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Irish Independent: OUR BURNING ISSUES . . .

EXTRACT: “The main benefit of having Corrib onstream will, of course, be security of energy supplies – as you know, we import over 85pc of our gas and the UK became a marginal net importer of gas this year,” Susan Shannon, external affairs director with Shell Exploration and Production, said.

THE ARTICLE

Published: Jul 27, 2006

IT’S going to be a tough winter for Irish business as fuel costs and the price of oil-based raw materials go through the roof.

ESB is expected to seek a price increase of up to 20pc which will come into effect on January 1 next. That’s on top of increases in each of the last three years as follows: 10.27pc in 2004; 3.5pc in 2005 and 5.2pc in 2006.

Independent energy producers who sell their excess capacity to ESB and use the semi-state company to provide electricity when fuel costs are high are expected to seek even larger increases. Some of these producers have seen their natural gas bills climb by 46pc in the past twelve months. If the energy regulator takes that on board, the price of energy from these sources will bound ahead.

Bord Gais has been provisionally allowed increase its prices by 34pc with effect from October 1 next – the onset of the winter heating period in this country. That’s on top of a 25.2pc increase in 2005 and a 16pc rise in 2004.

Together, the Bord Gais and ESB price increases will push Irish inflation to 5pc from January 1 next, according to Ulster Bank economist Pat McArdle, with energy costs making up 0.25pc of that inflation figure. Any unexpected increase in interest rates will see the 12-month inflation level rising as high as 5.25pc, he feels.

It’s all bad news for the Irish economy – which will spend over 1bn on natural gas in the coming year and about 3bn on ESB electricity in 2007.

Smaller companies will be worst hit as they do not have the facility of shopping around for the best electricity rate – consumers of less than 0.1GwH per annum and domestic consumers can only get power from ESB. Independent energy producers only want to supply very large energy users and do not accept low and multiple energy consumers – like a town with 10,000 separate meters to be read. In fact, one of the producers of electricity from gas – Aughinish Alumina – is a major energy user itself and only sells its excess into ESB.

It is no coincidence that the country’s two primary representative bodies for small businesses – the Small Firms Association and ISME – have been damning in their criticism of ESB and Bord Gais for foisting these increases on their members.

“The situation with regard to energy costs is running out of control, with once again the ineffectual Energy Regulator at the centre of the debacle, which has seen gas prices alone increase by 91pc since 2002,” Mark Fielding, the chief executive of ISME, said.

He calculates that the increase in gas and electricity costs will add an additional 13,000 to the costs of a typical SME.

“To put the issue in context, companies will have to increase turnover by 250,000 just to cover the gas increase and break even,” he said.

Mr Fielding said the energy cost increases faced by small businesses are unjustifiable.

“There is a long-standing and now an urgent requirement to provide alternative energy sources that can be used in business instead of relying on services provided by monopolies,” he said.

One of the most disappointing developments in recent years for Irish companies is the absence of real competition in the Irish energy market. Large users of energy can play off the independents against the ESB to find the most suitable rate card – but small firms cannot select an alternative supplier to ESB Networks.

The arrival of the All-Island energy market and a new interconnector to the UK will add to competition but is not expected to shake up the pricing structure to any noticeable extent.

Also galling to small businesses is the fact that the Exchequer is a significant beneficiary of high oil and gas prices through excise duties and VAT. On top of these tax receipts are the payments of dividends directly to the Exchequer by ESB and Bord Gais. Last week, ESB said it would pay the Exchequer 72m out of its annual profits of 240m.

In addition to paying a dividend to the State, ESB is pushing ahead with joint ventures abroad – in Spain and Wales – as well as investing billions in infrastructure on the island of Ireland.

By the end of 2004, cumulative dividends paid to the Exchequer by Bord Gais amounted to a staggering 675m and that figure is expected to increase substantially in the near future. Bord Gais is an extremely profitable, though small, semi-State, making a 108m surplus in 2004.

Whatever about the dividends he receives from these semi-States, Minister for Finance Brian Cowen has ruled out any decrease in excise duty rates to counteract rising energy prices, citing the policy decision made by European finance ministers not to tinker with excise duties but to leave the rising oil and fuel costs to market forces.

“The Government coffers have reaped significant benefit from excise duties collected on foot of the increasing oil and energy costs being paid by small businesses,” Small Firms Association director Patricia Callan said.

“This is unnecessary and is imposing undue hardship on those businesses already struggling to remain competitive. The Government must act now to relieve these competitive pressures,” Ms Callan said.

SFA feels that there is little or no effective competition in the energy supply markets in Ireland.

“Investment in energy infrastructure must be financed in an equitable manner to ensure that customers of today are not paying for the benefit that will also be derived by future generations,” Ms Callan said.

The bad news is that the outlook for energy prices is pretty dim. Even the arrival of gas from the Corrib gas-field is unlikely to make much of a difference to the cost of natural gas in Ireland.

“The main benefit of having Corrib onstream will, of course, be security of energy supplies – as you know, we import over 85pc of our gas and the UK became a marginal net importer of gas this year,” Susan Shannon, external affairs director with Shell Exploration and Production, said.

“One can assume that in the future we will have to import gas either directly or indirectly from much further afield. Obviously, having indigenous gas supplies will also cut down on transportation costs – again likely to be higher if gas has to come from Russia,” Ms Shannon said.

Having said this, the price that the gas will be sold into the market at will be dictated by global prices, which in turn are driven by supply and demand globally, Ms Shannon added.

Given that it will take 24 months for the Corrib pipeline and facilities to be constructed and there are still strong local objections, there seems little hope here for Irish businesses.

Irish energy consumption is increasing by 3.5pc to 3.7pc each year and this year, ESB expects to connect an extra 120,000 customers to its network – meaning the higher consumption will continue.

And while Opec may tut-tut about $80 a barrel oil prices and the damage they might do to the world economy, the buoyant industrial and consumer sectors will push demand (and therefore price) for fuel and energy higher and higher.

Andrew Oswald, economics professor and oil specialist at Warwick University in the UK, feels low interest rates have hidden the impact of rising oil prices.

Until now, this has kept down overall costs for companies, lifted property prices and prompted households – particularly those in the US – to spend as if there was no tomorrow.

“While drivers in every continent have complained about expensive oil, the world has managed to survive $60 a barrel,” he says. “Whether it can do so at $80 is an open question.”

“Presumably, when real and nominal interest rates go back to normal long-run levels, the effects of high petroleum prices will bite visibly once more,” he says.

ESB chairman Tadhg O’Donoghue warns: “There has to be a significant increase in the price of electricity in the next year to reflect rising fossil fuel costs – even though ESB is in the happy position of using a broad base of fuels.”

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