Monday 20 May 2019

Colm McCarthy: Selling off our energy businesses makes sense

The State's disposal of power stations will not marginalise anybody in this society, writes Colm McCarthy

The Government announced last week that it will seek to dispose of State commercial assets up to a value of about €3bn and that €1bn of the proceeds will be available for unspecified 'reinvestment' in the economy. The balance will be applied to reducing the State's debt.

Irish governments have been selling State companies for the last 20 years and the State's remaining commercial assets consist principally of the energy companies ESB and Bord Gais Energy (BGE).

The plan is that ESB will dispose of some more of its generating stations while retaining its 'vertically integrated' structure, while BGE will dispose of all operations except its gas pipelines.

Harvesting rights to Coillte's forests, as well as the one-quarter stake retained in the Aer Lingus privatisation, may also be sold.

The Government has wisely avoided any binding timetable and there appears to be no pressure for early disposals from the troika of official lenders -- the EU Commission, the European Central Bank and the IMF.

About half of the electricity-generation capacity in Ireland belongs to ESB, with the remainder in the hands of a number of mainly private power companies.

It has long been the view of both the energy regulator, the Commission for Energy Regulation and the Competition Authority that ESB's dominance in power generation is undesirable.

Several power stations, including Tarbert in Kerry and Great Island in Wexford, have been sold and the next set of disposals represents a continuation of that process. BGE owns some power stations and these too will be sold.

The result will be a more dispersed ownership of generation capacity and, hopefully, more vigorous competition.

However, the Government decision also includes the following statement: "The Government reaffirms its commitment to the retention of ESB as a vertically integrated utility in State ownership as at present -- notwithstanding the decision to dispose of some of its non-strategic power-generation capacity."

A vertically integrated power utility is one which generates, transmits, distributes and retails electricity.

Ireland, like many other countries, had a vertically integrated monopoly in State ownership until the power industry was liberalised and competition introduced, at EU insistence, during the 1990s.

It had been the intention of the previous government that the national transmission grid would be transferred to the State-owned company EirGrid, which operates the system and organises the wholesale market in electricity.

The current, and rather awkward, arrangement is that ESB owns the grid while another State company is the operator.

Under EU rules, the grid, which is the pitch on which the competition game is played, must be operated independently and should not be controlled by the dominant power generator.

Ireland complied only minimally with this requirement by transferring operational responsibility to a distinct State-owned company. But it has not taken the plunge, as have many other EU members, of separating ownership as well.

The EU's energy directorate has signalled that it prefers to see ownership, as well as operation, of transmission grids removed from generation companies and it is not kindly disposed to the retention of any semblance of vertical integration, which it sees as a potential inhibitor of competition. Irish policy on competition in energy has consisted of a grudging compliance with EU requirements, while clinging to State monopoly to the maximum extent allowed.

ESB management and trade unions have opposed the transfer of grid ownership to another State company, so the Government's reversal of previous policy is not just a piece of nostalgia, it avoids a more decisive move to a more competitive market structure.

The EU Energy Directorate may have more to say on this aspect of the Government's decision.

The gas company BGE owns the pipeline grid and the local distribution system, as well as some power-generation units, a wholesale gas trading business and a retail gas and electricity business. BGE's power-generation business includes substantial wind capacity purchased recently from the private sector.

The Government decision is to dispose of all except the pipelines, which are natural monopolies and are independently regulated in compliance with EU requirements.

There is an inconsistency in the proposed treatment of ESB and BGE, in that the Government has decided to get out of the retail business in the case of BGE but to retain the, essentially similar, retail business of ESB.

Having two State companies compete in retailing gas and electricity never looked like a coherent policy.

If it makes sense to dispose of BGE retail, along with its power-generation business, the same logic applies to ESB.

Potential buyers of the power-generation units of both BGE and ESB will be conscious of the latter's retention of grid ownership. If ESB were to exit the power-generation business entirely, the units to be sold would present a clearer business proposition.

Moreover, the Government's commitment to subsidising large-scale wind generation will depress the prices likely to be obtained. Power stations designed to run round the clock cannot do so when they must be stood down whenever the wind blows.

Wind generation has a role but over-generous encouragement of wind has a hidden cost to the State if it depresses the value of the State's base-load conventional stations.

There are unavoidable monopoly components in the energy business, specifically the electricity and gas grids.

The manner in which these monopolies are regulated is critical and the privatisation plans present an opportunity to review the Irish arrangements. The benefits of a more competitive industry structure are enhanced with robust regulation of the unavoidable monopolies.

Minister for Public Expenditure and Reform Brendan Howlin indicated that not all of the privatisation proceeds would be devoted to debt reduction. He stated: "I am pleased that following intense engagement the troika has agreed that one-third of the proceeds can be used for reinvestment into our economy."

There is no intentional implication here that the two-thirds to be devoted to debt reduction will somehow go missing and will not contribute to the promotion of economic recovery.

The country's economic prospects are improved with every step towards debt sustainability. Money routed to cutting the overdraft is not wasted, particularly given the high interest rates in prospect should the Government succeed in re-entering the bond market in due course.

The national debt is, of course, now so sizeable that the privatisation proceeds will make only a modest dent, but it is fatuous to object to selling State assets on the grounds that this measure alone will not solve the debt problem. Nobody ever said it would.

A €1bn portion of the privatisation proceeds is earmarked for 'reinvestment' and the merits of this will depend on the purposes to which the funds are devoted.

It will be difficult to finance even a modest public capital programme in the years ahead. But a modest programme should be enough, given the sharp reduction in demands on several key infrastructures, and the privatisation proceeds will provide a cushion to ensure reduced priorities can be funded. Fears the €1bn will get vaporised in job-creation gimmicks are understandable but the Government has prudently avoided specific commitments.

All of the energy businesses to be privatised are in power generation and wholesale and retail energy trading -- areas of activity where both public and private companies already operate.

Indeed, some of the units to be sold have been purchased by the State in recent times. In the case of Coillte, the proposal is to explore the sale of harvesting rights -- in effect, the produce of the State forests which Coillte has always had to dispose of.

The Aer Lingus shares are a residue of the 75 per cent privatisation already executed. No enormous ideological fences are being jumped here.

This has not inhibited principled objections from proponents of State enterprise, most surprisingly President Higgins, on his visit to the United Kingdom last week.

He said: "This is the road back to autocracy, in which a hollowed-out State is bereft of anything meaningful to attract the support of the citizen -- especially the marginalised, excluded from the mainstream of society."

Budget cutbacks around Europe are raising inevitable questions about the role of the social-democratic state, but selling some power stations and energy retailing units is hardly going to marginalise anybody.

Sunday Independent

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