This week sees the introduction of much-heralded cuts in the price of electricity and gas for households. Depending on your supplier, they should amount to average savings of €200 to €300 a year. Combined with the €450 household energy credit announced in Budget 2024 they are a welcome fillip as winter starts to bite.
Irish consumers will, however, continue to pay some of the highest energy prices in Europe. To date, no truly convincing argument has been put forward for why this is the case.
The most often cited explanation centres on our dependence on natural gas for the bulk of non-renewable power generation. Gas may be the cleanest fossil fuel, but it is also the most expensive. We produce some of our own and buy the remainder from the UK.
Our use of gas for power generation pretty much negates the value of renewable energy in terms of the price paid by retail customers. Suppliers of wind energy into the national grid are paid the same rate – under a balancing mechanism known as marginal pricing – as suppliers generating power from gas. The higher the price of gas, the higher the price of wind energy and the profits of the wind power providers.
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This may seem absurd, but it is integral to how power generation markets are organised and function. It also potentially creates a perverse incentive for all the producers in the market to ensure that at least some energy continues to be generated by gas.
State-owned ESB is a dominant player in the gas-generated power market. It also has significant wind power assets. The cost of power generation accounts for about half of your bill. Another quarter goes to Eirgrid, ESB Networks and Gas Networks Ireland, which deliver energy to your door. All State-owned. Taxes and the operating costs of the company that actually bills you for your energy account for the remainder. One of the biggest players here is ESB-owned Electric Ireland.
The concept of marginal pricing is so firmly embedded in the economics of power generation markets, both here and internationally, that it is hard to see a way in the short term to avoid the scenario of Irish consumers paying gas prices for renewable energy, even though renewables account for over 50 per cent of energy consumed.
In theory some of the super-normal profits being made by wind energy producers flow back to the State via the ESB and the other companies. They can flow on to the public via the energy credits.
There must be a better way. As we face into a prolonged period of high energy prices with no strategy for sourcing cheaper gas, the role of State-owned companies in the energy market would bear scrutiny.