Sunday 22 October 2017

Energy sector changes may spark competition -- but for how long?

Liberalisation of pricing among the utilities has had too many false dawns in past for us to get excited

THE liberalisation of Ireland's energy sector has witnessed as many false dawns as Europe's weary air travellers waiting for the all-clear from the aviation authorities following last week's volcanic eruption.

But like those travellers, the long-suffering Irish consumer finally received some sort of definitive answer on Wednesday about the future.

The broad picture is easy enough to understand: the old ESB logo will disappear from your utility bill as the former monopoly is forced to change its name for transactions with ordinary household customers or businesses.

The new-look, new-name ESB will still, however, remain a semi-state body and will continue to compete against another semi-state, Bord Gais, as well as Scottish power company Airtricity and possible Northern Ireland-based Energia which was once called Viridian to supply business and residential customers.

Electricity companies love to change their names every few years, something that can foster the illusion that there is real choice is the market when the reality is that the electricity market remains in the hands of a few, very large companies who were or are former monopolies.

There does not seem to be any other way of doing business as power stations or inter-connectors linking Ireland to Britain cost around €500m each and take many years to repay.

This is, in short, a business limited to the biggest of big boys although the prices they charge have the power to make or break thousands of smaller businesses as well as having a real effect on consumer spending.

Business market

The regulator said yesterday that he believed the business market was now competitive and he would allow the ESB to begin trying to regain market share by competing on price.

But before businesses pop the champagne corks, they should be aware that he also poured cold water on suggestions that this competition would lead to price cuts in either the retail or business sectors in the immediate future.

This reason for this is simple enough: Ireland has a very high dependency on fossil fuels and it is the cost of gas and oil on the international markets which will determine electricity prices rather than competition at home.

Disappointed

In the retail sector, where the ESB has somewhere between 70pc and 80pc of the market, the regulator wants the ESB's share to fall to 60pc before the ESB is allowed to set its own prices; something which the regulator believes is likely to happen early next year if the present trends continue.

That figure has disappointed the ESB's rivals who hoped following what one insider has dismissed as a "fog of consultation" that it would be 55pc. The ESB's rivals argue that the market is still far from mature and they should be allowed to continue offering big discounts while the ESB keeps prices slightly above cost.

Readers with a long memory will remember that the Government's first attempts to deregulate the energy market stretch back more than a decade and have so far met with little success. Will it be different this time round?

The first false dawn came at the turn of the century when some of the country's heavy-hitters poured time and money into ultimately fruitless projects to compete with the state-owned ESB to supply industry with power. They included the country's biggest company, CRH, and billionaire businessman Denis O'Brien's E-Power.

Most of the players in that first wave of European Union-inspired deregulation quit the market one-by-one, complaining that the ESB's stranglehold on the market made it impossible to compete though Belfast-based Viridian did stick around, building a gas-fired power station in Huntstown in Dublin and slowly winning a decent share of the business sector.

The failure back then to foster real alternatives and the Celtic Tiger's expansion rapidly led to energy crises each winter and forced the ESB to warn industrial customers that supplies might be cut off.

The slow liberalisation was criticised at the time by EU Competition Commissioner Mario Monti, the Organisation for Economic Co-operation and Development (OECD) and the Irish Competition Authority. Commissioner Monti warned that electricity firms had threatened to quit the Irish market if the national grid connection system, which remains under part ESB ownership, was not reformed. The OECD, meanwhile, criticised the Government for not giving the regulator at the time, Tom Reeves, enough resources and powers to do his job.

Even today, 10 years after liberalisation of the business sector, the ESB still controls half of the sector.

In the middle of the last decade there was a second false dawn when the government liberalised the domestic electricity market but the move had no real effect until the first months of 2009 when domestic customers finally began to see any choice after Bord Gais and Airtricity entered the retail market to compete.

Customers

Since then, Bord Gais has won around 300,000 customers while Airtricity has around 200,000 by offering double digit discounts to the ESB prices.

The newcomers have been able to compete on price because they are allowed to sell below cost price while the ESB is not. That ban on the ESB is likely to be lifted once Bord Gais and Airtricity control 40pc of the market.

WHAT happens next is anybody's guess. The regulator's new rules, which were announced yesterday, could herald the beginning of a price war which will benefit all electricity consumers or alternatively it could push Bord Gais and Airtricity to leave the market or at the very least stop gaining market share -- an outcome that would once again leave the businesses and individuals without any real competition. The likely outcome will probably be somewhere in the middle.

Certainly Bord Gais and Airtricity are fuming at the decision to open up parts of the market to competition little more than a year after they entered the market.

They believe that they will struggle to gain market share without double-digit discounts and that a small price cut by the ESB would make such discounts impossible. Executives appear to be genuinely confused about the regulator's motives for the move which they see as premature.

It is not just the ESB's rivals who baulk at the idea. The Competition Authority also seems to be taking a grim view. A report by the authority, which has every right to be seen as a neutral voice in this increasingly bitter dispute, said "it is not yet clear there is sufficient switching activity in the domestic market to consider the removal of regulatory controls. More information is required".

Submissions posted and available to read on the regulator's website from the two competitors complain bitterly that the regulator has failed to reform liquidity problems in the wholesale market.

It is trading in this market that can make or break new entrants to the electricity market as neither Airtricity nor Bord Gais are at present generating enough power themselves to supply the market.

Without an effective wholesale market, the ESB's rivals complain they are unable to compete effectively. The regulator denied yesterday that there were any problems with the wholesale market.

The eventual outcome from all this week's moves towards competition rather than regulation remains to be seen.

While competition is almost always seen as a good thing, nobody is promising price reductions and the jury is still out on whether an electricity market on a small island with around five million inhabitants can, or ever will, enjoy a vibrant market with real choice and variety.

Irish Independent

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