Irish electricity market must be opened up

Comment:Calls for reform of Ireland's flawed electricity market are growing ever louder and must be addressed if we are to avoid, as one leading business figure put it this week, "sleepwalking our way into an energy crisis".

Failure to face up to the underlying flaws of the current electricity industry has left a legacy of rising prices, excessive labour costs and a network straining to meet rising demand for power in a growing economy.

Reform of the electricity sector is urgently needed, and immediate structural separation of the ESB is the best place to start. Yesterday's announcement by the Commission for Energy Regulation that the ESB is to dispose of some of its smaller plants is a welcome first step.

The recent damning report by Deloitte estimated that inefficiencies in the Irish electricity sector add €100 million per annum to our bills when compared to international benchmarks.

Ireland cannot consolidate its position as an internationally competitive economy if it continues to rely on an uncompetitive electricity sector propped up by obsolete, unreliable plants.

The recent Green Paper on energy contains many welcome proposals, such as creating a landbank of potential generation sites, strengthening interconnectivity, and introducing an all-island wholesale electricity market in November 2007.

But these plans will take time to deliver and are insufficient to ease the rising cost of electricity that consumers are having to bear at present.

Last Tuesday, the OECD announced that competition in electricity must be boosted as a matter of urgency as electricity prices contribute disproportionately to inflation.

The American Chamber of Commerce has stated that electricity costs for US firms in Ireland - the Dells, Microsofts and Intels - have increased by well over 40 per cent since 2000.

At a time when Irish exporters are facing ever intensifying competition, higher costs resulting from a sheltered non-traded sector set them at an instant disadvantage.

High electricity prices are also hurting Irish households, especially the 17 per cent of households afflicted by fuel poverty; the poor, the elderly and infirm, and those on low fixed incomes. Meanwhile, Deloitte reports that the average wage at the Poolbeg plants is €102,742, even though one of the Poolbeg plants has not generated a watt of electricity since last January. ESB customers are paying for these inefficiencies.

There is simply not enough competition in the Irish market. High prices have coincided with the gradual liberalisation of the Irish market that began in 1999. Despite liberalisation, real competition has not been given a fighting chance. The ESB remains the dominant force in generation and in domestic electricity supply. This dominance renders the Irish market unattractive to investors and has led to firms such as ePower and Ireland Power exiting the market in recent years.

Owing to its ownership of a diverse plant portfolio, the ESB effectively sets the market price of electricity 99 per cent of the time.

Non-ESB plants just aren't at the races when it comes to price-setting ability. Without a rival of similar size in generation, the ESB will be free to build more new plants to ensure the lights won't go out, but this process will only copperfasten its dominance.

Ireland can best assure its continued international competitiveness by creating the structures for real competition in the electricity market.

Promoting vigorous competition in generation and supply will reduce barriers to entry and promote the innovation and efficiency benefits that deliver low prices. The Competition Authority has consistently argued that this can be achieved only by splitting up the ESB into a handful of sustainable, competitive energy companies. No other option will work as quickly to address the lack of competition and high prices.

Other bodies recommending structural reform include the OECD, the International Energy Agency, the European Commission and the Department of Enterprise, Trade and Employment, as well as Deloitte consultants. Deloitte, for instance, recommends the sale by auction of two generation plant portfolios and three supply packages.

Regardless of the specifics, any structural solution must ensure that no single entity continues to control the vast majority of price-setting plants.

Alternative solutions do not work. Heavy-handed price regulation can only achieve so much; it cannot mimic the dynamism of competition, nor is it designed to address the underlying causes of high prices and dominance. Moreover, the high and growing costs of regulation dissipate what few benefits have accrued from the liberalisation process so far.

Splitting up the ESB will promote competition, lead to lower prices and increase security of supply by increasing the number of players in the market, lowering barriers to entry, promoting efficiencies and innovation in generation and dispersing control of price-setting plants.

Any strategy to promote competition which does not involve structural separation of the ESB will be a second-best solution.

The ESB is justly proud of its track record in providing electricity to industrial and domestic consumers alike. However, the time when ESB could be used as an instrument of industrial policy is past, and EU legislation prevents a retreat back to the old days of cosy monopoly.

The interests of consumers and competitiveness are now best served by delivering on structural reform of the electricity market rather than persisting with the illusion of competition.

Bill Prasifka is chairman of the Competition Authority