Energy Institute

What is the cost of the Public Service Obligation?

The Public Service Obligation (PSO) is a levy on all electricity customers to pay for certain services that the Government believes are needed to keep the energy system secure and sustainable.  It accounted for an average of 4% of the cost of electricity in 2011 1, and it appears as a separate item on all electricity bills. ESB calculated it at 7% of the cost of electricity to its customers in 2014.

The levy calculations are reviewed annually by the CER on behalf of the Government.

The payments for 2014/2015 and 2015/2016 were set as follows;

PSO payments for 2014/2015 and 2015/2016

Electric Ireland rebate (13m), 13/14 PSO CfDs (13m) and other (2.4m) CER1514

Category PSO 2013/2014 €million PSO 2014/2015 €million PSO 2015/2016 €million
Renewables 80.1 94.3 180.9
Peat 75.9 119.0 121.9
Security of supply 54.8 104.7 47.3
Other - 17.2 (24.8)
total 210.9 335.4 325.3

The biggest drivers for the 2014 increase were 2:

  •  Lower wholesale electricity prices
  •  Lower running of Tynagh
  •  More renewable generation

The changes in 2015/16 prices were due to:

Factors that increased costs

  • Lower wholesale electricity prices (prices down by 9% but cost of guarantee up)
  • Increasing renewables (up by 11%)

Factors that reduced costs

  • Reduction in capacity payments (down by 20%)
  • Termination of the Edenderry, Tynagh and Aughinish contracts ( down to one quarter only, i.e. to 31 March)

In recent times a big factor in determining the size of the levy was the price of gas. This is because of the price-setting role of gas-fired plant in the Irish electricity market where the more expensive gas-fired plants are always last to be dispatched.

Under the rules of the market everybody gets the price of the last bid to be accepted. So the lower electricity prices that should follow lower gas and wholesale prices are partially offset by the increasing costs of the PSO. This reduces the benefit we get from lower international gas prices but is part of the price for the assurance of security of supply and the deployment of renewable energy.

Renewables, with their priority dispatch, have a merit order effect in reducing the need for the dispatch of higher cost gas plant.  When prices in Britain are lower the East West interconnector can have a similar effect.

However, three elements of the PSO have been phased out and others are to follow. The subsidies for peat generation are to be phased out by 2020 (one in 2015 and the other two, Lough Ree in December 2019 and West Offaly in January 2020) and the contracts for Tynagh and Aughinish Alumina expired in March 2016. The annual levy amount decreases from €64.37 (€5.37/month) in 2014/15 for the domestic customer to €60.07(€5.01/month) for the 2015/2016 period 3. The reduction in electricity demand with the recession meant that capacity plants like Tynagh became costlier. In other circumstances (rising demand for electricity) it would have reduced the PSO, emphasising the long-term insurance nature of the PSO.