The ESB’s dominance of the market is not helping competitiveness – an IDA client survey found that 44 per cent of foreign-owned firms cited electricity costs as a potential threat to their Irish operations
RESTORING COMPETITIVENESS is essential if Ireland is to bounce back from the current recession. Reducing the unacceptably high cost of electricity faced by Irish businesses is an essential step on the road to recovery. The dominance of the ESB, and more specifically its continuing ownership of the network of high-voltage wires and pylons collectively known as the electricity grid, is a major stumbling block to competition as it acts to deter entry by other electricity generators. Transferring the grid’s assets from the ESB to Eirgrid – known as ownership unbundling – would remove this stumbling block and give a clear signal to potential investors that the ESB’s dominance of the electricity sector has finally come to an end.
An IDA client survey in 2004 found that 44 per cent of foreign-owned firms cited electricity costs as a potential threat to their Irish operations. A discussion paper published by the Department of Enterprise, Trade and Employment in 2005 estimated that electricity costs represent 9 per cent of total costs for hotels and restaurants, and accounted for between 4 per cent and 6.5 per cent of total costs in the recreational services, RD and retail sectors.
More recently, the National Competitiveness Council’s Annual Report noted that Irish industrial electricity costs are the second highest in the EU-25, with prices having increased by 70 per cent between January 2000 and January 2007. Eurostat figures show that Irish industrial customers pay 13 per cent more for electricity than in the UK, 27 per cent more than in Poland and 53 per cent more than in France.
Though the Irish electricity market has been nominally “open” since 2005, the benefits of a competitive market have been slow to emerge. Under the current arrangement, Eirgrid, a State-owned company, plans the development of the grid which the ESB, another State-owned company, is then obliged to build. When the development is built, Eirgrid is responsible for all of the grid’s operation but – crucially – it does not own it.
Access to the electricity grid by rival generators is governed by complex agreements which require ongoing oversight by the State energy regulator to ensure that the rules on access and maintenance are adhered to.
The weakness of this model is one of credibility. Eirgrid, as the grid operator, and ESB, as the grid owner, must exchange potentially sensitive data about the grid’s state of repair. This could raise concerns among other generators that the ESB knows more about their operations than is healthy in a competitive market. True competition requires all players to believe that the playing pitch is level. This impression is hard to sustain when new entrants to the electricity generation game must rely on their biggest rival to grant them access to the pitch.
Transferring the ownership of the grid’s assets to Eirgrid would increase transparency for all competitors. The wider public interest is protected as the grid would remain in State ownership through Eirgrid.
Separating ownership of power plants and the cross-country transmission network is not just a theoretical concept, as it has been tried and tested in many other countries. According to the EU Commission, electricity prices for companies based in countries with full ownership unbundling have decreased by 3 per cent over the period 1998-2006. They have increased by 6 per cent for companies in countries which still retain vertically integrated operators (as in Ireland). Households in countries with a fully independent grid paid 6 per cent more in 2006 than in 1998, while households in vertically integrated countries paid over 29 per cent more.
Ownership unbundling makes market entry more attractive. But it will not lower prices on its own. In competitive industries, prices charged to consumers reflect the cost of efficient production.
It might be unrealistic to expect the lowest electricity prices in Europe – rather, our objective should be to ensure that prices more accurately reflect the cost of production and that the cost of production itself is as low as it can be.
Price transparency puts pressure on competing firms to reduce their prices, which is good for consumers and good for the most efficient producers.
Proposals for full ownership unbundling are already set out in the Government’s own energy white paper of 2007, which stressed the need to increase competition in the electricity sector by encouraging new entry, full ownership unbundling and increased interconnectivity between Ireland and Britain.
It is now time to put the findings of the white paper into action. Minister for Communications, Energy and Natural Resources Eamonn Ryan has promised to appoint an independent expert group to review grid ownership and this should be done as soon as possible.
Ireland cannot influence the price of oil and gas on international markets. All the more reason to ensure that factors within our control are operating as efficiently as possible. A study by Deloitte for the Department of Communications, Marine and Natural Resources estimated that domestic factors accounted for 30 per cent of the difference between Irish and average EU electricity prices in 2004.
Ownership unbundling is the simplest, most effective and stable solution to solve the conflict of interest in an industry where the largest generator also owns the key infrastructure.
Transferring the grid to Eirgrid would facilitate greater investment in the network at a lower cost to network users and more competition in generation. It could be done at little additional cost to the taxpayer.
While the single electricity market and the arrival of Spanish energy company Endesa should bring more competition to the Irish market, we should use every tool at our disposal to ensure that electricity prices on this island are as competitive as they can possibly be.
The alternative is higher prices, underinvestment and stagnation. An independent, standalone national electricity grid will not solve all our energy problems – but is it is a crucial step in delivering the full benefits of a more competitive energy market to consumers and restoring the competitiveness of the Irish economy. It should be made to happen soon.
Bill Prasifka is chairman of the Competition Authority