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Introduction
The founder of
this great party, Dessie O'Malley, was the first Minister to set out
government policy on energy.
He was also the
last.
Twenty seven
years ago he insisted we had to recognise the harsh realities of the
energy situation in Ireland. Almost every aspect of our
economic activity, he said, was dependent on oil. We could not
afford to stake our future prosperity on an energy policy that had
depended on oil as its cornerstone.
New options had
to be considered because, as the government discussion document said,
“we are particularly vulnerable to any outside interference with,
or restrictions on, availability of energy supplies”.
Ladies and
Gentlemen, twenty-seven years later the essential truths put forward
by Dessie O'Malley remain unchanged.
We are still the
largest importer of energy in the EU.
And we are still
vulnerable to threats to our energy supply, particularly in terms of
price.
This is why I
salute the wisdom of this party in recognising the central importance
of a sound energy policy for our collective well-being as a society,
an economy, a people.
You are
following in the tradition of the party's founder. A tradition
of facing facts, thinking the unthinkable, of setting the agenda.
And that is why
I am happy, and proud, to respond to your invitation to speak to you
today on what this country of ours should be doing about energy
policy.
Structure
of Speech
Let me tell you
what I am going to do in this shared reflection on the threats and
opportunities facing Ireland in the field of energy policy.
I am first going
to set out the context for framing policy, with particular reference
to the threats we face for the foreseeable future.
Secondly, I am
going to focus on the risks we run by our current over-exposure to
one source of primary energy – gas.
Then, I will
review our EU environmental obligations and the potential these
create for alternative sources of energy, especially wind.
Next I will
spell out the economic and environmental benefits of developing
indigenous sources of clean cheap energy, like wind.
And lastly I
will present the Annual Conference with the list of political
challenges facing this government in respect of a sustainable energy
policy for Ireland.
Policy
Context
To begin, it
goes without saying that energy policy has to be set in the context
of a global village with instantaneous world-wide competition for
primary energy sources.
As a small open
economy, importing 90% of its energy requirements, we are competing
for supplies with global giants, such as China. And, may it be
said, global giants with an ever increasing appetite for fossil
fuels.
This competition
might be of little concern if supplies of fossil fuels were so
elastic that they could be expanded indefinitely to meet demand.
But we now know
that they are not.
A quarter of a
century ago Dessie O'Malley warned against staking our future
prosperity on an energy policy based on increasing dependence on one
source of fuel.
Oil
Such a warning
is even more urgent today. The unstoppable upward march of the
price of oil is the clearest possible evidence that demand and supply
are out of kilter.
The market does
not lie. A political party, such as the Progressive Democrats,
which bases its philosophy on the power of the market, accepts as a
matter of course that price changes send us signals which must be
heeded.
In this case,
the message is clear. Oil is becoming a scarce commodity
because demand is outstripping supply.
Whereas a year
ago it was considered outlandish in some circles to predict an oil
price of $50 a barrel, now some forecasters, the eminent Goldman
Sachs among them, are talking of a price in excess of $100 per
barrel.
Gas
Then there is
the other main fossil fuel – gas. The most dramatic change of
context for Ireland's energy policy over the past quarter century has
been the switch from oil to gas.
With Huntstown
2, 63% of Ireland's demand for electricity will be supplied by gas.
The EU average
is 24%.
The
International Energy Agency said two years ago that we were too
over-dependent on gas, hardly a surprising conclusion because such a
dependence on one fuel exposes the economy and the electricity
consumer to disproportional risk.
Let's remember
that, once it is built, a gas plant lasts 25 to 30 years and so
exposes the electricity consumer to the risk of price variability
over the whole of that period.
And let's
remember as well that what is happening with oil prices is happening
too with gas, for the same reason of growing demand. Is the new
world price for gas, I ask, that of $6.25/mm Bthus as in the US at
present? I believe it is.
If it is, and if
it is set to go even higher over the next quarter of a century, what
does that do for the economics of gas-fired generation plant?
As part of that
context in which we frame energy policy we have to ask the question,
is choosing the lowest current price option actually the riskiest,
and the most expensive, for the long run?
The answer is
yes, providing we accept that recent market developments are
signalling a profound shift in fossil fuel supply and demand.
Security
of Supply
You will readily
understand that I have been dealing up to now with one aspect of
security of supply, that of price. But the other side of that
coin is physical security.
Gas comes to us
from gas fields through pipes. Over the next quarter century,
as North Sea and all other European oil fields run out, the European
Union will become primarily dependent on Russia gas originating in
Siberia. As an island off an island we will be at the end of a
pipe line thousands of kilometres long.
All natural gas
imports to this island come from a single point on the British high
pressure transmission system at Moffit in Scotland. As a
result, natural gas is potentially Ireland's least secure energy
source and, in the opinion of insurance assessors, a single incident
could result in the total loss of import capacity for up to ten days.
Our national
storage capacity at present is 15 days. We are consequently
running a very high risk on the physical security side which is
particular to our geographic circumstances.
But in common
with the rest of the EU we run a general risk of disruption to
physical supplies caused by political upheavals along the supply
route running across two continents or a conscious policy of economic
retaliation against the West, such as happened in 1973.
Liquid Natural
Gas has been touted as the answer to both the national and common
European type of risk. Certainly it improves the logistics of the gas
supply chain.
But there are
major downsides to LNG.
It requires
heavy investment in ships, liquefaction plants, re-gasification
plants, terminals, port facilities. We have no natural
advantage as an LNG importer and we would be competing against the
US, Japan, China and the rest of the EU.
Are we prepared
for that? As an alternative we could, of course, piggy-back on
facilities in the UK and elsewhere in the EU, as we do for our
strategic oil reserves. That would still leave us exposed.
But the biggest
downside is that LNG creates a single world market for natural gas,
as now exists with oil and coal. The price consequences are
obvious enough – and they are not attractive.
LNG leaves us no
better off than we are at present with oil and natural gas
price-taking in a market where prices are moving ever upwards.
Now when it
comes to energy policy we are like a cork bobbing round on an energy
sea – without rudder, propeller or captain.
The
Environment
I have just
mentioned coal for the first time and it serves as an appropriate
introduction to that other vital element of the policy context –
that of the environment.
Even if the
supply of fossil fuels was infinite, which it is not, and even if the
price was zero, which it is not, we still could not burn coal, oil or
gas indefinitely in unlimited quantities.
We all know the
reason. Fossil fuel conversion into energy, whether for
transport or electricity, causes CO2 emissions and which
is the principal cause of the Green House Gas effect. The
global eco-system is under attack to such an extent that none but the
most obtuse or obstinate can deny the dangers we are running from
global warming.
The
international community has accepted the harsh realities of global
warming and agreed the Kyoto Protocol. The European Union has
accepted responsibility for limiting CO2 emissions
and enacted legal obligations on all Member States in respect of
carbon emissions.
At the same
time, the EU has committed Member States to produce a certain quantum
of electricity from renewable resources by the end of this decade.
In our case, we
are obligated to produce 13.2% of our electricity from renewables
by 2010. At present, we produce less than half that and, as
things stand, won't meet the target to which we have agreed.
We will not meet
our CO2 emissions targets except by buying clean air from
other countries at considerable cost to us all as taxpayers and with
no permanent gain to the economy.
Let me say this
about the environment. It is the biggest change in the policy
context over this past quarter century. It most definitely is
not a concern arising solely from the fevered imaginations of
unrealistic do-gooders.
Rather it is an
issue which arises from scientific research carried out across the
globe, among many disciplines, over a protracted period of time.
We are
collectively destroying the planet through the use of fossil fuels.
We are destroying the eco-system on which we depend for our existence
as a species.
1,000,000
species will be gone by 2050 and 3,000,000,000 people could be
dead or dying from drought, flooding, disease etc.
Environmental
protection is therefore not an option which can be accepted or
rejected as a matter of choice. We have no choice. It is
an imperative. They are also relevant to a party lead by Mary
Harney who banned bituminous coal in Dublin thereby prevented many
premature deaths. Personally, I would go so far as to say it is a
moral as well as a political imperative. These thoughts are of
particular relevance to a party which rightly prides itself on always
doing the right thing.
That personal
stance explains why I believe renewable, clean, green energy is a
technological necessity – and why I stand before you this afternoon
as the proponent of one form of green energy, that of wind, both
onshore and offshore.
We set up FWP
because we saw in equal measure wind, as a moral imperative and a
business opportunity.
Wind
Wind is a
natural source of energy, like coal, oil or gas. But unlike
coal, oil or gas it is infinitely renewable, it is clean, emits no
noxious gases, and is free.
Unlike coal, oil
or gas, Ireland has an abundant source of supply. By virtue of
our geographic location we are as rich in wind as Saudi Arabia is in
oil or Siberia in gas or Manchuria in coal.
We have one of
the best wind resources in Europe and indeed, in the world.
The technology
for converting wind into energy is now well developed, especially for
sites on land, and is still being developed for sites at sea, where
many believe wind has the greatest potential of all renewables, as I
do myself.
The economic
potential of wind introduces a totally new dimension into energy
policy. Let me give you some bench-marks.
Denmark, a small
country like us, but which has always set a faster pace technology,
is producing over 30% of its electricity from wind. We are at
3%.
The Danish level
of production rebuts many of the more crude arguments against wind,
such as being too expensive or too unreliable as an energy source,
the so-called intermittency argument.
So too do the
wind output levels in our nearest neighbour, the UK, in Germany, in
Spain and further afield in the US.
It has been
estimated that the wind flowing across Ireland is equivalent to about
640,000 MW. To put that in context, our peak demand for
electricity in winter is around 4,500 MW, or about 0.7% of the energy
available to us from wind.
The economics of
wind are the reverse of those for fossil fuels; fuel costs are zero;
marginal costs are zero; the fuel price risk is zero; the
environmental costs due to carbon emissions are zero.
In respect of
Ireland, we can add that our geographic position – in terms of
longitude and latitude – confers a competitive advantage, the very
factor which economists advance as the justification for
international trade and for which politicians search as the basis of
national economic development.
In summary, wind
is a natural resource with the potential to solve our energy and
environmental targets. The only limits to realising that
potential are those we impose upon ourselves, because of a failure of
imagination or lack of political will.
Benefits
Here are some of
the benefits to be derived from wind.
We will reduce
our dependence on imported fuels and so enhance our security of
supply.
Because the
marginal cost of production is zero once project debt is repaid,
electricity prices will be reduced.
For example,
recent US studies indicate that a 5% increase in renewable based
electricity will reduce natural gas prices by 5%.
As an IEA study
showed, wind energy mitigates the price risk of exposure to any one
predominant fuel, such as gas. This is an example of what
economists call the portfolio effect.
Every 1000 MW of
wind energy installed reduces fossil fuel imports and improves the
balance of payments by some €70-80m per annum.
At the
macro-economic level, we will proportionately avoid GDP losses caused
by fossil fuel price spikes and volatility and simultaneously enhance
the international competitiveness of Irish energy consumers.
It would also
help develop a whole new industrial sector relying on developing a
new technology. In Germany, Denmark and Spain it has been
estimated that 2.8 jobs are created for every MW installed.
While employment
for its own sake is a relatively meaningless concept, it has power
and relevance when associated with creating new customer focused
knowledge or bring about innovative industry.
In Scotland
alone, a DETI study estimated they could create 30,000 jobs in total
for the renewables energy targets set by the Scottish Executive.
Finally, there
are the environmental benefits which so concern me personally.
Our Arklow Banks Wind Farm, when fully built out to 500 MW, will
prevent the emission of 960,000 tonnes of CO2 per annum.
Under certain
assumptions i.e. that CO2 will cost €100/tonne this
could mean an annual saving of €96m in Kyoto fines.
Challenges
I set out to
paint the policy context and to focus on the security risk posed by
gas.
I undertook to
review the potential for renewables and to spell out the economic and
environmental benefits of developing green energy, especially wind.
And then I
promised to pose political challenges.
Here they are:
The Government
has promised to make wind mainstream. This commitment is just
words until:
-
the electricity grid is built to accommodate wind, and
-
the regulatory regime implements a level playing field.
-
Adequate interconnection.
The existing
grid is the product of history. It is not the recipe for the
future. But its configuration is protected by an incumbent
monopoly.
That is to be
expected.
The current grid
operates as an entry barrier to new technologies, such as wind.
That is
inevitable.
But should it be
tolerated by a government committed to market-liberalisation, to
encouraging entrepreneurship, to developing our own resources, to
taking a lead in new technologies?
Can it be
tolerated by a party the PDs which tells itself and the rest of us
the truth?
No it should
not!
But, ladies and
gentlemen, this situation is tolerated at present.
I ask you why?
We have the
lowest and worst designed support system for renewable energy in the
EU. and U.S.
A support system
that recognises the unique characteristics of wind needs to be
designed. Wind has a high capital cost which must be funded by
debt.
It is an
innovative technology with a perceived new and different risk
profile.
A support system
that meets that risk must be designed and then when the debt is paid
off benefits society and the economy by clean, virtually costless
energy.
As a government
committed to the ethic of private enterprise, could you please
eliminate the obstacles to fair competition that block our path to
development.
As the party of
innovation could you help us at Airtricity to ensure security of
supply and reduction in electricity costs.
I particularly
mention here the grid code, which must be the most onerous in Europe
and US.
There will never
be proper competition in the electricity markets until the
transmission grid assets are put into a different ownership structure
to the ESB generation assets. The ESB currently makes most of
its money where it has no competition in its wires businesses.
This leaves the generation plant and all competitors who would seek
to generate in a condition where they can make insufficient profit.
It is no wonder that we have had no one become a significant new
generator in Ireland.
Above all, the
challenge is to create a culture of support for the entrepreneur.
At present, I can only tell you in all honesty that I believe the
opposite to be the case.
The Civil
Service never cease to tell us that they do not want to see folk at
Airtricity become wealthy.
My company
operates in Scotland, England and the US. We associate with
sister companies throughout the EU. Nowhere do I find such
negativity towards renewables, in general, and wind in particular,
than I do here in Ireland.
It pains me to
say so. But it is true.
The challenge
for the government is to create an entirely new culture which
promotes innovation and rewards risk taking.
If it does, my
company will not be found wanting.
Conclusion
I gladly
accepted your invitation here this afternoon in recognition of your
courage in facing up to difficult challenges and your proven capacity
to blaze new pathways in policy formation.
I accepted in
the belief you would welcome my views exactly as I hold them.
I know I have
not been mistaken.
This is the
place to speak the truth.
This annual
conference is where we come to express hope in the future.
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