The electricity industry is often seen as a natural monopoly. Monopoly status is easily justified by pointing to the logic of having only one system of wires to transmit and distribute (T&D) electricity from generator to the final user.
The Government devised arrangements to privatise big parts of the sector and, alongside the private sector owners, protect the T&D business with special regulatory ring-fencing requirements.
In Northern Ireland, T&D is the responsibility of NIE plc, not to be confused with NIE Energy Supply, which is a separate organisation.
Both are currently owned by Viridian, but they must maintain separate accounts, and are separately regulated.
As a result of the bid to buy NIE plc by ESB — the Irish government-owned electricity supply board, which is both an electricity generator and the organisation to construct and maintain the Irish distribution assets — these arrangements must be scrutinised. The Irish government has already acknowledged a need for ESB to ‘unbundle’ its links between generators and distribution responsibilities.
The bid by ESB to buy NIE plc has a generic logic. The electricity sector, across the island, should function to the advantage of all users if the economies of a single system are exploited.
The proposed merger should, however, avoid any conflict of interest by clearly separating the interests of the generators and supply companies from those of the T&D providers.
At first sight, this might seem more an academic than a practical problem, but that response is too complacent. One of the weakest aspects of the electricity sector has been the poor performance of NIE plc in building a stronger grid. Even without the bid from ESB, NIE plc merited critical review.
The draft strategy, published by the Department of Enterprise, Trade and Investment (DETI) confirmed that the T&D assets in Northern Ireland would need an investment of £1bn over the next 20 years.
DETI now needs to ensure that these investment plans are given a stronger leverage than has come from the private sector.
There are two new situations to be addressed. First, the purchase by ESB of NIE plc for a reported £1.1bn. Second, the implications of the purchase of Premier Power (Ballylumford) for £102m by AES, the owners of the Kilroot generating station.
Both of these transactions are so significant that they need to be assessed by the regulator and DETI, and in turn, this points to questions to be answered by the SEM (single electricity market) Committee and by the Office of Fair Trading (OFT).
Since the SEM is still incomplete, this adds to the complications. If the SEM was fully operational, with no constraints on the flow of electricity over an all-island grid, then the combination of Premier and AES would give it an 18% share of the all-island market. That would probably not worry either the OFT or the SEM.
However, there is still a tight limit on cross-border electricity flows (awaiting the building of new inter-connectors). This means that within the Northern Ireland grid, the combination of Kilroot and Premier would hold 64% of available generating capacity.
The recent evidence from the SEM is that, without cross-border constraints, even more of the demand in Northern Ireland would be met by the newer generators in the Republic.
The cross-border constraints are, therefore, significant.
The bigger, longer-term question is how the role of ESB as both a generator and a provider of the T & D system should be managed. How is it to be ‘unbundled’?
This is a problem for ministers, north and south, since it raises questions beyond the remit of the regulators.
An agreed solution is needed both to protect the integrity of the functioning of the electricity market and, co-incidentally, to meet the requirements of an EU directive on opening the market.
Advice to the ministers: this is a competition problem, not an Irish political question.