In addition to higher prices, over the 1970s and the 1980s there were periodic interruptions to supply due to industrial action. The cost of such interruptions to society is very high.61 The partnership
approach applied to industrial relations over the last 15 years has seen a major improvement in this situation, with few if any industrial relations related shortages. However, there remains a concern about the potential threat to security of electricity supply from potential industrial disputes in the future which might affect the dominant generating company. There are also concerns at the price of achieving such industrial peace in terms of inflated labour costs.
In Northern Ireland the industry was privatised in 1992 (McGurnaghan, 1995). The generation capacity was sold off to four different generators,62 with the transmission, distribution and supply
business remaining a single integrated firm – Northern Ireland Electricity. However, in return for substantial payments to the government, the firms buying the generation capacity received very generous long-term contracts. These long-term contracts, designed to enhance the value of the assets being sold, have resulted in very high electricity payments for consumers in Northern Ireland ever since. It will not be until 2011 that the effects of these legacy contracts will finally drop out of the Northern Ireland cost base, relieving consumers, and the Northern Ireland economy generally, of the heavy burden.
While the privatisation in Northern Ireland resulted in significant improvements in operating efficiency, the gains accrued to the UK Treasury (through the high sale price) and especially to the shareholders rather than to customers. Thus there was no offset for customers for the high premium resulting from the long-term contracts entered into as part of the privatisation.
60 See Fitz Gerald and Johnston, 1995, p. 12.
61 For an estimate of the cost to households and business see Leijsen and Vollaard,
2004.
62 Since privatisation two of the plants have closed (Belfast West and Coolkeragh).
New plant has been installed in Coolkeragh and in Ballylumford since privatisation leaving three different locations where there is generating capacity owned by three different companies, one of which is the ESB.
In the Republic in the early 1990s consideration was given to undertaking a similar privatisation exercise to that in Northern Ireland. However, as a result of a more cautious approach, the Republic was able to learn from the experience in Northern Ireland. This experience made it clear that privatisation was not a simple panacea for the ills of the electricity system in the Republic. The “option value” of delaying a decision was seen to be significant: better to delay making a decision rather than to make the wrong and irrevocable decision. However, the combined impact of EU legislation and the drive to create an all-island market to realise potential efficiency gains is raising in a much more acute form the issue of the dominant position of the ESB. In addition, the experience in Ireland and elsewhere over the last 15 years means that the appropriate way forward is somewhat clearer than it was in the 1990s.
The forces driving change in the sector are threefold. First, there is a broad “liberalisation” agenda, which has grown up in developed economies over the last 25 years, that promotes efficiency gains through industrial restructuring. Very often this involves privatisation, but the two agendas are not identical. Fitting within these agendas is a desire to improve the competitiveness of the Irish economy through driving down costs. Second, the related EU liberalisation agenda, is also driving change. While these forces are on a “convergent” path they are not always fully compatible. For example, the direct costs of market opening, required by EU law to introduce competition in electricity supply, may prove greater than the potential benefits to consumers. Finally, as discussed in Chapter 2, the Irish market for electricity is growing quite rapidly and is likely to continue growing out to the end of the decade. This means that there is a need for continued new investment in generation capacity and also in transmission and distribution. This is a rather different situation to that in the rest of the EU and in North America where there has been excess capacity for the last decade. The result is that the price of electricity in Ireland must be high enough to fully remunerate the capital employed. In much of the rest of the EU, where the assets have already been significantly depreciated (Helm, 2004), the price, albeit temporarily, may have fallen below long-run marginal cost.
The nature of the electricity sector is such that there is no simple solution that will introduce perfect competition. No single model of best practice has been developed elsewhere in the developed world. There are some significant markets where for a sustained period reformed market structures have realised significant gains for consumers. For example, the Nord Pool63 arrangements covering
the Scandinavian electricity market have worked well for over a decade (Olsen, 1995). Similarly the British electricity market of the last decade realised relatively low electricity prices for consumers. In
63 On 1 January, 1990 Sweden joined the Norwegian electricity exchange to form
the first multinational market for trade in electricity. Four years later Finland and Denmark became members of Nord Pool.
the US, the PJM market in the North-East United States has generally been successful. However, no single model has proved to be clearly superior to any other model and all of these models have suffered from significant problems in recent years.
The small size of the Republic of Ireland market, or even of an all-island market, poses special problems in introducing the disciplines of competition. It means that a specifically Irish model must be developed, taking account of the lessons learned elsewhere. This model must also allow for the possibility that over the course of the next decade the all-island market will eventually become part of a wider British Isles, or even of a North-West European electricity market.
It is likely that whatever the market structure, the small size of the electricity system on the island of Ireland will make an environment of competition difficult to achieve. As a result, if the market is to work in the interests of consumers it will need to be regulated on a fairly continuous basis by the appropriate authorities. To make regulation effective it will be desirable to make the market system that evolves as transparent as possible. This requirement for transparency to facilitate regulation should be a significant consideration in market design for the future. The need for transparency to increase the flow of information to the regulator(s) should inform any restructuring of the industry.