Mr. Pat Fenlon:

I thank the committee for the opportunity to discuss Electric Ireland’s role in the electricity market and, more importantly, the impact of the ongoing energy crisis on our customers. I am executive director of Electric Ireland, which is the retail division of the ESB. I am joined by two colleagues. Suzanne Ward is on my right and David Vickers is on my left.

I will focus on three areas. First, Electric Ireland’s role as a supplier in the Irish electricity market; second, I will summarise why electricity prices have increased over the past 18 months, and third, I will detail how Electric Ireland is supporting our customers during these challenging times. In addition, as requested by the committee, I will briefly cover ESB Group's profitability as set out in our recently published interim results for the half-year to 30 June 2022.

There are approximately 2.2 million residential electricity customers in the Republic of Ireland. Electric Ireland, as Ireland’s largest electricity supplier, has in the region of 1.1 million residential electricity customers and 170,000 residential gas customers. Electric Ireland also serves the SME and large energy user segments of the market, with an overall market share across the residential and business segments of approximately 40%.

The ESB’s generation and supply businesses are required to operate separately so that increased profits from the ESB’s generation business cannot be used to offset costs incurred by Electric Ireland. This means that Electric Ireland must operate in the residential market as an entirely stand-alone supplier, buying electricity and gas from the wholesale market to meet customer demand.

Turning to price increases, the electricity price for customers is made up of wholesale electricity costs, network or infrastructure costs, government policy regarding public service obligation, PSO, charges, VAT and the costs associated with operating as a supplier in the market. Over the past year, the significant increases in customers’ bills have been driven by extraordinary and sustained increases in the wholesale price of electricity. Such increases in Ireland have been driven primarily by unprecedented increases in wholesale gas prices in Britain and across the EU, driven by concerns over European gas supply, made much more acute as a result of the conflict in Ukraine and reduced Russian gas supply. Wholesale gas forward prices have increased by more than 1,000% over the past 18 months. This is an unprecedented level of increase. Two years ago, Electric Ireland’s annual wholesale energy costs were in the region of €300 million. At current market levels, we expect that cost to increase to around €2 billion.

Electric Ireland hedges its wholesale costs to remove uncertainty and to stabilise retail prices for our customers. We typically begin hedging about 18 to 24 months before delivery, and progressively increase our hedge position over time. This approach protects our customers from short-term volatility by smoothing out cost movements over time. In more normal wholesale conditions, this approach would be expected to result in small price adjustments, either increases or decreases, depending on the market movements each year. In conditions where the wholesale market sustains at extraordinary levels, however, retail prices will eventually trend upwards as hedges expire and suppliers have to buy or hedge future purchases of electricity at prevailing elevated prices.

Hedging is the reason residential customer prices have increased gradually over a number of iterations rather than in sudden changes that reflect the real-time volatile nature of the wholesale energy market.

I will now talk about Electric Ireland's pricing and customer protection activities in this difficult period. Electric Ireland is very aware that these price increases are difficult for customers to absorb. We are committed to helping our customers during these challenging times. We have maintained a lower standard variable tariff, SVT, for electricity than almost all competitors across the past 18 months. We continue to offer enduring discounts for all existing customers. Electric Ireland engages with any residential customers who have difficulty paying their bills and, where required, works with them to put in place manageable payment plans. Disconnections are, and always will be, a last resort. There is a regulatory moratorium on disconnections for the winter period for vulnerable customers.

We are also active in providing more specific targeted supports for our most vulnerable customers. Electric Ireland recently launched another hardship fund of €3 million, similar to the one in place during Covid, which will provide support to Electric Ireland customers who have difficulty paying their bills. Access and administration of the fund and issuance of energy credits will be managed by the Society of St. Vincent de Paul and the Money Advice & Budgeting Service, MABS. A range of products is also available through home electric+ for those with smart meters installed. Detailed appliance insights, user data, and accurate monthly billing can all help customers to manage their energy consumption. Electric Ireland is running extensive advertising campaigns profiling the benefits of smart metering to customers.

Electric Ireland is the designated supplier of last resort for electricity customers and has been instructed by the Commission for Regulation of Utilities, CRU, to take on the customers of Bright Energy, Iberdrola and, more recently, Panda Power, all of which have exited the market. This has significant implications for Electric Ireland, not least having to buy additional energy for these customers at current market prices. However, we will endeavour to make this transition as easy as possible for customers.

Electric Ireland has always sought to deliver affordable electricity to all customers in Ireland. The price increases we have had to announce over the past 18 months have been as a direct consequence of the unprecedented increases in international wholesale gas prices. As we operate as a stand-alone energy supplier in the market, we have no choice but to increase our prices given the quantum of increase in our costs.

The ESB's generation and supply businesses are required to operate separately, so increased profits from the ESB's generation business cannot be used to offset costs incurred by Electric Ireland. However, group profits are invested in critical networks, renewable generation and other important energy infrastructure, as well as used to pay tax and dividends to the Government. Electric Ireland will continue to work with customers who are most challenged by these increases.

I will move on to the additional question on ESB Group profits. I can talk about the published ESB Group financial results, however I am not in a position to discuss specific generation or network issues, other than as published or in the public domain. The most accurate representation of the ESB's underlying financial performance during the first half of 2022 is the operating profit before exceptional items. In the first half of 2022 this was €357 million, which compares with an operating profit of €363 million in the first half of 2021.

The ESB has recorded exceptional gains in the first half of 2022. These gains relate mainly to the technical accounting treatment of financial instruments, for example, mark to market on commodity hedges, and are not cash-related items. These non-cash gains are not related to the price paid for electricity by customers.

The ESB has more than €17 billion in assets and €5.8 billion of debt. The company must earn an appropriate level of profit, so that it can service debt, reinvest in critical networks, renewable generation and other important energy infrastructure, as well as pay tax and dividends to the Government. Over the past ten years, the ESB has invested more than €10 billion in energy infrastructure and paid more than €1.2 billion in dividends.