Selfish truth behind the rise in gas and electricity prices
While gas and electricity companies blame 'wholesale costs' for the massive price hikes we now face, Louise McBride reveals that some Irish energy suppliers charge a 200 per cent mark-up on the power that we all rely on
IN two weeks' time, our energy bills will start to go through the roof when Bord Gais increases its electricity prices by 12 per cent. The gas supplier Flogas has also just jacked up its standing charge for existing gas customers by 40 per cent. And these won't be the only energy price hikes to hit struggling householders over the next few months.
Bord Gais is expected to increase its gas prices by about 25 per cent this October -- though such a price hike must first be approved by the energy regulator, the Commission for Energy Regulation (CER).
Airtricity and ESB, who both supply electricity and gas, are also likely to jump on the price-hike bandwagon. Though both said last week that they had not yet decided whether or not to increase their prices, they are likely to make the same argument that Bord Gais has -- that is, that rising fuel costs leave them with no choice but to hike prices.
"The prices paid by Irish customers are intrinsically linked to international wholesale prices and with the markets signalling the prospect of higher winter prices, residential price increases have unfortunately become unavoidable," said Jason Scagell, managing director of retail and trading with Bord Gais Energy.
But do rising wholesale fuel costs really justify the extent of the price hikes being lobbed on to consumers?
In Britain, the energy regulator, Ofgem, is investigating the six biggest energy companies over accusations of unfounded energy price hikes. Ofgem is scrutinising the wholesale prices paid by energy suppliers to see if they justify the prices finally charged to customers.
To gauge just how much of a mark-up we're paying on our energy bills, the Sunday Independent asked Airtricity, Bord Gais and the ESB how much they paid for the electricity and gas they supplied to customers over the past year. All three refused to answer this question, stating that the information was "commercially sensitive".
Irish gas suppliers buy their gas on the British market. Between early April and the end of June 2010, the average wholesale price of natural gas on the British spot market was about 33p (38¢) a therm, according to Flogas.
If you look at your gas bill, you'll see that the price of gas is quoted in kilowatt-hour (kWh) rather than therm. As there are 29.3 kWh in a therm, this suggests that suppliers could have snapped up natural gas at a wholesale price of 1.3¢ per kWh between early April and the end of June 2010. Yet Bord Gais charged households about 4¢ a unit for a kWh of gas at that time -- about three times the wholesale price.
Wholesale gas prices have shot up since and were recently about 59p (67¢) a therm -- or 2.3¢ a kWh. Despite this increase in wholesale prices, we are still paying twice as much for gas from Bord Gais as the company can buy it for.
Bord Gais says that it must buy a certain amount of its gas in advance. About two-thirds of the gas used in 2010 and 2011 was bought at a time when wholesale prices "increased substantially", according to a spokeswoman, who added that this had put "significant pressure" on the company.
The prices charged by Bord Gais are set by the CER. Bord Gais says it is therefore only allowed to make a two per cent profit on residential gas.
Both it and the CER say that wholesale gas prices account for about half of the price households pay for gas. About 40 per cent of the price comes down to gas transmission and distribution costs and two per cent to profit margins. The remaining eight per cent "is made up of other costs including supply costs and capital expenditure", according to Bord Gais.
The CER does not control the gas prices charged by Bord Gais's rivals. This is why Airtricity and Flogas have rushed out to offer discounts of up to 20 per cent on Bord Gais rates.
Yet these discounts -- as well as the six per cent gas discount offered by ESB since last April -- still don't reduce the gas prices being offered to households to anywhere near the 2.3¢ per kWh that suppliers could recently have bought that gas for.
Under its 20 per cent discount gas offer, for example, Flogas sells its gas for about 3.15¢ per kWh -- which is similar to the rate available under an Airtricity offer that ran until the end of last May.
The CER recently set the electricity prices charged by the ESB -- and the ESB's competitors were free to charge what they liked. Since last April, however, the ESB has been able to set its own electricity prices. The regulator, therefore, has no control over the price any of the suppliers charge for electricity -- competition instead determines that.
About a third of the price we pay for electricity comes down to wholesale fuel costs, according to Andrew Ebrill, a spokesman for the CER. The rest is largely made up of generator costs, the costs of electricity wires, and the margins charged by suppliers.
Mr Ebrill says he does not believe that electricity suppliers are pocketing hefty profit margins on the prices charged for electricity. "We've had an electricity price war over the last few years -- competition has helped keep prices down," said Mr Ebrill.
With electricity price hikes now on the cards, however, the days of competition keeping prices down could be numbered.
Furthermore, although the gas market has been fully open to competition for the past four years and the electricity market for the past six years, there is still room for improvement, according to Cathal Hanley, economist with the Competition Authority.
"We'd like to see more competition at the generator level and more investment in new, modern generating plants," said Mr Hanley.
"ESB and Bord Gais have opened new and modern power-generating plants. That's improved efficiency. There may, however, be scope for the mothballing of older plants that are less efficient."
Consumer groups have long argued that if energy suppliers became more efficient, they could save money -- which would in turn reduce the cost of supplying electricity and gas to households and ultimately reduce the price we pay for energy.
"There are efficiencies that could clearly be made within the suppliers' trading budgets that could have the effect of significantly reducing costs to the consumers," said Dermott Jewell, chief executive of the Consumers' Association of Ireland. "These reductions include internal efficiencies in property and payroll, as well as marketing."
Given the massive salaries pocketed by some of those at the helm of energy companies, there is certainly scope for cuts in pay costs.
Soon-to-retire ESB chief executive Padraig McManus, for example, was paid more than €750,000 in 2009, making him one of the highest-paid bosses of a state-owned company at the time. Mr McManus was paid about €530,000 last year. Bord Gais boss John Mullins was on a salary of €265,000 in 2010.
Furthermore, the energy price hikes on the cards over the next few months could be the least of our worries.
There are plans to build a new transmission network to deliver renewable energy, such as wind energy, to Irish households over the next few years. It will cost a fortune to build this network.
"The cost of the new renewable energy transmission network will become an increasingly noticeable element in electricity bills over the next few years," said Mr Hanley.
"However, our economy has shrunk by about 15 per cent over the last few years and economic growth is not as strong as a few years ago. So we may not need all this extra electricity that's being planned.
"Yet if you produce electricity, you have to pay for it. And if you have a surplus of electricity, then that surplus still has to be paid for."
Sunday Indo Business