THE FRIDAY INTERVIEW:SUDDENLY, competition in the Republic's energy markets looks to have ignited after a period in the doldrums. Within the last few weeks, Viridian-owned Energia began selling natural gas to small- and medium-sized businesses, while Bord Gáis is challenging fellow State company ESB in the domestic electricity market and is positioning itself as a dual gas and power supplier.
Spanish group Endesa is also in the market, after taking over four ESB sites following a deal done last July, while the biggest renewable operator, Airtricity, is stepping up its challenge for more business and domestic customers, and plans to use the clout of parent Scottish Southern Energy to become a dual fuel player.
Viridian Group managing director Harry McCracken says it is an indication that the all-Ireland electricity market, launched in November 2007, is having an impact. He is “surprised” that the single energy market (SEM) has succeeded, but says that the pool system, which allows everyone to see what the market prices for electricity are, has brought greater transparency to the business.
Viridian is a big player. North of the Border, it’s a regulated utility, with key transmission assets. In the Republic, it’s the biggest private sector operator. This year, Energia will turn over €900 million. It is recruiting 500 new natural gas customers a month. It holds 40 per cent of the big industrial users of electricity, and a large chunk of the small- and medium-sized sector, and it’s a dual fuel supplier to most of its customers.
It has two power plants in Co Dublin, with a total capacity to generate 750 mega watts of electricity – in industry terms, enough to supply 750,000 homes. It owns wind energy supplier Eco Wind Power, which it bought from Treasury Holdings, and has agreements to buy power from a number of other renewable players. On that basis its total investment in the Republic alone is more than €1 billion. In Irish terms at least, it’s a big utility. “We did that from a standing start 10 years ago,” McCracken says.
He acknowledges that competition is very much a reality in the Republic’s energy markets. “Anyone we approach now has several quotes and that includes Government and public service customers. That didn’t happen before,” he says. Energia, which supplies power and gas in the Republic, is also seeing a fair degree of churn among clients. Even as it is winning business from rivals, they are taking some of its customers.
There is a certain amount of disquiet among private sector operators that, as the market has taken shape, its bigger players are owned by the same shareholder – the State. Bord Gáis is a regulated supplier of natural gas to homes and small business. At the same time, it supplies electricity to businesses, and more recently to households, where it is offering discounts to the regulated price. Both it and the ESB are building new generating plants in Cork at a cost of about €400 million each.
Similarly, both Bord na Móna and Coillte (the State forestry company) are attempting to move into the electricity market through the renewable route, developing wind farms on their estates.
All this means that the State will continue to own a high proportion of the Republic’s electricity generating capacity, even though its policy for the last decade has been to encourage the entry of independents to the market.
McCracken agrees there is no real evidence that this is denting competition; the opposite appears to be the case. But he argues that there is room for more transparency in certain areas of the electricity market.
The SEM is, in theory, designed so that the most efficient, and therefore cheapest, electricity generation plants come on stream first, and thus give the maximum service, ensuring that customers get the best price.
However, in practice, there are times when older, less efficient plants are given preference over more modern facilities, such as Energia’s, simply because the older generators – owned largely by the ESB – are less flexible, and cannot be turned off and on without the risk of something going wrong.
Grid operator Eirgrid does not want to lose its generating capacity, as a key part of its role is to ensure that there is plenty of generating capacity available to the system as a whole.
McCracken worked in grid and transmission management, and can see why Eirgrid takes this approach. “They are always going to have to be conservative. But in situations like that, there should be greater penalties if you can’t do what you’re supposed to do.”
Security of supply has been a key concern for the grid manager and the Government for the last decade, particularly when the economy was growing at a furious rate. Until it agreed to sell some of its old plants, the ESB was not allowed to build any more generating capacity, so for the larger part of the boom, the system was in danger of being stretched.
McCracken does not believe this is now the case. Between new generators already in place, what is due to come on stream and what is planned, there is less urgency around “base-load plant”, the large capacity conventional generators. Where he sees the next opportunity for capital spending is in “peaking plant”, more flexible units that can be turned on and off quickly to boost overall power supplies when demand is high.
These also have a role in backing up wind-generated power, which is intermittent, because of its dependency on there being enough, rather than too little, or too much, wind.
The Government, and particularly Energy Minister Eamon Ryan, are enthusiastic about wind power, both as a means of meeting energy needs and cutting greenhouse gas emissions. But because it is available only about a third of the time, the system needs conventional power to back it up.
Interconnectivity with other EU jurisdictions, Britain for the moment and possibly France in the future, is seen as another means of ensuring we have enough energy to meet future needs. One of the virtues of interconnection is that electricity can travel in both directions.
McCracken says there are cons as well as pros to this. If we are importing electricity from Britain, that means there is oversupply there and thus the power we are buying will be cheap, helping to lower its overall cost here. At the same time, if we are exporting power, it means that demand there is outstripping supply, and it is thus expensive. This will in turn push up prices here. “Interconnection is very much a double-edged sword. People tend to forget that.”
For now, Energia is going to continue to chase business from the large-scale, small- and medium-sized users. But the big question is whether or not it will enter the household electricity market.
McCracken says this presents it with a number of challenges. First, it has lost first-mover advantage to Bord Gáis.
More importantly, it would have to put in the infrastructure and IT systems needed to deal with a large number of small users, and then spend a lot of money building up its brand. “If we were to go out and knock on doors and say ‘I’m here on behalf of Energia’ people are going to say ‘what’s that, a drink?’,” he says.
He estimates it would require spending at least €30 million. To justify that, the company would have to be sure it can get a return on that investment. Spending €30 million is something that McCracken would also have to justify to Viridian and Energia’s owner, Bahrain-based private equity fund Arcapita.
The group put the businesses on the market last year, or at least invited bids. A number of interested parties lined up including Endesa and Bord Gáis, both of which subsequently walked away. “I know these things are very interesting and very glamorous, but the fact is there is no point to them unless you have got a viable business proposition in the first place, and that’s what we’re concentrating on.”
ON THE RECORD
Name: Harry McCracken
Position: Managing director Viridian Group (owner of independent energy player Energia).
Why is he in the news?Viridian, formerly Northern Ireland Electricity, entered the Republic's market as an independent player a decade ago. It recently began competing with Bord Gáis to supply natural gas to small- and medium-sized businesses.
Background: An engineering graduate from Queen's College Belfast, he began his career in that role with Northern Ireland Electricity. He worked abroad for a period, and helped establish the electricity system in Nigeria.
He moved to corporate organisation and remained in that role while the company was privatised. He moved back to operations post privatisation, and played a key role in establishing the business in the Republic.
