44 minute read
Round table discussion: Making corporate PPAs work for business
marry it with unpredictable demand, can create difficulties. Large industrial users and their predictable profiles allow you to know what’s needed and give you something to tether your operations to. The expectation, as we see increasing levels of intermittent sources on the system, will lead to price cannibalisation of the market. When wind blows, the price will drop significantly. There’s a motivation there for suppliers and generators to try and flatten out that revenue profile and have more certainty; corporate PPAs are a potential way to do that.
Siobhan McCabe
An interesting development is the recast Renewable Energy Directive (RED II). It places an obligation on member states to assess unjustified regulatory or administrative barriers to corporate PPAs and to remove them and to facilitate the uptake of corporate PPAs. RED II has to be transposed into Irish law by 2021, so now is the time for Government to look at policy levers and to try to figure out how to incentivise generators and corporates. In the national energy and climate plans and progress reports, member states are required to set out the policies and measures that they have put in place to facilitate the uptake of corporate PPAs. Another driver is price certainty. The idea is for corporates and generators to enter into a contract with a fixed price or a cap and floor pricing structure, to allow some flexibility, yet price certainty. They act as a hedge against fluctuating energy costs in the wholesale market.
Patrick Mohr
We come from a neutral perspective. We are neither a generator nor a corporate but we try to understand the needs of both as we play the role of enabler sitting in the middle. I have to bring us back to a few years ago when EirGrid published its report about the growth of data centres in Ireland. Hyperscale data centres increase demand massively. They are equivalent to small cities. When you have large data centre players coming into Ireland, paired with their corporate sustainability desires, which are driven from HQ, they make a very large investment in the structure that sits in Ireland and their team have to deliver over time. As they have approached the Irish market they have found it difficult. There hasn’t been the availability of renewable credits for these data centre operators to assign to themselves. 4
The Participants
Siobhan McCabe Siobhan is a partner at Philip Lee and heads up the firm’s Energy Team. Siobhan specialises in renewables, energy and natural resources law and has an in-depth knowledge of the complex regulatory and legislative frameworks applicable to the Irish energy market. Siobhan has extensive experience advising energy clients on acquisitions, project development and regulatory matters. Darragh Crowley Darragh is a Regional Category Manager for Kerry Group since 2018. Darragh is responsible for negotiating energy supply and investment projects for Kerry Group in the region, including development of business cases for energy efficiency projects and corporate PPAs. Prior to joining Kerry Group, Darragh worked in financial markets with Bord Gáis Energy, Mediolanum, Geneva Trading and AIB Capital Markets. Darragh holds a degree in corporate law and an LLB in civil law from National University of Ireland, Galway. Donal Flavin Donal is Head of Strategic Policy – Energy, Telecommunications, Digital & Data for IDA Ireland, with responsibility for public policy in energy (including climate action) and technology. He is a member of the Government’s (Department of the Taoiseach’s) Data Forum and prior to 2018, was Vice President, Technology Group, IDA Ireland. Donal was Regional Executive, West/Mid West, IDA Ireland from 2003 to 2006. Donal has agricultural science and MBA degrees from University College Dublin (UCD). Peter Lefroy Peter is a Director of innogy Renewables Ireland, a subsidiary of innogy SE which is a leading German energy company. Peter is leading the development of Dublin Array, a >600MW project on the east coast of Ireland. He has extensive experience in the energy industry in Ireland having worked in both engineering consultancy and project development and construction. Peter holds a degree in Mechanical Engineering from University of Limerick and an MBA from Trinity College Dublin. He is chair of the IWEA Offshore Wind Committee.
Patrick Mohr Patrick is a Senior Investment Manager in Ireland Strategic Investment Fund focused on the Fund’s climate investment pillar. He helped develop ISIF’s climate investment strategy which targets opportunities that position Ireland for a Net Zero Carbon economy. He has been a member of ISIF since the Fund’s inception in 2014 and brings 10 years of transaction and market advisory experience to the Fund. Patrick is a graduate of Cambridge University and UCD where he studied sustainable development and engineering. William Walsh William is Chief Executive Officer and Chief Operations Officer in SEAI. He initially held the position of Chief Financial Officer when he joined the organisation in 2013. Prior to joining SEAI he worked for IFI. Prior to that he held senior management positions in several roles in the private sector. William is a Chartered Accountant, holds a Bachelor of Business Studies from Dublin City University and a Graduate Diploma in Strategy, Innovation and Change from UCD.
relatively small pool of generators in the Irish market in comparison with others. In the past it’s been dominated by smaller developers and entities with smaller portfolios. That’s changing, we’re seeing consolidation and larger players like ourselves coming into the market, who have a greater ability to manage the complexity of the transactions we’re talking about. They have a greater ability to manage the consequent risks that come with arrangements like this and the supply and trading capability that you need. That is certainly an issue that will diminish over time. The price expectation is the largest piece for me, and it’s not only driven by the historical REFIT context. There are several obstacles emerging in the Irish market to developing new assets. The onshore planning guidelines, the revision of the rates regime, continuing uncertainty in terms of offshore policy, all of this is driving up the cost of developing assets in Ireland, where the objective of RES and corporate PPAs should be to drive down the cost. It doesn’t make sense to introduce structures that drive down cost and then simultaneously introduce a whole new set of barriers. What you’re seeing with corporates is that the wholesale price is largely driven by the wholesale price of gas, which is probably lower than it should be but is expected to rise. While that continues to be low, the development price for new renewable assets will not drop as quickly as it should and there will be a valuation gap between what a developer needs and what a corporate needs.
Darragh Crowley
To bridge that value gap, there are practical issues for corporates that need to be addressed. For example, the tenure of PPAs is one issue. For an industrial or FMCG company, 10, 15 or 20 years is considerably longer than your typical two to three-year deal, with a lot of flexibility and get out clauses. Kerry Group, or any other large corporate, need to be comfortable with the length of a commitment such as that and need to be rewarded for that with a lower price. You need to be able to provide a compelling sustainability, business and risk management case to your board to get it over the line. There is also the complexity of the contracting, there is no standard template. That is changing and gathering pace, we’re starting to see slimmer contract terms and documentation become standardised. Once it’s easier for a corporate to analyse documentation, I think agreements will move along quicker. “We are lucky that we have many corporates who have their European headquarters here, but if you’re looking for large tech companies to credibly say that they are powering their data centre infrastructure from renewable energy produced in Ireland, not being able to trade that energy into Europe undermines that.” Peter Lefroy
specifically the barriers, we come back to the participation in the community in terms of objections to the roll out of infrastructure in the longer term. There is a requirement within RESS to engage the community and it’s important to understand what motivates people to accept renewable energy projects, both onshore and offshore. Understanding how to allay community concerns is very important. Also, from a political perspective, things can slow up very quickly if the political system isn’t satisfied or the populace are not supportive so it’s important to get that right.
Peter Lefroy
It’s worth balancing that with the CSR obligations from corporates. They will have obligations that feed down through their supply chain. They cannot have the situation where they are resourcing their energy from a generator or supplier who does not have a good relationship with their local community. It’s a risk and one that the industry needs to tackle and make sure that, even if they’re not engaging with the RESS, they’re still engaging in the spirit that is contained within the RESS. The Irish market is almost entirely decoupled from the rest of the European market and while that situation remains, a large corporate that has operations in other parts of Europe will find it very difficult to focus their resources on such a small, isolated market. We are lucky that we have many corporates who have their European headquarters here, but if you’re looking for large tech companies to credibly say that they are powering their data centre infrastructure from renewable energy produced in Ireland, not being able to trade that energy into Europe undermines that.
What changes are required by industry and government to deliver the 15 per cent RES-E target from PPAs by 2030?
Siobhan McCabe
One area that would help achieve the target is ensuring ‘direct lines’, or ‘private wires’ can be built. Currently, in Ireland you can only have a direct line if your grid connection application has been refused on the basis of lack of capacity and CRU believes it is in the public interest. As far as I am aware there are no direct lines in Ireland. This is not the case in other countries. For example, in Germany direct lines are prevalent. Many corporate PPAs are physical PPAs and lifting such restrictions on direct lines in Ireland would help the growth of corporate PPAs.
Darragh Crowley
I would certainly support that. In Kerry Group the priority for us is energy
4
“Corporate PPAs can be quite complex, they’re big legal documents and I think that, until there’s more familiarity and comfort, there will be a material impact on uptake.” Donal Flavin
efficiency; we refer to it as the ‘silent renewable’. The second measure would be a PPA. In the UK there are very few barriers to a private wire PPA. For example, for solar projects on your roof or on land adjacent to your site there are few restrictions to private wire installations. Their main benefit to the corporate is you can avoid all network charges and the power is 100 per cent renewable. We would welcome that model in Ireland.
Patrick Mohr
If the regulations restricting direct lines were changed at the stroke of a pen, PPAs would flourish in Ireland – leading to much more renewables development. There’s a huge opportunity particularly in the food and agriculture sector, where they have a real challenge to demonstrate their sustainability credentials. There is a lot of attention on that sector in particular – some would say unfairly as we are one of the most efficient countries at producing agri-food. However, that doesn’t take away from the challenge of absolute carbon emissions. Enabling that sector to use energy sustainably is something we need to do as a country.
Peter Lefroy
It’s not just energy efficiency onsite but also offsite. The practical trading for offsite would, from a corporate buyer’s perspective, the most favourable structure in terms of ease of understanding would be a base-load slice PPA for 20 to 30 per cent of their demand. This would remove the current mismatch in terms of the shaping and balancing risk aspects of most PPAs. At present it’s difficult to get certainty for 10 to 15 years and that type of approach would help corporates.
Donal Flavin
It’s critical to get the balance right between the regulations and the commercial reality. How RESS will operate and how it is viewed by the commercial parties will be very important. Where you have a traditional energy regime you don’t have many PPAs. We need to look at policy levers to make PPAs more favourable and maybe some incentives to encourage companies to take them up.
Peter Lefroy
From a generator’s perspective, it comes back to price differential. We need to see RESS and corporate PPAs co-exist. RESS is the best way to drive down the cost of generation but while the wholesale price of electricity is linked to relatively cheap fossil fuels you are always going to see the corporates favouring the wholesale price rather than a more expensive PPA.
Donal Flavin
The sustainability agenda of companies will come more into play, rather than the cost of energy. Particularly for companies whose customers demand it.
Patrick Mohr
The cost issue is now much broader. The cost of energy is only one element and with carbon taxes and other sustainability measures climate change will only push costs in one direction. Looking at the overall costs from climate change, any addition cost for renewables today may be a good deal. That pressure is coming.
Siobhan McCabe
Yes, that pressure is coming but we need some policy levers now to drive corporate PPAs. Corporate PPAs have been extremely successful in the US because of the tax incentives for both generators and corporates. We should also look at options such as government guarantees to overcome counter-party creditworthiness risk, particularly for smaller companies. Tax incentives or reduced commercial rates would help get some momentum in the market. RED II also calls for the simplification of authorisation processes. A one-stopshop approach to authorise these projects could be useful in achieving that.
William Walsh
As part of the implementation of the Climate Action Plan we have engaged consultants to look at the policy levers. From a policy implementation perspective, we need to get RESS working, together with corporate PPAs and guarantees of origin – we need to pull all that together. We are getting the best advice internationally. We are looking at how things are working elsewhere and how that can be transposed into the Irish setting. DCCAE is keen to get this implemented quickly and the governance around the Climate Action Plan is fantastic with actions being held to account by the Climate Action Board – which is made up of Secretary Generals from right across government. The grid is going to play a central role in the delivery of the 70 per cent target. We are currently world-class at facilitating renewables on the grid and we have to keep working at that.
What is the future of the Irish Corporate PPA market and what are the opportunities for all industry sectors and smaller corporates to participate in this market?
Donal Flavin
The future is bright for corporate PPAs when you look at the potential demand
that is going to be out there. Data centres want renewable energy and they will be the big drivers behind PPAs. You see the life sciences sector increasingly looking in that space too. It’s important, in order to ensure that the potential is maximised, that the balance between what happens on the wholesale market and what could happen with corporate PPAs is good. Things can’t be more favourable on the RESS side. It’s important that PPAs have a standard legal template to give comfort to companies and reduce fear. There has to be flexibility too, maybe with regard to the timeline in case companies aren’t comfortable. It will be down to realistic expectations between both the supplier and the procurer.
Patrick Mohr
At a macro level, I would say the future is very positive. We have an incredibly ambitious policy, we are operating in a global business environment where sustainability has never been higher on the agenda and those are strong drivers to make corporate PPAs work in the Irish market. However, those operating on the ground today have a lot of challenges. The question is how do you develop those projects with all those challenges to deliver the lowest levelised cost of energy projects? It remains to be seen how smaller corporates can be comfortable with 10/15-year contracts, but I would hope that the macro vision drives down to create structures in the market to enable that.
Siobhan McCabe
We need to attract more players in the market and for smaller corporates to realise that corporate PPAs are something that they could benefit from. We need to look abroad at other models that have been successful. Aggregation and consortium structures have worked in other countries, where several smaller corporates come together and agree a Corporate PPA. There was a good example of the Dutch consortium between Google, AkzoNobel, Phillips and DSM where they each took one quarter of the project on similar terms. Another potential model is using an anchor tenant where a large corporate commits to offtake a large portion of a project and a smaller corporate tags along and secures a smaller amount of the project which may be for a shorter term. Aggregation of generators for large-scale PPAs is also an option. There is real potential out there for all sizes of corporate and generators. “We have an incredibly ambitious policy, we are operating in a global business environment where sustainability has never been higher on the agenda and those are strong drivers to make corporate PPAs work in the Irish market.”
Patrick Mohr
Peter Lefroy
The future is bright for generators and suppliers. Corporate PPAs offer flexibility and the ability to choose how long they want to fix their price for, and who they want to fix it with. We need to be careful and recognise that there will probably always be a need for a RESS type arrangement and that corporate PPAs will not be able to erase that structure. You will always need that framework to encourage competition. So there needs to be a way for corporate PPAs and RESS to sit in conjunction with one another. The barriers that make it more expensive to develop new assets in Ireland compromises our ability to close Corporate PPA transactions and it’s for government to recognise that those barriers are there and to work with industry to remove them and keep driving down the costs.
Darragh Crowley
There has been a step change in the capacity of renewable generation that’s coming out to the market along with a rise in the importance of sustainability and that’s married up with lower prices. It makes for an attractive environment for corporate PPAs to get concluded. On the syndicate deals, they are very interesting and something that needs to come to the market in terms of encouraging the next layer of corporates that would like to participate into the market. On a practical level, it would be very useful for developers to look at things through the lens of the corporate buyer and see what would be useful in terms of internal structure. That is the one thing I think would really push things along from the corporate perspective.
William Walsh
We are heavily involved with the Government and Department of Finance, so from our perspective, getting the policy right is crucial to a successful future for corporate PPAs. What we would see as a success would be big partnerships and aggregation. The bigger companies coming together and potentially putting mechanisms in play that the smaller corporates can leverage off the back of. We developed a support scheme for renewable heat recently and learned many lessons from other jurisdictions and now we believe we have a solid offering to renewable heat industry. Aggregation drives down costs and makes PPAs a much more viable option for companies of all sizes.
points to a lack of effective UK regional policy and, related to this, insufficient funding in key areas under the various devolved administrations.
Over what period would the process of unification take place?
Many of the assessments of the cost of unification appear to assume that unification will occur immediately following any border poll result in favour of unification, with all the associated costs of administering Northern Ireland immediately transferring to the Republic. Such a scenario would be highly risky and unmanageable, both politically and economically, and it is both advisable and likely that any unification process will require a substantial transition period. So how long might any transition period last? Looking at some recent constitutional upheavals involving the UK, while the transfer of sovereignty of Hong Kong from the UK to China in 1997 occurred 13 years following the signing of the Sino-British Joint Declaration, the planned transition period for Brexit was just two years. A transition period should also involve the introduction of new education, regional and industrial policies aimed at increasing productivity levels in Northern Ireland and reducing the eventual cost of unification. Furthermore, presuming that the UK has left the EU by that stage, Irish reunification will also involve the North reentering the EU, which opens the possibility of EU involvement in the transition process.
What is the likely cost of unification to the Irish tax payer?
Another factor relates to negotiations on debt and assets that are attributable to Northern Ireland. In terms of citizens in the Republic, a central concern will be the additional cost of running Northern Ireland under unification. The level of subvention, which refers to the gap between government spending and tax revenues in Northern Ireland, is often focused on as a measure of this cost. Subvention in 2014 was £9.16 billion. However, when items of expenditure not directly related to the running of Northern Ireland are subtracted, for example, its contribution to UK defence spending or UK government debt, potential subvention levels could fall by around 25 per cent. The level falls further when account is taken of UK public sector pensions and contribution based old age pensions, both of which would remain a UK liability post-unification. Nevertheless, it is Northern Ireland’s low productivity levels that create a need for subvention payments in the first place, and the ultimate cost (or benefit) to the Irish tax payer will depend on the success of policy reforms aimed at addressing this problem.
Dr Adele Bergin.
Will the loss of the NHS be costly to Northern Ireland citizens?
Our analysis suggests that the gap between the Irish and UK health systems has narrowed, presumably as a consequence of much higher levels of per capita health expenditure in the Republic and the impacts of austerity policies in the UK. According to OECD data, in 2017 per capita health spending (PPP adjusted) was €3,930 in Ireland and €3,045 in the UK. The Irish system does have more up-front charges compared to the NHS; however, it also contains balances to ensure that healthcare remains free at the point of use for the most vulnerable in society. By international standards, both health systems have an unacceptably high acute bed occupancy rates, which results in an inability to cope with variations in levels of patient demand and points towards failures in the social care systems of both jurisdictions.
Dr Seamus McGuinness.
Concluding comments
A border poll appears increasingly likely at some point. It is important that any debate on this vital issue is accompanied by facts, so that voters can be appropriately informed. There is little to be achieved through a static analysis of Irish unification whereby the current costs of administering Northern Ireland, which are themselves debateable, are simply superimposed on the current tax and welfare systems of the Republic. Such a scenario would never seriously be proposed, or ratified, in any border poll. Responsible debate on the economics of Irish unification should be based around the facts that have been established through research that fully accounts for the likely dynamics associated with any unification process. What we must avoid at all costs is a repeat of the UK Brexit referendum, which is best characterised as a scenario of spurious claims and counterclaims that led, ultimately, to sustained political stalemate.
Dr Seamus McGuinness is a Research Professor at the Economic & Social Research Institute, Dublin and Dr Adele Bergin is a Senior Research Officer at the ESRI.
The wider trade flows across the island have progressed and cross-border trade has more than doubled over the last 20 years, benefitting the over 90 per cent of small businesses that make up the cross-border market. InterTradeIreland’s research suggests that those businesses that trade across the border on the island receive an average 9 per cent productivity uplift, increase the likelihood of job creation and have a doubling of turnover.
“Our supports facilitate small businesses to get on to the export ladder. We know from our research that 75 per cent of businesses that have gone on to sell off the island took their first steps on the export ladder through entrance into the other market on the island.
“Cross-border cooperation delivers for small businesses and it delivers benefits for both economies,” Gough states.
Support
Gough explains that InterTradeIreland operates two pillars of support – trade and innovation, each with a range of programmes within. Under trade, the Acumen programme has proven successful in assisting businesses to develop new markets, new customers and new sustainable sources of income on the island, while Elevate offers funding for specialist sales and marketing support to grow micro enterprises.
Under the innovation pillar InterTradeIreland has a number of support programmes in place for business innovation and growth, including the FUSION programme which helps to fund a high calibre science, engineering or technology graduate and partners business with a third level institution with specific expertise. Another example is the Challenge Programme, which embeds a proven, reliable and repeatable innovation model into the organisation.
InterTradeIreland's Funding for Growth team helps growing businesses access the finance required to achieve their ambitious plans.
The Designated Officer and Director of Strategy and Policy explains that such supports are tailored to and underpinned by an evidence base. As one of the largest conductors of cross-border research, Gough highlights that InterTradeIreland places a high value on its research which informs their understanding of the all-island market and programme development. The InterTradeIreland All-Island Quarterly Business Monitor ensures that the organisation remains “on the pulse” of small business sentiment across the island.
To this end, InterTradeIreland also plays an important role in contributing to policy development for both governments on the island of Ireland through its involvement in various committees and steering groups, feeding in their research to inform debate.
While the value of trade has changed dramatically, so too have the intricacies of the market. Highlighting the major shift in cross-border trading on the island in the last two decades and also a significant change in the complexities and interconnectedness of supply and export chains, Gough points to research which shows an increase in cross-border goods trade alone of €1.6 billion in 1995 to €3.7 billion in 2017.
The 2018 Cross-Border Trade and Supply Chain Linkages report by InterTradeIreland outlined that Northern Ireland accounts for 10-12 per cent of total exports from Ireland to the UK as whole and accounted for 7-8 per cent of imports. The report also found that a significant share of cross-border trade is accounted for by businesses that trade in both directions, with two-way traders making up around 18 per cent of firms but accounting for over 60 per cent of exports and 70 per cent of imports.
Given their understanding of the closeness and importance of the economic ties linking Ireland, Northern Ireland and Great Britain, Gough outlines the importance of InterTradeIreland’s role following the outcome of the UK’s referendum to leave the European Union.
Work underway at McAvoy Group, Lisburn, Co Antrim – the construction company has benefited from InterTradeIreland’s innovation programmes.
Brexit
“As well as our understanding of the allisland trade market, following the referendum we responded quickly to initiate research on the impact of the various outcomes for that market. We didn’t know then, and we still don’t, what an agreement would look like but it was quickly apparent from our research that a no deal scenario posed a real threat to cross-border trade. Reverting to WTO tariffs could lead to a 9 per cent decrease in cross-border trade. When factoring in non-tariff barriers, this figure could double.”
Gough highlights a fundamental understanding of the need for a frictionless land border for many small businesses on the island of Ireland, stating that in one month an average of 177,000 lorries, 205,000 vans and over 1.8 million cars will cross the border between Ireland and Northern Ireland. In one day, it is estimated that some 30,000 people make the cross-border commute to work. 4
InterTradeIreland recently launched a new Bitesize Brexit campaign to help SMEs prepare.
However, more striking was the understanding of business preparedness for any disruption to the status quo. The InterTradeIreland All-Island Quarterly Business Monitor (July-September 2016) revealed that 97 per cent of businesses across the island had no plans in place to deal with a UK exit from the EU. The survey also showed that 91 per cent of cross-border traders had no experience dealing with tariffs and 80 per cent of businesses said that TV news was their only source of information about Brexit.
“We recognised early on that businesses were not getting ready despite the fact that Brexit could pose a considerable threat to their existing business model. We found that businesses were not preparing and weren’t factoring in the risk,” says Gough. detailed, firm-level patterns of risk exposure to examine the capacity of firms to absorb shocks outlines that just over half of Ireland’s goods firms have at best a mediocre ability to absorb shock and that more than 7 per cent are extremely vulnerable to any post-Brexit fall out. A similar outlook is recognised in the services sector where the most exposed or highest risk category stands at 4.4 per cent, while over 47 per cent are at risk.
This understanding formed the basis of various supports rolled out by InterTradeIreland in relation to Brexit. The launch of the Brexit Advisory Service for potential and current cross-border traders in early 2017 provided a service including direct access to specialist technical advice in areas such as tariff and nontariff barriers, rules of origin, certification, staffing, exchange management and logistics through Brexit Readiness vouchers to the value of €2,250. As well as this, Gough says that specific guidance on tariffs at detailed product level, as well as access to latest research, led to core supports being built on the mantra of encouraging businesses to “plan, act and engage”.
“We very quickly got on the road engaging with businesses and advising them on how to undertake risk analysis to understand where they are most exposed. In this regard we brought in experts, recognising that the small business nature of cross-border trade meant a lack of capacity or capability to undertake these assessments from existing resources. As well as establishing exposure, we were able to take this information and develop supports in relation to actions that could be taken to put new processes in place to mitigate risk,” explains Gough.
Uptake of InterTradeIreland’s Brexit Planning vouchers and support services has been high, especially as the exit deadlines grow closer. Well over a third of all applications for the scheme launched in May 2017 have come this year. However, Gough explains that the organisation continues to tailor and evolve their research and supports from their interaction and communication with traders, including he says, the tendency of small business to be overwhelmed when delving into Brexit.
businesses not yet engaged in Brexitplanning, it is not too late to identify risks and opportunities. Recognition of the overwhelming nature of Brexit for small business and the opportunity to still identify exposure and mitigate risk is the basis for InterTradeIreland’s enhancement of its Brexit support.
“Planning is never wasted,” he states. “Businesses need to work out where their greatest exposure is and try to mitigate any risk. Analyse your own supply chains, your export market, employee impact, VAT, cash-flow, these are all areas that can be assisted with early interventions.”
Gough explains that the enhanced Brexit Advisory Service, where businesses can secure up to €5,625 of funding and benefit from a new bespoke online learning tool (Bitesize Brexit) focussed on practical help to prepare for Brexit, has been much welcomed.
Gough says: “Our research and ongoing engagement with cross-border traders identified that for small business Brexit was overwhelming and often the elephant in the room in terms of future planning. What we are seeking to do is to break that elephant down to bitesize chunks which can be readily understood and actioned.
“Like everything we do our supports are evidenced-based interventions and Brexit is no different. Our research agenda allows us to remain on the pulse of small business sentiment and tailor our programmes. Our research, coupled with our staff, InterTradeIreland’s most valuable asset, helps deliver programmes that deliver for small business.”
Opportunity
However, the Designated Officer and Director of Strategy and Policy is quick to point out that InterTradeIreland’s recent work has not solely focussed on helping small businesses to mitigate risk but also to identify opportunities going forward.
“We are in a very different place than we were 20 years ago and those relationships that didn’t exist across all spheres of business and research activity now do exist. Whatever new trading relationship emerges post-Brexit, businesses will continue trading across the border and we will continue partnering with these businesses to deliver mutual value to both Ireland and Northern Ireland.”
Gough highlights the emergence of new areas of opportunity despite Brexit which InterTradeIreland is focussing on. These include the areas of Industry 4.0, adaption to a low carbon economy and the re-development of cross-border clusters.
He adds: “We are also targeting SME productivity, which is a key challenge for both governments on the island, in the knowledge that businesses involved in cross-border trade have a productivity premium. Also, we are looking at the facilitation of cross-border clusters and all-island clusters in areas of opportunity such as that of the bioeconomy, advanced manufacturing and life sciences.”
While InterTradeIreland’s focus remains on small and micro businesses, Gough outlines scope for facilitation of crossborder partnerships with other agencies within research communities. A prime example is the partnership brokered by InterTradeIreland between Cancer Trials Ireland and the Northern Ireland Cancer Trials Network which has resulted in the sharing of cancer research trials on an all-island basis.
“When you broker these partnerships you find other opportunities and so we’re now looking at things like all-island bio banks. All of these initiatives have supply chains behind them that link in to industry, offering new opportunities for business including small businesses.”
Gough continues: “The research partnerships we facilitate are expansive and evolving. The US-Ireland R&D Partnership, for example, is a trijurisdictional alliance launched in 2006 and to date 51 projects have been successfully funded under the partnership across key sectors including agriculture, health, science and engineering, telecommunication energy and sustainability. Funding raised to June 2019 was valued at over €78 million.”
As well, InterTradeIreland has recognised a doubling of the amount of successful applications by companies and researchers it helps to collaborate in Horizon 2020, the EU Commission’s €80 billion research and innovation programme designed to boost jobs and growth across Europe.
“These relationships and networks exist. Going forward we remain positive and see further opportunities to facilitate new cross-border potential,” concludes Gough.
Dr Richard Fernandez, co-founder of Luxcel Biosciences in Cork. Luxcel Biosciences is a previous winner of InterTradeIreland’s start-up competition, Seedcorn. The company has now been snapped up by an international buyer for an undisclosed sum.
W: www.intertradeireland.com
expectations, which projected no recession, despite the fact that EU economies had actually been in recession for about six months and the US’s longer still, Blanchflower highlights the UK GDP estimate for Q2 of 2008 as +0.2.
“That completely threw me, I had been saying the UK was in recession,” he admits.
“Actually, what happened was that the estimate didn’t get revised down to a negative until July 2009 and so you’d have to wait until then to recognise two successive quarters of negative growth in the data. What was first estimated as +0.2 growth actually became -0.7 growth and what turns out to be true is that the original estimates were horribly wrong because policy makers and statistical analysts are much too optimistic.
“The reason this is so relevant is because I think this is probably where we are currently and the figures are overly optimistic.”
Turning to the period after the recession, he points out that the original OBR productivity forecasts for 2010-2017 and the subsequent 20 forecasts, based on outturn data, were far more optimistic than the eventual outcome (see figure 1). Blanchflower believes that forecasting optimism is also diagnosable in the labour market.
“Despite the fact that output doesn’t pickup and productivity doesn’t rise, you still keep saying it’s all going to be fantastic and it never turns out that way. You also say wage growth has been really weak but don’t worry, wages are all going to pick up because we’re nearly at full employment.”
Pointing to 23 successive MPC wage forecasts for the period 2014–20, Blanchflower highlights how “optimistic” forecasts have constantly been revised down. Taking 2015 as an example, the original forecast made in 2014 for 2015 was a 3.75 per cent increase in wage growth. The subsequent revisions were Q2: 3.5 per cent; Q3: 3.25 per cent; and Q4: 3.25 per cent. However, the outcome was much lower at 2.4 per cent. This is a similar story throughout the forecasts.
“What you see each time is that the same forecast is always being made despite the evidence to show that these were wrong 22 times.”
Blanchflower outlines that despite a pick up in wage growth in the UK and the US over recent years, wage growth has done nothing like what forecasters have predicted. Diagnosing this, he adds: “The assumption was that wage growth would mean revert and go back to 2008 levels, meaning wage growth in the order of 44.5 per cent. This is the forecast that has always been made but wage growth has not mean reverted.”
So why is the wage growth so weak? Blanchflower outlines that real wages in the UK are some 4.5 per cent below what they were in 2008 and that real wages are much less than they were for the same period, something which should not be the case if the UK was at full employment.
“Wage growth is expected to slow in the year ahead, according to the latest research from pay analysts XpertHR”, he says. “Pay awards over the past year have typically been worth 2.5 per cent but there is less optimism for the coming year, with a going rate of 2.1 per cent expected to emerge over the next 12 months, much less that the AWE Total Pay single month growth which averaged at 3.5 per cent but had many exclusions.
“Similar data in 2008 suggested that we were in recession and it appears to me that at the very least growth is going to be very weak.” 4
Figure 1: Successive OBR productivity forecasts (output per hour) for the UK; 2010–2017
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Note: Solid lines represent the outturn data that underpinned the forecasts at the time (the dashed lines). Source: ONS, OBR
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Figure 2: UK Unemployment and Bell/Blanchflower underemployment rates
Underemployment rate (SA)
Unemployment rate (SA)
Underemployment
Blanchflower previously authored the book ‘The Wage Curve’ which looked at how the unemployment rate impacted wages and prior to 2008, the unemployment rate kept wages down because of the availability of other workers.
“It turns out that post-2008 my wage curve book is wrong,” he states. “The unemployment rate is now irrelevant for wage determination and what matters is the underemployment rate.
“If you want to explain the fact that a variable has not mean reverted you need to explain it with a variable that has also not mean reverted and so the new labour market variable is the underemployment rate.”
He adds: “It appears that instead of wages being impacted by things at the external margins, ie the labour market, they are now actually being impacted at the internal margin.
Blanchflower defines underemployment as a worker who carries out a set number of hours but would like to work more hours, believing these underemployed staff are inadvertently keeping the wages of those working their desired hours down. “When recession hit in most countries the number people who said they wanted more hours, rose sharply and there was a fall in the number of hours that fulltimers wanted their hours reduced by. Even though the unemployment rate has returned to its pre-recession levels in many advanced countries, underemployment in most has not.
“Underemployment replaces unemployment as the main influence on wages in the years since the great recession and this largely explains the lack of wage pressure and why central banks have been wrong.”
Blanchflower believes that a misunderstanding of labour markets is driving mistakes in economic growth predictions and that even though unemployment rates are at historic lows in many countries, this does still not suggest that those country's labour markets are close to full employment.
“Underemployment replaces unemployment as the main measure of labour market slack in the post-recession years,” he states.
Blanchflower believes that a greater focus on business sentiment could be more valuable in assessing wage growth predictions than the NAIRU (nonaccelerating inflation rate of unemployment), which was overestimated by central banks when wrongly raising rates. Taking the UK’s 2008 experience as an example, he points to various business surveys such as the Bank of England’s agents’ scores, an EU’s Commission sectoral survey of the UK and consumer perceptions which all show declines at a time when the recession had not yet been identified.
The academic draws comparisons with similar data occurring now of a steady decline of similar scores. “We’re now in a territory for many businesses that we haven’t been in since 2008. When this happened in 2008 it predicted that was coming was going to be horrible and that is a concern.
He concludes: “The phenomenon is that we have seen error upon error despite clear signs that structural change has occurred. There is a clear desire to seek business as usual but that is no longer where we are. I don’t think we’re at full employment and I think the NAIRU is likely to be untrue. If we were at full employment then wage growth would be taking off and it’s not.
“As it turns out, underemployment proves to be the most important variable and that’s an explanation to why people are hurting and why I think recessions are coming.”
Ombudsman expects considerable number of tracker mortgage decisions
The Financial Services and Pensions Ombudsman, Ger Deering, has told an Oireachtas finance committee that he expects to make “a considerable number” of decisions on tracker mortgage complaints over the course of winter.
The Ombudsman told the Oireachtas Joint Committee on Finance, Public Expenditure and Reform and Taoiseach that he had been dealing with 1,174 tracker mortgage complaints at the end of November having received 374 new cases over the first 10 months of 2019. These cases included AIB customers who had been told that they were wrongly denied tracker mortgages, but the committee member and Fianna Fáil spokesperson for finance, Michael McGrath TD, noted that the “prevailing rate” for such mortgages would have been as high as 7.9 per cent.
The Central Bank published their final report into the entire ordeal in July 2019, saying 40,100 borrowers had either been wrongly refused mortgages or given the incorrect rate for the cheap mortgages linked to European Central Bank mortgage rates.
The Ombudsman told the committee that he plans to publish a synopsis on the initial tracker mortgage decisions taken by his office in January and then to publish progress reports either quarterly or biannually. Central Bank officials told the committee that banks will have to review how they handled customers if the ombudsman finds against them, with the banking industry said to have ring fenced over €1.1 billion in order to pay future fines, refunds and compensation related to the matter and banks are said to fear that more yet may be needed. The Central Bank’s Director General for Financial Conduct told the Committee that the failings within the banking sector had been a systemic and cultural issue whereby some had failed to halt such behaviour even after they had been warned. This claim came less than a month before KBC Group Executive Director Jonathan Thijs was forced to apologise for saying that “all of this tracker mortgage stuff” was “annoying”.
Derville Rowland said that despite being given “clear instructions” to “stop the harm” once investigations into the tracker mortgage scandal had begun, onsite inspections of some banks revealed that they had failed to do so.
Rowland further told the Committee that €693 million had been paid to 98 per cent of the 40,500 customers affected. When it was put to her that this figure represented a rise of 400 on the total number included in the Central Bank’s July report on the matter, she explained that the combination of a data lag, which had made some information inaccessible at the time of the report’s publication, and more complaints being lodged during the investigation had meant that the number had risen once again.
Speaking in October, she said that 11,000 complaints had been made to that point and the figure of those outstanding was down to 126 at the time. Rowland also told the Committee that the Central Bank had strengthened their approach to supervision of lenders and that while their supervisory work was complete, they would continue to monitor the outcome of any complaints, appeals and court cases.
Also giving evidence in October was the Central Bank's Director of Enforcement and Anti-Money Laundering, Seána Cunningham, who told the committee that the Central Bank are examining the actions of senior individuals with a view to possibly imposing sanctions. Cunningham demurred when asked if the Central Bank were “hopeful” of sanctioning individuals, saying that they would go where the “evidence leads us”.
principles of British (or should that be English) constitutional law.
That is one reason why so many are now considering alternatives. The entitlement to hold a view on our constitutional future is hardwired into our supposed ‘new beginning’. The key is that conversations must be guided by the values of the GFA, and that new configurations follow informed dialogue, respectful debate and proper planning.
My own view is that this island is already in a detailed conversation about the constitutional future but there is a habit of neglecting the work completed or underway. Lazy, dismissive shorthand prevails. At its worst it reveals a condescending attitude towards civic leadership that takes place outside of approved, orthodox settings. Forgetting of course that it was courageous civic leadership that underpinned the entire peace process.
Pretending that there is no work done or this is not in fact happening is unhelpful, especially if the collective ambition is to encourage and promote responsible planning and preparation. The island is on a path towards concurrent referendums on whether people would prefer a united Ireland (and thus EU membership) or wish to retain the Union with Britain. Making use of the arrangements to test the principle of consent/right to self-determination, at the appropriate time and with proper preparation, should provoke no one. Planning has commenced; governments will catch up.
Brexit alters the nature of the discussion because Irish reunification means automatic return to the EU for this region, as confirmed by the European Council in April 2017, and as President Macron recently observed. That might be a good or a bad thing depending on your view of the EU, but it will inform the debate.
What we are discussing is in full alignment with the constitutional legal orders of both states, an agreed, democratically endorsed foundational constitutional compromise underpinned by domestic and international law. This stands behind everything else that has emerged since 1998. Pull it away, label it provocative, dangerous and divisive, dismiss it as decorative and you risk the whole edifice collapsing even further. A different approach is required. We need to talk openly and honestly about how we share this island in the years ahead.
An inclusive and properly organised approach to providing a framework, including, but not limited to, political parties would end speculation about the criteria and required evidence that will trigger such a step. There is now an urgent need for clarity and certainty, and both governments will have a vital role in filling in some of the existing gaps. Those calling for prudential planning and preparation are the responsible participants on this island at this time.
I have suggested a date to be agreed by both governments, within the framework of the British-Irish Intergovernmental Conference: 22 May 2023 (which would be within the lifetime of the next Parliament – if it runs its ‘full course’ – a big if in the current context). A Monday is not ideal. But sufficient time to allow for the required levels of preparation.
Such an approach would end speculation about the criteria and required evidence that will trigger such a step, but will not end disagreement and challenge on, for example, the question to be asked and who will be eligible to vote. Both governments, through a new Joint Declaration and associated domestic law and policy changes, would set and implement the framework, following extensive, wide and deep consultation and engagement, including, but not limited to, political parties.
Measures outlined would embrace a Citizens’ Assembly and a Minister for reunification in Ireland, with appropriate North-South inclusions and linkages to ensure informed and evidence-based dialogue. The matter should not simply be left to the Secretary of State and the flexibility to engage in the way noted is, arguably, already there in the provisions of the Northern Ireland Act 1998, and in the way they have been judicially interpreted to date.
To conclude, it was inevitable that Brexit would prompt constitutional reflections. As these conversations advance, and they will, it should be recalled that the values of human rights and equality are also central to the Good Friday Agreement. These values now map on to urgent matters such as climate justice and environmental rights. Vital ingredients in the ongoing dialogue about how we share this society. If this is genuinely about a better and therefore ‘new Ireland’, then we need to hear much more about how the lessons of our history will be learned, north and south.
