Electricity and Gas Prices

A report on Irish electricity and gas prices in the first half of 2009 was prepared by Martin Howley, Dr Brian Ó Gallachóir & Emer Dennehy for Sustainable Energy Ireland. For those readers interested in the topic they will find the report here.

12 thoughts on “Electricity and Gas Prices”

  1. Allow competition.

    Even buy out users to allow them to set up their own generation. One thing: Ireland can no longer afford to waste money on green projects just because they are fashionable or because they may cut down on CO2. CO2 is good for growth!

  2. This report was published a little while back. In the context of Richard Tol’s post about water charges on 25th Jan. and the risk to consumers of pouring money into the unreformed pit of multiple local authorities I made the following comment:

    “We might like to believe we have top-class electricity and gas businesses with effective metering and charging, but look at the reality. SEI has just published its latest rationale for glorious inefficiency:
    http://www.sei.ie/Publications/Statistics_Publications/EPSSU_Publications/Understanding_Electricity_and_Gas_Prices_in_Ireland.pdf

    It’s dressed up as good news and, hot on its heels, is a press release from the CER:
    http://www.cer.ie/en/information-centre-newsroom.aspx?article=b8b3a79d-3369-478e-badc-e185eac1a04a
    waxing lyrical about the wonderful job it’s doing.

    The basic price (without taxes) of electricity to industry is the 4th highest in the EU and Ireland is uncontestably in the top spot for electricity to households. The basic gas price to industry comes in around 9th, but it is more than 16% above the UK price – though the bulk price in Ireland is determined by the UK wholesale market. Ireland is, once again, clearly most expensive for gas to households – a good 40% above the UK price.

    The need to invest in infrastructure (to make up for the failure to invest enough in the ’90s), the electricity generation mix in Ireland, its peripheral location and the fact that prices may be too low in other countries certainly contribute to a high cost base. But enforcing competition in generation when the scale of the market is insufficient, forcing consumers to compensate the ESB and BGE for any detrimental impact of competition, requiring consumers to finance a share of investment up-front and then to pay the full return on all investment and forcing consumers to pay for some pretty dumb investment decisions contribute even more.”

    We’ve been here before – many times – but the extent of the denial about the dysfunctional – and consumer-damaging – nature of policy and regulation in these sectors is simply breath-taking. It’s clear that the ESB management and its unions – with BGE and its unions in its slipstream – hold a veto over any sensible reform of policy in this area that would benefit consumers and the economy. It is a microcosm of the wider dysfunction in economic policy over the last decade where the interests of privileged and influential sub-sectors over-rode the pursuit of the public interest. It appears that almost total collapse is required – as in the banking sector – before the detrimental (and economy-damaging) impact of this dysfunction is recognised. And even then the pervasiveness of this posture of denial is such that any inquiry into the causes has to be conducted in private.

  3. @Paul Hunt

    You’re quite right about the requirement to invest in infrastructure, but that said – two new base load CCGTs will roll out this year, two additional peakers will also be commissioned and Endesa have entered the market with plans to invest along these lines as well, so the investments should be there in time! But since just about every new entrant want to invest in gas, there’s some definite issues that need to addressed.

    I’m not aware of any mechanism to compensate state bodies for competition effects, apart from the Public Sector Obligation (for peat stations) which continues despite the economics…a fine consequence for questionably policy!

  4. @ Paul Hunt,

    You are a brave man to make such statements.

    In relation to cost of electricity we have seen nothing yet as funds will have to be paid for the connection costs of all these new wind farms over the next number of years..

    Your last two paragraphs effectively sum up the sorry mess we are now in. It’s hard to believe how such a small country could make such a mess of things.

    I sometimes wonder “Is there a deliberate policy to undermine the country in force?” Are there various forces at work to make Ireland such a expensive country for business so as to drive business out of the country? If there isn’t then I ask “Is Ireland capable of governing itself effectively?”

    Slightly off topic, but the only thing I see coming down the tracks in the next few months is industrial strife in the generation sector.

    Middle management will take the opportunity to cut costs in the running of a power station, without consultation with the workers or the higher management of the company. These maverick middle management people will use the opportunity to make themselves to look good with the aim of self promotion.

    This is already happening in one station that I know of. There is a danger that it will spiral out into the wider industry.

  5. @Sporthog and Simon,

    A huge edifice of explicit (and implicit) policy, regulation and contractual arrangements has been constructed in these sectors during the last 13 years – and all at the expense of final consumers. Getting into the detail often attracts the wrath of some of the principal contributors on this site, but you can be assured that I can back up my assertions with analysis – though not with as much as I would like since the scale and complexity is enormous and time available is limited.

    Part of the problem is that the Government (via the Department and various quangos), the CER, the ESB and BGE are the principal commissioners of research and consulting services in this area. In reality there is no market for genuinely independent research and analysis. Anything I do, I do at my own expense. Brave, perhaps, but almost certainly foolish as the consumers who might benefit ultimately are too isolated, atomised and managed to recognise the necessity for this type of analysis.

    (Perhaps, Sporthog, a bit off topic, but I’m not surprised at your observation on some power stations. I understand that the capacity pot which pays for station availability (whether it generates or not) has been cut. Therefore there is an incentive to price send-out to ensure the station is called on and to make money from generation.)

  6. @ Paul Hunt,

    “as the consumers who might benefit ultimately are too isolated, atomised and managed to recognise the necessity for this type of analysis.”

    It’s not just that, try talking to people about what you have written here and in other threads and their eyes just glaze over and they mentally switch off.

    Irish people are not interested, the psychology of the Irish public is when hit for expenses / taxes in one area they just try to economise in another area to compensate. You could describe it as a coping mechanism, except after this recession there will be very few places to economise in, everything is going to be taxed to the max.

    It’s a sad reflection, as we have witnessed the cutting of this countrys economic throat over the last 7 to 10 years or so.

    Maybe when when we have no jobs to work at, because industry has upped sticks to a lower cost environment then we will see some unity and action from the public.

    Until then, the more things change, the more they stay the same.

  7. @Sporthog,

    Believe me, I’m experiencing a similar sense of despair, but something has to give eventually…just keep the faith.

  8. Is this not at least welcome? Industrial users now get electricity cheaper than the UK. Industrial and business users would be the only ones I’d be concerned about.

    Home users are notoriously demand inelastic and getting them to take efficiency steps with paybacks of even a year is difficult. You’ll also notice this from the report:

    “When adjusting for purchase power parity to remove currency and other effects, Irish domestic electricity prices in the main consumption band were just 4% above the EU average, and were actually below the EU average for higher volume consumers.”

    and:

    “In purchasing power parity terms, Ireland is cheaper in all gas consumption bands for domestic consumers, ranging from 15% to 30% below the EU average.”

    Business and industrial users area also unwilling to exploit the negative cost items on the MACC curve. As an 07 McKinsey report showed, business and industry customers will not implement efficiency measures unless the payback is under 2 years. In SEI’s latest CHP report they mention an industrial company which wouldn’t implement CHP even with a 1 year payback.

    You’ll also have read SEI’s data which show that only about 4% of Irish businesses have energy expenditure which is over 10% of total costs, with most of these being utilities. Sometimes I wonder if there’s not too much focus put on electricity competitiveness when the real excess costs are in labour.

    What do you economists reckon?

  9. Are these figures not somewhat out of date?

    There were large price reductions for both electricity and gas in Ireland in May 2009. The report says that the figures it gives are for the period Jan-Jun 2009. It doesn’t make clear if the figures are the average for the period Jan-Jun 2009 or for the end of the period Jan-Jun 2009. If they are for the end of the period Jan-Jun 2009, then the figures are little changed as of today. However, if they are the average for the period Jan-Jun 2009, then they will only have captured part of the price reductions that occurred in May 2009. Using the same Eurostat database that the report uses, the following further changes had occurred by December 2009 as compared with the average for the period Jan-Jun 2009:

    electricity:

    Ireland: further fall of 7.2%
    Eurozone: further increase of 0.5%
    U. Kingdom: furher fall of 4.6%

    gas:

    Ireland: further fall of 13.7%
    Eurozone: further increase of 12.9%
    U. Kingdom: furher fall of 2.6%

  10. Ooops – an error in my previous post:

    should be further fall (not increase) of 12.9% for Eurozone gas prices

  11. @ John the Optimist,

    Your posts always shed a interesting light. However I ask you…..

    Even if energy prices were coming down in 2009 (which we know they were) what difference does it make? The recession started in mid / late 2007, the country had already cut its throat well before then. (thats not to say energy cost reductions are unwelcome, but the horse is already long gone).

    Unions consistantly argued for benchmarking, wage increases etc etc long before the 2007 crash. We are all linked together, if the cost of living is high, pressures are generated for wage increases etc which in turn increases the cost of labour in this country. If Labour costs are high then business / industry are impacted etc etc. It’s a bit of a vicious circle etc. Even if business industry gets off a bit more lightly than the domestic user with regard to energy costs.

    Also please note, due to the recession oil Major companies will have cut back on investment, exploration etc. Oil which hit $147/barrel was down to approx $40 / barrel and is now up to around mid 70’s / barrel. It was even in the low 80’s a few weeks ago. Most importantly the psycological $100/barrel was broken nearly 2 years ago. In addition Major oil companies are so bloated by paperwork and bureaucracy that they cannot look at a potential field unless the price of oil is above a certain threshold. Higher energy prices are in the pipeline again.

    The point I am making is that we can all cherrypick a particular point on the graph / curve to prove ourselves right, while ignoring the overall trend of the graph in our competitiveness.

    For example (example only, not factual), what does it mean if energy costs have reduced by 50%. Does it sound good? Yep, it sure does, but what does it mean if originally energy cost were 500% above the EU average? Well in actual fact a 50% reduction means F*** all. You are still grossly uncompetitive.. But the facts are the facts and this country needs to get back to basic economics and less of the political spin.

    By the way the rant above is not directed at you personally, just a general overall outlook……….., I think I need a holiday, just to cool my jets.

  12. I think it should be recognised that a considerable amount of time and effort has been expended preparing this report. Unfortunately, the principal objective appears to be to show that: “Sure, things are not as bad as they might seem at first sight”.

    If one-tenth of this effort were expended to examine the price and cost components that make up final Irish electricity and gas prices, it might have added to the sum total of human knowledge. But, of course, this might have revealed the totally dysfunctional nature of policy and regulation in this area and the resulting consumer and economy-damaging impacts.

    And, sure, we couldn’t be having that now, could we?

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