Size of energy market hinders rivalry

Competition in the Republic's electricity industry will not come about simply by making the ESB sell some of its stations, an ESRI paper claims.

The paper by, Laura Malaguzzi Valeri, points to the small size of the Irish energy market as a significant impediment to getting new players into the market. It says while everyone wants lower prices, this might militate against new entrants joining the market.

The paper - released yesterday as part of a series of special ESRI articles - says deregulation in the Republic is going to be difficult.

"Deregulation in Ireland faces additional constraints due to the small size of the electricity market. This makes it difficult to create adequate competition by simply forcing the current incumbent to divest some of its generation capacity. This problem will be slightly alleviated with the single electricity market, but it still remains a concern," states the paper.

It also says: "In the absence of specific regulation, we should not expect the wholesale electricity markets to be perfectly competitive. There are high investment costs in the industry."

The paper points out that based on international experience, regulation does not solve all problems. "Regulated firms tend to be less efficient because the constraints that are imposed by the regulator create a wedge between the true cost of resources and the cost faced by the regulated firms."

It says deregulation is designed to deal with this. "Deregulation aims to remove such constraints, encouraging a more efficient allocation of resources, with the hope that the greater efficiency will be passed on to consumers in lower prices."

The latest report follows a report on reform of the electricity industry, which said Irish electricity prices were among the highest in the EU.