PSO levy (3) Post author By Richard Tol Post date August 26, 2010 Sarah Carey is not impressed with the PSO levy. See the earlier discussion here and here. Categories In Environment Tags Energy 77 Comments on PSO levy (3) ← De Volkskrant on Ireland → FT: Pluck of the Irish 77 replies on “PSO levy (3)” The Chairman of the CER stated when the PSO levy increase was annouced that “The renewables will help us a lot in the future, will help to keep prices down” This IT article states “People think wind is wonderful because it’s free. In actual fact, wind-created energy is horrendously expensive, which is why it needs guaranteed pricing and subsidies to be viable. Oil and gas are still cheap in comparison.” There appears to be a lot of misinformation regarding renewables especially wind. Each report I read from DCENR, CER, EIRGRID & ESRI are all based on different generation portfolios (e.g. different levels of interconnection, different assumptions about GB market, some include wave and tidal, various levels of installed capacity, different wind capacity factors, models with no technical grid constraints). It’s impossible to make a direct comparison between all the reports and to determine if wind is actually cost effective and the resulting impact on consumers. @Tecumseh See http://ideas.repec.org/p/esr/wpaper/wp334.html Wind makes a lot of sense in some circumstances, a lot less in others. @Richard Yes that report states in the Conclusion section that “More wind is only good if combined with 1900 MW of interconnection”. The latest report from Eirgrid http://www.eirgrid.com/media/Faciltiation%20of%20Renwables%20WP3%20Final%20Report.pdf states “According to modelling results imports via the interconnectors have to be restricted to a maximum between 500 MW and 1350 MW. This applies even to cases with moderate wind generation, in order to avoid frequency instability after loss of generation.” Maybe I am oversimplifying the issue but the latest Eirgrid report combined with the findings of the ESRI report would indicate that wind is not such a good idea ??? I sought some assistance previously: http://www.irisheconomy.ie/index.php/2010/08/23/electricity-prices/#comment-67480 to divine the meaning of reported statements by the Minister on the PSO levy, but got no takers. Not surprising, perhaps, when commentary is convulsed by estimates of a €90 bn liability for taxpayers; €157 mn is a flea-bite in comparison. However, Ireland retains little or no sovereignty to deal with the bank resolution crisis. It does, however, retain considerable sovereignty to address fundamental dysfunctionality in energy policy and regulation – of which this PSO levy is but one, relatively small, example. Addressing this dysfunctionality would have significant beneficial impacts on consumers and the economy – and assist the economy to recover more rapidly from the impact of the severe fiscal adjustment. It appears that the Government has learned nothing from the build-up to the banking fiasco. The spin-machine is in full flow mouthing the same type of dogma. Any dissent or critique – even those based on solid evidence – are ignored, rejected, selectively attacked or pilloried. Eamon Ryan has a plan, don’t worry. Wind energy won’t solve anything. We are blighting our landscape for nought. It simply does not have the capacity to make any real difference. Even if we literally cover the country with them (a horrible thought) we still won’t be making a significant amount of power. Denmark is instructive in this regard. Despite being the wind capital of the world, they are still one of the few EU countries who will miss their 20 20 20 targets. Even Ireland is making the grade with this environmental target, despite our obvious disadvantages, yet Denmark with a windmill on every steeple is falling short -lesson is that Wind energy produces energy in too small quantities to make a difference. There is a well worn chestnut about half of our energy being powered by wind on a breezy day. But a day here or there is irrelevant, power consumption must be managed over the medium term. I’d much rather see PSO being put into further household energy efficiency measures -not just feathering the pockets of green-party supporters. @ Ger “It simply does not have the capacity to make any real difference. Even if we literally cover the country with them (a horrible thought) we still won’t be making a significant amount of power.” Wind supplied 10.5% of our gross electricity requirements in 2009. Wind probably won’t solve our problems but it’s not insignificant. wind does have a future in ireland through pumped storage: http://spiritofireland.org/ Peat does not have a future. Once this awful Taoiseach is out of the way, the peat plants should be closed down. That 78 bn could create a lot of alternative jobs in Offaly, but that would require the govt to actually do something. Ricahrd, Like Tecsumeh, I find myself confused and I’m afraid the ESRI study to which you provided the link doesn’t do much to clarify my thinking. As the authors acknowledge, it has loads of assumptions built into it that may or may not turn out to be accurate, such as what the UK energy mix will be in ten years time, what level of interconnection is possible between the two islands within that timescale or likely carbon price levels by 2020, for example. It leaves out cycling costs of back up plant, in terms of both emissions and fuel. The direct environmental costs of wind production on the scale required to reach 6000MWs is also excluded. Further, as the authors acknowledge, their model is static and extends only to 2020, not over the lifetimes of the plants, which would obviously yield more meaningful results? The controversy ignited by the recently announced PSO has alerted the public (and columnists like Sarah) that energy subsidies cost money – our money – and presented a further opportunity to score points off a beleaguered government, which is all fine and dandy and good old political knockabout. But it doesn’t answer the question about where we are going with our energy policy and whether or not the target of 40% renewables by 2020 is achievable or even desirable. Most of that 40% is going to have to come from wind, since we’re at about 14% penetration by renewables at this stage and options for hydro and other forms of renewables are limited or can only make a negligible contribution within the coming decade. So ramping up wind can either provide energy on the scale we require at a reasonable cost to the consumer, business and industry or it can’t. @Veronica, Good questions, but, perhaps, you should be directing these at the Minister rather than Richard. Would it be possible to extend an invitation to the Minister to provide a guest post where he could set out his position on energy policy, the organisation of the sector, the role of energy regulation and the evidence on which it is based? @Veronica I thought that the ESRI paper made a very clear point: It all depends, which is economics jargon for we don’t know. Some engineers look really happy with the prospect of 40% wind, because it is a big and cool experiment. Other engineers look glum, for the same reason. The renewables target is driven by Brussels. It should be taken seriously if the other 26 Member States do. The Brits have admitted they cannot meet their targets, the Spaniards have realised that cannot afford theirs. There are no straight, simple answers here. Don’t forget that the EU renewable target is about more than renewable electricity. In fact, even if we meet the 40% renewable electricity it won’t even take us half way to the target. Transport will be a bigger nut to crack followed up by the heat market! @Richard, Have I gotten it wrong? My understanding is that the EU target is 20% renewable by 2020 with 20% gain in energy efficiency and that Ireland’s 40% is a Green fantasy. Considering the amount of direct and indirect subsidy and encouragement being directed at wind in Ireland, it looks like the 20% might be exceeded by 2020. And I’m a bit surprised that a reasonable stab can’t be made at the cost implications of a generation mix with 40% renewables relative to one with a much lower, say 10%, renewables. The straight and simple answer is that the current situation where Ireland imports 90% of total energy requirement, 60% of which comes from oil, is totally unsustainable. It leaves Ireland massively exposed to vagaries of international energy markets. Wind & EVs (and efficiency) are the only games in town…unless someone else has got any other bright ideas. Anyone who has an even passing interest in international energy trends (or analysis of IEA) knows that we are probably entering a period of oil price volatility and persistently high prices (although outlook for gas probably a lot more favorable). Paul, On your earlier comment, the reason you probably got no takers in response to your request for someone to make sense of the Minister’s reported statement to the Irish Times is because it defies logic as it applies to energy policy. It is more about the politics of the Greens being labelled with raising taxes – and the Minister’s immediate concern to dispel that notion – in their pursuit of the ideological and environmental objectives of ‘saving the planet’. Plato and Machiavelli might have had a field day working out the true meaning of the Minister’s many statements, but more ordinary mortals, like myself, are generally perplexed by them. I think it would be a fine idea if he was invited to submit a guest post along the lines you suggest and it would certainly lead to an interesting discussion. @Paul BigEnd is right. The target is for 20% of all primary (?) energy. We can never do that from transport and home heating, so we’ll have to overachieve in electricity. Any estimate of the cost of doing this is conditional on the price of energy on the world market, the price of capital, and on UK energy policy. @jc Ireland imports 100% of cars, and most clothes. Should we produce those here too? @Paul Hunt Ireland target under the EU Directive is actually 16% of gross final energy consumption. Currently and very approximately of all energy used in the country one third goes into electricity generation, one third to transport and one third to heat. Also approx. 40% of the energy used for electricity generation actually ends up as electricity. Therefore, the 40% renewable electricty targer will give 40% x 40% x 33% = 5.3% approx of overall energy consumption or about 8% of gross final consumption. These are very rough figures. @Richard If consumers are being asked to fund renewables via the PSO levy and REFIT then their reasoning must be based on solid facts. To show the insanity of some of the “research” being carried out the recent Poyry report for Eirgrid http://www.eirgrid.com/media/Low%20Carbon%20Generation%20Options%20for%20the%20All%20Island%20Market%20(2).pdf – went off and modelled 5GW of interconnection for the high renewable portfolio ! It of course stated “As well as capacity and energy to meet demand, there are additional support services required to ensure a safe and secure power system such as frequency response, load following capability, fast-acting power reserves to manage loss of generation, voltage support, short-circuit current and inertia. Mostly these services are provided by generators but interconnectors, network devices and demand can also contribute to them. These issues are outside the scope of this report.” How convenient is that ? Surely the technical constraints should be established and finalised before all these economic reports are undertaken (paid by Mr. Taxpayer). We seem to be doing it in reverse and paying dearly as a consequnce. @Tecumseh The PSO levy relates to the period 2005-2011. The fact that we’re correcting payments five years after the fact is an indication of the complexity. Looking forward to 2020 is more difficult. @ Richard You don’t believe that energy security should be a consideration in energy policy formulation? Mea culpa on the EU’s 20:20:20 targets – and many thanks to those who put me right. I generally pay little attention to these politically-driven targets; they usually bear little relationship to reality. More fun may be had watching politicians, public officials and industry players ducking and diving as they try to justify why they need to be modified, re-defined, pushed into the future or why they can’t be achieved. @jc, I’m fully on board with decarbonisation of the economy – it makes sense for all sorts of reasons. The difficult questions are how quckly and how efficiently may this be achieved. Going all TOGIT with wind and EVs on us isn’t going to help very much in this respect. @Veronica, Astute, as usual! For what it’s worth, my take on the Minister’s reported explanation is as follows: He claims wind generation provided a subsidy previously so that there was no requirement for the PSO levy. And he now claims that, since prices have fallen, wind generation can no longer provide a subsidy so the levy has to be imposed. In the current phase of the ETS Ireland was awarded more Emission Allowances (EAs) than were required. This allowed generators, mainly the ESB, to make windfall gains. This happened, and is happening, throughout the EU. The more wind brought on the system, the more ESB fossil fuel generation (for which EAs were granted) that was displaced and the bigger the ESB’s windfall. For the last number of years the ESB used part of its ETS windfall to defray the net cost of the PSO. This may be what the Minister means when he says that wind subsidised some of the other sources of electricity. This is total nonsense, of course, because some of the windfall that the ESB was extracting, without any justification, from consumers was just being given back to them when the PSO levy was set to zero. Once the Minister was forced, belatedly, to apply the Carbon Levy to extract this windfall for the Exchequer – something which should have been done from the initial issue of ETS EAs, there was no windfall to subsidise the PSO. The ESB was damned it was going to continue providing this subsidy once its windfall was being taxed away, so the CER had no option but to impose the PSO levy from October. The Minister could have come clean and said to consumers that they were paying for the PSO all along in higher prices that generated the windfall for the ESB and all that had changed is that they will now pay a specific charge directly. But that might raise further questions. Instead, he goes on talking about price reductions eliminating the available subsidy from wind. This is where he loses me. It wasn’t price reductions; it was the carbon Levy that removed the subsidy. And I don’t how he (or “we”) has brought prices down 25%. Over what time period and for whom? I must say that his performace so far has out-FF’d FF – and I’m sure there’s more to come. @Richard, I know it’s all terribly complex, but there are billions of Euro at stake here. I know we’re going through billions into the banks as if there were no tomorrow, but one would expect this would encourage a tad more parsimony – or, at least, a desire to ensure value for money – in other areas. As Tecumseh has pointed out, there has been little, if any, estimation of the costs increased wind generation imposes on other generators and on the transmission and distribution system. I still can’t see why something fairly basic can’t be done for two different levels of wind generation – with international energy prices, cost of capital and UK energy policy assumed unchanged in both cases. @ Richard As big end says, the target for Ireland is 16% of energy consumed, not 20%. Most of the posters above seem to be confusing this with our domestic target of 40% of electricity generated to come from renewables by 2020. Of the top of my head, the strategy in Ireland is to achieve this through 12% penetration or renewables in heat and another 10% in transport. Along with the 40% in electricity this would yield the magic 16% which is legally required by the EU for Ireland. It will also help achieve the 20% emissions reduction required of Ireland’s domestic sector by 2020. The latest iteration of this strategy (requested by Veronica) is available here: http://www.dcenr.gov.ie/NR/rdonlyres/C71495BB-DB3C-4FE9-A725-0C094FE19BCA/0/2010NREAP.pdf @ Paul Great. You want to decarbonise the economy. You might perhaps explain why wind and EVs won’t help, and propose a few alternatives. Sorry to get in the way of a good ould honest bit of government bashing. I know how much fun it can be. @jc Energy security comes in many flavours. You seem to be worried about a disruption of world markets. There is little that Ireland can do against that. A disruption of more than three months is unlikely, so the best hedge would be to store a winter’s worth of gas and oil. Would be cheaper and more reliable than peat and wind. @jc The report (NREAP) is an embarrassment. Have a look at table 10 – work out the capacity factors for Ocean Energy (an unproven technology!) – in the second table onshore wind capacity actually reduces over some years. They even have 5MW of photovoltaic on the grid by 2020 !!!! It’s a complete joke and sailed through the public without any scrutiny and is now policy. Let’s not forget that the 40% renewable electricity target arrived on the back of stupid and unsustainable biofuels targets which had to be dropped. Ambitious biofuels targets for transport were part of the plan when the 20% EU energy target was produced. The result, in 2008, was a massive spike in food prices and riots in several countries. Biofuels will come more slowly, if they come at all. As a consequence, the 20% “renewable” energy targets became as 40% “renewable” electricity target. @Richard technically we already have the 3 months oil storage all we then need is gas storage. @jc, I only bash governments when they’re stupid and demonstrably behave in ways that damage the public interest and consumers’ welfare. I agree that wind and EVs will play a role, but I am more interested in how – in the EU context and wider – a hybrid of an increasing, assured price for carbon may be integrated with a cap-and-trade regime. This, in my view, is the best way to assure recovery of the huge dedicated investments that are required in technology, innovations and incentives to change consumer behaviour over a long time-frame. My preference is to allow consumers and markets to decide the extent and pace of decarbonisation. A plethora of centrally directed targets and instruments are likely to generate rent-seeking and policy failure costs greater than any market failure costs. Specifically, in the Irish context, in addition to wind and EVs, I would like to see consideration of the most efficient CCS technology for the replacement of Moneypoint, of the use of gas-fired generation as a bridge and to supplement wind, of the use of pumped storage and of the planning of nuclear generation to replace retiring base-load gas generation after the replacement of Moneypoint. @ Tecumesh Agree the NREAP is certainly a work in progress. Sorry but can see on shore wind falling on table 10, and PV reads 0. Am I looking at the wrong table? You are right that ocean is an up-proven technology, but I think Ireland is right to pursue an ambitious strategy in this area. Much like Denmark did with with wind in 1970s. The Danish wind turbine industry consist of more than 200 companies and manufactures 35% of all wind turbines in the world; the world’s two largest producers of enzymes to bio-ethanol (covering a combined 70% of the world’s market) are Danish; Denmark’s Riso National Laboratory for Sustainable Energy is leading in hydrogen fuel cell research; and Europe’s largest producer of thermal solar energy (SolarCAP) is located in Denmark. Danish policy has given rise to a new industrial cluster. This is clearly not a result of a natural competitive advantage (Ireland’s wind power resources are superior to Denmark’s), but rather as a result of strategic and targeted long-term policy. While the Danes were getting on with this, in a 1970s Irish policy document wind turbines or “aero-generators as they are now generally known” are very briefly discussed and the conclusion is reached that they may pose a “danger to life and damage to property from their use”. @ BG Wrong. Riots were caused specifically by US bio-ethenal policy. EU has strict sustainability critera attached to target (which is for renewables in transport by the way, not biofuels). These criteria will be diffucult to enforce. See energy act 2010. Subsequent to the Energy Act 2010 all motor fuel sold in Ireland as of July 1st 2010 must include at least a 4% biofuel blend. The draft Renewable Energy Action Plan foresees an increase in the biofuel blend to 6% in 2012. But hey, never let the facts get in the way of a good bit of government bashing. @jc It’s the “second” table 10 – page 139-140. Including unproven technologies is ridiculous for meeting targets. If they come along at a better stage then great and that’s an added bonus. Let’s get the engineering right first then figure how much it’s going to cost. @ Paul The answer to your question is that it can’t, ie: an increasing price for carbon (I assume you mean for the domestic sector) to supplement the ETS within EU context. If you don’t believe me just ask David Cameron. “My preference is to allow consumers and markets to decide the extent and pace of decarbonisation” Well then why have a carbon tax or an ETS? Why interfere with consumer and market preferences at all? And who decides the price of carbon, the tax of the price of a permit? Because it is the level of the tax (or the cap in the case of ets) which will determine the pace of decarbonasition. So in the end policy makers must decide, and they should listen to what the scientific consensus tells us on climate change. That’s arguably what the EU has done, and Ireland by default. The whole point about climate change is that the earths capacity to absorb GHG emissions without inducing dangerous climate change may be limited, though you seem to believe this constraint is a figment of some scientists’ imagination. And CCS, your other proposal is experiencing cost overruns in Norway from here I have recently returned (the only serious CCS venture in the world) that make our PSO look like a couple of coppers. @Paul “I still can’t see why something fairly basic can’t be done for two different levels of wind generation – with international energy prices, cost of capital and UK energy policy assumed unchanged in both cases.” This can be done and has been done. Note, however, that the discussion started with Tecumseh complaining that all these studies conclude different things — which is because there is no agreed set of assumptions. @jc “Wrong. Riots were caused specifically by US bio-ethenal policy. EU has strict sustainability critera attached to target (which is for renewables in transport by the way, not biofuels).” Of course, it all the fault of the US. Bet that piece of US-bashing plays well in Irish green circles. Prof Bob Watson http://www.guardian.co.uk/environment/2008/mar/25/biofuels.energy1 Sir David King http://checkbiotech.org/node/25843 “Then there’s the notorious effect of such “first generation” food-based fuels on the supply of food, and hence its price. A World Bank report attributed fully 75% of last year’s spike in food prices to the surge in demand for biofuels. Moreover, because of the rising global population, food demand over the next two decades is predicted to increase by 50%, making first generation biofuels an even more foolish idea.” The 40% “renewable” electricity target is an accidental product of the biofuels fiasco. @ Tecumseh That is described very clearly as “Table 10 Non-Modelled ‘Export Scenario’” It is a Scenario. I think that the Dept are quote right to outline possible pathways to meeting the targets given the huge uncertainties outlined above by Richard and others. Have you any idea of the extent of the resources available to Energy section in DCENR? Believe me they are punching far above their weight. I wouldn’t say that for many (or even any other) gov department. There are huge deficiencies in our energy policy making, coordination etc but basically we are on the right track in my view. It is important to acknowledge progress where it is being made. Agree with the basic point that PSO for peat is crazy. @jc, The key policy/political decision in response to the scientific evidence is to set the price of carbon to achieve a volume reduction or to cap the volume, thereby setting a price – or some combination. “..though you seem to believe this constraint is a figment of some scientists’ imagination.” Please do not attempt to dismiss my scepticism about your certainty by accusing me of denying the scientific evidence that exists. Not once in this exchange – or anywhere else – have I done so. Not once have I resorted to ad hominem attacks, though you have accused me of government-bashing (which I cheerfully admit) to avoid engaging with the issues – and now you accuse me of denying the scientific evidence. Not a basis for civilised engagement I’m afraid. jc, I’d already read the NREAP, but thanks for the reference anyway. NREAP is the Irish Government response to an EU set of questions on what we are doing to make progress towards our obligations. The officials in charge of putting it together have already run foul of the Oireachtas Joint Committee on Climate Change and Energy Security who claimed they were not properly consulted about its contents in advance and are preparing their own report. Seems to me we’ll all be drowing in a series of reports and analyses – all of them coming from different angles with caveats about this, that and the other thrown in to cover the respective authors’ uncertainties – before the year is out, but will still be none the wiser about the answer to the question : is the 40% renewables target achievable, at what cost to the consumer and is it the right way to go? I, for one, have no interest in ‘government bashing’, which is a silly distraction and a waste of time in this context. Governments come and go but the impact of policy decisions outlasts them and public discussion, I think, is best focused on facts rather than rhetoric from the government or opposition side. Unfortunately, that’s all we seem to get these days in respect of any major policy initiative. We’re now at the point in the debate on energy policy where the public are finally waking up to the reality that there are going to be serious costs involved in switching from over-dependence on fossil fuels to more sustainable sources and that those costs will fall on them. Public support for a renewables based generation model may be widespread, but it’s also shallow and support will disintegrate pretty quickly if politicians rely on rhetoric or ideology or moral arguments to make their case rather than being straight with the people about costs and the whys and wherefores of what they’re actually proposing. @Paul Hunt At last, I now have a clue what the Minister was trying to explain. I agree with you, he might have found a better way of putting it. @jc The “Modelled Scenario” page 138 includes these unproven technologies. The “Non-modelled Export Scenario” page 139 shows onshore capacity decreasing from 2015 to 2017 and 2018 to 2019 !!! Clearly someone made a serious faux-pas here. When billions are been invested in this policy I would expect better. Surely they can pick up the phone to somebody in SEAI, Eirgrid, ESB, CER etc etc. @Richard Sorry if a derailed the thread but I thought the inconsistencies in the documents supporting our renewable policy and hence the PSO levy needed to be discussed. @jc There is, of course, uncertainty and disagreement about the definition of the word “scenario”. One definition is “a not implausible future”. The term not-implausible indicates that scenarios should be technically feasible and respect the laws of physics etc. Wishful thinking has no place in a scenario. While this is no law of physics, decades typically go by between the blueprint, the first demonstration plant, and commercial application. There is no demonstration plant for ocean energy — there are experimental ones, including some at unit scale — so chances are that commercial application is more than a decade in the future. @ Veronica Fair point. I think that given the uncertainties it is asking a lot for anyone to have a definitive answer at this stage though. Price of carbon, gas an oil will largely determine how costly these policies will be. Whether we like it or not we are bound by a legal commitment to reach 16% energy consumed by 2020. If we don’t achieve this target we will be fined. Notwithstanding Techmseh’s valid criticism of NREAP, this is a good broad outline of how targets will be achieved. It stands up. If anyone has alternative proposals for devision of burden across the sectors that would be interesting. For example, could we plan to go beyond 12% in heating and achieve less renewables in power gen? Aside from the legal obligation, there are many reasons for going beyond what is comfortable or makes immediat economic sense with renewables. I will discuss just one here: energy security. We may well be sleepwalking into another crisis which could make the financial crisis look like a minor blip. There are serious concerns over both supply and demand for oil. Global oil demand is projected by the International Energy Agency (IEA) to continue to grow with a net increase in demand from 85 million barrels per day to 105 million barrels per day anticipated by 2030. Oil demand in the OECD has flattened since 2005 primarily because car ownership rates have reached saturation. The surge in demand will be driven by growth outside the OECD countries, particularly by increasing demand in the transport sectors of emerging economies such as China, India and Brazil. China as an example currently has 20 cars per 1000 people compared to 680 in Europe. As the Chinese economy continues to grow so too will demand for private transportation. In the past OECD countries might have expected slow growth to result in lower oil prices – acting as a systemic automatic stabilizer – but the structure of the global economy has now changed. Even a prolonged recession in the developed world would not relieve the underlying demand pressure for oil as emerging economies continue to record strong levels of growth. On the supply side there are, according to the IEA, short and medium term concerns. In the short term there has been a dramatic fall in investment in oil exploration and production since 2008. If global demand grows strongly there will simply not be enough supply and according to Faith Birol, Chief Economist of the IEA, “we may see significantly higher prices that we have now”. This would definitely not good news for the fragile recovery of the Irish economy. The bigger concern arises from medium-term structural issue. A significant proportion of today’s production comes from old or mature fields. Fields outside OPEC are in irreversible decline. According to the IEA even if demand were to stay constant it would be necessary to find, develop and produce 4 new Saudi Arabias by 2030. Another factor to consider is the progressive nationalisation of the oil industry in the four main suppliers – Saudi Arabia, Iran, Iraq and Kuwait. Forces other than market conditions may increasingly inform production and investment decisions in these countries. International oil companies as a result have been forced to move to more exploit more technically challenging fields. The explosion on the Deepwater Horizon in the Gulf of Mexico and the difficulties encountered in stemming the subsequent spill have brought the viability of these activities into question. It is now commonly accepted in energy circles that a period of increased oil price volatility may be on the horizon and that higher prices will become the norm. Chris Huhne, UK Secretary for Energy and Climate Change in a interview with the Financial Times reported on 23 July stated that “the world we’re going into…will be a world where we will have very substantial oil price spikes…exactly as they did in the 1970s and 80s”. The picture for natural gas, Irelands second most important source of energy, is somewhat different. There have been huge investments in Liquefied Natural Gas (LNG) in the last five years. Furthermore, technological breakthroughs in the US have made the extraction of “non conventional” or “shale gas” possible in large quantities. According to the IEA the resultant gas glut will see depressed prices at least until 2015, perhaps beyond. The mainstream view is therefore that the era of cheap oil has almost certainly come to an end and high prices and increased price volatility may become the norm in the coming years. The story may be somewhat different for gas, and we may be entering a period where gas and oil prices become increasingly divergent. How to deal with this? As Sarah C alludes to in the article, there are uncomfortable trade offs between objectives of security, competitiveness and sustainability, especially in the short term which is what is emphasized in democracies with 5-year election cycles. ps: I had most of that post written already for something else @jc “Notwithstanding Techmseh’s valid criticism of NREAP, this is a good broad outline of how targets will be achieved. It stands up.” With respect it doesn’t stand up just like the Zoe Group’s business plan didn’t hold up. @jc And there was I thinking: “Oh my, that guy gets his arguments mustered pretty fast! Wish I could do that.” @ Tecumseh Which targets won’t be met and why not? I don’t see your problem. @ V I though better to come clean:) HI all This is the study on which I relied previously for costs assertions. http://www.dcenr.gov.ie/Energy/North-South+Co-operation+in+the+Energy+Sector/All+Island+Electricity+Grid+Study.htm Not sure if its still in good standing with the number crunchers. I don’t mind the wind policy sooo much – you can at least argue that its “clean” if expensive. Its the peat is the real annoyance – it’s a fossil fuel but expensive. The jobs are nice, but that’s about all. For me as a consumer it seems simple, though I acknowledge its not. They told me two years ago our electricity costs were the highest in Europe because we were dependent on imported gas. The price of gas is coming down, yet they still add charges to my ESB bill. My main purpose in writing the column was to expose Richard’s arguments to more readers. @Sarah Carey, Many thanks for seeking to increase the currency of Richard’s arguments which, if you pay any attention to the debate here on these issues, many, but not all, of us agree with. The PSO levy is just one, relatively small, example of the dysfunctionality of energy policy and regulation in Ireland. In fact, electricity consumers have being paying it for years via the ESB’s ETS windfall that the ESB was extracting, without as much as a by your leave, from all consumers. It used to, very generously, donate some of this to net out the cost of the PSO. This avoided the need for the levy and I think you can see, given the current controversy, why this was all very convenient for the Minister and the CER. And even though consumers will now have to pay the levy from October, all is not lost. The Minister was finally persuaded to extract the windfall from the ESB and it will now go into the Exchequer. I’m sure some of it will finance the cash transfers to redeem the promissory notes issued to Anglo. And I’m sure most people will see this as an excellent quid pro quo. And again, if you take the trouble to track through some of the other threads here you’ll find other, most more costly, examples of the dysfunctionality of energy policy and regulation. @Richard While in general I agree with your points against import substitution, comparing energy imports to car or clothing imports is not reasonable. If we couldn’t import another car from tomorrow the current stock could be made to operate successfully for years, ditto for clothes. The same is not true for energy. If energy imports were interrupted we’d be in the dark ages within days or weeks. Energy security is a major issue. Wind and peat may not be useful in guaranteeing energy security, but comparisons with cars and clothes devalue the seriousness of the issue. Similarly, the importance of Kinsale and Corrib gas fields to the country’s winter comfort is underestimated in general….hence the govt’s ability to ignore Corrib’s paralysis for all these years. Let’s pray for continued tranquility in Russia and the Ukraine. @Veronica, The point is the Minister can’t play it straight – though I would still love to know how he gets his 25% price reduction. (This is the kind of unevidenced assertion that gets regurgitated by the government spin-machine until it becomes gospel.) The Green agenda is being financed by ‘stealth’ taxes. If the Minister were to come clean about how much his desires are likely to cost over the next decade I think there could be enough of a backbench FF revolt to overturn the applecart. I was interested in Richard’s point that some work has been done on the total economic costs of significant wind generation, but there is no agrement on the estimates because there isn’t an agreed set of assumptions. The problem is that the kind of analysis required takes time, effort and competent resources – and this costs money. But who is going to fund this? You’ll find no takers in the government or public sector sphere. And do you think any private sector players would want to p off the Powers That Be? Paul Hunt: “The PSO levy is just one, relatively small, example of the dysfunctionality of energy policy and regulation in Ireland. In fact, electricity consumers have being paying it for years via the ESB’s ETS windfall that the ESB was extracting, without as much as a by your leave, from all consumers. It used to, very generously, donate some of this to net out the cost of the PSO. This avoided the need for the levy and I think you can see, given the current controversy, why this was all very convenient for the Minister and the CER.” I think its worth adding some further clarity on this issue. Between 2005 – 2007, the CER allowed ESB Generation very little revenue for ETS allowances – if you check the Bulk Supply Agreement rulings of the time (published on the CER website) you should find that about €1 – 2m in total over the period allowed, hardly an overwhelming windfall in the context of ESB Generation’s overall revenue in that period. ESB was not “extracting” a windfall gain duirng this period. Once the SEM was put into place, the bidding rules required all generators to bid their full costs, including the cost of carbon. This did indeed give rise to a windfall gain for a period, to both ESB Generation and to other private generators, and this would have been clearly understood at the time, explicitly set out in the SEM documentation. I think it understandable that the issue of windfall gain was left to one side in the context of establishing a single market between the two jurisdictions – the attendent structural and legislative changes to be put in place were probably sufficiently complex on their own. During the past few years, the PSO has been put at zero by the CER because the level of the wholesale price for electricity in the SEM was higher than, for instance, the guaranteed floor price for renewable electricity and accordingly no “out of market” costs arose. Of course it could be argued that the inclusion of the price of carbon is an element in the higher wholesale price, but then that’s an element of pricing the externality, imperfect though it may be. ESB may have applied some of the ETS windfall in the post-SEM period to offset electricity price increases – recall the price reductions in recent times – but it would not have been offset against the PSO, there would have been no need. The fact that the windfall gain is now being addressed deals with a remaining anomaly post-SEM, and in any event will only be necessary until the end of 2012 – from 2013 onwards all electricity generators will have to pay for all of their allowances through ETS auctions, hence no windfall gain. A major issue for Irelands energy supply is the dependence on the terminal at Moffat from which both of the pipelines supplying the south and the one pipeline supplying the north are supplied. A major problem at this site would stop gas flows into Ireland – perhaps for a considerable time. Gas is the fuel for approx 60% of our electricity on an annual basis but is at times responsible for over 85%. We have approx 2 days gas storage in the depleted Kinsale fields and no LNG plants. The gas-fired CCGT fleet can run on distillate, but sites are required to hold only 5 days liquid fuel. In the event of a gas interruption distillate would deplete faster than we could source supplies. The SEM isn’t helping. Our oil running plant which could presumably use the strategic oil reserve is old and unreliable. As part of Endesa’s limited portfolio, the oil-fired Great Island and Tarbert stations only have a future in the SEM if they are decommissioned and converted to gas turbine sites. Meanwhile the Moneypoint site is getting limited running in the SEM and the new Aghada (ESB) and Whitegate (BGE) will only increase our gas dependence. Any talk to PSO contributing to energy security in this context is a joke. There’s shale northeast of Limerick at Silvermines which Irish Rail used to haul to cement works – is there gas potential? Thing is, the extraction technique (fracking) is a wee bit controversial… Paul though I would still love to know how he gets his 25% price reduction. He may be referring to Eurostat, who reported a fall of 24% for 2009 in the ex VAT price of electricity for Irish industrial electricity customers in the largest market band: Band ID (2,000 – 20,000 MWh. This figure was quoted by the NCC as evidence that industrial electricity prices were now in line with the rest of Europe and not a threat to competitiveness. You can look at the numbers here: http://epp.eurostat.ec.europa.eu/portal/page/portal/energy/data/database Ossian @sean, Many thanks for the detailed clarification. It highlights the immense complexity – and associated costs – of the entire SEM project – and we are examining just one relatively minor aspect. It does raise a major question about the ability of legislators in both jurisdictions to exercise any effective scrutiny of this complex project on behalf of their voters. An enormous amount has to be taken on trust and this is never a good way to proceed in a democracy. One doesn’t need the example of the continued government and official assurances that everything was for the best of all possible worlds in the lead up to the banking fiasco to be sceptical of the assertions being made by the Minister and the CER. These may not be the same people who brought us Pearl Harbour, but they come from the same stable and have the same mentality. I accept your point that the ETS windfall wasn’t used directly to offset PSO costs, but perhaps one of the reasons that electricity wholesale prices were high enough to avoid this is that they included the full costs of carbon – some of which was extracted by the generators as a windfall gain. Wholesale prices have come down, primarily, given Ireland’s dependence on gas-fired generation, because gas prices have fallen in western Europe. This is purely fortuitous and has nothing to do with the efforts of the Minister or the CER – and they have fallen for everyone else as well. The Minister is at pains to point out that the PSO levy is not a new tax. This is true, but the point is that the Carbon Levy is a new tax which has extracted some of the unearned surplus that was previously sloshing around in the system. And yes, I agree that the windfall was used previously to prevent prices rising too high, so I think you will agree that, were the Carbon Levy not in place, it is likely it would be used to offset the PSO cost and avoid the imposition of the levy. I have grave doubts about the benefits of the entire SEM project to consumers – particularly as the Irish market is so small in the context of the EU/ERGEG’s feeble attempts to create a UK-France-Ireland regional electricity markets, serious policy and market failings in the UK electricity market and France’s atavistic distaste for market mechanisms and preference for national champions (EdF & GdF/Suez) – but that, perhaps, is for another day. What is clear is that, on top of high bulk prices, there sits an excessively expensive transmission and distribution system. This is what is driving excessively high final prices. The PSO levy is largely unnecessary and primarily politically driven, but it pales into insignificance when compared to the excessive costs of transmission and distribution. @ossian smyth Thanks Ossian you beat me to it. Band ID has one third of the business electricity market. Higher consumption band IE fell by 23% and IF by 21.5%. During the same period Ireland moved some 25% points closer to the Euro Area average price. By the way, during the same period our nuclear cousins in France experienced an 11% increase in electricity in Band ID. @Ossian, BigEnd, Many thanks for highlighting the Eurostat data. The EU now has a new energy portal which presents industrial and household fuel prices on a monthly basis – but it is a subscription service: http://www.energy.eu/#industrial Snapshot comparisons of prices often conceal more than they reveal. I prefer to look at movements in the components of final prices excluding tax over a period of time. It allows the possibility of disentangling possible drivers and generating more effective cross-country comparisons. In the Irish context, the fall in gas prices, given the dependence on gas-fired generation, has benefitted Ireland more than most. And competition in the larger volume industrial market has also helped, though, in the case of the ESB and BGE, prices have been subsidised by excessive profits in their network businesses. (I’m not sure what this is doing to their competitors who are not similarly blessed with such a slush fund, but I suspect it’s not making life easy.) And the Minister has required the CER to ‘re-balance’ prices – higher prices for households and small businesses; lower prices for big industrials. And more re-balancing is due in October. (I’m not sure to what extent the initial re-balancing impacts on the Eurostat data cited.) Although Ireland doesn’t provide it to Eurostat, Eurostat occasionally presents breakdowns of the components of final prices. Some preliminary digging I have done suggests that Ireland’s transmission and distribution costs are way out of line and this, more than anything else, pushes up Irish prices. The Minister and the CER are making every effort to bring down prices for the big industrials, but it is at the expense of households and small businesses. @Paul Hunt “The point is the Minister can’t play it straight – though I would still love to know how he gets his 25% price reduction. (This is the kind of unevidenced assertion that gets regurgitated by the government spin-machine until it becomes gospel.)” I can just picture the Minister saddling up to get on his high horse as Paul did to jc in an earlier post;-) @Paul Hunt “Snapshot comparisons of prices often conceal more than they reveal. I prefer to look at movements in the components of final prices excluding tax over a period of time. It allows the possibility of disentangling possible drivers and generating more effective cross-country comparisons.” ww.energy.eu is not official EU, it’s a commercial undertaking. Time series data on gas and electricity prices are available for free on Eurostat’s website. The tax exclusive price movements for electricity in Ireland for the 12 months to the end of 2009 were; IC -17.5% ID -24.3% IE -23% IF -23.5% @DylansGoneElectric, …and is Pete Seeger still wielding the axe to cut the supply? You raise a very important issue. But in the medium to longer term it should not pose a problem. However, it does highlight glorious imbecility in gas system planning. In the late 1990s a major study (Gas2025) established what we have now. LNG import got very cursory treatment and was dismissed. (For some reason, BGE has never liked it.) BGE won the chest-beating contest to build IC2 – as opposed to the alternative of reinforcing SNIPS. The logical sequence should have been, given SNIPS and IC1, reinforce SNIPS (with a North-South interconnector – which has been built in any event), LNG import and, then, if required, build IC2, but to Wales. The pattern of gas supply has changed dramatically in Britain with supplies from the north (St.Fergus) that feeds Moffat in decline and new supplies from LNG (2 in Wales and one in Thames estuary), Norway (to the east coast) and interconnectors to Bacton (East Anglia) supplementing declining indigenous supplies. Pulling all of the Irish supplies off Moffat does raise scheduling, investment and operational issues. However, with Shannon LNG slated to come on stream and Corrib (when will we see it?) emerging sometime, it is likely that the capacity in IC2 (and, possibly, some of that in IC1) will be redundant. This will reecue the importance of Moffat, but BGE and the CER are determined to recover the costs of the interconnectors even though they will be only partially used. This will insert a significant and unnecessary cost wedge between the bulk price in Britain and that in Ireland. The simple solution is to write-down the value of IC1 and IC2 to reflect their likely future use, integrate the operation of the transmission systems on both islands, extend the existing British transmission pricing system to the Irish system and have a single bulk price on both islands. @BigEnd, I’m not denying that prices to the industrials have gone down, but I would still contend that it is at the expense of households and small businesses and that the underlying transmission and distribution costs are excessive. And so far as jc (and similar Green evangelists) is concerned, I find it is impossible to engage effectively when any scepticism about the implementation of the Green agenda (or suggestions of alternative means of implementation) is dismissed as government-bashing and denial of scientific evidence. There should be enough evidence that centrally imposed diktats, involving multitudes of targets and instruments – and that frequently involves bribing people with their own money to comply – are unlikely to be successful. It must be great getting paid as a journalist to re-package blog posts into an Irish Times article. @Paul Hunt Ok the point I was making is that because you didn’t know the genesis of the Minister’s 25% you assumed that it was an “unevidenced assertion” and based on spin. Clearly, in this case, it was based on evidence. @BigEnd, The Minister is reported as saying “we’ve brought prices down by about 25%”. He didn’t say that this applies only to (largish) industrial consumers. What about everybody else? The spin-machine often gets more mileage out of smaller sound-bites. The MNCs (and other players in the traded sector) are getting restive as they can see what is going on and the Minister is looking to buy their silence by hosing everyone else. @Paul Hunt Yes of course the Minister will use the best looking figure – it’s easier to quote one figure rather than about nine or ten to explain all the price movements in all the consumption bands. Remember also that it was the larger business consumers that were complaining most about the cost of electricity so the 25% (or 23.5% actually) was more relevant. Just to be clear, if you read the Eurostat methodology, the ‘industry’ prices actually refer to non-residential prices and they cover from the very small consumers to the largest. Throughout 2009 there were price reductions in all bands – the four largest I’ve given above. The two smallest bands which I didn’t give, fell by 4% and 10%. Residential electricity prices fell by approx. 9% in the bands that have over 80% of the consumption and up to 12% reduction for smaller consumers. @jc “Which targets won’t be met and why not? I don’t see your problem.” 1. The capacity factors for onshore and offshore wind as installed capacity increases is wishful thinking in the NREAP – take a look at the 2009 & 2010 Generation Adequacy Reports to see the decline. 2010 is already considered another “poor wind year”. 2. Including Ocean Energy is just daft as Richard alluded to above. The above are used to meet your targets and clearly are not realistic. I note from table 10 (the Modelled one !)that 5MW of Geothermal is planned for 2020 ! @ Tucumseh Fair enough. I think you have raised some interesting points which I would like to explore further myself. I’m not an expert on wind, but I would say that from discussions with officials from across public and private sector that the received wisdom on meting wind target varied from positive to “too early to tell”. I would also describe ocean energy targets are ambitious, not daft. There are demonstration plants springing up for a few years (eg: http://www.pelamiswave.com/our-projects/agucadoura). SSE are developing a 200MW tidal energy farm in Scotland. So it is at plausible we could have significant wave/tidal power on stream by 2020. Whether it is likely or not is another question. ESRI were telling us a few months ago that our EV targets were also impossible to meet due to production capacity constraints. Nissan Renault and others now beg to differ. To get back to NREAP, perhaps one valid criticism is that it added little new. For some reason a decision was taken not to include some of the work which is being done on how to meet targets for heat etc. Perhaps there was no political sign off on the measures being proposed. I’m not sure. @BigEnd, This is the CER’s decision on the ESB’s regulated prices from around this time last year: http://www.cer.ie/en/electricity-retail-market-decision-documents.aspx?article=0398d6dc-b24a-4c48-84f4-2ed88c1ef947 The Executive Summary (quoted below) outlines the machinations that have taken place over the last year or two (and the decision that engineered the 2009 decline in prices you cite). “The Commission for Energy Regulation has approved the regulated tariffs of ESB Customer Supply, the Public Electricity Supplier, to apply from 1st October 2009 – 30th September 2010. This decision will result in an average reduction of 0.2% for all regulated categories of customers. The regulated retail tariff year was aligned as an annual review for the public electricity suppliers in both the Republic of Ireland and Northern Ireland from 1st October – 30th September. However, the dramatic increases in fuel prices in 2008 meant that the Commission undertook a number of tariff reviews. An Interim review in July 2008 resulted in an average increase in regulated tariffs of 17.5% and in December 2008 an average decrease of less than 1% in the final retail tariffs. The December review took into account falling forward fuel prices at that time and also the €315.4m ESB rebate and an €87m PSO related rebate which was returned to all customers over the 9 month from 1st January 2009 – 30th October 2009. In April 2009, in light of the worldwide economic recession and the difficult economic circumstances facing Irish consumers, the Commission issued a Direction to ESB Networks to re-profile approximately €120m of networks revenue. This action effectively reduced retail tariffs to all customers by approximately 10.3%. This decision was taken to bring forward anticipated reductions, to benefit all consumers, on the basis of forward fuel prices at that time. The Commission noted that in bringing forward the 10.3% price reduction, to apply from the 1st May 2009, there was likely to be no scope to reduce regulated prices any further from October 2009. This has proved to be the case for domestic consumers, where many households will see no net change to the average annual bill.” So customers who stayed with the regulated ESB business saw prices largely unchanged this year, but customers who switched to BGE experienced their cross-subsidised price reductions – and other competitors had to follow suit. We don’t know precisely where prices are going from October, but we do know that the PSO levy will be applied, that the bulk price may be lower and that the CER wants to increase transmission tariffs and reduce distribution tariffs. In addition, the Minister wants more ‘re-balancing’ – charging small volume consumers more and big volume consumers less. I expect big users will get whatever price reductions will be required to keep them quiet and smaller volume consumers (the big majority in numerical terms) will pick up the tab. @Paul Hunt “I expect big users will get whatever price reductions will be required to keep them quiet and smaller volume consumers (the big majority in numerical terms) will pick up the tab.” And the point is? Is this not what happens in a deregulated market? @jc Pelamis is full-scale experimental. It is not yet in demonstration. The experiment in Portugal failed, by the way — both technically and financially. The plan is to have 200,000 all-electric cars on the Irish roads by 2010. Nissan plans to supply 50,000 Leafs per year to the European market. Renault has not announced any numbers, but Bursa has a capacity of 360,000 cars per year — for the Megane, the Clio and both versions of the Fluence. Other companies are sitting on the fence. Ireland would have an implausibly large share of the market. @observer Some journalists indeed copy without attributation. Sarah acknowledged her sources, and added value by retelling the story. @ Richard You mean 200,000 by 2020 right? It is my understanding that Renault and Nissan together have announced global production capacity of 500,000 EV units per year. So that’s essentially one manufacturer. Then there is BYD in China with 8000 engineers and the advanced plans for the introduction of the E6 (range 200-250 miles), BMW, Ford, Coda, Mercedes Blue Zero, Mitsubishi iMiEV. Toyota, Subaru etc. I could go on an on for quite a while. So in sum, it is far very implausible (despite the customary certainty in ESRI) that Ireland would have have a high proportion of these vehicles given we are currently one of the only countries which will have the infrastructure and that our supports are far more generous than those available elsewhere. @BigEnd, “Is this not what happens in a deregulated market?” I wish I could share your confidence that the Minister and the CER will be able to replicate the outcome of a genuinely competitive market – particularly when the primary objective is to ensure that the two state-owned participants in the market can gouge enough cash from consumers to finance the Minister’s policy desires. @jc There are indeed plenty of companies sitting on the fence, waiting to see if the Leaf will sell and if subsidies will hold up. @Paul Hunt I just posed a question and you attributed a position to me that I never expressed. From that I can only assume that the last part of your statement is also conjecture. I have no opinion on it. @BigEnd, OK. I imagine there is a probability that the outcome wrt the level and structure of prices which the Minister and the CER are seeking to engineer would replicate the outcome of a genuinely competitive market, but I would expect it to be very low. The CER intends to remove price regulation of ESB CS sometime after Oct. once some – not very onerous – conditions are met. The market will then be deemed to be competitive, so why not let it work? Why indulge in this specific engineering of the level and structure of prices? @Sarah C, I think you are completely writing off the value of having peat here as a fuel, you mentioned in the IT about England not being an unstable country, but when the Scottish gas runs out, and the Russians cut off Gas to Europe again, will the english export gas to us so readily if there may issues about their supply. On the other hand I agree the burning of turf is a jobs for the biffos issue, if it was important, we’d keep it til it was needed. —- Wind power has several bad points for the running of a national grid, the main one being that it don’t blow for about a week every winter we our peak electricity demand is, so we need to have backup conventional power to cope with this. This unused backup capability has to be paid for. THe more wind, the less time the backup generation capacity is working to actually generate power and earn it’s keep. Bit late, but may be interesting enough. I had a conversation with CER on legal implications of the PSO levy. My question was whether they can take me of the grid if I deduct the amount that they force me to pay to subsidize the Idiotic peat-> electricity production in Brian Cowen’s Constituency. Interestingly, the gentleman was very much in line with my thinking. The term they use is de-energizing, and he confirmed that they would de energize me if I would start to deduct from the next invoice. I thought, if a couple of thousand people would agree to do the same, this would make an impact and put pressure on Minister Ryan, but…. well…. Best Georg Comments are closed.