Since new European Union and Irish energy policies were introduced 15 years ago electricity and gas prices in the Republic have gone from being consistently at or below the EU average to now being consistently among the most expensive. Household electricity prices in the Republic are a third higher and household gas prices are a quarter higher than the UK’s. The cost of electricity to householders has increased by nearly a third in the past three years. These high prices are a direct consequence of energy policies adopted in the Republic between 2000 and 2008.
Price increases for the past three years are being attributed to rising fossil fuel prices, ie oil, natural gas and coal. But very little oil is now used for electricity generation in Ireland and in any case oil prices have been stable in the past three years; use of natural gas for power generation has decreased; and coal prices have fallen.
The reasons for electricity price increases in Ireland are due to other factors, ones that need much closer scrutiny.
One of the main factors is the very high level of capital investment in power plants, gas and electricity networks which has coincided with a significant drop in demand for electricity since the economic collapse in 2008. In the period between 2008 and 2014 electricity consumption declined by 8 per cent. The peak demand on the system dropped from more than 5,000MW in 2008 to 4,700MW in 2014. The decline in demand is mainly due to the economic downturn but also reflects the fact that demand for electricity in developed countries is either static or increasing at a slower rate. In the UK, demand in 2013 was at the same level as in 1998. The reasons for this change in demand include energy efficiency, the changing nature of industry and relocation of manufacturing industries to countries with low energy costs, such as China.
Generating capacity
In the period 2007–2014 generating capacity in the Republic rose by more than
a third, from 7,465MW in 2007 to 10,000MW in 2014. The additional capacity includes wind power, gas-fired plants and new interconnection to the UK.
Allowing for normal operating margins, there is now 2,000MW of surplus generating capacity in the Republic. The estimated cost of adding this additional capacity and the associated networks since 2007 is of the order of €5 billion. Investment on this scale, as the demand for electricity reduced, raises serious economic issues.
The Eirgrid median 10-year forecast for the period to 2023 is for a growth in peak demand of approximately 500MW. On this basis there is no need for any new capacity to meet demand for at least the next 10 years. However, due to current Irish energy policies, a further 3,000MW of generating capacity (mainly wind power) will be added to the system over this period. The investment requirement for this new capacity and associated transmission networks constructed to facilitate its connection to the grid will be in the range of €5 billion to €7 billion.
The only basis on which this capacity can be financed is by a set of guarantees approved by the Government and regulator that underpin the commercial risk to the developers. These include subsidised tariffs, priority access to the grid and capacity payments. The public service obligation (PSO) levy will add €335 million to consumer bills in 2015. The PSO is a subsidy for non-competitive power plants including peat-fired generation and intermittent wind power.
Given the absence of corresponding increased demand and additional revenue streams the cost of the bulk of the capital investment and associated subsidies will have to be carried by domestic and business electricity customers. Owners of existing conventional generating plant (eg the State) will face major devaluation of these assets. An example of this has been the loss by Bord Gáis of €300 million on the recent sale of its new gas-fired power plant in Cork.
This amount of capital investment, about €10 billion, that is not required to meet electricity demand raises serious issues for energy prices, competitiveness and employment growth in the Republic.
Competitiveness issues
There is now a growing realisation that current EU energy policies have damaged European industrial competitiveness especially when compared with the US. In the US gas prices are a
third of those in Europe. In individual US states that are home to major players in the pharma and ICT industries, electricity prices are 60 per cent below Irish prices. These price differences raise economic and competitiveness issues and threaten our ability to attract foreign direct investment.
The European Commission has indicated that looking forward to 2030 new energy policies will be proposed that take into account economic realities and bring about a reduction in greenhouse gases in a more practical and effective manner. Major EU countries, including Germany, the UK and Spain, are already rethinking subsidised tariffs which have proved to be unaffordable. In this regard Ireland would do well to adopt policies that prioritise our need for competitive energy prices.
Don Moore is president of the Irish Academy of Engineering
