The electricity network will operate without a safe margin of reserve capacity next winter, the national grid company has warned.

EirGrid's managing director, Mr Kieran O'Brien, said that that did not necessarily mean there would be power cuts, but the risk of failures was "higher than we would normally expect it to be". The "very tight generation situation" was compounded because the Irish system had no large interconnection with networks outside the island.

In an interview, Mr O'Brien also said the rejection by ESB technicians of a crucial transformation agreement had the potential to create "enormous difficulties" on the State's transmission network.

EirGrid will be formally separated from the ESB next June. Yet while EirGrid will function as a grid operator in the liberalising market, the ESB will retain ownership of the transmission assets and responsibility to maintain the network.

Mr O'Brien said his company would shortly enter talks with the ESB to reach an "infrastructure agreement" setting out how the relationship between the two would be managed. There would be a "fair bit of disagreement" when legal rights on the network and the timing of construction projects were discussed. EirGrid already has legal "step-in" rights on the network, but Mr O'Brien said these could be complex and difficult to exercise.

Citing the necessity to have additional generation capacity on the network during winter, Mr O'Brien said: "It is fair to say that for an awful lot of this winter we did not have that margin and we probably won't have it next winter either."

This meant the Republic's power system would operate outside the statistical risk standard until new power stations were completed in 2003.

Demand for power broke the 4,000 megawatt (MW) threshold for the first time in January. While the national system could produce up to 4,800 MW, Mr O'Brien said some of the reserve capacity would be available for only five or six hours. Such reserves would not be sufficient to replace two major generation stations if they broke down.

A £500 million (€635 million) five-year programme to upgrade the electricity transmission network was crucial because the equivalent of a quantum leap was necessary to modernise the system.

That £500 million investment was required to meet standards set by the electricity regulator, Mr Tom Reeves. Mr O'Brien said further work, described as "investment ahead of standard", was also required. Such investment could cost an additional £50£100 million.

Of the rejection by ESB network technicians of the transformation agreement necessary to implement the plan, he said: "Every day that passes we're falling behind."

This would have fundamental implications also for the Government's plan to secure half of all inward investment for the Border, Midlands and Western region. No investor or industrialist could cope with the timescale required to upgrade the network in these regions, he said.

"If we wish to locate a very large industry in Mayo, for example, it would be quite out of the question."

Mr O'Brien also expressed dissatisfaction with the trading and settlement system that dictated how firms traded power supplies in the partially liberalised market.

The system was an interim one only and should be redrawn. "It would be important for us to relook at it from the point of view of how we will re-incentivise investors to come into the market."

This was especially important because indications from the European Commission suggested the market would be fully opened sooner than expected. Mr O'Brien said a new system would have to be agreed by the electricity regulator, Mr Tom Reeves. This should be done sooner rather than later because the best systems had lead-in times of two or three years.

Of a proposal by Mr Reeves to change the system of allocating power stations connections to the national grid, Mr O'Brien said this had the potential to increase the cost of power to customers. This was because there were considerable constraints on the system. The decision was one for Mr Reeves, but EirGrid had put forward separate proposals.