As the electricity markets North and South prepare to merge, the ESB finds itself at a crossroads, writes Barry O'Halloran

Even after the electricity markets in the two parts of this island merge in November, ESB chairman Tadg O'Donoghue believes that there will still not be enough customers to make Ireland attractive to new players.

"You need about five million customers, that's five million meters, before most of the big players will think of investing in a market," he says.

The all-Ireland market will have about three million customers. It theoretically should make the island more attractive to new investors, but O'Donoghue remains sceptical.

The fact that the ESB is the only supplier to the Republic's 1.9 million domestic users and that its main competitors, Airtricity and Energia, are staying away from this market in favour of supplying businesses and industry, gives a certain amount of credence to what he says.

As it approaches its 80th birthday, the ESB is at a crossroads. The company began life as a flagship for the newly independent Irish State and was the monopoly generator and supplier of electricity in the Republic for most of its career. Now it has less than half the overall market and it expects to see its share continuing to fall as time goes on.

The regime under which it operates is designed to facilitate competition, even where it appears detrimental to the State company. O'Donoghue points out that it is committed to taking nearly all the electricity generated by one of its competitors, Tynagh Energy, in Galway for 10 years. "That, to my mind, is not competition at all," he says.

It was the Commission for Energy Regulation (CER), the State body which writes the rules for the industry, that demanded that the ESB buy Tynagh's output. It means that the plant's investors, which now include global giant General Electric, Turkish construction multi-national Gama and consultant Bran Keogh's Mountside Properties, are guaranteed a return.

Building electricity plants is a costly business - Tynagh cost about €400 million. To be able to raise that kind of cash, you need to be able to tell bankers and investors that you can sell the power.

While there is competition in the market for big customers such as businesses and industry, independent operators have been reluctant to move in. At the same time, the CER has not allowed the ESB to build new plants to replace those that are reaching the end of their lives.

The consequence is that to guarantee supply, while leaving the market open for new competition, the ESB has had to keep old generating stations on what O'Donoghue calls "life support".

Earlier this year, as there were no competitors willing to come in and replace the ageing ESB stock, the CER gave it the go-ahead to build a new plant in Aghada in Cork Harbour, where it already has a natural gas-fired facility.

In return, the ESB has to close four plants, at the Marina in Cork, Poolbeg in Dublin, Great Island in Wexford and Tarbert in Kerry, by 2010. The plants have a capacity to generate 1,300 mega watts of electricity, about a quarter of total demand. It will have to give its competitors first call on the sites if it is selling them.

O'Donoghue has no difficulty with closing the plants. In fact, he says that if the ESB was independent, they would have been replaced because they are out of date.

However, the company's powerful trade unions are opposing the move. While the closures will lead to 300 job losses, the unions are also against it because they see it as part of a bigger Government agenda to break up the ESB.

Either way, the closures and the opening of the new plant, which the ESB wants badly, are part of the same process as far as the CER is concerned, and one can't happen without the other.

The unions, however, are showing no signs of budging, and ultimately have the power to switch off the lights. It's going to take some negotiating to pull this off. ESB chief executive Pádraig McManus made it clear this week that he was confident the company could do it. Basically, he argued that it's done this sort of thing before and can do it again.

O'Donoghue agrees that there is a lot of ground to be played between the various sides. "The fact is though, that either way, business has to go on," he warns. "It's not in the interests of anyone, including unions, to stop the clock."

The unions argue that the closures are part of a Government plan to transfer ownership of the national grid - the transmission system - from the ESB to another State body, Eirgrid, which currently manages it. The unions are against this. For their part, O'Donoghue and his executives say that the plans contain no provision for the future of 700 ESB staff who work on the grid and want the issue clarified.

The grid is the system by which electricity demand and supply are managed. It is supposed to ensure that the cheapest available power comes on line first. The ESB's competitors argue that the grid cannot be independent if the power generator also owns the grid.

There is also confusion about the distribution network, that is the lines that ultimately feed electricity into homes and businesses, which will remain in ESB hands.

The former energy minister, Noel Dempsey, said it would be operated on a not-for-profit basis. However, it now appears that he meant that it would be allowed to generate enough surplus to cover its debts and to have something in the kitty to deal with the unexpected.

O'Donoghue says though that all this needs to be worked out in light of the fact that the ESB is redeveloping and renewing its distribution networks at a cost of €500 million a year, much of which is borrowed.

These proposals, and the all- Ireland electricity market, are all part of the process of opening it up and boosting competition.

Whatever happens, there will be no real growth prospects for the ESB in this country. Its international arm is stepping up its activities - it has projects in Britain and Spain - and this increasingly looks like the direction it plans to take.

One thing is for sure, once it reaches 100, the ESB will be a very different company from what it is now, let alone what it was 80 years ago.