A premium product in the hot seat

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Debate was fierce at Ireland's wind energy conference over whether or not wind as a superior electricity product should attract a premium price. It was only the energy minister Joe Jacob, however, who was surprised by the conference's fury over the barrier to new market entrants of the high use-of-system charges demanded by the Electricity Supply Board

The title of Ireland's premier wind energy event this year could not have been more apt. "Green Electricity -- a Premium Product" was a subject that generated heated debate at the Irish Wind Energy Conference (IWEC), held March 31 to April 1 in Tralee, county Kerry. With the recent partial liberalisation of part of Ireland's electricity market, green suppliers are able for the first time to sell their power direct to consumers. Until February, the state owned Electricity Supply Board (ESB) was the country's sole public electricity supplier; now, the business sector is open to competition from all electricity suppliers. Sellers of green electricity have the advantage over "brown" electricity suppliers because they are allowed to sell direct to domestic customers.

Against this background, the most hotly contested issue at IWEC 2000 was whether or not electricity from renewables should command a premium price. Energy Minister Joe Jacob was convinced it should not, but left before hearing any dissenting views. He stressed that "premium product" related only to its superiority at an environmental level. Green electricity is a premium commodity, superior to brown electricity from conventional sources, which has had such a negative effect on the world's environment, he said. However, "this is not to say that green electricity should attract a premium price in the retail market. The sustainable solution in the longer term must be to deliver a green electricity product capable of competing on equal terms in the single electricity market."

Eddie O'Connor, president of the Irish Wind Energy Association (IWEA), agreed with Jacob. O'Connor heads Ireland's first green supply company, Eirtricity, which claims it can sell electricity from wind to the business community at prices 10% under those of ESB. Wind energy is a premium product from almost every viewpoint, O'Connor said, but it will remain a small niche area if sold at a higher price. "You see utilities around the world at the behest of their shareholders offering green energy at premium prices, but we see very few people taking it up," he said. "It is much better if we can be competitive and offer this obviously premium product to our customers at a price which makes sense to them."

Market better than subsidies

Building up a willing customer base was a preferable approach to wind energy deployment than subsidies. "If you can get a voluntary commitment from thousands upon thousands of customers, you will have built a far sounder base than could ever be achieved by forcing a reluctant utility to accept your product."

O'Connor also argued that any move on the part of local authorities to ban wind energy development from the hills would be a "retrograde step," pushing up its price. "You would be forgoing enormous commercial and environmental benefit if you take the wind machines down from the high areas." A wind farm investment in a lowland area would yield just 50-60% of a windier site on higher ground. "If wind energy can be produced cheaply, there is absolutely no argument against its mass deployment, and the history of marketing shows that mass deployment follows lower prices," he said.

LIKE The prize bull

But Vincent Costello from Treasury Holdings, which was soon to launch its own green electricity offering, was not persuaded. From a businessman's and an investor's point of view, a premium product should be expected to command a premium price, he maintained. Discounting the price of wind was "the height of nonsense." "If you are an investor or a farmer trying to earn money out of a wind farm, a premium product means one that will deliver on the bottom line. Otherwise it is like having the prize bull at the show and taking the lowest price for it," he said. "Wind energy will survive if we are good at marketing, and marketing is not about discounting our price."

The essence of success is less about marketing than about selling in the deregulated environment, countered Jim Barry from National Toll Roads -- one of the joint venture companies that owns Eirtricity. It is important to understand your target customer grouping; Eirtricity is aggressively targeting small and medium sized enterprises (SMEs) which already pay a higher price for electricity than other sectors, Barry explained. Already, he said, the company has obtained IR£1 million in annual contracts from over 300 customers. Without a discount, it would be difficult to persuade SME's to switch from ESB. He added that Eirtricity is not specifically targeting the residential sector yet; it will agree to supply domestic customers, though not at discounted prices.

It is not the price that green electricity suppliers and generators are paid, but their profit margin that matters, said John Bourke from Saorgus Energy. Small companies have a huge advantage over a cumbersome organisation like the ESB which employs thousands of people. "What's their margin with these kinds of overheads?" he asked.

The wind industry is too young to have intense competition between suppliers vying to undercut each other, cautioned Thomas Cooke from the farmers' representative body, the ICSMA. He suggested the renewable energy industry should co-operate more and in particular it should push for a high level "advocate for green energy," someone of at least equal authority to the regulator, and who would fight for a level playing field for renewables rather than the existing distorted energy market.

Cooke's concerns were symptomatic of a widespread dissatisfaction with Ireland's new regulatory environment. The issue emerged as one of the major themes of the conference. Martin Halley from Bord Na Mona -- the green representative on the Commission for Electricity Regulation Trading and Settlements Advisory Committee -- pointed out that a complex system, designed around fossil fuel generation, is being applied to green energy. Renewable generators are being penalised under the new trading and settlement rules, such as the charges for "top-up" and "spill," the need for half hourly metering and the "savage" use of system charges, he said.

Indeed, the system charges, published by electricity regulator Tom Reeves just hours before the market was due to open on February 19, was the issue that provoked most antagonism. David Fitzgerald from National Wind Power Ireland led the attack: "The minister has done very little to support the price of power by allowing the regulator to charge the outrageous price of 2.7 pence per unit for the use of the wires system." Yet a wind farm operator, could expect around IR£0.030-0.035/kWh.

"Use-of-system charges are some 65 times what the ESB charged itself last year," commented O'Connor. "It represents an absolute barrier to entry for new players. The 2.7 pence cost amounts to around 40% of the total cost of electricity, he said. This compares with the average across the world for system charges of around 28-29%.

Consultation opportunity

Anticipating that the new regulatory framework would be a focus for discontent, Jacob had already claimed that liberalisation was a major step forward for wind. He expressed surprise at the criticism. "It will evolve, but realistically this will take time," he said. He drew attention to Reeves' forthcoming paper on green issues and urged the IWEA to participate fully in the consultation.

The regulator is still finding his feet, agreed Halley. But he believed the unfairness of the market framework is due largely to the influence of ESB. "What we have to do is to get the regulator in a more positive frame of mind towards renewables." He echoed Jacob in urging the industry to fight its corner. The battle lines are being drawn, he said, and not only between the green lobby and government, but also between government departments: with Ireland already having reached its limit on greenhouse gases set out in the EU's Kyoto burden sharing agreement, the environment department is "pushing like hell" to make sure renewables take off, said Halley.

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