Energy Policy and Economic Recovery 2010 - 2015

1. Energy Policy and Economic Recovery2010 - 2015 Dublin Economics Workshop Symposium Kieran O’Brien 16th June 2011

2. Introduction • Irish Academy of Engineering • Energy Standing Committee • Reports • Current Perspective • Short Term • Economic Recovery • Competitiveness June 2011

3. Agenda • Energy v Electricity • Competitiveness • Demand and Investment • Natural Gas • Large scale renewables • The “16% renewables” target • Conservation • Privatisation • Conclusions June 2011

4. Competitiveness – Natural Gas • Irish natural gas industry performed very well in the recent periods of extremely high demand. • Exceptionally cold weather: • Drove up heating demand • Closed down wind generation • Ireland is part of the UK natural gas market. Pre tax: • Our prices are higher than the UK… • But lower than mainland Europe. June 2011

5. Competitiveness – Electricity • Pre tax or post tax comparisons? • PPP corrections –or not? • Competitiveness has improved • Prices were typically 35% to 45% higher than the EU average • Now about 15% to 25% higher • In terms of the overall economic efficiency of the Irish power industry we have plenty of room for improvement June 2011

6. Demand and Investment • Energy demand growth has collapsed as a result of the economic collapse. • We have refused for several years to recognise reality. • The policies of the 2007 White Paper are utterly inappropriate today. • We are now formally revising policy but… • What has taken us so long? • Why are we so reluctant to carry out quality techno-economic studies and base policy on evidence. • Why don’t our regulators insist on “price impact analyses” for all policies or investment proposals as is standard practice in jurisdictions with developed economic regulation. June 2011

7. Demand and Investment –Natural Gas • Complete the Corrib project • Undo the damage the done to Ireland’s reputation • Maybe even sort out our entirely dysfunctional planning regulations • Promote investment in Gas storage • Seasonal and operational • Promote LNG importation facilities • Long term supply security June 2011

8. Demand and Investment –Electricity • Consistently over-estimated demand for the past half decade. • Our investment in both generation and networks over the past decade has been excessive • Minimise investment in new facilities which are not needed • Sweat our existing assets! June 2011

9. Natural Gas –a game changer? • Vast new reserves of “unconventional gas” • 250 years at current consumption -IEA • NOT in the Middle East! • Dispersed resources + LNG = global gas market • Ireland’s generation mix suits this fuel more than most other countries. June 2011

10. Natural Gas –a “fracking” problem? • Environmental regulation • Undoubtedly some poor practices in the US. • Banned in France –already! • IEA report • Opinion: • Probably won’t be produced in Western Europe. • But will be produced elsewhere in sufficient quantities to restrain world gas prices • And in Ireland? June 2011

11. Large scale renewables ESRI 2009 “For a small and isolated electricity system such as Ireland, a high penetration of wind is economically sound only with increased interconnection to Great Britain, since wind generation would otherwise be curtailed. Not surprisingly, for low fuel prices the least-cost scenario contains low levels of wind generation whereas the opposite is true for high fuel prices.” Assumptions “We analyse the costs to the system for a variety of fuel prices and carbon emission permit costs, as outlined in Table 1, interacting each level of carbon permit price with each level of fuel price. We assume that natural-gas prices change in proportion to the changes in oil prices. • Only onshore wind by 2020. • Target is 42% of generation • Well known issues of intermittency. Problematic in a lightly connected system. • Full techno-economic study please! • Include ALL capex and opex arising from the proposed investment. “Nevertheless, the identified limitations clearly imply challenges for power system economics and project viability as well as regulation; this was out of the scope of the studies and needs further analysis.” EirGrid June 2010 June 2011

12. Large scale renewables –Why? • Meeting carbon abatement obligations. • Buy permits, it’s the cheapest option by a mile. • Becoming a major exporter of renewable electricity. • Techno-economic study please. • Include full costs -please. • Can we compete with marginal French nuclear on a Normandy beach? • Perfect opportunity for the private sector. • Encourage new technology like marine generation and capture some of the supply chain activities? • Enterprise argument. • Not significant this decade in energy terms June 2011

13. Large scale renewables – “the 16% target” • We have agreed with the EU to produce 16% of our final energy from renewables by 2020 • We have decided ourselves to do this by generating 42% of our electricity from renewables by 2020. • Onshore wind is the only real option in this timescale. • The cost has been variously estimated at between €6bn and €12bn. We really don’t know because we have never properly done the studies. • Neither security of supply, cost of production or carbon mitigation arguments justify this expenditure. • We are told the agreement is “cast-in-stone”. • Just like our international debt obligations! • Maybe it is time to “restructure”, or “re-profile” or just “kick the can down the road a bit”. • Seek a derogation to 2025. The world won’t end. June 2011

14. Privatisation • The Irish Academy of Engineering has no position on the ownership of public utilities and does not purport to offer any policy advice on the topic. • We are aware of pressure from the EU/IMF to sell state assets and the Government’s commissioning of a preliminary report on the issue. • With respect to power generation assets we have a particular concern. • The addition of large quantities of intermittent generation with priority dispatch will seriously impact the economic return from existing investments, including quite new CCGT plant. • Reducing the load factor on this plant will “partially strand” it in economic terms. • The cost of this partial stranding will either be borne by investors or customers. In the case of state owned plant this boils down to taxpayers or electricity consumers which probably equates to the same thing. • A sale of such plant will immediately crystalise such future losses. • The policy of adding large amounts of intermittent generation with priority dispatch to an already oversupplied power system will, in the event of a sale of state owned generation assets, seriously reduce the price that the taxpayer is likely to receive for those assets. June 2011

15. Conservation • The IEA has long recognized that at least half the effort in reducing carbon emissions must come from conservation. • During the boom years in Ireland we focused on energy production and did little on conservation until ex Minister Gormley : • Introduced mandatory building insulation standards • Incentivised a switch from petrol to more efficient diesel engines • There is a significant opportunity for investment in improving insulation standards in the existing building stock. • Such investment carries the added advantage that very little would “leak” out of the economy and therefore it would provide a significant economic stimulus. June 2011

16. Transport • Existing policies encouraging the switch to diesel have been very successful • Policies incentivising a switch to electric Vehicles (EVs) are likely to be costly and ineffective. • When the technology is “right” and costs have dropped customers will move to EVs. • In the absence of a motor industry it makes little sense for Ireland to subsidise the early adoption of this technology. June 2011

17. Conclusions (1) • Power prices in Ireland have significant room for improvement in competitiveness terms. • Utilising Natural Gas in the large existing fleet of efficient gas fired plant is likely to be the best way to keep power prices down. • Additionally, Ireland should substantially curtail capital expenditure in the power sector reflecting the drop in demand growth. • A revolution has taken place in the production of natural gas internationally and there are strong prospects of substantially increased supply and price moderation for the coming decade. This could be a lucky break for Ireland – as long as we avail of it. Given our oversupply of generation we can afford to wait and see for the next five years. • Unless it can be demonstrated that a strong business case exists for exporting renewable electricity, the on-shore wind generation target of 42% renewable electricity by 2020 should be abandoned. A derogation should be sought from the EU in respect of the 16% target. • In as much as investment is available it should be targeted towards conservation and in particular to the retrofitting of insulation to the existing building stock. June 2011

18. Conclusions (2) • Continuation of the current policy involving the addition of large amounts of intermittent generation with priority dispatch to an oversupplied power system will lead to significant load factor reductions on existing plant thereby partially stranding it and greatly reducing its economic value. • Any sale of such state owned plant will promptly crystalise the above losses and significantly and adversely impact the price paid to the taxpayer for these assets. • Energy security over the coming decade will best be assured by: • Completing the Corrib project • Investing in Irish gas storage • Encouraging the development of an Irish LNG re-gassification terminal • Planning and permitting procedures in Ireland have been shown time and again to be highly dysfunctional. Political reform is required in this area. June 2011

19. Energy Policy and Economic Recovery2010 - 2015 END June 2011

20. De-linking Oil and Natural Gas June 2011

21. IEA: June 2011 June 2011

22. IEA June 2011 • “This continued reliance on oil indexation in continental Europe contrasts with the dominant role played by gas-to-gas competition in the mainland United Kingdom market (as in North America)” • “Demands from the European gas utilities for wholesale pricing reform are meeting considerable resistance from major import suppliers, notably Gazprom (despite the limited duration concessions by Gazprom mentioned above) and Sonatrach.” • “Spot trading in Europe continues to grow rapidly… prices across hubs are converging” • Volatility will be a consequence of gas-on-gas competion. • Continental Europe: the jury is out on if and when gas-on-gas competition will arrive. • Ireland? A judgement call. June 2011

23. Energy Policy and Economic Recovery2010 - 2015 END (Again!) June 2011