How the ESB protected UK customers from higher energy prices but not Irish ones – The Irish Times

Energy markets are complex. The days of a vertically integrated monopoly utility, generating electricity, operating the grid and billing households are long gone, shredded in the interest of competition.

What we have instead is a veritable spaghetti junction of interweaving and overlapping interests – generating, buying and selling – a marketplace in which former monopolies compete with new firms and rebranded entrants from other sectors.

The grid in Ireland is now operated independently by EirGrid and on an all-island basis while the ESB Group is functionally separated into three basic divisions: ESB Generation, ESB Networks and the group’s retail arm, Electric Ireland. The latter has a 50 per cent market share in the Republic, equivalent to about 1.1 million customers, a market position that reflects its former monopoly status.

In the weeks leading up to the announcement of the ESB’s full-year results in March this year, the company had what insiders described as a brewing PR problem. It was about to announce huge profits – a record €847 million for the year – at a time when households were paying through the nose for electricity and in the wake of four big price hikes from Electric Ireland.

There was also growing disquiet about the hedging contracts the ESB and others had negotiated which had (and still have) tied customers here into high prices for an extended period (more on this later).

Nervy ESB executives met several times in advance of the results to discuss how they could sweeten the pill.

EU competition law, however, forbids former monopolies from using profits from one division, in this case ESB Generation, to subsidise another part of the business. As a result, the ESB’s eye-watering profits had to sit uneasily beside hefty bills for end users.

Rivals Bord Gáis, SSE and Energia – the next big three in the market – are not subject to the same strictures and could in theory use their profits from generation to subsidise other parts of the business, potentially shielding their customers from price hikes on wholesale markets, mindful they have shareholders and capital investment requirements to think of as well.

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Ironically while the ESB was restricted from what it could do for customers here, it was directly subsidising its UK retail arm, So Energy, which was losing money because of the UK’s energy price cap. That meant the company was – in effect – shielding UK customers from the global price shock but not Irish ones.

In the end, as a public gesture, the company took the profits at Electric Ireland – €55 million – and doled them out to customers in the form of a €50 credit, a token in the context of the annual hike in bills but all the company was permitted under EU competition law and more than other companies were doing at the time.

Such are the intricacies of Europe’s newly liberalised energy markets.

Despite the increased use of renewables, Ireland is still heavily reliant on natural gas to generate electricity. Approximately a third of the supply comes from the Corrib gas project off the northwest coast but the bulk is imported via the interconnector with Scotland from the North Sea.

This means we’re tied into UK gas prices, which hit a record £7.25 a therm, the unit in which it is measured, in August last year. In pre-Covid times, it averaged just 40-50p a therm. Since the high of last August, prices have fallen back significantly and are now trading at £1-£1.50 a therm.

Companies here have, however, yet to pass on any this reduction to customers, prompting accusations that they have hedged badly and that Irish consumers are, literally speaking, paying the price. Badly is perhaps the wrong word, conservatively might better describe it.

Forward hedging contracts, ostensibly designed to insulate operators against price volatility, can be for a period of up to two years and are entered into at different points in time and for different volumes.

The culture of hedging here seems to be different from in the UK, for instance, with operators typically locking in prices for bigger volumes longer in advance. Electric Ireland is said to hedge up to half its requirement 12 to 18 months out with fixed-floor prices.

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So when prices initially started spiking in 2021, the company was slow to announce price increases – compared with its UK counterparts – as it had locked in much of its energy requirement at lower prices. The converse is true now. Because it has locked in so much at the higher price levels experienced last year, it is unable to retreat from the market peak as quickly as others.

A spokesman for company recently told The Irish Times that energy suppliers “typically hedge energy costs in advance to secure costs for the upcoming year, so any increases or decreases in the wholesale market can take some time to feed into retail prices seen by residential customers.

“The lag between movements in the wholesale market and movements in retail prices is a function of both the rate of change in the wholesale market, and the tenure of forward hedging contracts for electricity and gas,” he said.

Figures obtained by The Irish Times show Irish companies could be locked into contracts to buy natural gas for next winter at an average of almost £2.54 a therm, higher than the £2.10 average they paid last winter, an anomaly linked to the conservative hedging practices of operators here.

For the moment it seems we’re stuck with higher prices.