Electricity market is an 'inefficient oligopoly'

The National Grid has suggested that the ESB's dominance of the electricity market has deterred international investors and skewed the pricing system in the sector.

The grid, which is ringfenced from the ESB group, described the electricity market as resembling an "inefficient oligopoly".

In a confidential letter seen by The Irish Times, the grid, officially known as ESB National Grid, says that attempts by energy regulator Mr Tom Reeves to create a new pricing system will be a "complete waste of time" unless the issue of ESB dominance is tackled.

"For any electricity market to work in Ireland (or indeed anywhere else), the issue of incumbent dominance must be effectively tackled. If it isn't, then investors will be deterred and the best that one can hope for is an inefficient oligopoly. After five years of effort, this is precisely what we have at present," states the letter.

Oligopoly is the term used to describe a market where a few major suppliers account for the large majority of sales.

"Incumbent dominance is not so much about market share but about price-setting capability.

"This is determined primarily by incumbent control of mid-merit plants. Incumbent control of this plant is Ireland is virtually total.

"Incumbent controlled plant typically sets the price 99 per cent of the time at present," the letter points out.

The grid, which has sought to distance itself from the ESB group in recent months, expressed concern about how overseas investors perceived developments in the market here.

"The critical issue is investor perception. A rational investor in generation, faced with an investment choice between Ireland and a less incumbent-friendly jurisdiction, will be most unlikely to decide in favour of Ireland."

Mr Reeves has been criticised for not fully reducing the ESB's presence in the market. However, he has insisted that he is lacking certain powers to radically reduce the presence of ESB in the market.

But the letter from the grid suggests that regulation alone will not solve the problems.

"The problems associated with a super dominant incumbent cannot be solved by regulation alone. There are no successful examples of this approach internationally."