Any aspiration to create an all-Ireland energy market must be backed by political will and appropriate policy, according to Mr Douglas McIldoon, the director-general of the Northern Ireland electricity supply regulator, Ofreg. There is a danger that any single energy market to emerge on the island of Ireland could be a poor shadow of the single market in continental Europe, so that Irish industrial customers will be put at a competitive disadvantage, Mr McIldoon warned in the latest issue of the Irish Banking Review.

Properly functioning competitive markets are the most efficient mechanism for supplying customers with the electricity they want at the lowest possible prices, according to Mr McIldoon. But he warned that "markets do not fall out of the sky".

Stating that a fully-functioning all-Ireland market in electricity and gas, linked by interconnectors to Britain, is a necessary project for the first decade of the next century, he said that such a market "must have champions to wear its colours and fight its cause". But the signs are not encouraging, he warned, adding that the danger now is that the energy costs of industrial customers in both parts of Ireland will diverge from those of their competitors in other parts of the European Union. For a single market to work in Ireland, the infrastructure to allow the free flow of electricity from suppliers to customers must first be put in place, Mr McIldoon advised.

In addition, the two governments need to develop a degree of fiscal compatibility so that "their fiscal instruments do not destroy what they are seeking to achieve through their energy policies", he said.

If these two conditions are met, the two energy regulators will find it "relatively easy" to provide the third required ingredient - compatible regulatory regimes. Putting the infrastructure to create a single market into place will not be enough by itself, Mr McIldoon warned. Fiscal compatibility is essential because relative energy price differences were largely the result of different fiscal policies and the levies and taxes each fuel has to bear. "A single energy market on the island of Ireland with fiscal regimes which create and sustain 35 per cent price gaps (which are not in any way reflective of underlying cost differences) is unhealthy.

"It is difficult to see how it can be anything other than highly damaging to the Northern Ireland economy. It would be a hollow achievement if we succeeded in physically creating a single market only to see the two governments destroy it even as they were creating it - through uncoordinated fiscal policies."

Mr McIldoon said he considered it "extraordinary" that civil servants in Dublin and Belfast were not grappling with the problem of one market with two fiscal regimes. He warned that this problem would not simply go away because the governments ignored it and was likely to get much worse.