How energy bills pay for vanity projects and empire building
Forget oil prices - in Ireland energy costs stop and start with a select group who have a stranglehold on the market. And they can't spend the spoils fast enough
Irish energy users are subsidising cheaper bills for UK customers of SSE Airtricity. In the past five years Airtricity has made so much money from Ireland that it was able to send a €70m dividend back to its UK parent, the €18bn-valued energy giant SSE.
This is money that could have been used to reduce the bills of its 800,000 Irish customers, who pay some of the highest bills in Europe. Electricity prices have risen 15pc since 2011. Plunging wholesale oil and gas prices have not been passed onto customers in the form of lower tariffs.
A 2014 Eurostat report showed that Ireland has the fourth most expensive electricity in the EU, while gas prices are 22pc higher than the cost of gas in the UK. Last week Commissioner for Energy Regulation Aoife MacEvilly said the agency was "engaging" with energy suppliers which have not cut tariffs.
Who are these suppliers?
The Irish market is dominated by the semi-state ESB, which has close to 40pc of the domestic market. UK-listed firm SSE bought Airtricity for €1.1bn in 2008. Bahrain investment bank Arcapita owns Energia while Bord Gais Energy was bought by a consortium including UK power firm Centrica in a €1bn deal last year.
These companies argue that Irish energy bills are high for a variety of reasons, including the cost of importing fuel to power generation. Fluctuations in wholesale gas and oil prices do not immediately feed in to cheaper bills because much of the fuel is forward bought, so they have already paid for a big chunk of the 2015 generation needs at high prices.
The energy utility industry is highly capital intensive, so the energy companies need to continuously invest in maintaining and improving infrastructure.
But it is also a bloated industry. The ESB is spending money on a variety of projects and schemes that could be used instead to reduce customer bills, like plans for a staggering €150m redevelopment of its Fitzwilliam Street head office on one of the most valuable pieces of real estate in the capital.
It is not clear why the state company needs to occupy such a prime site nor why its customers should pay for a huge refurbishment.
The semi-state also spends big money on branding, marketing and sponsorships. A senior marketing source calculated that its marketing budget is around €15m a year, one of the country's biggest. If you have ever been to music festival Electric Picnic, you might have come across an entire stage dedicated to ESB sales/ billing unit Electric Ireland. Nineties star Mr Motivator is drafted in every year to lead dance routines and drum up interest in the company among Millennials.
ESB also invests in start-ups. It is the cornerstone investor in the €200m Novus Modus fund, which backs risky start-ups developing new green energy technologies.
The ESB is not alone in spending money on vanity projects and empire-building that could feasibly be used to reduce bills.
Bord Gais Energy, which last year was bought by Centrica, committed to paying €3.5m or €700,000 per year for five years for the naming rights of the Grand Canal Theatre in Dublin's Docklands, at a time when it was controlled by another state agency, Nama. Bord Gais has a major sponsorship slate, as does SSE, which is the sponsor of the League of Ireland, Dublin City Marathon and other events.
Then there is the overlap in business interests between various suppliers. With a staggering lack of joined-up thinking, ESB, Bord Gais and another semi state, Bord na Mona, have all invested in developing wind energy or renewable portfolios. It is nonsensical that three agencies owned by the State should invest in competing wind energy strategies. Bord Gais Energy has also invested in tidal energy technology programmes.
And there's ESB spending on electric cars. We now have more than 1,200 public charging points for electric cars all over the island and a fast charger, on average, every 60km on our main roads. The company, which is 95pc owned by the State, has spent a fortune not only on their installation, but also on elaborate marketing projects for the initiative - like giving 32 random members of the public free e-cars for a year, in return for feedback on how they fit in with their lives. But just 125 electric cars were bought in the first six months of 2014.
These companies can afford to do this because they are making huge profits. ESB generated operating profits of €685m in 2013, on revenue of €3.5bn. That's an impressive profit margin of around 19pc. Its Electric Ireland division had an operating margin of 3.8pc, so other parts of the semi state make far more money than domestic sales.
Before selling Bord Gais Energy to Centrica, the Bord Gais group made serious money. It made an operating profit of €346m on revenue of €505m in 2013. Pre-tax margins were world beating, at 31pc.
SSE's Irish operation saw revenues hit €924m last year with gross profits of almost €80m, giving it the leg room to pay its €70m dividend back to its parent company.
Viridian's Energia has only just entered the retail business, but upcoming figures should throw further light on the profitability of the market.
There is also a "stealth tax" aspect to the state energy companies' profits. Last year state companies paid a whopping €475m in dividends back to the Exchequer, with the ESB - or its customers - contributing €269m. This is money that could have been used to cut consumer bills rather than to balance the books.
The reasons why energy companies earn so much from the Irish market are opaque and complex. Experts all have different answers. Deregulation of the market, most agree, hasn't worked, and too few private companies have come to the market to keep prices competitive.
"Ireland never made the transition from a state-owned monopoly to a free and competitive market," says Richard Tol, an economics professor and formerly of the ESRI.
"Previously, ESB and BGE were run for the benefit of the trade unions and the politicians. Liberalisation should have put an end to it, but it did not, for a mix of reasons.
"Foreign investors did not want to take over the former incumbents because of their high salaries and generous pensions; energy professionals in Ireland earn about twice the European average, and you can't have a subsidiary company where people make loads of money without being obviously smarter.
"Foreign companies also did not want to go into greenfield investment, because they feared that they would be at a disadvantage.
Overly generous subsidies are partly responsible, he added. A report into EU nations' energy subsidies in 2012 said government support for the sector was worth €510m for Ireland, up from only €250m in 2008.
"There are a few companies, like Airtricity, who are making money from the overly generous subsidies for renewables. There is double regulation of carbon dioxide emissions. Emissions are priced by the EU Emissions Trading System, which levels the playing field for fossil and renewable energy," says Prof Tol.
"But on top of that, there are subsidies and guarantees which skew the playing field towards renewables and creates opportunities for rent-seeking that some companies have taken advantage of."
Who runs Irish energy?
Ervia, formerly Bord Gais Eireann, is headed up by Mike McNicholas, whose salary is €250,000, the maximum level afforded by the cap on public service pay. Its chairman is Rose Hynes.
The ESB's chief executive is Pat O'Doherty, whose salary, according to its last annual report, was €358,950. Its chairman is Lochlan Quinn, brother of former Education Minister Ruairi Quinn.
Bord Gais Energy was until recently the generation and sales unit of Bord Gais Eireann. It was sold to Centrica last year. Its managing director is Dave Kirwan. Centrica's CEO is Iann Conn, on £3.7m pay.
Airtricity is a subsidiary of Scottish energy company SSE. Airtricity's managing director is Stephen Wheeler, while SSE's chief executive is Alistair Phillips-Davies, whose pay packet totals £2.7m.
Energia is part of the Viridian Group, which is owned by Bahrain investment bank Arcapita. Viridian's CEO is Patrick Bourke; because it is not a listed company, his salary is unknown.
Flogas is owned by Irish conglomerate DCC, whose chief executive Tommy Breen's pay packet was around €4.5m in 2013. The Flogas managing director is Richard Martin.
Sunday Indo Business