IEA Commends Irelands Progress on Market Reform but Warns of Challenges in Reconciling Security and Environmental Goals

"Ireland has made excellent progress on market reform in the electricity and natural gas sectors and this will encourage the growth of a cheaper, more secure energy sector," said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Dublin at the launch of "Energy Policies of IEA Countries – Ireland 2003 Review." Further efforts are needed however to ensure the free entry of new competitors and to address the dominance of the incumbent utility. "Achieving market reform, energy security and climate change mitigation simultaneously is also a challenge," Mr. Mandil added.

Market Reform of the Electricity Sector
Market reform of the electricity sector is progressing well. About 40% of the market (by volume) is open, with 100% market opening envisioned by 2005. The basic framework of a sound liberalised market is now in place. A legally independent regulator has been established and all eligible parties can gain access to the transmission network at regulated, non-discriminatory terms.

A fully competitive market cannot be achieved overnight, however. Viable competitors have been reluctant to enter the market due in part to Ireland's small size, uncertainty over market rules and the continuing dominance of the incumbent utility, ESB. These issues can be addressed through expanded international interconnectors, the rapid establishment of trading rules and a reduction in ESB's market share, which remains too large. While some commentators suggest that the Irish market is not suitable for reform, the IEA review team believes a successful competitive market can be developed and encourages Ireland to address the challenges it faces in this transitional phase.

Market Reform of Natural Gas Sector
Reform of the Irish natural gas sector is also proceeding apace. This reform is especially important since Irish gas use is expected to grow substantially in the coming decade, possibly accounting for more than one-third of the nation’s primary energy by 2010. 250 of the largest customers in Ireland – accounting for over 85% of the market by volume – are already free to choose their gas supplier. An independent regulator has been established and all eligible customers have access to the gas transportation network on regulated, non-discriminatory terms.

The basic regulatory structure for the reformed market is sound and there are some positive signs that competition is developing. A number of larger customers have changed suppliers and production from a new gas field has been sold to a viable new entrant. While Ireland’s finite supply sources will limit upstream choices for consumers, the IEA encourages Ireland to continue with the reform process in order to achieve a more efficient, reliable natural gas sector.

Energy Security
Energy security is a high priority in Ireland due to the country's modest domestic fuel resources, its relative isolation and lack of extensive international energy connections. Ireland complies fully with its IEA oil stock obligation through the National Oil Reserves Agency. A number of developments have recently affected Ireland's electricity and gas security. Continuing uncertainty about electricity sector reform has deterred investment in electricity generation, raising concerns of a capacity shortfall by 2005. To encourage new generating capacity, the regulator is offering a 10-year power purchase agreement for a new power plant to come on-line as soon as possible. While this type of arrangement is inconsistent with the ultimate goal of the fully liberalised electricity market, such a step will bring the needed capacity to Ireland without seriously impeding the long-term reform, if properly established as a one-time contract. Expanded electricity interconnection with Northern Ireland will also contribute to security of supply.

While the commissioning of a new subsea gas pipeline linking Ireland with Scotland provides sufficient transportation capacity for the foreseeable future, developing domestic Irish production remains a priority. Ireland must balance the need for greater domestic production with the concerns for the local communities and the environment.

Climate Change
Ireland faces a serious challenge in achieving its emissions target under the Kyoto Protocol. The country must limit its greenhouse gas emissions to 13% above 1990 levels by 2008 to 2012. Emissions grew 24% from 1990 levels by 2000 and are believed to have grown substantially since then. CO2 emissions, which make up over 65% of total GHG, have grown even more, reaching more than 40% above 1990 levels in 2001. Much of this growth is due to the expansion of the Irish economy.

The In-Depth Review recommends implementation of the emissions-cutting measures outlined in the National Climate Change Strategy as a matter of urgency. A significant share of GHG emissions reduction could be achieved with the closure of the Moneypoint coal fired power plant. However, this would raise the share of gas in the power sector to 80% in 2010. Due to Ireland's geography and natural resources, energy security concerns must be weighed in any climate change decision. While the domestic measures will substantially reduce emissions, Ireland must also begin integrating international flexible mechanisms into its overall strategy. The EU emission allowance trading scheme should be fully employed alongside planned domestic measures. Such an international approach to cutting emissions is the cheapest way for Ireland to meet its Kyoto target.