Competition sparks major IT investments at ESB

12 Dec 2007

A brisk wind of change is blowing through the electricity supply market on this island. It is already the case that generators other than the state-owned ESB can provide electricity to the national grid.

As and from 1 November this year, there is an all-island market for electricity generation and supply. From 2011 onwards, an interconnector to Great Britain will mean that the Irish and British electricity markets will be combined.

The intention is that greater competition will ensure greater power options at keener prices for domestic and business consumers of electricity, and the effect that these initiatives are having on the ESB, once the monopoly generator and supplier in this state, is dramatic.

Nowhere are the effects of all the changes more apparent than among those with responsibility for developing, procuring and managing the ESB’s IT systems. As Peter O’Shea, the utility’s CIO since July 2006 puts it: “ESB will move very quickly from being a very big fish in a small pool to being a minnow in a much bigger pool, so the management of that change is a big challenge.”

But change has been a constant companion of the ESB’s IT team for the past four or five years. The move to a competitive market could not have happened without information technology, O’Shea insists. “Competition in electricity is facilitated by IT systems: It does not come intuitively to an industry like electricity supply. It needs systems to make it happen.”

The ESB performs two functions in the evolving competitive electricity market, acting both as a generator of electricity to the wholesale market, and as a retailer buying from the wholesale market and dealing directly with consumers. Both sides of the business have invested heavily in IT systems in recent years, according to O’Shea.

On the generation side, there is a need to aggregate and meter what each company is contributing to the overall supply. Among those now generating electricity in Ireland apart from the ESB are Viridian, which has just built its second power station in the Republic; Tynagh Energy which has a power station in Galway; Aughinish Alumina, which has a power station in Limerick; Bord Na Mona which has acquired a power station at Edenderry from the German giant Eon; and smaller renewable energy specialists like Airtricity. Bord Gais also has plans to enter the generation business.

The market operator Eirgrid, a separate semi-state now completely independent of the ESB, has a range of systems which manage the flow of electricity from the generators to the wholesale market. “Generators such as ourselves need their own systems so that we are measuring the volumes correctly, submitting our prices correctly, and managing our settlement,” says O’Shea. “The wholesale business has been a major driver of IT requirements in the ESB in recent years.”

For generation companies to compete effectively they need to manage the cost of producing electricity. As such, their business is dependent on the markets for fuels, namely oil, coal and gas which are used to generate electricity in the first place. These companies’ IT systems need to be integrated into those markets, which are typically in the UK, says O’Shea. “We have to place orders to buy or sell gas depending on whether we have fuel sufficient for our needs at any one time or a surplus that we can do without,” he says. “We also use coal and oil, but they are not as system-bound as gas, and the purchase of these is more transaction-based.”

Depending on how much they have to pay for the various fuels at any one time, generation companies then have to decide which power stations they are going to run at any one time. “If gas prices are high on a particular day, we would look to run more coal or oil-fire power stations,” says O’Shea. In addition, climate change considerations now require that we include the cost of CO2 in our decision making. “So our IT requirements on the generation side are for a set of systems to interface with primary power market, systems to decide which stations we run ahead of which, and systems to interface with the wholesale electricity market.”

At the moment, the ESB generates about 50pc of the power sold in the Irish Republic. With the advent of the all-island market, O’Shea expects that market share will reduce further and by 2011 will have reduced to around 40pc market share in the wholesale generation market.

The IT requirements for the retail side of the business are different, and include billing systems, customer relationship management (CRM) systems, metering systems and trading systems to ensure that the company can get the best possible deals on the wholesale markets.

This represents a major difference from the past when most of the IT department’s function would have been in billing. Today, the retail sections of ESB, namely ESB Independent Energy and ESB Customer Supply, which deal with the commercial and domestic sectors of the market respectively, must have the skills of commodities brokers to ensure they are sourcing electricity at the right price before they can sell it to consumers at a profit.

O’Shea explains that retail suppliers sign contracts to supply customers at a particular price, and in order to set the price at a competitive rate and still make a profit, they need to be able to forecast the likely demands from their aggregate customer base and then acquire the electricity at the lowest cost possible while ensuring that supply is guaranteed.

Retail suppliers can buy large quantities of electricity in advance and top it up with spot-price purchases on the local wholesale market. With the advent of the all-island electricity market, this spot price will vary every half hour, says O’Shea.

“Each retailer will have a range of customers with a different load profile,” he says. “Peak demand for domestic customers, for instance, is at 8am and then from about 5pm. Naturally, the wholesale electricity price is high at those times.”

The key to the suppliers’ profitability will be how they optimise their purchases to meet demand. “They can manage their risk by contracting long,” says O’Shea. In other words, they can agree to buy a certain amount of electricity in advance at a favourable price from a generator. But there is a risk here. “Retailers can over-contract or under-contract,” says O’Shea. “If they over-contract, they could be paying too high a price. If they under-contract, they may not have sufficient contracts in place at times when the spot price is highest. They have to optimise this decision making process and IT systems can help them to do that.”

The application that the ESB uses in this area is called Lodestar, which is now part of the Oracle suite. Lodestar helps retailers to take a structured approach to their forecasting by helping them see the shape of the aggregate demand from all of their customers.

They then have to make decisions about the quantities of electricity they buy from wholesalers. They can vary the size of the ‘blocks’ of electricity they buy, and can choose to buy larger amounts and attempt to grow the market accordingly, or they can buy smaller blocks to meet the expected demand from the customers they already have. But generators will charge different prices for different sized blocks of electricity, so the supplier has to play in that space where they optimise both the generation and supply piece. Lodestar helps them manage that decision-making process.

The ESB’s IT department comprises approximately 440 people and is responsible for IT and telecommunications across the organisation. As well as the systems put in place to deal with the changing competitive market, there are IT systems for the back office functions common to all large organisations such as payroll and HR and also the operation technology control systems for the ESB’s electricity network and power stations.

O’Shea firmly believes that major IT projects require the input of business people in whatever section of the organisation will be affected and says that typically, 30pc of the resource to deal with such projects come from the business units themselves. “If you don’t have businesspeople in the project it’s a big risk,” he says. “Another third of the resource would come from the IT department with the remaining third coming from a partner company such as Accenture, Bearing Point or SAP.”

SAP is the software of choice for much of the ESB’s needs. “We decided some time ago to adopt an enterprise-wide strategy,” says O’Shea, “so rather than implement best of breed applications we have gone for SAP as our programme suite. It has modules that are suited for the company in general, such as the whole ERP suite, financials and payroll and we implemented that as our main system at the back end of the Nineties.”

Since then, he continues, SAP has brought out modules it calls ISUs (IT Solutions for Utilities) aimed specifically at companies such as the ESB, which uses many of them it both its generation and retail businesses (see panel).

Another part of the ESB’s business which has seen a large investment in IT in recent years is the network infrastructure which is used to carry electricity around the country. “We have a big IT program around managing our assets in an optimal fashion so that we are replacing assets as we need them and not periodically,” says O’Shea. “We are continually upgrading the transmission networks because demand for electricity is growing every year. We have to get the best value we can out of the systems we have invested in to date so asset management is increasingly important.”

The annual IT budget for the ESB is “in the upper tens of millions”, says O’Shea which he insists is unremarkable for a utility of its size. “For any utility, the dependence on IT to run the business has increased hugely and so has the complexity of IT over recent years,” he states.

O’Shea says that although the capital expenditure part of the IT budget has increased, the operating costs have had to remain more or less constant from year to year. “The regulator had to approve the investment in capital expenditure which we had to make because of the changes to our business, but he did that on the basis that our operating costs didn’t increase,” he claims.

O’Shea is an engineer by profession. A graduate of UCD, he spent 12 years in the UK with The National Grid Company where he worked in IT as a systems manager on VAX computers and “had a lot of hands-on works on networks”. His career in the UK also saw him involved in commercial work, project management and latterly he worked in the regulation area. At the time of his return to Ireland in 1999, O’Shea was programme manager responsible for National Grid Company’s implementation of New Electricity Trading Arrangements across England and Wales.

“Upon joining ESB I spent six years in the regulation area and then six months as financial controller in the power generation business, before becoming CIO just over a year ago,” he says.

Unsurprisingly, O’Shea identifies the management of the change from being a monopoly supplier to being a participant in a larger competitive market as being the main challenge for the ESB and its IT department in the near future. “Certainly on a strategic level that is the main challenge facing the organisation,” he says. “In the IT department, our challenge, given the degree of investment we have made in IT of late and given the increasing complexity of the systems we have had to put in place, is to ensure that we leverage those systems so that we get the best possible return on those investments.”

By David D’Arcy