Energy Prices In Ireland Post author By Philip Lane Post date December 18, 2009 The Irish Academy of Engineering has released a new study of energy price competitiveness: you can read it here. Categories In Economic Performance, Environment Tags energy prices 8 Comments on Energy Prices In Ireland ← Investigating the Banks → Withdrawal and Expulsion from the EU and EMU 8 replies on “Energy Prices In Ireland” @ Philip Lane, Very interesting report, but I feel it raises more questions than it answers. Firstly there appears to be a number of contradictory themes running through the report. Perhaps further clarification is required. It is stated that the primary driver of electricity cost is the technology fuel mix. This is the fuel that is burnt and the type of machine the fuel is burnt in. The report states that gas generation represents 55% of generation capacity in Ireland, it also calls this disproportionate. So from these two statements above, if we want to reduce electricity price we should reduce the amount of electricity generated from Gas. But then the report also states…. 1) Gas supply over the next 5 years or so will be more than adequate. 2) Gas prices will diverge away from oil and become cheaper, cites gas as 30% cheaper than oil in the US when comparing BTU. 3) Gas on Gas competition will also drive down gas generation costs. So from the above data Gas generation must be the way to go for the next 5 years. If gas generation is dominant in the technology mix then why does the report recommend changing the mix now? This does not make sense, I must be missing somthing here. Interestingly the report states that Ireland will have a surplus of electricity generation for the next 7 years. So what incentive is there for investment in renewable sources of energy. It also mentions that there are high costs associated with renewable energy being connected to the grid. These two factors do not bode well for renewable sources. The report makes no recommendation for improving the efficiency of existing generation capacity. As mentioned in previous threads Ireland does not utilise waste heat from existing power stations, district heating etc. A modern combined cycle gas turbine power station is currently the most efficient design available ( around 55% thermal efficiency). Other designs do exist but they tend to be still in the developmental stage i.e fuel cell units. Other contributors to this site have mentioned other methods of electricity generation in the form of pumped storage etc. But the report does not expand on these. Several Gas fired stations have been built over the last decade, if we wish to change the energy mix, just how are you going to tell these companies to switch off their shiney new power station? A typical Gas fired station costs around 350 to 400m Euro, money borrowed at commercial rates which has to be paid back over a time span between 10 to 15 years. In addition I believe there are plans in progress to import natural gas via a LNG terminal on the Shannon. There is the RealPolitik to be considered here. No mention has been made of micro generation, i.e each home having its own generator. In addition the report states that electricity demand should continue to fall as more efficient technologies are introduced. This is not true in every case. Sometimes if a novel more efficient method is introduced it is adopted on a wide basis. So even though it is more efficient because of the multiplier effect energy usage increases instead of decreases. But this is more of a theoritical argument and is not always true in every case. Don’t get me wrong, I think this is a exciting time of opportunity for Ireland to reduce our fossil fuel usage, but it has to deliver results. I fear our tendency to make a dogs dinner of things will once again muddy the waters even more. The reported U-turn by Eirgrid in assessing Ireland’s future energy needs, seems more likely to be inspired by their new green minister than changes on the ground. One would hope that Eirgrid does not plan its future needs based odemand in the middle of a recession. The whole point of a GAR is to look at our needs across the cycle. Incidentally, Eoghainn Harris, writing in today’s Sindo about the ESB (and other trivialities), manages to mention Newstalk FM 5 times (positively) and also mentions RTE 5 times (negatively). I hope Denis O’Brien (owner of both Newstalk, as well as a big share in the Sindo) reads this article, because Eoghainn is plumbing the depths of obsequiacy to please his master. Unfortunately, Denis does not have any Senate seats to distribute as thanks. This report makes a good case for its recommendation that “Ireland re‐examines the basis for current energy policy and that it does this using professional evidence‐based research with the objective of restoring price competitiveness subject to compliance with international carbon abatement obligations” However, in this respect we have had the Deloitte Report “Review of the Electricity Sector in Ireland”, 9 Dec. 2005 (all 327 pages of it) and subsequent Green and White papers. The ToR for this report called for a comprehensive and strategic review of the institutional arrangements and market structures for the Electricity Sector in Ireland, including the structure of the State-owned utility and its position in the sector.” (Dept. of Communications, Marine and Natural Resources, Request for Tender, 21 Feb. 2005). The RfT went on to constrain the scope of the study: “This Review will not extend to the existing structure, functions or responsibilities of the Commission for Energy Regulation (this exclusion applies to any subsequent reference in this document to “existing institutional arrangements and market structures”). The CER exercises considerable control over the design of, and pricing in, the electricity generation market, sets the tariffs and revenues for the networks and the ESB’s final prices to smaller businesses and households. Constraining the scope of the study in this way was like attempting to put on a perfromance of Hamlet without casting the Prince of Denmark. Not surprisingly the Review had limited impact on Government policy. The then Minister, Deputy Dempsey, in a speech to Energy Ireland Conference in June 2006 was able to declare (under the rubric of Economic Competitiveness): “ESB has played a fundamental role in the economic and social development of the State and the Government recognises the strategic value of maintaining the ESB as a strong and commercially viable company into the future. The retention of natural monopoly networks in State ownership is also a core policy tenet for the Government. The Government does not in any circumstances favour the privatisation or atomisation of ESB. With that taken as given, structural reform must deliver outcomes that are in the best interests of consumers, the market and ESB itself.” No one should be surprised that, when it comes to any conflict between the interests of consumers, the market and ESB, the ESB comes out on top and consumers a distant third. The CER has been, and continues to be, the principal policy mechanism to ensure this outcome and to compensate the ESB at consumers’ expense for any damage market reform might inflict on it. (It is clear that some other parts of the Government were not unaware of what was going on – or of the impact on consumers and competitiveness. For example, the Department of Enterprise, Trade and Employment, “Irish Electricity Market: Principal Challenges”, Feb 2005 included the following: “Given the recognised national importance of electricity infrastructure, there may be a case for part-funding this investment under the NDP. Part-funding the required investment through the NDP, rather than requiring the user to pay for it in its entirety, would reduce the competitive disadvantage faced by firms arising from higher tariffs.” However, the Minister’s June 2006 statement reflects settled Government policy in this area. Apart from an, not unexpected, increase in emphasis on renewables following the appointment of a Green Party Minister, this policy stance remains unchanged. It is not, of course, based on any professional, evidence-based research”; and, therefore, cannot be swayed irrespective of the quantity or quality of professional, evidence-based research that is presented. Nor, as we have seen, will such objective and unconstrained evidence be encouraged or commissioned. We have no shortage of energy policy research and analysis – Forfas, NCC, energy policy groups, SEI. Even the relevant Oireachtas Joint Ctte has (limited) powers and resources to review policy. We have, in the ESRI, the Energy Policy Research Centre staffed by the highest calibre national and international expertise in this area. However, all appear to be constrained by settled Government policy in this area and all are prevented from pointing to the “elephant in the room”. And this is the fiefdom that the ESB (and, to a more limited extent, BGE) has created that usurps the prerogative of governments to set policy in this area. Fine Gael, to its credit, in its NewEra proposals, seeks to bring these fiefdoms to heel, but the power exercised by these fiefdoms (ably supported by their unions) strikes fear into the hearts of politcians and I remain sceptical about the ability or tenacity of any future government to prevail. But a continuation of the current approach is both unsustainable and extremely damaging to consumers and to the economy. This report from the Academy is deeply flawed. It used data that has since been updated on Eurostat’s website and most significantly it uses the price exclusive of all taxes which no consumer anywhere in Europe pays. The data that shoud be used to assess competitiveness is the the ex-VAT price for business and the all taxes included price for households. These are the prices that these consumer must pay and therefore is the only measure that should be used to assess competitiveness between countries. They also mixed the old methodology data with the new methodology data which is in force since the second half of 2007. These two data sets are not comparable and must not be used together. The bigest flaw however is in their assessment of the position of Ireland in relation to the EU average for the price of electricity paid by business consumers. The Adademy in its report states that Ireland was sitll 44% above the EU average for electricity cost to business in the first half of 2008. The latest data on the Eurostat website puts Ireland at between 9% and 11% above the EU average (the lower figure being for the largest electricity users). This is hugely significant as Ireland has moved from being one of highest cost countries for electricity to being about 30% points closer the the average in the space of 6 months. This is a huge good news story that the Academy has managed to turn into a (false) depressing story based on analysis that’s bordering on being negligent. Should read ‘2009’ rather than 2008 in the last paragraph above. “The reported U-turn by Eirgrid in assessing Ireland’s future energy needs, seems more likely to be inspired by their new green minister than changes on the ground. One would hope that Eirgrid does not plan its future needs based odemand in the middle of a recession. The whole point of a GAR is to look at our needs across the cycle.” I don’t know if the report by the Academy of Engineers deals with this question or not – but certainly, the Spirit of Ireland group seem keenly aware of this dimension – that quality of power supply to industry in the future will become a real concern. I attended a lecture recently at Trinity college by someone involved in looking at un-scheduled downtime, a major black mark against wind generation reliability, to see how we can insure against this. Perhaps with a view towards improvements there. But that is only at one part of the system, the equipment used in the generation. The fact is though, the more expertise we can develop in Ireland in making this renewable system ‘work’, the more chance Ireland has of developing new green-er enterprise with a view to developing a knowledge which is export-able to other countries contemplating a move towards a green-er grid infrastructure. It is an opportunity, we either embrace or we fluff it. The counter argument being, if we invest our money in spare fossil fuel generating capacity, we learn nothing in the meantime – except old technology, old methods and stuff that is on the way out anyway. That deserves a qualification however, as in the future there will always be some gas generation, or some amount of conventional electricity generation on the grid. Except, there is new stuff to be learned in the sense, we need to learn how to ‘run’ fossil fuel plants at reduced output, reduced profits and reduced manpower I presume also. I.e. Thinner margins. In that sense there are new tricks to be learned even on the conventional generation side of the equation. @BigEnd, It always seems to be open season for messenger shooting. The Academy may have attempted to squeeze too much out of the Eurostat price data. I have had occasion previously to query some data points, but I’m confident the statisticians involved do the best they can – given the diversity they encounter. Richard Tol, in a previous post (can’t find the link now), pointed out that there is limited value in these comparisons. So many factors impact that it is diffciult to draw substantive conclusions from relative data while moving from one semester to another. However, the basic message is clear. Once pricing responsibility was transferred to the CER Irish electricity prices climbed rapdily. Yes, prices previously had been kept artifcially low – for a variety of reasons – and they had to increase, but the subsequent extent of the increase is entirely unjustified. My previous post seeks to identify the underlying problems. Comments are closed.