Innovation and ambition

Bord Gáis Energy Managing Director Dave Kirwan talks to Owen McQuade about the potential for innovation under Centrica’s ownership and his own ambitions for the sector. Natural gas remains a significant player in Irish energy with the scope to connect at least 100,000 homes to the network.

The sale of Bord Gáis Energy to Centrica promises to open up new opportunities for smart metering and dual fuel products, according to Dave Kirwan, but he also emphasises that Ireland cannot ignore security of supply in a changing international situation.

Bord Gáis started to prepare for the transaction two years ago. The deal was signed in March by a consortium of Centrica, Brookfield and iCon – buying the Bord Gáis Energy vertically integrated generation and retail, wind and firmus energy businesses respectively.

With the preferred bidder announcement before Christmas, there was a widespread expectation that the project was done although this did not prove to be the case.

“The ensuing six months have involved quite a lot of work around the separation of three businesses from one,” Kirwan remarks, “and indeed extricating what was just a division of Bord Gáis Éireann and establishing three independent businesses”.

At midnight on 31 May, three entities were legally incorporated in preparation for the finalisation of the deal at the end of June. From that point, all staff at Bord Gáis Energy, Brookfield and firmus energy transfer to the new owners.

Asked about the position going forward, he explains that he is “delighted” with the prospects for the business. Kirwan comments: “We think Centrica, the parent of British Gas, is the ideal fit for the Bord Gáis Energy business. And it’s very interesting. Here we are, at the point of sale and at the point of deregulation, when for the first time we can compete for gas customers and start to offer a dual energy product.”

The timing is “completely coincidental” but nonetheless symbolic. Centrica understands the journey which the business needs to take as it has also gone through deregulation and has done “very exciting and innovative things in the markets they’ve operated in.” Kirwan adds: “We like to think we’ve done some exciting and pretty innovative things at a retail level in Ireland so we’re very interested in having a conversation about what we can do next.”

As a vertically integrated business, BGE comprises the Whitegate gas-fired plant, the trading division and the retail division: “We see prospects for growth across this market from our position today and we’re very excited about it.”

The ability to offer dual-energy products is a key running theme which Kirwan highlights.

“It’s interesting and ironic,” he reflects. “We were the first mover in the residential electricity market and we like to think we shook up that market and created a dynamic in it. We’re the last supplier out of price regulation so we’re the last of the suppliers awaiting the opportunity to offer bundled energy products.”

BGE is “very proud” of creating competition and is looking forward to competing on a level playing field. At the time, the Big Switch was regarded as one of the most successful energy launches due to its high uptake. “The Irish energy customer clearly wanted competition,” he notes.

Natural gas in 2014

At a macro level, three or four years ago, there was a common view that with the greater integration of renewables, gas was going to be the “other” part of the solution for a lower carbon energy market. Gas appeared to fit well with renewables but “it hasn’t quite worked out that way.”

Across Europe – and indeed globally – gas has been partly displaced by coal. Around 21GWh of combined cycle gas capacity has been retired in Europe in recent years: “It’s certainly a factor in keeping a downward pressure on gas prices because you’re taking out a significant demand of natural gas across European energy markets.”

The parallel increase in renewable generation and coal-burning was not anticipated or intended but he emphasises that gas still has a major role to play.

Back in 2012, 16 per cent of homes in the Republic of Ireland gas market were within 20 metres of gas mains but unconnected to gas; around 100,000 homes in total. Considering this situation, he points to the need to ‘sweat the asset’.

“There’s an overall economic benefit, with low incremental spend, to get more people on gas,” Kirwan adds. “You’ve got a reduction in carbon right there of around 33 per cent. There’s an economic benefit versus kerosene and, if it can be economically supported from a connection investment perspective, you are also able to drive down the use of system charges and benefit the wider customer base.”

One of the biggest questions in energy is: “Are we doing enough to make our prices competitive?” The commodity element makes up around 40 per cent of the end user price of gas. System charges then make up a further 35 per cent and “there’s benefit in pursuing greater penetration as a device for reducing costs.” BGE is very supportive of incentivising network companies to sweat their assets more thoroughly and therefore drive down the unit cost of systems.

All suppliers need to be under pressure to drive down operational expenditure but an incentive mechanism is always needed to make the best use of the asset base. He comments: “I genuinely would be supportive of the regulator directing the network company to drive connections and really bring about an incremental benefit from a use of system and carbon perspective. Gas has a role to play.”

Bord Gáis put considerable thought into setting up the firmus business in Northern Ireland i.e. increasing connections, and driving down the use of the system for the benefit of society and the Irish gas customer.

Security of supply

Natural gas represents 25 per cent of Ireland’s primary energy market. Asked if security is still an issue, he notes a perception that “the heat was taken out” of the security of supply question by the economic downturn.

“We think that gas customers – more so than electricity customers – have certainly tightened belts and are endeavouring to use less product,” Kirwan explains. “We face a different challenge in electricity, how people use electricity is changing with the advent of more and more smart technology etc.

We are shifting usage patterns but not necessarily reducing overall use.”

As an issue, security of supply for gas hasn’t gone away and he questions if there is a market signal that will lead to a solution. BGE took the exploration of underground cavern storage in Larne forward along with GDF Suez but it was not commercially viable because of the geological structure. The business case was also unclear i.e. whether the market would have supported significant investment in storage for Ireland.

“Clearly, we’re all looking to Corrib and we’re looking forward to the day gas flows from it,” Kirwan continues. “Back in 2003, I was involved with the contract negotiations to build the line from Galway and that pipeline has been waiting to flow gas for quite a considerable amount of time.”

Corrib will be an indigenous solution but he predicts that Ireland will only have another ten years for deciding where its storage solution will come from.

Looking at the market going forward, he sees greater European market integration as “generally advantageous” with some nations keen to reduce dependency on “very local” sources.

Common arrangements for gas are still incomplete but the project still promises the wider and more efficient integration of the Northern Ireland and Republic of Ireland markets: “That remains a challenge for us all and one which should be delivered to the benefit of Irish energy customers.”

The onset of smart metering “remains very interesting” and he sees this as an opportunity which cannot be lost. “I spoke at Energy Ireland last year and used the phrase paradigm shift,” he recalls. “A lot of people quoted it back to me and in some ways the phrase distracted from the message.” He affirms: “There is an opportunity, if we use it, for energy businesses to engage with customers in a very important new way to help them manage their energy costs, to reduce carbon and to facilitate enhanced energy efficiency behaviours.”

Suppliers, more and more have to innovate and to partner with customers in a more efficient manner. “If we don’t,” Kirwan warns, “we’re threatening our own extinction because it’s a necessary next step and that’s where the relationship has to evolve.”

The Commission for Energy Regulation, in his view, has to provide a future- proofed platform for customer engagement. There is now little point in having “panels on the wall” when smart meter technology can provide the “architecture for smart phone access to real time data,” thus allowing businesses to talk to their customers and shape products as a result.

“I would sincerely hope that we don’t miss that opportunity,” he comments. “There’s a significant investment arising and I hope we choose wisely and promote that new engagement.” The telecoms industry shows that customers “start to buy smart” once they have been engaged.

Having gone through a sale of a state asset, Kirwan wants to make the deal “a success for the new shareholder, and Irish energy customers alike.” He relates: “The good news is that Centrica is very excited about helping Bord Gáis Energy innovate on behalf of Irish energy customers. It’s a great combination, we’ve got a great company supporting us as we continue to make Bord Gáis Energy a great Irish company and we’re very ambitious about what we can achieve.”

And in terms of dual-use products, he wants to give his competitors “something to think about” alongside the greater choice for customers.

Profile: Dr Dave Kirwan

From Tullow, County Carlow, Dave Kirwan is an electronic engineering graduate from University College Dublin. He has an MBA from University College Cork and completed his doctorate in Business Economics from UCC last year. Before joining Bord Gáis in 1999, he worked for ESB and ESBI in power generation in Ireland and abroad. Prior to becoming Managing Director, Dave was responsible for the company’s assets division and for its northern subsidiary, firmus energy.