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ESB under investigation over electricity prices following complaints from rivals

State energy firm says allegations ‘appear based on limited understanding’ of market

Energy market watchdogs are investigating ESB following complaints from rivals about the State energy company. The Commission for Regulation of Utilities (CRU), the agency that oversees the Republic's electricity industry, confirmed this week it has received "a number of complaints about a market participant", which regulatory authorities are investigating.

The commission is not naming any of the parties, it will only identify a business if it finds violations of market or competition rules and penalises that company. However, the subject is known to be ESB, which has been drawing fire since last year.

Politicians, led by Fianna Fáil TD Barry Cowen, and competitors, primarily the Independent Electricity Suppliers of Ireland (IESI), argue that ESB cannot justify the prices it has been charging for power. The Dáil deputy and others also say some of its practices deterred new competitors from setting up shop here, shoring up its strong position in the market.

ESB rejects this. The State company says it is unaware of any formal CRU investigation but notes that it several times told regulators, in the Republic and the North, of various charges raised against it last year, fully answering any questions the authorities asked as a result.

This week, it published three statements meant to refute allegations that it profiteered on the back of last year’s squeeze on electricity supplies, and that it low-balled bids for payments to build new power plants to stymie fresh competition.

All this plays out as families and employers face increased energy bills. Household electricity costs rose about 70 per cent from late 2020 to the end of last year. Some estimates calculate that the hikes added €1,000 to €1,300 to the average home’s yearly expenses, depending on the supplier. Irish wholesale electricity prices rose to €156 a mega watt hour (MWh) – the unit in which it is sold – in the third quarter of last year from €37 MWh 12 months earlier.

Suppliers, including ESB subsidiary Electric Ireland, which has about 40 per cent of the market, blame rising natural gas prices globally for this. Those costs topped £5 (€6) a therm – the unit in which the fuel is sold – by the end of the year – five to six times more than a year earlier. The problem spooked the Government to the point where it pledged to return €100 to the Republic's electricity customers in March.

So prices are a flashpoint. In October, figures emerged showing that ESB power plants earned profits of between €132,000 and €138,000 an hour at different times in July and September on the wholesale market, where generators sell electricity to companies that supply homes and businesses, including Electric Ireland.

ESB counters that the wholesale prices quoted do not represent what other electricity suppliers paid for the power they ultimately sold to homes and businesses

The plants – Aghada in Cork, Coolkeeragh in Derry, Dublin Bay and Poolbeg in Dublin – had been charging prices from €375 MWh to €490 MWh. Their generating costs were between €90 MWh and €150 MWh. Three of them, Aghada, Coolkeeragh and Poolbeg earned profits of €2.3 million on July 15th and €4 million on September 9th.

The profit calculations, based on official electricity market data, were gross figures, the difference between the plants’ costs, mostly natural gas, and their prices. They did not include other business expenses. Soon after, Cowen told the Dáil that he had single electricity market information showing that wholesale prices charged by ESB added €250 million to household and business energy bills in the three months from July to September last year.

IESI, backed by independent suppliers Prepaypower, Panda Power and Naturgy, issued its own statement saying that rising natural gas prices, mainly blamed for increased electricity charges, did not justify ESB’s wholesale offers.

This week State-owned ESB said it wrote to Cowen in December and again this month asking for a copy of the information he has and that he pass it to the regulator. The company maintains that it has not seen the material given to him or the media, while it argues that allegations about its prices “appear based on limited understanding of how the energy market works”.

ESB says the average wholesale price it charged during that three-month period was €124 MWh against the market average of €156 MWh. It maintains that just 0.2 per cent of the electricity generated by the plants highlighted was offered at those high prices. However, critics dismiss the average price as “meaningless”, arguing that it is the higher charges that ultimately determine what we pay for electricity.

Even so, ESB counters that the wholesale prices quoted do not represent what other electricity suppliers paid for the power they ultimately sold to homes and businesses. This is because most electricity is bought and sold under forward contracts, agreed up to a year in advance.

Under those deals, parties agree the price based on the market at the time. If the wholesale price is higher when the electricity is sold, ESB simply refunds the difference between that and the agreed advance price to the customer.

So, if the advance price is €37 MWh, and the wholesale charge is €156 MWh, the customer gets €119 back. Consequently, the State company maintains that irrespective of what Aghada, Coolkeeragh or any other plant might have charged in July or September, it did not see any jump in profits.

“In fact, the total energy margin earned by ESB generation in quarter three 2021 was of a similar order of magnitude to that in the same quarter of the previous year,” ESB says. The focus fell on those three months, July to September, because the State company enjoyed a larger share than normal of the wholesale market.

On average, it generates about a third of Irish electricity. However, during the third quarter of 2021, two power plants owned by competitors Bord Gáis and Energia were out of action, while good weather meant wind farms were contributing far less energy than usual. ESB says it "strongly refutes" any notion that it tried to exploit the advantage it had at the time. Instead, the company insists that it operated strictly by single electricity market rules.

ESB also faces accusations that it tried to protect its position in electricity generation by submitting bids for new power plants in Dublin to the Single Electricity Market Operator (SEMO) that were too low to be viable, in an auction known as T-4, in 2019. The company won contracts for two generators at North Wall, with a total capacity of 215MW, and one each at Corduff, Poolbeg and Ringsend, for a total of 192MW.

The State company sought and was awarded capacity payments of €46,150 a MW a year over the contracts’ 10-year lifespan, a total of €187.8 million. Capacity payments are paid monthly to electricity plants that commit to being available to generate power when needed. They are tied to each generator’s capacity. Auctions such as T-4 are meant to favour projects that seek the lowest payments, as electricity consumers ultimately fund them through network charges on their bills. The European Union approved this system in 2017.

Submitting bid

A document sent to Cowen, among others, shows that after submitting its bid, ESB told the SEMO that the maximum €138,450 bid the market overseer was allowing for new generators was too low, even while the company itself sought just a third of this figure.

That paper was close enough to the bone to prompt speculation that an ESB insider wrote it and sent it to Cowen, the politician asking the most questions about the State company. Industry sources do not believe it was a whistleblower, but say the author evidently works in the energy business, is an expert on the generation market, how it’s regulated and the so-called “capacity auctions”, such as T-4, which are meant to recruit new power plants.

The paper states bluntly that “ESB bids in the auction were so low that it prevented others from building new capacity”. At least one company whose bid to build a power plant in Dublin was not successful challenged ESB’s strategy with the CRU, but nothing has come of that to date.

As it turned out, ESB shelved plans for all five plants, incurring fines of €4.1 million for failing to fulfil the contracts. The State company denies that it axed the projects because it deliberately sought payments that were not viable. Instead, it says that it won the contracts based on equipment manufacturers’ costs and the likely returns from the generators themselves.

ESB maintains that the five plants did not involve building new power stations from scratch, meaning its argument about the €138,450 figure did not apply. North Wall is an existing facility where the company intended to replace old turbines with new equipment meant to comply with the EU’s industrial emissions directive and clean energy package. Despite original assurances that the manufacturer could provide parts that met these standards, the supplier ultimately said it could not, forcing the project’s abandonment.

The other three, 64MW each, were “aero derivative” turbines. These resemble jet engines adapted to use the energy they generate to produce electricity. The speed at which these can be switched on to supply power meant they could be used at times of peak demand, maximising their returns from selling energy and reducing the need for revenues from capacity payments.

Corduff received planning permission in 2020 and its licence from the Environmental Protection Agency (EPA) in November. ESB made separate planning applications for Poolbeg and Ringsend in September 2019, but Dublin City Council subsequently told it to seek permission for the plants jointly.

The company had to start the planning process again, running into further delays caused by Covid lockdowns in early 2020. The contracts demanded that all three plants have planning permission and environmental licences by November 2020. ESB successfully sought a six-month extension from the SEMO to May last year.

Rivals argue that whatever ESB's explanation for the failure to build the power plants, the outcome remains that no one else was able to get contracts

It did not get planning permission for Poolbeg until May last year and for Ringsend the following month. The company applied to the EPA for the plants’ licences in February, revising this in April. The agency has pledged to decide on those by the final quarter of this year.

ESB sought a second extension of the contract milestones, but this was refused. The company says this forced it to drop the three projects. Its agreement with the SEMO required the plants to be ready by October this year, with a final backstop date of March 2024. The company argues that it would have met the backstop, but accepts the contract’s termination.

The company is now “focused on consenting the sites and developing new projects for bidding into the next capacity auctions”. It is unlikely that future ESB bids for the sites will be as low, as the turbines it had intended using are no longer available. Rivals argue that whatever ESB’s explanation for the failure to build the power plants, the outcome remains that no one else was able to get contracts, limiting both competition and the system’s ability to meet growing demand.

At least one other competitor for capacity in Dublin in the 2019 auction had permits and grid connections, but could not match ESB’s low bids.

Last year's squeeze on electricity supplies prompted national grid operator EirGrid to seek emergency power generation for this winter. ESB emerged as the preferred bidder for that contract, which did not involve capacity payments, but was estimated to be worth about €110 million. The State company maintains that virtually all of this would have been paid to whichever business provided the technology needed – the most likely candidates were multinationals General Electric or Pratt & Whitney – and not ESB itself.

EP UK Investments, owner of 80 per cent of Tynagh Energy in Galway, and Kilroot and Ballylumford power plants in Co Antrim, began a legal challenge to this contract. It subsequently dropped this but EirGrid in any case decided not go ahead, partly because the Bord Gáis and Energia plants were going to restart on time for winter. It paid some cash to ESB to cover the company's costs in preparing to provide the power. That figure is less than the €10 million quoted several times in the Dáil, according to the company.

ESB is one of those in the running for a contract for 300MW of emergency power for next winter that EirGrid put out to tender more recently. The results will be known in coming weeks.

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