thanks,
michel

There a major issue when we compare electricity prices casually across european nations - a casual analysis would imply that Irish electricity prices are actually rather competitive. Adjust for the presence of a capacity market however, and the picture is distorted considerably.

As for peat - the fact remains is that despite the rationale that as an indigenous source of energy it deserves a place as part of the portfolio, it really has no place. You need to do some significant massaging of your market models (negligible carbon prices, high brent and gas) to get them to dispatch at all! But then again, depending on the time horizon, some would say the same for wind - but apparently 40% penetration is the right thing to do…

For Ireland, because of the need to maintain a high level of investment, it is correct to price at long-run marginal cost. This is reflected in the structure of the Single Electricity Market. The half-hourly price reflects the short-run marginal cost. Firms are then remunerated for their capital costs through capcity payments. The combination of the two elements of remuneration for generators means that they should be paid roughly the long-run marginal cost of electricity.

Change is coming elsehwere in Europe as existing plant ages and needs to be replaced. Also the rising cost of carbon and other EU regulations will mean that electricity prices will probably have to rise elsewhere. There is a real concern that the sclerotic planning process in GB and regulatory uncertainty could see GB undersupplied in the coming decade. Many coal stations will have to close through old age or failure to meet environmental standards. If the lights are not to go off in GB investors will have to be incentivised to provide new capacity - prices will have to reflect the long-run marginal cost.

This could have implications for Ireland once there is a higher level of interconnection to the UK. Already there have been significant flows of power to the GB market, reflecting the fact that prices some of the time were higher there. With enhanced interconnections, a failure by GB to provide adequate capacity could be good for Irish generators, but bad for Irish consumers.

The issue of the public service obligation for peat and its cost for consumers has been correctly identified as a factor in higher prices in earlier years. With high oil and gas prices in the past year peat, when the plants were actually available, was probably temporarily profitable. However, with a rising cost of carbon they should be let fade out as and when they prove more costly than the alternatives.

On wind, so far it has probably proved good for consumers. Because it has zero marginal cost, in an uncertain world where future prices of fuel are unknowable, a significant weighting of wind in a generation portfolio can reduce risk . In addition, with a rising cost of carbon wind should enjoy a further advantage. The jury is still out on what the optimal share of wind is in the system. However, it is certainly higher than it is today.

The lack of competition is not a very significant factor in determining the wholesale price of electricity. However, where lack of competition and resulting excess costs are a serious factor is in the development and operation of the distribution and transmission system. As we have previously argued (See Aspects of Irish Energy Policy - ESRI, 2005) what is needed is a move by the ESB to contract out much of its work to subcontractors who would compete on price. Such a move would bring competitive pressures on the natural monopoly elements of the electricity system.

It is noteworthy that labour costs are very high in the utilities sector relative to other sectors with similar levels of human capital. To some extent this is true in other countries. Nonetheless, increased competition in provision of services to the ESB could do much to reduce these costs in the long run.

http://www.cer.ie/en/information-centre-newsroom.aspx?article=c25a1f5a-0f5e-4be3-a47f-d968145284e8&mode=author

http://www.eirgrid.com/EirgridPortal/uploads/Announcements/EirGrid%20GRID25.pdf

Its a sorry coincidence that the introduction of competition into the Irish market through new entrants and coupling with the North (Single Electricity Market) also saw fossil fuel prices reach all time historic highs. There is no getting away from the fact that our heavy reliance on these fuels for generation has led to our high electricity costs (Section 2.2 Table 1 of the SEI).

And yes the solutions - (1) More renewable energy on the grid, wind being essentially free to generate will presumably push down the market price and (2) Greater interconnection with the UK and European partners.