is relevant. Malachy McKernan has had good notice.

Mr Newton:
Mrs Pyper referred to the Utility Regulator and terms that were being changed by a European directive. What does that relate to, and is there any information available to the Committee on those changes?

Mrs Pyper:
Those changes relate to the gas market and take us into territory that I did not cover when answering a previous question — asked possibly by Mr Neeson — about the work being done on gas on an all-island basis. We are not looking at an all-island gas market in the same sense as a single electricity market. We are not talking about creating a new market. However, we are looking for scope for efficiencies and economies if there were to be harmonised mechanisms North and South. We are connected through the North/South pipeline. Through the common arrangements in gas, we are looking to see how the two systems might co-operate — North and South — at a practical level, to achieve operational efficiencies in integrating network systems, IT, etc.

Initial work carried out by the two regulators suggests that there are initial cost benefits of around £10 million quantifiable over 10 years. However, there are further qualitative market benefits for security of supply, barriers to entry, etc, which are still being costed and have yet to come before Ministers, North and South.

Common arrangements for gas are not about creating a new market; rather it will look at driving out costs from the separate operation and interface of the two markets. As part of that, we are examining how the gas infrastructure exists. When I talked about one of the challenges for the strategic energy framework, I referred to infrastructure. How far do we extend the gas market, and how do we pay for that? How do we get the gas to Dungannon, Cookstown, Omagh, Enniskillen, etc, and how do we take it further?

The Department did some work about two years ago when the Republic of Ireland examined the cost of taking gas from Corrib in the west and bringing it to Sligo and possibly as far as Donegal town. If it were economic to bring gas as far as Sligo, could the Northern Ireland network be extended to bring gas to the west? It seemed like an attractive proposition. If gas were to go to Donegal, would there be an opportunity to take gas from the north-west to Letterkenny and Strabane to cover those areas? However, the economics did not add up as the cost implications were huge. There was no economic case that any company or private-sector investor could pursue to drive that opportunity forward.

We must look at whether there is any case for public-sector money to be used to reinforce the infrastructure to take gas further, and that is part of the infrastructure debate. I am conscious that the Executive put £38 million into the pipeline to the north-west to help to drive that forward and if we are looking for new infrastructure as part of a regional economic strategy, that there is potential for an infrastructure investment that might be made to help drive gas out.

We are conducting a study to assess the relevant costs, how the economics would stack up and what incentives would be required for the private sector to develop the gas market. The study will also examine what public-sector subvention would be required if there was a funding shortfall and the economic case did not stack up.

Gas is still the cheapest and most efficient means of generating power, and most global commentators believe that fossil fuels will continue to be the cheapest and most efficient way of generating energy for the next 20 or 30 years.

Mr Hamilton:
At the risk of being accused of parochialism, Jenny has concentrated on the west.

The Chairperson:
Are you about to produce a press release?

[Laughter.]

Mr Hamilton:
The south-east is an example of another area in Northern Ireland where the economic considerations of developing the gas market may be less challenging than those in the west.

Mr Wells:
I think I understand what is going on here.

The Chairperson:
That is a bold claim.

Mr Wells:
In South Down, Phoenix Natural Gas is more than happy to bring pipelines to Comber, Downpatrick, Lisburn and Ballynahinch. However, the regulator has refused to allow Phoenix to do that because it is unhappy with the rate of return. Phoenix is prepared to take that risk but the regulator says that it will decide whether that risk should be taken. It is frustrating that the regulator has an impact on that decision and that it cannot be made commercially.

The Chairperson:
OK, that is the end of the breakout.

Mrs Pyper:
Mr Wells is right that proposals to extend gas to Downpatrick, for example, are being discussed. However, I am not equipped to comment specifically on the regulator rejecting Phoenix’s plans for that area. The regulator has to consider what the cost of extending the pipeline will be to consumers. As Committee members probably know, we have a postcode-based tariff, which means that consumers pay the same gas tariff regardless of where they live.

Dr McDonnell:
The rest of us do not want to pay for gas that is going to Downpatrick.

Mr Hamilton:
You already pay for gas that goes to the north-west.

The Chairperson:
I remind Alasdair that the meeting is being covered by Hansard and that E K McGrady is an avid reader of the Official Report.

[Laughter.]

Mrs Pyper:
The regulator must be satisfied that the cost implications for consumers can be sufficiently justified. I am sure that you will ask the regulator about all of that at another stage.

I have not read ‘The Sunday Telegraph’ article about wind power to which Alan McFarland referred.

The Chairperson:
It relates to banding.

Mrs Pyper:
I am considering the implications for energy policy. Challenging targets are being set by the European Union and the UK Government, and as a region of a member state, Northern Ireland must play its part. I am looking for a balance; if we do not use wind power, how do we contribute to our targets and ensure security of supply? The potential advantages of wind power — security of supply and protecting consumers from the volatility of global oil and gas prices — must be set against the disadvantages.

If we do not use wind power, how do we meet our targets on carbon emissions and renewable energy? The possible options are potentially even more expensive. Work needs to be done to map the cost of wind against some of the other alternatives. Greater interconnection is one option. Northern Ireland could benefit from generation — of whatever hue — on the GB mainland.

However, that does not enhance our security-of-supply position in looking after our own generation and supply needs. There is always a risk that the contracts or deals that are set up for interconnection may not always be for the benefit of consumers here and that we would have to rely on further regulation. One option is to simply choose the cheapest and most cost-effective generation and rely on interconnection to meet our targets. That option will be discussed as part of the consultation.

A debate on Europe’s third package on electricity and gas is at an advanced stage. That is the attempt by the European Union to force through changes that will encourage competition, inhibit monopolies, particularly the power of the big, vertically integrated utility companies.

We have implemented the first two packages in relation to market opening; for example, opening up the domestic and business markets to competition. The EU is putting together a further package, and the signals are that that third package will go even further in what it requires. I confess that I have not focused on the package, but I understand that its implications for the regulator are that it will introduce plans to enhance further the powers and independence of regulators on a Europe-wide basis.

Northern Ireland is fortunate with its system of regulation in that it has its own regulator and does not come under the jurisdiction of Ofgem. The GB market is very different to the Northern Ireland market, so the fact that Northern Ireland has its own regulator is an advantage. The regulator in Northern Ireland also has greater scrutiny powers than those of Ofgem, and he receives more consultation on the decisions that are made.

The system of regulation in Northern Ireland is line with UK and European policy, and the third internal market energy package from Europe will include more about more powers for regulators and greater co-operation. The overall objective of the EU is to build a Europe-wide, regional electricity and gas market, which would result in regulatory decisions that are consistent across Europe. I cannot point to anything that is published because the package will not be agreed for some time, but the indications are that policy will head in the direction of helping to drive a single European market.

The Chairperson:
I am conscious of the time, and that the discussion has gone into issues about renewable energy and the possible role of the changes to the renewables obligation regime, which is the next item on the agenda. Therefore, we will now move to the next presentation. Members have a cover letter, dated 16 September, from sustainable energy branch to the Committee Clerk, entitled, ‘Banding of the Northern Ireland Renewables Obligation (NIRO)’.

Mrs Pyper:
The discussion about NIRO is not new to the Committee; several discussions on it have taken place. Around this time last year, a discussion took place on the legislative change that was needed to coincide with the introduction of a single electricity market. A couple of iterations have taken place since then, moving towards banding of NIRO, in line with the way in which GB has taken the issue forward. Any changes to NIRO inevitably involve a lengthy process, because that involves changes to primary and subordinate legislation and various consultation phases in line with the Department for Business, Enterprise and Regulatory Reform (BERR) in GB.

At the meeting on 17 April 2008, the Department presented to the Committee the outcome of the UK-wide BERR consultation on banding proposals, and we said that we would go ahead with our own preliminary consultation to try to identify NI-specific issues, rather than taking the BERR consultation as being adequate. In May, the Committee saw the preliminary consultation, and a summary of responses is included in members’ papers.

In July, the Committee noted the SL1 document, concerning the required primary legislation changes, and it asked for clarification on the implications for Northern Ireland of banding. I hope that the papers provided for today’s meeting go some way to answering those questions.

The other papers that we have submitted include the outline of the statutory consultation that we are proposing to initiate shortly and the SL1 document for subordinate legislation: the new renewables obligation Order, which will come into operation from April 2009.

We have a tight timetable for completing the rest of the necessary work, and that is due to the fact that the Energy Bill to amend the primary legislation did not, as expected, get Royal Assent in the summer and is not enjoying straightforward passage through the Lords. However, the process should be completed by November.

We are grateful that the Committee has agreed to hear our presentation on NIRO-banding discussions this week, rather than next week, because, given your agenda, at one stage, it was proposed for then. We are keen to move ahead and commence consultation in order not to miss any opportunities in the legislative time frame.

We will forward the statutory consultation document to Committee members as soon as it is ready, and during the consultation phase, we will be happy to have further dialogue with members after they have had a chance to scrutinise the document.

I will not say any more in my introduction. There are some specific technical matters concerning NIRO, and we have attempted to present those as clearly as possible. I hope that we have succeeded; however, that is Malachy’s specialist subject and he is on the question-time panel for detailed questions.

The Chairperson:
Malachy, do you wish to add anything?

Mr Malachy McKernan (Department of Enterprise, Trade and Investment):
Given the time frame that we have, if members are happy, I am happy enough to take questions.

Mr McFarland:
What is CHP?

The Chairperson:
Combined heat and power. We will go to Alan McFarland first, because the issue that he raised, in many ways, goes to the heart of some of the banding proposals.

The article to which he referred, which was specifically about England, contended that wind farms have been created purely to benefit from subsidies provided through the existing renewable obligation certificates (ROCS) scheme and, perhaps, they were located in areas that do not have much wind or they were benefiting from renewable obligation certificates but, because of a lack of storage, the energy was not being used as productively as it might have been.

Many parts of Northern Ireland are far more wind prone than some of the places in England that people are complaining about. Storage is also an issue. Has that been incorporated into plans about how the future regime will work?

Mr McFarland:
In addition, the article mentions “installed capacity”, and quotes a hypothetical figure for how much power each wind farm produces of 16 megawatts for x thousand houses, whereas, in fact, the output due to low wind or other reasons fails to reach that figure. If we base our calculations on such production figures — whereas, in reality, less is produced — we will never achieve the production levels that are envisaged. I am worried that if we incorporate imprecise data in the technology model, we will be asking for trouble. We talk about securing output; however, if we cover Northern Ireland with windmills and that does not lead to the hoped-for, guaranteed energy-production security, we will be asking for trouble.

We need a degree of reality in our planning. If we begin with imprecise data, we will have problems later when that data does not produce the required result.

Mr McKernan:
Mr McFarland is correct to acknowledge that wind power is a less efficient generator of electricity if measured by units of installed capacity. As we calculate what we are going to get against our 12% target come 2012, we have taken that factor into consideration. We have been using a 30% efficiency factor. That is built into our estimates of what we are going to get. As the Chairperson said, we have a better efficiency level in Northern Ireland because of our weather. We have a very good wind resource in Northern Ireland. That is what attracts the applications that we have received during the planning process, as well as the renewables obligation.

If we move to tidal power or some of the bioenergies, we could expect to get at least twice that type of efficiency. However, the reality is that the capital cost of wind power makes it the cheapest option at the moment for developers. Developers will go where they will obtain the best return. Hence, the banding proposals that we have put forward are intended to enhance the viability of those more costly emerging technologies.

Mr McFarland:
I wish to examine the biomass issue. The world has caught a cold as regards growing maize. People are beginning to grow crops to produce fuel. That has created a crisis in animal-feed production, which has led to a rise in the price of beef production. Are we in danger of encouraging farmers to grow willow biomass and no other crops, with a view to producing wood chips? Will we all have enormous hoppers at the back of our houses, in which we store wood chips to put in our burners? Farms have stopped producing food crops in order to grow biomass. Have we made any projections that will prevent us from repeating the maize situation?

Mrs Pyper:
Mr McFarland has made some very valid points. This is an area in which we overlap with our DARD colleagues. I may have previously mentioned to the Committee that DETI took the lead on a piece of consultancy work that looked at the bioenergy potential in Northern Ireland, the options for the different feed stocks in bioenergy and the interrelationship between them. I hope that the results of that work will be presented to the Committee in a matter of weeks, so that members can examine its conclusions. It will be important to feed that work into the strategic energy framework. We have relied greatly on the work that our colleagues in DARD have done. It comes together in the bioenergy report in a joined-up way.

Mr McKernan:
I will augment that briefly. The banding consultation document that we are putting out is based on the GB version issued by BERR. It contains a plan to introduce sustainability reporting as part of the new proposals. The Office of Gas and Electricity Markets the UK regulator, when it issues renewables obligation certificates will require biomass producers in particular to report on sources, alternative uses and costs of the biomass. It has been realised as an issue.

The Chairperson:
A few points were made earlier about BERR. When we examined this issue previously, I questioned how far BERR’s legislation would define or confine the legislation that we would be making. The fear was that we would end up with karaoke legislation; we would end up with the BERR necessities, and would not be able to do anything of our own.

I noticed that there is some variation. One is in respect of landfill gas. Can you explain that variation? Why is DETI proposing that landfill gas retain its 1 NIROC/Mwh status despite the GB obligations wishing to reduce it to 0.25 ROCS?

Secondly, you said that ROCS in respect of generation in Northern Ireland’s offshore waters are handled under the GB obligation, which only intends to offer two ROCS, whereas the Scottish Government is offering three ROCS for tidal power and five ROCS for wave technology. Does that skew matters and create a particular advantage for Scotland?

Why do we not adopt the banding values proposed by the Scottish Government rather than those proposed by BERR? Has the issue of variation been addressed, because I do not see any reference to it the documentation. I have voiced my concerns, in the Committee and elsewhere, about the eligibility for ROCS being confined simply to energy generated in Northern Ireland. We know that renewable energy sited in the Republic of Ireland supplies only the Northern Ireland market, and yet that is disqualified from being considered for ROCS.

We hear about the imperative of creating a single energy market, but that does not tally with what we hear about the imperative of placing emphasis on renewables; it is an anomaly. Where renewables are concerned, there is no way to create a single energy market via the ROCS regime. If we are serious about a single electricity market and the all-island grid study, I would be happy to discuss those issues with Eamon Ryan TD, Minister of Communications, Energy and Natural Resources, when he holidays near me during the summer.

Mr McKernan:
First, I want to answer your question on landfill gas variation. Northern Ireland’s existing obligation level is lower than that of GB’s, which is an important variation because it reduces the impact on cost to our consumers. BERR had made it well known that consistency across all three obligations is the name of the game.

Some people within the industry have indicated that the banding of landfill gas was slightly harsh on Northern Ireland, because, in the first instance, landfill gas generation is a fairly well established practice in GB. Also, under the EU landfill directive, the availability of landfill gas will be reduced in the future. Additionally, it has been claimed that cost of landfill gas generation is higher in Northern Ireland, because there are more landfill sites, which are smaller and more remote, and, therefore, the cost of transmission is much higher than in GB.

We are also conscious that, up until last year at least, landfill gas was the biggest renewable source of electricity in England and Wales. Landfill gas generation accounted for around 46% of the total renewable obligation certificates issued in England and Wales. Northern Ireland did not receive any ROCS for landfill gas generation. One small landfill gas site has opened within the past three months in an attempt to improve the situation here. Under the grandfathering principles, GB will retain one ROC for landfill gas generation, so Northern Ireland should also be facilitated.

The Chairperson:
Will that be subject to state aid?

Mr McKernan:
Yes, BERR has confirmed that. ROCS are now regarded as state aid, so we must go through that process, as indeed will the Scottish Government, which is an important point. BERR has been silent on the issue, but it has told the Scottish Government that they will need state-aid approval.

There are a couple of points to note in relation to that. First, the Scots already had additional support mechanisms in place in the form of a marine supply obligation, which was part of their marine renewables obligation. Admittedly, that never came into operation, but they always had it on the stocks to introduce.

The Scots have removed that from the legislation and replaced it with a banded obligation, proposing five ROCS for wave energy and three ROCS for tidal energy, on the condition that it complies with EU state-aid rules. Under the Scottish renewables obligation, the requirement is that anyone receiving that level of entitlement cannot avail themselves of capital assistance upfront, which is available across the UK under the marine renewables deployment fund. Therefore, there is an option for them.

Northern Ireland has adjacent waters; therefore, we have some concerns about how we would “compete” for the waters.

The Chairperson:
We had a territorial water dispute about Ards and Strangford earlier, and now we are going to have one about Northern Ireland and Scotland.

Mrs Pyper:
It will be interesting to find out whether the Scots get state-aid approval, so we will monitor the situation closely. If they are successful, it will make it more straightforward for us to make any changes because the precedent will have been set. In the meantime, we will go ahead with our strategic environmental assessment, which is an essential pre-requisite for any marine project, wave or tidal. Any projects that come forward in the next five years are more likely to be in the pre-commercial or demonstration stage, and they will need capital support. As Malachy said, if a project receives capital support, it will not get ROCs. Therefore, there is no imminent disadvantage.

We must meet our obligation by 2012, so we are considering proposals up to that date. The issue is not a show-stopper for Northern Ireland, but we are monitoring it closely. If the Scots beat the path to Brussels and secure state-aid clearance there, that will make life more straightforward, and it will enable us to move quickly to do the same if necessary.

The Chairperson:
Would the fact that the Scots are setting more ambitious targets for renewables be a factor in them getting approval on state aid? The fact that we have lower targets might mean that we will not get approval, because it may be viewed that we are merely piggybacking on what they are doing and not contributing to wider renewables achievements.

Mrs Pyper:
We will have set sustainable energy targets in the new strategic energy framework, which will be agreed by 2009. However, the Scots set an ambitious target of generating 50% of its energy from renewables, which is the figure that the European Union would like all its member states to achieve.

Mr Neeson:
I am being slightly parochial, but the geological survey for gas storage in Larne and Islandmagee was due to be completed in August. Has that happened?

Mrs Pyper:
I do not think so. The delays have been caused by the difficulties in getting a vessel that is capable of conducting the survey. The vessels are highly specialist — it is not simply a matter of going out and hiring one. They are involved in work all around the world, so there have been delays in getting the survey carried out. However, the project is ongoing, and it got funding from DETI to proceed.

The Chairperson:
The North/South issue was not answered.

Mr McKernan:
We are still dependent on BERR for the issue of ROCS anywhere outside of Northern Ireland. We have made representations for that, but we may have an opportunity to approach it again regarding that specific case. To date, we have had a blank response, even at ministerial level.

During the existing banding consultation, there was a suggestion that BERR intends to consider territorial waters outside the UK for eligibility. That will, perhaps, provide an opportunity to approach BERR again.

The Chairperson:
We need to do that. It is nonsense to place a huge emphasis on renewables in the single electricity market because we have not factored those two aspects into the regime for gearing the market on renewables. I have told the Prime Minister — including during his recent visit — that, as well as helping with finances, Whitehall could help by including Northern Ireland in its legislation on the renewables obligation.

Mrs Pyper:
You should follow up on that.

Mr Butler:
The paper outlines your intention to protect NIRO beyond 2012, and it mentions that DETI has conducted work to determine implications for consumers.

Mr McKernan:
That work must be initiated and will form part of the wider strategic energy and framework development. 2012 is a watershed — or, at least, a focal point — for Northern Ireland renewables. Our current target applies until 2012, and we have yet to set a target for subsequent years. That new target must consider the EC proposed renewables target for 2020. Moreover, that applies to the whole of the UK, which is currently consulting on its renewable energy strategy. That might determine the level of renewables obligation, because, although the current banding of the obligation is a major radical support step, it will need to be reviewed after the 2020 targets — and how we intend to reach those targets — have been agreed. At present, the renewables obligation across the UK is predicated on reaching 20% by 2020. The review will be major.

Furthermore, we have projected our renewables obligation at 6·3% until 2012 — it is an important year for us. That level would be unviable if we operated a renewables obligation on our own. However, BERR agreed to constrain the impact of the cost of NIRO on consumers. In fact, NIRO should be, perhaps, in line with the GB level of 12·4%. When we project our new targets, we must determine our renewables obligation level and decide whether we can justify approaching BERR with a case for maintaining and extending that concessionary renewables-obligation level. That will affect the cost to the consumer and the implications for 2012 onwards.

The Chairperson:
The Committee needs to understand the processing and timing of the SL1, which is the subject of a separate letter. Will you explain that?

Mr McKernan:
The SL1 is a standard procedure during the proposal of legislation. The SL1 outlined in the letter relates to the Renewables Obligation Order ( Northern Ireland) 2009, which we intend to have in place by 1 April 2009. We issued an SL1 to the Committee in July 2008, which outlined the changes that are necessary to the Energy ( Northern Ireland) Order 2003. However, this SL1 relates to the implementation of banding in subordinate legislation. The detail of that Order has not yet been agreed in GB or Northern Ireland. Does that answer the question?

The Chairperson:
There have previously been issues around SL1s and the time limit. The Committee often receives a submission and has to be reminded that members have had sight of it in advance. The Committee sometimes feels that it is pre-constrained by the way that some of these things are issued and brought forward, and by the time there is a fuller understanding, it is almost too late because things have already been said. The Committee needs to know where the SL1 fits in relation to the development and consideration of the other issues.

Mr McKernan:
That particular SL1 relates to the forthcoming renewables obligation Order. That Order will be subject to the draft affirmative resolution of the Assembly, so it will be debated in the House. That is expected to take place in February or March 2009 in order to have the legislation in place by 31 March 2009. Much is dependent upon the time frame in which we are involved, as Jenny said earlier, and the completion of the Energy Bill at Westminster will determine when we kick off and can amend our primary legislation. We plan to propose the other piece of legislation before Christmas. It may be before the House in January 2009.

The Chairperson:
Right, I think that that is all perfectly obscure. [Laughter.]

Mrs Pyper:
Would it help the understanding of the Committee if we presented this in a graphical form?

The Chairperson:
It could not do any harm.

Mr McKernan:
Within the papers that have been distributed to the Committee, there is a step-by-step plan of what remains for us to do. It may not clarify entirely what needs to be done, but the Committee should be aware of these points — they are the key steps that have to be undertaken, including consultation on the legislation.

The Chairperson:
So we will be in Donald Rumsfeld territory then — we will know the unknowns.

Mrs Pyper:
I should have mentioned this when I was talking about the strategic energy framework: big decisions need to be made about energy targets and priorities, and we are consulting quite widely across all the Departments. We would be very glad to hear how best to engage with the Committee. Any thoughts that the Committee might have about how best we can structure the dialogue during the next scoping consultation phase — before we get to an actual paper — would be most welcome. Our timetable may be too ambitious, but I would rather set an ambitious timetable and start the dialogue than agonise over what the process should be.

The important thing is that we start the dialogue — we are very open to any input from the Committee on how that is best structured to meet its needs.

The Chairperson:
That would be appreciated. As I have said, we have tried as a Committee, on different issues that we have been interested in, not to get into a situation of rivalling scoping or planning work that the Department or the Minister may be involved in, but there is a very keen interest within the Committee on a number of energy issues that would feature in the medium- and long-term energy strategy.

It could well be that, as we look at our forward work programme, there will be some specific areas that the Committee wants to look into. We would want to do that in ways that would be complementary with, and contributory to, wider work on strategic energy arrangements. I am very glad that you are open to idea of the Committee having input and I know that a number of Committee members want to pursue some issues.

Dr McDonnell:
If I could regress to the strategic matters mentioned earlier, there is a question that I did want to ask and I will put it on the table if we cannot get an answer today. I am keen to explore the question of mutualisation.

Mrs Pyper:
I am happy to touch on that. There are some very considerable benefits from mutualisation in relation to the Moyle, the Scotland to Northern Ireland natural gas transmission pipeline and the Belfast transmission pipeline — which is the most recent. It projected savings of approximately £30 million over the lifetime of the assets. Mutualisation can be beneficial in relation to the associated benefits of low-cost finance through the mutual model.

Mutualisation is not a plank of our energy policy at the moment. There are concerns that returns from mutualisation are not, on occasion, as efficient as equity-based models because the rigour from shareholders is absent.

In a mutualised model, there is also the fact that risk is transferred to consumers. There is a much greater exposure than there is with an equity-based alternative, in which shareholders also bear responsibility for the risk. Our position has very much been that it is definitely worth considering whether individual projects might lend themselves to mutualisation. The transferring of risk onto consumers is always the issue that gives the most cause for concern and is something with which the regulator needs to be closely involved to monitor and assess risk.

The Chairperson:
That is the point of information that I was about to draw to the attention of members. Alasdair raised the question about mutualisation last week, when the regulator was here. It is one of the issues that is touched on in the regulator’s letter to the Committee when he responded to some of the questions that were raised. Under point 3 — changes to regulation — the regulator wrote:

“We are also willing to take forward a discussion about the future of mutualisation, although expectations here should be realistic. Financial benefits for consumers will come at the price of extra risk, and it is far from clear that consumers have an appetite to take on risks relating to operational performance, the costs of electrical switchgear, pensions, etc. As a first step, we have recently conducted a review of the performance and governance of the mutual model so far, which we will publish later this year.”

It seems that that is an issue that we will want to follow up.