What is the point of competition?
Hotel and Restaurant Times asks what’s the point of competition in the electricity marketplace when it seems to be our dependency on gas is the real issue….
What is the point of competition? Increasingly, the EU (which began with very social programmes in mind) is concerned with liberating and privatising. The point is, of course, that this will bring lower prices for everything. In a free and open market, you can pick and choose who should supply you with whatever you want, and you should get it cheaper than before.
While we now have cheap phone calls and cheaper flights (all thanks to privatisation), electricity is going in the opposite direction.
Since the electricity market was liberalised in Ireland, more and more suppliers have come into it. There are now 11 companies operating in the country, supplying electricity to homes and businesses. There is much head-scratching amongst the public when they see the ESB making profits in the hundreds of millions of euros, but that has little to do with the market of selling electricity to the consumer, as Doctor Paul Deane of UCC points out:
“When we talk about profits at the ESB, we have to be careful,” says Dr Deane, who is a senior lecturer in Clean Energy, “because the ESB have different revenue streams and they’re not allowed to share those streams horizontally across the company… Electric Ireland made a profit of around €50 million last year from about a million households. So that’s about €50 per household in profit… the margins that electricity supply companies make are of the order of 3% – 5%. There’s a perception out there that we’re dealing with gouging by suppliers but that’s not correct – the margins, I think, are quite low.
“Are they profiteering? No. Are the making profit? Yes. Are those profits proportional to the investments they have made? Yes.”
Electricity is getting more expensive. Even before the advent of Russia’s invasion of Ukraine and the American attack of Iran, there were already hikes in prices in a world where we were promised the opposite would happen.
“Up until Covid, costs in energy management were going pretty well,” says Chris Austin, Chief Operations Officer of the iNua Group. “Hotels were working on consumption, we had good systems in place, and we were buying pro-actively.”
Ireland dependent on gas for 65% of electricity production needs
In the immediate aftermath of the Russian invasion of Ukraine, Chris says, people hadn’t quite realised how dependant we were on Russian gas transiting through Ukraine. Wholesale prices per therm shot up and have remained very high since. With Ireland dependent on gas for 65% of electricity production needs, we’re stuck on this record until something else happens.
“We were seeing some months where you were paying 30p for a therm of gas (the energy units, purchased from a UK market),” says Chris. “Then it might get up to 50p or 60p per therm and you’d get anxious over the cost. Suddenly, it was going up to £2.50 or £3.
“It kind of came out of the blue… we would have had traditional energy purchase contracts directly with energy management companies; so, we’d be buying directly from Bord Gáis or Energia and we wouldn’t really have had a strategy around energy.”
After the start of the war in Ukraine, the company started working with a Dublin-based energy management company who now purchase iNua’s energy on their behalf, negotiating contracts for them and also adapting a hedging strategy. Once the price drops below £1/therm, for example, the company buys options ahead – similarly to a futures market in the stock exchange. It’s a practice that maintains a degree of control over energy costs, but there’s no getting around the bottom line.
“Managing energy needs like that has worked well for us,” says Chris, “but we went from being a company with annual energy costs in the region of €2-€2.5 million to suddenly having annual costs of €4.2 or €4.3 million.
“There was a lack of Government supports. I know we leveraged hard on VAT rates and on any kind of support we could get but… the situation stabilised after a while but it was often news headlines that would dictate the price, rather than facts on the ground: There could be an announcement that a peace deal was in the offing and prices come down. We relax a bit and buy a little bit forward. Then the deal is off, suddenly and the price goes through the roof again.”
The role of ‘Trump-economics’ has come into play more recently since the American administration has continued its surprise attack of Iran.
One of the upsides of all this is that it redoubled efforts to save energy in the hotel group, with lots of energy-saving measures now in place; from alarms that go off on a mobile phone once the temperature of a function passes a certain point. But any efforts that are made are quickly eroded when energy prices go up.
Heavily reliant on imported gas
“On a daily basis, that attack had a huge impact on energy costs for us. We’re heavily reliant on imported gas – mostly from the UK.”
Getting electricity into the country from abroad isn’t easy when we’re on an island. So far, the only international interconnector we have is with the UK. However, that is going to change with the arrival of the French connection in the form of the Celtic Interconnector. In France, electricity costs are 20% less than they are here. Buying wholesale from French suppliers, those 11 companies will now finally be able to offer something better to the long-suffering households and business owners of this country. Right?
“No, that isn’t going to happen,” says Paul Deane. “The French are wonderful and I’ve a lot of French friends, but they’re not going to sell us cheap power. They’re going to sell us power slightly below what we’re paying for it at the moment because that will allow them to maximise their profits.
“No company is going to sell us electricity that is significantly below market price. Traders will simply look at the Irish market and offer electricity that is marginally below current market price – not substantially below market price.
“There’s no silver bullet, unfortunately. The core challenge for Ireland is that a lot of our electricity is generated from natural gas and, with a war going on in the Middle East at the moment and another war in Europe, the price of natural gas is going through the roof… and that feeds directly into electricity prices in Ireland.”
Given that France still uses nuclear power for approximately 60% of its electricity needs, it also begs the question: shouldn’t we be looking at nuclear power for our electricity needs? If we have no moral qualms about using French electricity partially created by nuclear power, we shouldn’t have any if we go the nuclear power route ourselves.
Competition in the electricity marketplace isn’t working
Competition in the electricity marketplace isn’t working, and it doesn’t look like it will bring electricity costs down any time soon. Maybe the answer to the question of our electricity costs is that we lack long-term vision in this country with regard to vital infrastructure and energy needs. The solution can only be a more long-term look at how we can generate electricity for ourselves.
With mini nuclear reactors (Small Modular Reactors or SMRs) now becoming common in a swathe of countries – particularly in Scandinavia – it’s surely one of those options that we should be looking at. If only we had brave Government leadership who wish to reduce the costs of doing business in this country…
