We characterise, in several complementary ways, etale groupoids with locally compact Hausdorff space of units whose essential groupoid C*-algebra has the ideal intersection property, assuming that the groupoid is either Hausdorff or $sigma$-compact. This leads directly to a characterisation of the simplicity of this C*-algebra which, for Hausdorff groupoids, agrees with the reduced groupoid C*-algebra. Specifically, we prove that the ideal intersection property is equivalent to the absence of essentially confined amenable sections of isotropy groups. For groupoids with compact space of units we moreover show that is equivalent to the uniqueness of equivariant pseudo-expectations and in the minimal case to an appropriate generalisation of Powers averaging property. A key technical idea underlying our results is a new notion of groupoid action on C*-algebras that includes the essential groupoid C*-algebra itself. By considering a relative version of Powers averaging property, we obtain new examples of C*-irreducible inclusions in the sense of R{o}rdam. These arise from the inclusion of the C*-algebra generated by a suitable group representation into a simple groupoid C*-algebra. This is illustrated by the example of the C*-algebra generated by the quasi-regular representation of Thompsons group T with respect to Thompsons group F, which is contained C*-irreducibly in the Cuntz algebra $mathcal{O}_2$.
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