Oct 31, 2006 -- Datamonitor

 

With relatively robust regulatory polices and demand growth, the Irish power market has future developmental prospects not enjoyed by a number of markets elsewhere in Europe. Recent developments further highlight how the Irish power market remains a market to watch, although the decision not to break up former power monopolist ESB will curtail the development of true competitive intensity.

Over the past decade, electricity demand in Ireland has grown at an average annualized rate of 5% - significantly above that seen in the EU25 as a whole. Going forward, this growth is likely to continue at an above average rate, albeit slightly lower than that seen in recent years. Recent forecasts by Datamonitor indicate that Irish power demand will reach 37.8TWH in 2020, representing compound average annual growth of more than 3% per year.

This relatively strong demand growth, combined with a notably higher degree of pro-liberalization regulatory policies compared with many other EU markets, means that Ireland remains a pertinent power market in future developmental terms. Two recent developments serve to highlight this development potential further.

The first of these developments is an admission from Noel Dempsey, Ireland's minister for communications, marine and natural resources, that a power interconnector between Ireland and mainland Europe may be developed. Currently, all of Ireland's imports come from the UK through an existing connection between Scotland and Northern Ireland which then interconnects with the Irish Republic. A second connection linking Ireland with Wales is currently being developed and is likely to become operational in 2012.

If an interconnection with mainland Europe is developed, it will greatly increase Irish security of supply, as well as opening up a number of alternative procurement sources for wholesale supplies. This will serve to significantly increase the scope for the development of competitive intensity in the market.

Further to this, the development of the Irish power sector was given a further fillip with the recent announcement by Bord Gais, the former monopoly gas player, that its plans to construct a E300 million, 440MW combined cycle gas turbine plant by 2009 had received planning permission.

The proposed project at Whitegate, County Cork will be located close to the site of a ConocoPhillips oil refinery, which has the dual advantage of both offering a convenient back up fuel source and being already connected to the national transmission grid.

Although electricity is by no means a new diversification for Bord Gais, the development of the Whitegate plant will significantly advance the company's power sector activities and development plans. Bord Gais has been active in the power market since 2001 by sourcing volumes from ESB, and currently has a market share of around 9%. By developing its own generation capacity, Bord Gais will not only be able to secure its power volumes more cheaply and more flexibly, it will also be able to further develop its ambitions to supply the residential market.

While the Irish power sector was always likely to continue its relatively rapid development towards increased competitive intensity, these two factors are certain to contribute to the acceleration of the process. However, the recent decision by the Irish government to reject the proposed break up of ESB is likely to have the opposite effect. The suggestion came as part of a government-sponsored report undertaken by Deloitte and Touche as part of the governmental green paper on energy policy.

The report highlighted a number of inefficiencies and higher labor costs at ESB which, the report estimates, add around E100 million per year to the company's cost base.

Although new entrants are increasingly gaining a foothold in Ireland, ESB maintains a commanding position. Had the Irish government been keener to promote the development of full market liberalization, it would have followed the proactive regulatory polices of, among others, Italian regulator the AEEG and taken decisive action to loosen the former monopolist's stranglehold on the market.

Nonetheless, new entrants and potential new entrants to the Irish power market will be afforded some degree of comfort from the inefficiencies reported by Deloitte and Touche. New entrants able to maintain strict cost discipline and undercut ESB will be able to reap the rewards of building a presence in a rapidly growing and dynamic market.

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