Energy Institute

Has the drop in demand for electricity had an effect on prices?

Yes, it has affected prices in two ways and in opposite directions. Less demand for electricity means that lower cost generators supply a bigger proportion of our electricity and therefore the cost of electricity reduces. On the other hand, there are large fixed costs in the gas and electricity systems and if these fixed costs (for network and transmission) are spread over a smaller number of units produced then the price per unit increases.

One of the consequences of the drop in demand for electricity is that in the reduced market, competition has intensified between electricity generators. In practice the Market Operator schedules the lowest cost plants to run and with lower demand for electricity the need for higher cost plant is reduced. As a result, the wholesale electricity price, the price at which electricity suppliers such as Electric Ireland and SSE buy their power, has fallen (Fig.4, Fig.5).

Figure 4. Average monthly System Marginal Price (SMP) for 2013-2015.

  • Basic price
  • Taxes and levies
  • Test

Figure 5. Average system marginal price (SMP) and percentage change from 2008 to 2014

  • Actual FT
  • SMP % change
  • BNP (gas price)

Retail prices for consumers are also falling but more slowly as the impact of reductions in wholesale prices on customer bills are dampened by taxes, policy costs and the fixed costs of the transmission and distribution networks (30% of the cost of a unit) which have to be carried over less units causing that part of the cost to rise [1][2].

Other developments have put downward pressure on wholesale prices. These are:

  • More wind power connected to the system.
  • Lower natural gas prices.
  • Cheaper electricity being imported from Great Britain over the East-West interconnector1.

However, despite falling wholesale electricity prices, some customer charges most notably the network charges approved by the Commission for Energy Regulation (CER) and those levied through the public service obligation (PSO) have increased2.

The effect of the fall-off in demand on network charges can be gauged from one example given by the CER in its determination of the allowable costs for the transmission system. The allowable fixed costs of our grid and network infrastructure are determined annually. The Average Unit Price is calculated using these allowed costs divided by projected demand. The Average Unit Price increased by 4.7% on the 2013/2014 tariff-year, partly because the forecast demand was some 13% less that was originally anticipated3.

When usage goes down, there are fewer units of electricity to bear the fixed cost of the transmission and distribution system (and PSO) and the cost per unit goes up. Another way of looking at it is that the investment in the electricity transmission network is being under-utilised and therefore the cost rises for everyone connected to the system.

The fall-off in demand with the economic downturn also affected the size of the PSO levy and the average cost per unit of the PSO levy. For example, lower demand meant that Tynagh Energy, contracted at the peak of Ireland’s economic boom, had to be paid for even though it was now not needed to generate power. This is because the contract under which Tynagh was built guaranteed a certain level of payment to ensure it would recover its investment. This increased the size of the PSO. Coupled with this is the drop in demand which meant that there were fewer units of electricity among which to share the cost and the average unit cost increased. However, the PSO for the 2015/2016 tariff-year has been reduced by about 3%, mainly due to the anticipated expiry of contracts with Tynagh and Edenderry Power and Aughinish4.

As demand recovers and more electricity is delivered across the network, the fixed costs cost of transmitting are spread over a greater number of units and this part of the cost of each unit of electricity will fall.