How does the PSO rise or fall when a) gas prices are high, b) gas prices are low, c) wind generation is high, d) wind generation is low?
a) When gas prices are high the peat and wind elements of the PSO are zero or less. This was the case in from 2008 to 2010 1. When international gas prices were high, the wholesale market price for electricity in Ireland was high and exceeded the fixed (minimum) price guarantees given to peat and wind and hence there was no need for compensation (top-up to the guaranteed price).
b) However, when gas prices are low, as they currently are, the cost of meeting the guaranteed prices for peat and wind in Ireland under the PSO obligation increases. International gas prices are a big cost driver in electricity (~30%2) as the benchmark price is used to determine the levy for the next PSO period. A lower wholesale price results in the PSO plant (whether it be renewables, peat or security of supply) needing more PSO money to cover their allowed costs to offset the lower money they are predicted to receive from the market. The lower estimated wholesale price outlook is reflective of a trend in the SEM of lower spot prices, related to lower gas prices 3. The PSO levy is designed as an incentive around providing a minimum level of revenue so that the generators are not completely reliant on prices on the wholesale electricity market 4. Put simply, the PSO provides a buffer to some generators against volatile market prices. The higher the prevailing market price, the lower the cost of the PSO, and vice versa
c) As more wind comes on to our electricity system it displaces the higher cost gas fired generators and the SMP falls. This increases the support payments (REFIT) for wind and others in receipt of guaranteed prices, thereby increasing the PSO. This means as the wholesale price of electricity has fallen, the PSO to support back-up generation (Tynagh), secure supply generation (peat) and wind has increased, cancelling out some of the savings from better competition and lower natural gas prices internationally. Increasing wind generation beyond current levels also increases the need for more transmission and distribution lines, the cost of which coupled with lower electricity prices will impact on the wind generators return to investment. In an ESRI scenario with 6000MW of wind, support payments are a higher percentage of the gross wholesale price. However, the wholesale price itself decreases with more renewables when fuel prices are high 5.
d) When wind generation is low due to low wind speeds the SMP is set by the higher cost gas-fired plant in Ireland. This is because with an annual wind contribution of 20% at the current time, at any one time of low wind generation electricity demand could be 25% higher than average and the SMP would rise as the more expensive gas fired plant was dispatched to meet demand. In this situation all generators enjoy the high prices and the requirement for and the cost of the PSO guarantee for that period falls.