Why are Irish electricity prices so high?
Analysis: there are a number of underlying factors behind the high cost of electricity for Irish homes, especially our dependency on imported fossil fuels
The increasing cost of electricity, particularly for householders, is a recurring news story. Figures released by Eurostat at the end of November 2017 (based on data from January to June 2017) showed that Ireland had the fourth most expensive electricity prices for household consumers across the eurozone area. When compared to the average price for the EU-28 countries, Ireland’s electricity prices were 13 percent higher. If this wasn’t bad enough, the second half of last year also saw most energy suppliers announcing price increases in electricity, varying from four to six percent.
So why are electricity prices high in Ireland? What are the factors which influence the increasing cost of electricity and energy in general in Ireland? A recent report from the Sustainable Energy Authority of Ireland (SEAI) on electricity and gas prices in Ireland is very useful in this regard. The report provides a comprehensive examination of electricity and gas prices to households and businesses as well as a discussion of the factors affecting both electricity and gas prices in Ireland.
The most significant factor relates to our dependency on imported fossil fuels, which in turn leaves us exposed to fluctuations in global energy prices and particularly oil prices. Fossil fuels account for 77 percent of Total Final Consumption (TFC) in Ireland with oil and gas at 58 percent and 15 percent shares respectively. Ireland’s oil dependence (as a proportion of primary energy supply) is the fifth highest in the EU.
Oil prices were relatively stable in the first half of 2017 averaging just under $52 per barrel, but by the end of the year, they had increased to a little over $64 per barrel. Wholesale gas prices have also experienced a large amount of volatility in recent years. On average, wholesale gas prices during the first half of 2017 were 14 percent higher than the first half of 2016 and, similar to oil, have been increasing throughout the second half of 2017.
The second factor is related to the first and this is the fuel mix used in electricity generation. Ireland has one of the highest levels of fossil fuel use in electricity generation in comparison to other European countries, ranking sixth in the Euro area. Taken together, fossil fuels account for 63 percent of the fuels use in electricity generation. Taking gas on its own, it represents 44 percent of the total fuel use in electricity generation, a share which is ranked only second behind Latvia at 50 percent.
The third factor relates to the continual investment that is required in our electricity infrastructure assets in order to keep pace with the increased demand from households and businesses and the requirement for the higher penetration of renewable energy on the grid. Currently the electricity network is separated from the retail end of the business. Thus the Transmission System Operator (TSO), EirGrid, and the Transmission Asset Owner (TAO), ESB Networks, have what is termed a "natural monopoly" over the transmission network.
Unregulated monopolies may be inefficient and impose prices that are too high so the Commission for the Regulation of Utilities (CRU) regulates the activities of the TSO and TAO. Part of this regulation is deciding on tariffs which can be imposed by the TSO on those using the network as a means of covering the costs incurred by the TSO in the operation, development and maintenance of the transmission network.
The CRU reviews the transmission revenues on an annual basis and their September 2017 review approved an 8.23 percent increase in the transmission Average Unit Price (AUP). In doing so, the CRU cited the additional funding that is required by the TSO to facilitate higher levels of renewable energy on the transmission network. Unfortunately, such costs are inevitably passed on to the consumer and the CRU estimated that an extra €2.77 was added to the average annual residential customer’s electricity in October 2017, an increase of just under one percent.
The final factor is the amount of taxes that are paid by electricity customers. For residential customers, this includes VAT, the carbon tax and the Public Service Obligation (PSO). The PSO levy is designed to support renewable generation plants primarily but also certain peat and gas plants in order to increase the security of the energy supply through the promotion of renewable energy generation and the use of indigenous fuels. The SEAI estimate that in the first half of 2017, these taxes comprised approximately 20 percent of the final price for electricity to residential customers who use between 2,500 and 5,000 kWh of electricity per annum. This figure is set to rise however with the increase in the PSO levy in October 2017. Plans to increase or change how the carbon tax is implemented are also likely to be examined in the future.
Given the nature of these factors, i.e. predominately external, the upward pressure they have on electricity prices is going to be difficult to address in the short to medium term. It is true that renewable energy is playing an increasingly important role in our overall energy portfolio. For example wind energy now contributes 22.3 percent of gross electricity consumption compared to only 4 percent in 2005.
But the increase in renewable sources of energy is a gradual process and is dependent on ensuring the transmission network can handle the increased capacity (which in itself comes with a cost through transmission charges and the PSO levy). Thus in the short to medium term Ireland’s electricity prices are likely to remain high mainly due to our exposure to global oil and gas prices and the costs involved in our transitioning toward renewable sources of energy.