An industry at the crossroads

The Irish energy market, north and south, mirrors trends and issues familiar across Europe. Monopoly is giving way to competition, coal is losing ground to gas, and potential trading opportunities are multiplying. Add in impressive energy demand growth, not to mention peace in the north, and you have a market heading straight for wrenching and irreversible transformation. But there is a long way to go.

Benjamin Tait

Prospex Research Ltd.

State corporation, the Electricity Supply Board (ESB), is the only power industry player of significance in the Republic of Ireland. Its current capacity of 4400 MW dwarfs small scale industrial combined heat and power (CHP) and renewable capacity of 176 MW.

But forget the “sleepy utility” image. Radical change is underway: in 1996, the government, trade unions, and ESB management agreed a “Cost and Competitiveness Review” that changed working practices and will reduce the payroll by 2000 positions by April 1999, saving ESB some $80 million net per year.

Today, the government`s bill bringing the Republic into line with the EU electricity directive`s requirements is under legislative review. The Republic has a one-year directive extension, but the law must be on the statute books by February 2000 at the latest – a very near-term deadline for a large monopoly utility that is accustomed to gradual change.

Decisions about competition are urgently needed. The Republic`s system will come under pressure over the next five years without capacity additions: peak demand is currently around the 3600 MW level, leaving a reserve margin of 27 per cent, or 22 per cent if CHP and small scale renewables are excluded. ESB thinks a 30 per cent margin would be preferable, but this will be increasingly difficult, if not impossible, to achieve.

The utility expects peak demand to hit as much as 4428 MW in 2002 under high growth forecasts, or 28 MW more than current ESB capacity. By 2005, annual demand could be close to 30 TWh, or 50 per cent above current levels, and the peak demand-current ESB capacity gap would widen to 789 MW. This spells blackouts if new plants do not come on line soon. ESB and new entrants therefore need to know now what business terms and market structures their projects will have to balance. ESB alone puts its investment bill for the five years to 2002 at £1.7 billion ($2.5 billion) – this is serious planning money.

Whatever long-term competition regime the government finally settles on, ESB is confident it will be ready for market action. It knows that even if it were left more or less intact by energy law reforms (this is possible, with conditions, under the EU electricity directive), it still might lose some of its biggest customers when the market opens in 2000.

Around 300 customers will be able to choose their supplier, putting 28 per cent of ESB sales volumes at risk. But ESB industrial rates are already below the EU average, even though some insist they could be lower still if “cross subsidies” for residential rates were eliminated (ESB says residential customers paid the third lowest residential rates in the EU in 1998).

ESB is also countering competitive challenges with strategic expansion as well as restructuring. For example, it is developing a 400 MW, $280 million gas-fired project at a decommissioned Dublin plant site. This may involve a new entrant: ESB is in negotiations with a potential partner, identified in unconfirmed Irish media reports as Norway`s Statoil.

If Statoil does jump in, ESB will gain an experienced international energy player and gas major as a partner, perhaps breaking fellow state utility Bord Gais Eireann`s stranglehold on gas business. ESB has also almost completed a 470 MW combined cycle addition to its Poolbeg plant.

ESB may be confident, but it will face credible opposition. It appears to have already lost one top industrial name – construction and aggregates giant Cement Roadstone Holdings (CRH). CRH is developing a 600 MW CCGT plant in the Dublin area in partnership with Viridian, the Northern Ireland utility. The plant would sell low-priced power to CRH, and market any excess to eligible customers. CRH is an aggressive multi-national, and Viridian is determined to break into the Republic. Perhaps only local opposition to projects, or an unexpectedly restrictive competition regime, will stop this pair of new entrants.

There are other solid contenders. One is IVO of Finland, which won the Republic`s first IPP tender in 1998, beating a rival ESB/Foster Wheeler bid. IVO`s 117 MW plant in Edenderry will burn peat, Ireland`s indigenous fuel. The plant will sell output to ESB from 2001 under a 15-year agreement, rather than tackle competitive supply markets, but IVO has expressed interest in other Irish opportunities. Its experience with peat at home in Finland is in fact only one of its strengths: the company`s followers will know it as one of Europe`s most interesting and ambitious cross-border competitive players.

Who else likes Irish power? Bord Gais Eireann is one notable name. Like so many European fuel suppliers, it wants to get into the power game, perhaps even if this upsets its biggest customer, ESB. Together with Canadian Utilities, BGE is developing a 280 MW gas-fired project, which may be located in Cork.

Another possible contender is US oil and gas group Marathon, which owns the Kinsale Head and Ballycotton gas fields in the Celtic Sea, and is considering a gas-fired project on the Republic`s south coast.

The Canadian gas company Atco, Japanese trader Mitsui, and the consortium Ireland Power Corporation are planning a $180 million gas-fired plant in the northern Dublin area. Finally, some of the names linked with the peat tender before IVO won it may resurface, with lots to spend. They include Abengoa, InterGen, Marubeni, and PowerGen.

A crowded market

The capacity under construction or development, even assuming the Marathon and Atco/others projects of yet-to-be-established capacity come in at just 100 MW each, totals 2137 MW. Depending on terms for excess sales to the grid, industrial CHP may account for a few hundred more megawatts, coming in ahead of official expectations for capacity additions in that sector. This means total additions that are more than enough to cover the capacity gap ESB expects in the early years of the next century. Indeed, if all the projects go ahead, excess capacity might spark a very ugly price war. But such a consumer victory may never come: extra gas import capacity would be required to fuel so many projects, since Ireland`s gas fields are mature, and this raises cost and sensitive energy security questions. Moreover, the eligible market is just not big enough to support so much competitive capacity.

Developers and independent analysts might see this as unfortunate. Opening the entire Republic market, and forcing ESB to cope with the consequences, might make sense for customers, the environment, and even ESB and the other companies involved. Irish economic growth is impressive, but why not make sure electricity is always competitively priced, at the European level, so that growth can be fuelled effectively well into the future?

Capacity under development is surplus to requirements, but why not build anyway to replace ageing ESB coal, oil and peat-fired plants? Perhaps some 1400 MW, or a third of the system, could be shuttered over a decade, making way for new plants, fired by LNG if pipeline gas supplies are not available, and offering high efficiency and lower emissions. Prices could drop while utility operating profits could rise (gas stations require a handful of operators, while coal and peat stations are labour-intensive), and the Republic would be a Kyoto star.

But this is a dream. The Dublin government is inclined to a hard line, as illustrated by its recent rejection of ESB`s request of a 3 per cent price increase to “prepare” for competition and fund plant investments. So is the competition authority, which has banned a long term contract model ESB employed to defend soon-to-be-eligible customer business.

But the Republic is not ready to join the EU`s electricity liberals, such as the UK and the Nordic region, in full market opening. Nor is it ready to take on the trade unions in a final battle to decide the industry`s long term direction. The unions understand better than most just what electricity reform might mean for their members – the only clear losers under industry deregulation. They are preparing accordingly, and may not hesitate to wield the strike weapon, pressurising a government that cannot afford to let the lights go out on the rampant Celtic tiger.

Bright future?

The Republic is hardly alone in facing fundamental change. In Northern Ireland, the electricity industry is, today, a question mark over the UK record. The province`s three generators and dominant supplier have spent more time arguing their cases at the Monopolies and Mergers Commission and in court than dealing with real competition.

The generators, with four power stations, are bound to supplier Viridian (formerly Northern Ireland Electricity) by long term power supply agreements struck in 1992, just before Northern Ireland Electricity was privatized. These contract prices are some 40 per cent above generator prices in Great Britain. Viridian`s own grid and supply operations have been subjected to intense regulatory pressure, but Northern Ireland`s final prices are still high by the Great Britain yardstick, since the generation price issue remains unresolved.

As a de facto system operator, Viridian does run a generation merit order. And utilities are quick to point out Northern Ireland`s peculiarities, such as the need to import fuel, the low population density, and the lack of economies of scale available to major generators in markets like England and Wales. But everyone from the regulator to business has another story to tell, which starts with the pressing need to get prices down, and get competition going.

Grids will play a key role in the desired changes. From 2001, Northern Ireland will be linked to Scotland by a 250 MW submarine cable. ScottishPower will exploit its excess capacity to provide Viridian with an assured 125 MW of supplies at lower rates than Viridian pays Northern Ireland generators, while another 125 MW should be available to target eligible customers in Northern Ireland, or the Republic for that matter. The link will cost £150 million ($246 million).

On the Republic side, ESB is very interested. In the short term, it has its hands full serving its home market. But in the longer term, tackling Northern Ireland must look attractive. ESB already has 15 per cent of Coolkeeragh Power, Northern Ireland`s third largest generator, and is negotiating to raise its stake.

Exports to Northern Ireland might also make sense. The interconnector between the two systems was once a favourite target of terrorist bombers, who wanted to frustrate any trade between the two sides of the island. But today peace, with a few ugly but minor exceptions, is holding and remaining extremists are under intense pressure from the great majority of their countrymen who want to move on. So ESB`s official insistence that it is too soon to rely on trade may give way to a more optimistic view. If this happens, everyone except incumbent utilities should welcome ESB to Belfast with open arms.

The hard part

All in all, no matter how much turbulence lies ahead, Ireland has everything to look forward to. Market opening and integration make sense, even in the end for jobs: utility losses should lead to manufacturing gains, if utility efficiency means the manufacturers` power costs less. Luck though, will have little to do with it. With demand surging and urgent issues requiring rapid solutions, something more authentically Irish is needed: hard work.

Finding the way in a new market

Cork: A possible location for a new gas fired power station