Electricity prices

Yes, I agree, the Sindo, as is its wont, confused levels of prices, components of final prices and percentage changes – and they still fail to get to grips with the real reasons for all these policy and regulatory machinations, but, in key respects, the report was accurate.

Chief among these is the fact that the Minister has directed the CER (repeating an intervention earlier this year) to ‘re-balance’ tariffs by reducing final prices to large volume consumers with household and small business consumers subsidising this reduction thorugh higher prices. Yet the CER is planning to remove regulation of final prices from October.

So is the regulator empowered to set prices, when regulation is required, in relation to economic costs or is the level and structure of final prices determined by the Minister? It’s either one or the other.

And, if competition has taken hold in the market to the extent that the regulator is prepared to remove regulation, why is there a requirement to intervene to determine the structure of final tariffs? Either competition is working to set the effcient level and structure of prices or it isn’t. Again you can’t have both.

As to the PSO levy, the Sindo may have over-egged the impact on consumers, but I think we reached some measure of agreement on this board that it mostly imposes an unnecessary additional cost on consumers.

Finally, one should take the CER’s ex ante projections about movements in network tariffs with a pinch of salt. I have sought to reconcile the CER’s allowed, projected network revenues in previous reviews (adjusted for inflation) with the revenues (in Money-of-the-Day terms) actually recorded by the ESB in its Summary Regulatory Accounts and the latter consistently exceed the former. In addition, the CER overvalues the assets to award more revenues to the ESB.

In most jurisdictions a national audit office or the counterpart of the Comptroller & Auditor General would audit these revenue calculations and out-turns, but, not, of course, in Ireland.

The reduction in distribution tariffs (and the limited increase in transmission tariffs) come from the CER cutting back the ESB’s capex projections, but when push comes to shove – and any hint by the ESB that the lights might go out – the CER will pony up the revenues the ESB requires at consumers expense.

Sindo is a rag.

@Ger,

I can understand why you might find the Minister’s various interventions and apparent omnipresence in the sector confusing, but I’m pretty confident that the Minister isn’t one bit confused. His primary objective is to ensure that the ESB and BGE have all the finance they require to implement his policy desires wrt renewable energy, electric cars, green industry, import substitution and decarbonisation. All else is secondary, though there are constraints on his room for manoeuvre.

It has been the policy of successive governments not to advance any direct exchequer financing of investment to the ESB or BGE (and neither probably wanted because of the additional scrutiny that might accompany it). The cupboard is bare now and both the ESB and BGE seem reluctant to tap the international capital markets (and are probably being discouraged by the DoF as the State is ultimately on the hook for their borrowings). However, the DoF would also like some dividends from both to help close the fiscal gap.

The CER was established with the powers to extract whatever revenue the ESB and BGE required from consumers to compensate for the lack of direct state financing and their reluctance to increase gearing. While the bubble economy expanded very little attention was paid to what the CER was up to. Now everyone is paying more attention to energy prices and how out of line the underlying costs are with those in other economies. The pressure was starting to grow on the CER, but it has ratcheted up significantly, as the ESB and BGE – both cleverly and sensibly – take steps to implement the Minister’s policy desires, and the CER must extract the cash to finance these desires from consumers.

The ESB used to finance the PSO from its EU ETS windfall (so that the levy was zero for the last copule of years), but the Minister was finally compelled to extract this for the Exchequer – as he should have done from the beginning. However, the quid quo pro is that the CER must now impose the levy to compensate the ESB.

For some time, large volume consumers (in particular MNCs with plants in other countries) have been complaining about high electricity prices. Some price ‘re-balancing’ was done previously (taking from households to give to big industry), but it seems more is needed now and every effort must be made to maximise the ESB’s and BGE’s cash flow.

Internationally, there is a global gas glut which is depressing prices and, given Ireland’s dependence on gas-fired generation, these lower prices are, temporarily, counteracting domestic increases in the components of final prices. However, businesses in the internationally traded sector can see what is going on and that it is why it is important to keep them quiet at the expense of households and small businesses in the largely sheltered sectors.

The intoduction of competition is creating another headache for the Minister. Because the ESB’s and BGE’s network businesses aren’t financially ring-fenced, they can use the profits from the network businesses to cross-subsidise low prices (and losses) in their supply businesses. Upto now the ESB hasn’t been allowed to do this (as the CER set its final prices to households and small businesses) and has been forced to accept BGE stealing its customers using cross-subsidised prices – and losing market share to other players as well. It has long wanted to retaliate and, from October, will be able to.

The CER is trying to limit the surplus cash it awards to the ESB in distribution revenues so as to limit this destruction of retained earnings by the the ESB and BGE. It will probably try the same with BGE next year. You see, you can’t have too much of this extra cash extracted from consumers flowing back to them again – how will the Green policy desires be financed?

It all a total con game ripping off consumers, but Minister Ryan has maybe another 12-18 in power to lock in as amuch of this as he can – and he is playing a blinder.

So may layers of policy and regulatory complexity have been imposed that hardly anyone can get to the bottom – or even try to get to the bottom – of what is going on. And there are many vested interests eager to ensure it remains hidden.

@bg,

Thank you. In a number of respects, though much smaller in economic impact, this is identical to the build-up to the banking fiasco. In that case, the credit crunch caused the sky to fall in. In this case it is a continuous nip-and-tuck that is eating in to the disposable incomes of households and the bottom-lines of businesses.

And the vested interests, similar to the banking fiasco, who benefit are formidable. There is no way the Government, governing parties, the Department, the CER, the boards, managements, staff and unions of the ESB and BGE – or other state agencies such as the Competition Authority, the NCA, NCC, Forfas, BNM, SEI, etc who might be aware of what is going on – will blow the gaffe. This combined spin-machine, moving in lock-step, is difficult to counter.

And it’s difficult to expect consulting firms, academics or research centres who might have some inkling but who wish to secure future consulting assignments or research funding to make waves. Even the ESRI is hamstrung because its Energy Policy Research Centre is funded more than 50% by the Department and energy sector stakeholders.

And market participants competing with the ESB and BGE are reluctant to make waves because such an elaborate policy/regulatory/procedural edifice has been constructed that there is great uncertainty about how they would fare if the house of cards were to collapse.

The media find it all oh so terribly complex and publish reporting such as the one cited by Richard which confuses more than it enlightens – and the political opposition is totally ineffectual.

The poor consumer is on his (or her) own.

@ Richard

Paul Hunt notes that:

“Even the ESRI is hamstrung because its Energy Policy Research Centre is funded more than 50% by the Department and energy sector stakeholders.”

Do you agree?

In terms of the interest of the consumer, it depends on the time frame you are considering.
Ryan and Greens generally see renewables as the long term future, reducing import dependency (supply uncertainty and price volatility not to mention the environment etc.).
Complaining about not getting the benefit of a price trough is all very well but the spike will come as energy goes east.

Yes. Of course you’re right

But at the same time does this mean, Richard, we’ll be paying less or more?

Does this factor in the high cost of economic analysis in Ireland we pay for through support of an unproductive university sector?

God save the Sindo, the only questioning voice in Ireland

@Paul Hunt

Keep going Paul, your general analysis is quite accurate and the PSO is most certainly being used for purposes beyond the obvious.

The CER has announced its decision only on the PSO levy following its usual process of ‘public consultation’. This is the process whereby the CER announces what it is minded to decide, receives submissions which it generally ignores or rejects and then publishes what it had originally decided.

The consultation process is still ongoing for transmission and distribution revenues. The deadline for submissions by interested parties was 13 August. In this case it is likely there will be serious behind-the-scenes negotiations between the CER and the ESB before a decision is announced next month, as it is rumoured that the ESB is not best pleased with the revenues the CER proposes to award. Despite benefitting from the sale of some generation assets it is facing big bills for investment, the acquisition of the NI networks and other ambitions (some driven by Minister Ryan). And the CER, now that the spot-light of public attention is being focused more directly on it, may not be being as compliant as it has been in the past. It would certainly be in the public interest if these decisions were arrived at in public hearings – as they are in better governed jurisdictions – because the interests of consumers and the economy are unlikely to feature prominently in these hidden negotiations.

And it appears that the ESB’s business supplying small volume consumers will be allowed to compete on price once it meets some conditions which are expected to be satisfied early next year – principally that its share of this market falls below 60%. As Richard notes, it remains to be seen, whether or how aggressively the ESB will compete. The minister and the CER might prefer it to roll-over and play dead – and it may not want to throw surplus profits on the networks at buying market share – but, at the very least, it will have to play the game and help to shore up the optical illusion of competition. It may decide to tackle the gas and dual-fuel markets.

In any event it doesn’t matter if prices are higher or lower; all that matters is that prices reflect efficiently incurred economic costs. We are a long, long way from that.