What options does Government have to help protect consumers from major energy shock?

Ireland, along with the rest of Europe, has already suffered a major energy shock this year as the price of gas and oil skyrocketed.

It is most acutely felt in the price of natural gas, which is being driven by “speculation, fear and uncertainty, not [the cost] of extracting it from the ground,” says Dr Paul Deane, an energy researcher in UCC’s Marei institute.

While the problem can be easily diagnosed, tackling it is anything but simple, with billions of euro being deployed to support homes and businesses, as well as novel windfall taxes and fundamental restructuring of the electricity market now under consideration. All this is playing out against a ticking clock as winter approaches, promising longer, colder nights and higher utility bills. “The shock is coming, the prices are coming,” says Deane.

The political logic to try to protect voters from this is clear, but every solution contains unintended consequences and invites difficult political choices and trade-offs. Ahead of the budget, what can the Government do?

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Market redesign

European Commission energy ministers will convene next week to discuss what commission president Ursula von der Leyen called an “emergency intervention” in electricity markets to reduce energy prices. The conventional wisdom is that this will seek to break the link between the price of gas and the price of electricity, a design feature that is now sorely outdated. While this drives for the core of the problem, it’s unlikely to move quickly. Experts also warn of unintended consequences. Dr Muireann Lynch of the Economic and Social Research Institute says: “What’s happening right now is a very natural consequence of how our electricity market is designed, and it suggests that we’re getting things right.”

Price cap

Lynch is sceptical about the impact of a price cap on gas, which she said would introduce new costs for generating companies which would have to be met from elsewhere. She and Deane believe some companies are also currently using the revenue from their generation business to subsidise the price their customers pay — suggesting that even the nosebleed prices currently being paid may be artificially low. Again, intervention at a European level may be preferable to domestic moves, says Deane. “The Irish Government needs to be a lot more proactive in encouraging EU intervention at gas hubs and imposing a maximum price.”

Windfall tax

There is growing political support around some sort of windfall tax — but that doesn’t mean it’s a done deal for the budget, and there are significant concerns in the Department of Finance, including whether something could be designed in a way that didn’t invite legal challenge from energy companies. The tricky part, says Lynch, is designing a tax that hits the windfalls specifically. The biggest windfalls are being enjoyed by wind farm operators, but targeting them specifically is “really tricky and I don’t know how you go about it,” says Lynch. Even if a tax could be designed just for those enjoying supernormal profits (or the parts of large energy companies pulling in big revenues), some generators are protected by the subsidy regime they have with the State, or bound to sell power to energy companies at the guaranteed price rather than the market price — in which case the benefits aren’t actually accruing to them.

It’s a fiendishly complicated thing to design, in short order. Lynch believes the way to tax windfall profits is through their corporate profits. This might be done by adding an additional charge on the difference between 2022 profits and historic averages. But a poorly-signalled and sudden shake-up of that system is anathema to Minister for Finance Paschal Donohoe and the custodians of Irish industrial policy’s core offering — stability on taxes.

Senior sources say it is complicated and will take time to impact, requiring differentiating the treatment of energy companies to the taxation of oil and gas. Some version may ultimately get the go-ahead, but it may not be a major or straightforward revenue driver.

More of the same

The most likely outcome is that the Government will favour more interventions along the lines already pursued — extending excise and VAT cuts to energy products, loading more money into once-off and permanent welfare increases, and implementing across-the-board rebates. This is all costly, especially against the backdrop of funding a new public pay deal, which will increase the calls for a cash raid on energy companies.