Competition is meant to bring better value for consumers. The opposite has been the case in the electricity market, where prices have risen sharply since deregulation. Electricity prices have risen sharply in recent years, with industry now paying 25 per cent more than the EU average and consumers suffering increases way ahead of inflation.
Now the ESB has applied for a further 12 per cent increase, eight per cent from next September and the balance from next January. The application is a matter for the Commission for Electricity Regulation, but the continued rise in prices points to the need for a fundamental reassessment of the way the entire market works.
Deregulation of the market seems to have brought the worst of all worlds for business and consumers. Competition, though increasing, remains limited and prices are rising well ahead of inflation. For business, high energy costs are now a significant competitive disadvantage and will discourage further inward investment.
The experience of the electricity market does not show that competition cannot work. After all, markets such as air travel and telecommunications have been transformed by increased competition in recent years and consumers are also getting a better deal in some areas of financial services, due to the entry of new players to the market. However it does indicate the difficulty of introducing competition in electricity, where huge investment is required to enter the market and where questions about who controls the network and how regulation is carried out can prove particularly complex.
Unfortunately the evidence of the last few years is that the Irish model for introducing competition into electricity is not working. The logic seems to have been that higher prices were neded to attract new players into the market. To an extent, this may have been true, as pre-deregulation the Government held down electricity prices for a number of years. One of the results was under-investment in generating capacity.
New players have entered the market in recent years and there has been some progress in introducing competition. However the continued sharp increase in prices way ahead of inflation raises serious questions about the competitive model being used.
The regulator is currently considering the introduction of a new system to manage the market; there have been strong objections from many to his initial model and a re-think appears to be in order. However other fundamental issues also remain to be tackled, including the control of the network, the way new entrants are encouraged to enter the market and pricing policy.
The goal must be to have energy prices at, or below, the international norm. Whatever the short-term pressures - and higher oil prices are clearly a factor at the moment - it is essential that on average prices here do not continue to rise way ahead of inflation. The latest application for an increase may be a matter for the regulator, but the overall policy must come from the Government.