We answer the key questions on energy cost, supply and infrastructure in Ireland today.
We answer the key questions on energy cost, supply and infrastructure in Ireland today.
Movements in the international prices of oil and gas eventually feed through to changes in the retail price that we pay for our petrol, diesel and natural gas. However, the international price makes up only one component of the cost to the consumer. Government taxes and distribution charges are also significant elements.
As a result, major changes in the international prices of oil and gas are not reflected to the same extent in the retail price. The fall in the price of oil from about $150 at peak to a low of about $30 in early 2016, resulted in a much lower fall of about 25% at the pumps. Oil prices have since recovered to around $50 per barrel by mid 2017.
During the first quarter of 2016 when the price of oil was low, the oil component of the cost of petrol accounted for only about 10% of the price we paid at the pumps. A major share of our petrol prices (currently between 70-90% depending on the price of oil) is made up of government taxes, comprising a combination of excise duty, VAT and various levies, and the cost of refining, distribution and wholesale and retail margins. Monthly petrol prices broken down by component can be found by following the link in the source beside the chart below.
For gas, the tax burden is lower (about 15%), but the cost of gas itself is still only about 45% of the retail price. Gas transmission and distribution accounts for about 40% of the price.
Ireland has a relatively high dependence on oil as a source of domestic heating. We use oil in 45% of homes, compared to 4% in Britain. We use two grades of oil - kerosene and gasoil. The commodity price of these fuels is set on international markets. The prices of home heating oils track the price of crude oil, but they can also move independently in response to regional supply constraints or a demand surge from a cold winter in Northern Europe.
The share of the price taken in taxes is much lower for home heating oils than for petrol, so changes in the international price of oil tend to have a more pronounced impact on the home heating oil price. Many consumers have directly experienced the effect of low international oil prices on home heating oil recently. Less than 10% of the consumer price goes toward import and distribution costs.
It is true that the price of petrol (excluding taxes) has tracked reductions in international prices more quickly and more closely than gas. The wholesale price of gas fell by 18% in 2014, but the domestic price of gas fell by only 3-4%.
Oil is a more freely traded commodity, with the price reflecting the global benchmarks, Brent Crude and West Texas Intermediate. On the other hand, gas prices are affected by regional price variations and there are often long-term contracts in place, where the price is agreed far in advance. Operators and suppliers require more certainty on future price and supply, because it determines where companies invest in gas infrastructure and pipelines. The cost of providing and operating the gas import and distribution system is a large fixed cost, about 40% of the final price compared with 10% or less for oil. Currency changes also influence how much of the oil-driven international price reduction is carried through to the consumer.
At present, 58% of our gas requirements are met from Irish sources at Corrib and Kinsale, and the rest of it is imported from Britain. Before the gas field was operational at Corrib, we imported 96% of our gas from Britain. The price we pay for gas is determined by the cost of natural gas at the UK gas trading hub (known as the National Balancing Point) plus the cost of transporting it here via a system of three subsea pipelines from Moffat in Scotland. We can acquire gas at wholesale prices, which are in line with European market prices thanks to the competitive market for this fuel in Britain.
Transmission system costs are addressed via entry and exit charges from Moffat. The final price paid by the consumer also includes on-land transmission and distribution costs of about 40% plus a margin for the supplier, the amount of which is determined by the CER.
Because we import the vast bulk of our energy, we cannot insulate ourselves from energy price changes, but we can selectively reduce their impact through fuel source diversity. Government policies have included limits on the use of natural gas to 50% for power generation, a target of 40% for renewable energy in electricity supply by 2020, as well as a 12% renewable heat target, and 10% renewable transport target, both of which will assist in reducing our dependence upon imported oil in the transport and heat sectors.
Although gas is a large part of the cost of electricity generation, the use of some sources of power such as wind, peat and hydropower reduces the impact of gas prices on the average cost of electricity. As gas plant has a price-setting role in the wholesale market the precise mechanisms are both indirect and complex. Regardless of fluctuations in the price of gas, the fixed costs of the electricity network don’t change, nor do the guaranteed prices offered to peat and wind generators.
The Corrib gas field is not sufficient to meet our needs and we will continue to import our outstanding natural gas requirements from Britain. The price of this gas is established at the National Balancing Price in the UK. This in turn determines the price of gas supplied from Corrib. Thus Corrib will have little effect on the price of gas for Ireland. It does, however, improve our security of supply of the fuel.
Potentially, yes, but it would have to be a big find because the wholesale price of gas would continue to be set, just as it is now, by the cost of top-up imports from the UK. The costs of producing shale gas tend to be much higher compared with conventional natural gas, however, the possibility of discovering oil alongside the shale gas can provide an incentive for drilling.
At present, we don’t know how much economically recoverable gas there is in Irish shale deposits. Our best prospect, the Bundoran Shale, has yet to be assessed to establish the nature and quantity of the reserves. In 2016 the EPA published research that aimed to identify and assess the potential environmental effects and risks of shale gas extraction. In the wake of that report the Dail passed a Private Member’s Bill banning fracking for the exploitation of shale gas. The enactment of the Petroleum and Other Minerals Development (Prohibition of Onshore Hydraulic Fracturing) Bill 2016 prohibits the exploration and extraction of petroleum from shale rock, tight sands and coal seams onshore or in inland waters in Ireland. This follows similar bans on fracking in Germany, France and the Netherlands.
Despite estimates indicating greater amounts of recoverable shale gas in Europe than in the USA and, with that, a potential for a reduction in energy costs and less dependency on imports, the environmental risks from fracking have left it politically unpopular in Europe.
There are three main gas markets in the world – Europe, the USA and North Asia (Japan, South Korea and Taiwan).
European gas consumers (more than half their gas comes from within the EU and Norway) pay less than the Japanese for their gas (which is imported from Indonesia, Australia and the Middle East), but considerably more than their American counterparts (now self-sufficient in gas).
We in Ireland pay at least the UK wholesale market price, an exit charge from the British system plus the entry cost to the Irish transmission system at Moffat in Scotland. The extra costs for British and Irish consumers involve the national gas transmission and distribution systems and a supplier margin.
Between 55% and 60% of the price of electricity in Ireland is the price at which generators sell power to our wholesale electricity market; this element of the price is determined by competition. The cost of transmitting and distributing electricity accounts for another 30% and includes system charges to cover network investment and operation as determined by the Commission for Energy Regulation. The remaining 10% to 15% is supplier charges and government taxes and levies, such as the Public Service Obligation (PSO), which cover services relating to creating a secure and sustainable electricity system.
Residential customers pay more than businesses because they are liable for VAT and incur higher supplier charges to meet the extra cost of supplying and billing small customers.
According to Eurostat, Irish industry paid the fifth highest electricity price in the EU in the first half of 2016, after Denmark, Germany, Italy and the UK. Our residential customers paid the sixth highest in the EU, behind Italy, Germany, Denmark, Belgium and Portugal in 2016. However, it is difficult to make simple comparisons between EU member states. If taxes and VAT are excluded, residential customers actually pay the highest basic price for electricity. This illustrates that our taxes and levies, as a proportion of the cost of electricity, are relatively low. Our network costs are similar to those of other Member States.
Although transmission and distribution costs have increased year on year, the high price of our electricity can be attributed to the cost of generation and supply and our dependence on fossil fuels, particularly gas.
Comparisons of the proportion of income spent on electricity suggest that, relative to spending power, our prices are less out of line with EU norms than appears at first glance and are actually very close to the average price that customers in the EU pay for their electricity in terms of ‘purchasing parity’.
We are more reliant on natural gas for generating electricity than most other European countries and it is this factor, more than any other, which drives Irish wholesale electricity prices.
Also due to the small size and nature of our market we miss out on economies of scale. The dispersed settlement pattern of our population means it is more costly to connect, service and supply customers here than in Britain, for example. In addition, the Public Service Obligation levy has increased in each of the last two years. Finally, one of the effects of the economic downturn was to increase the burden of transmission and distribution costs because the forecast demand for electricity was less than actual demand.
Yes, probably, but this would necessitate both a change in policy by the Government and action by the Commission for Energy Regulation (CER). In practice, both are constrained by EU policy and law, respectively. CER is responsible for ensuring that consumers get the best sustainable price. It structures the electricity generation and supply markets for competition and regulates investment in the electricity grid and network. To date, competition is believed to be working and has recently caused wholesale prices to fall, but the design of the Irish market is to change in line with the EU model to facilitate cross-border trade.
Theoretically, if we postponed investment in new plant and infrastructure, prices could be consequently lowered. However, as the economy recovers, there are security of supply and environmental risks to such a strategy. One of the cornerstones of government energy policy is environmental sustainability. Although we can meet the forecast demand for electricity for the next several years, increased use of renewables such as wind power as we shift to a cleaner energy system requires new and more flexible types of power plant.
Higher electricity prices in Ireland are the result of a combination of differing investment, fuel price, wage rates, and other factors that make it less expensive in other European countries. The reasons for the latter vary, but include the benefits of indigenous natural resources such as hydropower in Norway, Sweden and Austria; investment in nuclear power by France; large reserves of natural gas in the Netherlands and other strategies based on making best use of indigenous resources.
Ireland lacks major hydropower potential, decided against nuclear power, and relies on natural gas to meet much of the variable demand for electricity. The price setting role of gas-fired generating plant, combined with the rapid expansion of our electricity demand and investment in networks between 1995 and 2008, led our electricity prices, for a time, to move from among the lowest to being one of the highest in the EU.
There are two markets that feed into the price of electricity – a wholesale electricity market where price is determined by competitive bidding between electricity generators, and a retail market where electricity suppliers compete for customers.
The wholesale market is structured according to a complex set of codes and regulations. The wholesale price of electricity is based on the last bid (offer) by a generator that is accepted by the market operator to meet the demand for electricity every half-hour. The CER is responsible for market design, which must adhere to EU standards.
The Market Operator accepts all the available renewable power first, and any other power source that has priority, and then the lowest bid followed by the next lowest and so on until the demand for electricity is matched by supply. The last bid required to meet demand sets the wholesale price for electricity for that half hour. Our electricity suppliers buy their power at the variable wholesale price, add their costs, a profit margin, and any consumer levies (like the PSO), and offer a range of price contracts to consumers.
The suppliers’ risk from the variable wholesale price is usually covered by a contract for difference the operation of which is illustrated below.
Yes – in two quite different ways. Less demand for power means that lower cost generators supply a bigger share of our electricity requirement. However, there are large fixed costs in the gas and electricity systems and if these are spread over a smaller number of units, then the price per unit increases.
Intensified competition between electricity generators has led to a fall in the wholesale price - at which electricity suppliers, such as Electric Ireland and SSE buy their power. Consumers are benefiting from falling wholesale prices, but the effects are not as strong because the transmission and distribution network costs, as well as taxes are largely fixed. Some customer charges, most notably the network charges approved by CER and those levied through the PSO, have increased. However, as demand recovers and more electricity is delivered across the network, the fixed costs cost of transmitting it will be spread over a greater number of units and this part of the cost of each unit of electricity will fall.
Movements in European wholesale gas prices impact on UK wholesale gas prices and these in turn affect the Irish market price for both gas and electricity. The UK gas price is closely linked to other North Western European traded gas market prices, which are mostly driven by supply and demand, but the price of oil also has an indirect influence.
As gas is the largest, and the marginal, fuel input to electricity generation in Ireland, the price of gas directly affects the price of electricity. However, the full volatility of international commodity gas prices is not reflected in domestic prices because infrastructure costs and levies remain the same, irrespective. Currency exchange rates also influence the price of gas and oil products in Ireland.
A way to avoid the high payments to generators at peak times is to reduce the spike in the amount of electricity used at such times. Time of use (TOU) tariffs, such as the night saver options offered by Bord Gais Energy and Electric Ireland, can help consumers to save money by using less electricity at the most expensive times. This in turn reduces the cost of providing the power. As a supplier has to pay premium prices for electricity at peak times, it is in his interest to persuade users to reduce their demand at these times and to provide incentives for his large customers to do so.