Alan Ahearne in his post on the recent National Competitiveness Council report draws attention to the high electricity costs in Ireland relative to our trading partners documented in the report. Malore in his/her comment on Alan’s post suggested some reasons for this. These and other reasons are further explored in the Sustainable Energy Ireland 2008 report Understanding Electricity and Gas Prices in Ireland.
To this list we should note the cost of the Public Service Obligation which is a levy introduced in January 2003 related to the purchase of electricity from peat-fired stations in the midlands. A 2005 Department of Enterprise, Trade and Employment consultation paper put the average annual cost of this levy in its first three years of operation at €74 million annually, and estimated that it contributed 4% to the electricity bills of medium and large-scale commercial/industrial customers.
With higher oil prices in 2006 through 2008, the cost of the peat levy fell to €2.7 million in 2007 and was zero in 2008 (Commission for Energy Regulation, 2008). However, Tuohy et al (2008) from the UCD Electricity Research Centre calculate that it may be reasonable to assume that the annual public cost of support for peat generation is of the order of €60 million per annum. If we are required to purchase carbon credits to meet our EU burden-sharing obligations for the first Kyoto compliance period 2008-2012, then the social cost might be even higher (although the peat-fired stations were grand-fathered permits for a high proportion of their emissions under the EU ETS, pricing is supposed to reflect the cost of carbon so that there is an incentive to consumers to change their behaviour, but I am not sure about the extent to which this has occurred).
Richard Tol in his comment goes on to suggest that more competition in electricity supply would help to drive down prices. Certainly, greater interconnection with the liberalised markets elsewhere in Europe would help and two new interconnectors with the North and Wales respectively should be in use by 2012. He is supported in this argument by the DETE paper above which calls for the price-fixing power of the ESB to be eliminated and suggests various reforms to this end.
What puzzles me, however, is that Irish electricity costs were not always particularly high relative to our trading partners. In fact, a chart (figure 3) in the DETE paper shows that electricity prices for industrial users in Ireland were well below those paid in the EU-15 for most of the 1990s, and were still no higher on average than in the rest of the EU-15 in 2002-2004. Yet in 2008 Ireland was the second most expensive country for industrial users in the EU-15. According to IBEC, Irish companies have seen industrial electricity prices rise by 70% since 2000.
It may, of course, be sheer coincidence that liberalisation of the Irish electricity market began in 2000 with partial market opening and achieved full market opening in February 2005, a period which saw the beginning of the dramatic increase in electricity prices. There was also a sharp increase in transmission investment from around €30 million annually in the 1990s to around €100 million annually in the 2000s.
Nonetheless, questions remain. Were prices allowed to rise to ensure that there was a profitable market for new entrants? If the ESB is an inefficient generator of electricity and prices have risen as a result, why does a market with the second highest electricity price in the EU not attract private competitors? While in a market with a dominant supplier, there could be a temptation for new entrants to price-to-market rather than compete aggressively for market share, current rules (limits on the ESB’s capacity to generate and sell additional electricity on its own account) would seem to incentivise new entrants to price efficiently to capture market share. Whatever the reason, liberalisation of the Irish electricity market does not appear to have brought lower prices to consumers.
Incidently, Richard in a further comment suggests that energy costs are a relatively minor cost in production, less than 2% on average and more than 10% of costs for a handful of companies only. These figures are broadly supported by the DETE paper. However, percentages can be much higher for service sectors where the DETE paper (based on 2001 data when electricity prices were relatively much lower) reports electricity expenditure shares only (i.e. less than total energy) of total cost at 5% for R&D enterprises, 6% for retail trade and 9% for hotels and restaurants.