AFTER years of fretting about how to keep Ireland's lights on, the electricity industry is now experiencing a sharp decline in demand, the first since records began, which threatens to leave it with too many power stations for the country's needs.

Such a scenario raises the possibility of cheaper electricity prices for consumers but threatens to undermine the business models of key players in the sector as well as new entrants such as Bord Gáis and Seán Quinn's Quinn Energy. Ten days ago, at an industry gathering in Dublin, the head of Energia, the supply arm of the country's second-largest generator Viridian, spelt out the crisis facing the industry in stark terms.

"Since the start of 2009, we have seen a consistent 6% drop year on year in electricity demand. To put this into context, a 20% reduction in demand is equivalent to the output of four to five power plants," said Energia managing director Tom Gillen. He said Energia estimated, however, that the amount of generation capacity in the country could double over the next five years as a result of the government's wind energy policy and a host of major new gas-fired power plants from the likes of the ESB, Bord Gáis, Quinn Energy and Endesa, all of which were conceived at the height of the boom.

"If all the proposed plants are built, we will have a severe oversupply of capacity which, at current price levels, could undermine investment returns for new developments such as the ESB's new plant at Aghada and Bord Gáis's plant at Whitegate."

The demand drop has taken the industry by surprise, particularly as Irish electricity demand has never declined before. Even the forecasts issued by national grid operator Eirgrid and used by the industry to underpin its investment decisions, indicated that demand would grow by around 1.6% a year even in a worst-case scenario.

According to Dave Bunworth, head of energy supply at Bord Gáis, the fall in demand has largely been triggered by the decline in retailing and construction.

"However, this unprecedented demand destruction is being seen in a whole range of sectors with demand generally down by 5% to 10%. That said, demand in some sectors remains strong, such as pharmaceuticals and other export-orientated industries," he said.

Despite Energia's concerns that this fall-off could affect the business models of new power plants, Bunworth said the operators of older, less efficient, plants were likely to suffer most in an overcapacity crisis.

"When dispatching [ordering power], Eirgrid prioritises the most efficient sources of energy, such as wind and gas, which means the new plants should be at the top of the tree. What you could find is that the older, less efficient plants won't be used as much and they will be mothballed, scrapped or rebuilt as a result," he said.

Although some industry figures believe this could lead to lower electricity prices, as more efficient plants generally cost less to run, the Commission for Energy Regulation (CER) said any customer benefits were likely to be marginal. A CER spokesman said customers might even be hit by increased fixed network charges as demand declines.

"There has been significant investment in the network over the past 10 years and further investment is required. As demand falls, particularly if there is a lower number of business customers, there will be higher network costs to recover per customer," he said.

The spokesman said however that the CER had yet to conduct detailed modelling on the impact of falling demand on the electricity market and that speculating on such a scenario was "fraught with danger".

"What we do know is that a fall-off in demand is unlikely to be a long-term issue. As economic activity picks up, so too will the demand for electricity. At the moment, we wouldn't speculate about whether older plants would close as this would be a commercial decision for each generator," he said. "[But] if demand was to fall off significantly, then clearly it would be inefficient and costly for some older generators to remain on the system as they would be run less and less."

Despite this uncertainty, it is clear from the CER's own data that falling demand is already having a dramatic impact on the sector, with a record gap between supply and demand recorded last month. In the week of 11 May, almost 50% of the country's generation capacity lay idle – a potential harbinger of things to come.

If this continues, it is likely the industry's attention will shift to the ESB, which will come under renewed pressure to close its older plants and review its planned €22bn capital investment programme which is due to run until 2020. But an ESB spokeswoman said the company had already committed to closing its thermal units at Poolbeg and was converting its Marina plant in Cork to more modern technology. She said that, as a result, the ESB had no intention of decommissioning other plants. She added however that the recession would be considered in the company's future investment decisions.

"The ESB remains committed to delivering its long-term corporate strategy of renewable investment and sees the fall in demand as impacting mainly on the timing of implementation of that strategy," she said.

How high are salaries in the energy sector?

DESPITE falling demand for electricity, energy workers continue to enjoy high, and occasionally controversial, salaries.

Although the ESB was traditionally regarded as having the best-paid workers in the semi-states, salaries there have been overtaken in recent years by both Bord Gáis and national grid operator Eirgrid. Earlier this year, Eirgrid revealed that its 225 staff earned an average of €109,462 a year, which it said reflected the fact that their skills and experience were hard to find internationally.

"EirGrid is engaged in a 24/7 operation, 365 days a year which is vital for the Irish economy. The work of our staff involves operating the power system and market, balancing supply and demand at all times, and maintaining security of supply, as well as planning and developing the power system," said a spokesman.

Meanwhile, Bord Gáis's 911 employees earned an average of €80,777 in 2008, with the company's chief executive John Mullins receiving a €518,000 salary. ESB chief executive Pádraig McManus is on a similar pay, having earned €534,998 in 2007. In the same year, the average salary of ESB's 7,856 staff stood at €76,259.

Industry figures have consistently said these salaries reflect the specialised nature of the work and the anti-social hours. Average earnings at the three companies are also lower than some of their international counterparts. For instance, staff at British Gas were paid an average of over €160,000 in 2008.