We are spending an average of €4,000 a year to power and heat our homes, yet the price the suppliers pay has fallen by 58pc since last summer. Kim Bielenberg asks when consumers will start to feel the benefit
It is the great energy price drop — but there is little sign of it showing up on our gas and electricity bills.
Irish electricity companies have failed to pass on a large decrease in the wholesale price of electricity. Instead, as reported this week, some pensioners found themselves with bills of more than €1,000 for a two-month period.
While households struggle to pay their bills — with up to 29pc living in fuel poverty, according to the Economic and Social Research Institute — energy companies and their shareholders are enjoying bumper profits. Among the beneficiaries of spiralling prices are the owners of private companies including Bord Gáis Energy, SSE Airtricity, Energia and the Canadian owners of the Corrib gas field.
There was an unprecedented energy crisis last year as the war in Ukraine cut off most of the supplies of natural gas from Russia.
Although Ireland did not rely on Russia for gas, the war pushed up prices on the wholesale market, and consumers quickly felt the effect. Typical annual electricity bills for families have doubled to over €2,000 since early 2021, and there have been similar increases in the cost of gas — often taking total bills for energy to over €4,000 a year.
But that is just an average — and many householders pay a lot more. This week, the Irish Independent reported on the case of Gerry Clarke, a 77-year-old who was charged €1,678 in his latest two-month electricity bill.
Since August last year, the crisis of gas supplies in Europe has eased, partly due to a mild winter in central Europe and a drop in consumption in countries such as Germany.
Wholesale prices of electricity in Ireland — the rates at which power companies can buy their electricity from generators — have fluctuated over the past six months, but figures from the Single Electricity Market Operator (SEMO) showed the average price was 58pc lower in January than at the peak in August.
The price was 41pc lower in January than in December. Separate figures from the Central Statistics Office showed that the wholesale price is now lower than before the full-scale invasion of Ukraine, falling by 19.5pc between January 2022 and January 2023.
But during the same period, the price of electricity for ordinary consumers has soared 63pc, and by Thursday this week only one small operator, Pinergy, had dropped prices for residential users. Electric Ireland, the country’s biggest supplier of electricity, announced a price drop of 10pc this week, but only for business users.
So why aren’t the electricity companies, including Electric Ireland (a semi-state enterprise owned by the ESB), not passing on the falling prices?
Energy Minister Eamon Ryan this week called on Electric Ireland to do so as soon as possible, while Taoiseach Leo Varadkar told the Dáil he expected energy companies to reduce their rates over the coming months for both residential and business customers.
The alarm over high prices has prompted the Government to consider taking action against the ESB. One option is a levy on any amount above the historic three-year average of its profits. This could be taken by the State and used to offset household energy bills.
The ESB, which reported a half-year operating profit of €357m for the first six months of last year, paid a dividend of €121.6m to the State last year, but the Government could charge a special dividend on top of this.
So why did prices shoot up in 2022, but fail to come down when the natural gas crisis eased?
The companies argue that they buy their power ahead of time to ensure stability of cost to the consumer. A spokeswoman for Electric Ireland said: “Energy suppliers typically hedge energy costs in advance to secure costs for the upcoming year, so any increases or decreases in the wholesale market can take some time to feed into retail prices seen by residential customers.”
Bord Gáis Energy offered a similar defence. A spokesman said gas and electricity suppliers buy energy up to 18 months — and sometimes longer — in advance of when it is used by customers.
“We do this to protect our customers, in so far as we can, from normal market volatility,” the spokesman added. “This has been particularly important given the extreme price volatility of the energy markets over the past 18 to 24 months since prices began to move upwards in early summer 2021. For this reason, the recent downward fluctuation in wholesale energy prices is not reflected in current customer prices and won’t be for some time.”
But Michael Kilcoyne, chairman of the Consumers’ Association, says: “The rates paid by consumers do not come down nearly as fast when [wholesale] energy prices drop.”
Average prices for electricity have stuck at near the same level since the wholesale price soared in the summer before falling back in the autumn. There was a short rebound in wholesale prices in December before they fell again.
When wholesale prices increased sharply in the summer, Irish power companies did not take long to respond with a series of rapid hikes. Wholesale prices are heavily linked to the price of gas, which peaked on August 26 last year. It took less than a week after that spike before Electric Ireland announced it was pushing up residential electricity bills by 27pc and gas bills by 38pc. The hike, which came into force in October, added almost €450 to average electricity bills and over €500 to gas bills.
Electric Ireland had increased its prices only weeks earlier in August, when it upped its gas price by over 30pc and electricity by over 10pc. Before that, it raised gas and electricity prices by almost 25pc in May.
Bord Gáis also had substantial hikes in the autumn — 34pc in electricity prices and 39pc for gas. This followed substantial hikes in April. While Electric Ireland is a subsidiary of the publicly owned ESB and pays a dividend to the State, Bord Gáis Energy is a private company owned by Centrica, the biggest supplier of gas and electricity to UK households.
The British multinational bought Bord Gáis Energy in 2014 in a sale of State assets under the terms of the EU/IMF bailout. It has benefited enormously from last year’s energy crisis, recently returning mammoth profits of €3.7bn for 2022 — up from €1bn in 2021.
Meanwhile, profits at its Bord Gáis Energy rose 11pc to €35m last year. The company actually reported a loss in the retail side of its business in Ireland last year, but it makes substantial profits from trading in gas and generating electricity at the Whitegate plant in Co Cork.
Centrica has a wide range of energy interests including gas fields, solar power projects and shares in UK nuclear power plants.
Chris O’Shea, Centrica’s Scottish-born chief executive, earned a salary of €900,000 for the past year, but according to British press reports he could also be eligible for a bonus of €1.8m. Last year he turned down a €1.2m bonus, “given the hardships faced by our customers”.
Another profitable British supplier, SSE, also implemented massive hikes in electricity and gas prices in its Irish subsidiary SSE Airtricity in October — by 45pc and 46pc respectively. Earlier in the year they had increased the price of its gas by 39pc and electricity by 30pc.
The Financial Times reported in November that SSE enjoyed a fourfold increase in profits in the six months to September, buoyed by the volatility in gas and electricity prices.
The total remuneration package of its chief executive Alistair Phillips-Davies was reported to be over €5m in 2021.
A spokeswoman for SSE Ireland says: “We know energy prices are a primary concern for our customers and last year we announced that SSE Airtricity would forgo all profits this financial year to support our customers through the cost of living and energy crises, and keep our tariffs as low as possible.”
She says current wholesale prices still exceed pre-crisis levels.
“Over the past year we have seen wholesale market prices spike at over 1,000pc from previous levels, which, when considered against average market increases in consumer prices, demonstrates the active role suppliers have been playing in protecting customers from this volatility.”
The company says it would reduce its prices “as soon as it is possible to do so”.
Another electricity supplier, Energia, has two power stations in Dublin and also supplies wind energy. It is owned by Miami-based I Squared Capital, an investment firm managing more than $34bn in assets. Its founder is the Cairo-born economist Sadek Wahba, a former senior executive at Morgan Stanley investment bank.
RTÉ recently reported that two Energia power generation firms in Ireland recorded a surge in combined pre-tax profits to €112.3m last year.
However, the pre-tax profits recorded by the two firms were partly offset by losses of €40m in the retail side of Energia’s business.
Like the other power companies, Energia pushed up electricity prices by 29pc in the autumn, and gas bills were hiked by 39pc.
Asked why the wholesale prices were not being passed on to consumers, Energia said: “We monitor wholesale electricity and gas prices on an ongoing basis, and we will continue to do so with any future changes to customer pricing being carefully considered.”
Ged Nash, Labour’s finance spokesman, says: “It’s really galling that the wholesale price has dropped while at the same time we are being lectured as end users [and told] that it’s going to be 18-24 months before we see any reduction to the prices we might have seen in 2019.”
Part of the problem is that wholesale prices of energy are linked to the price of gas, leading Nash to conclude that the market is “dysfunctional”. He says: “We need to see the decoupling [of electricity and gas prices] that the European Commission has been talking about for some time.”
So will energy prices eventually drop after the easing of gas shortages in Europe?
Dr Paul Deane, energy researcher at University College Cork, predicts that electricity bills of €1,800 to €2,200 will be the new normal for 2023. “The days of having an annual bill of €1,000 are gone even if the war [in Ukraine] ends tomorrow,” he says.
“At a structural level, there isn’t more gas in the world and we remain one of the most fossil-fuel reliant countries. We are exposed to the whims of the global market.”
Deane predicts that any price reductions in the coming months would be small. He says the power companies may offer retrospective rebates rather than future reductions. He says they may also offer contracts where consumers choose to set a price for a fixed period.
While the short-term outlook is bleak for consumers, the long-term prospects are brighter as we move to greater reliance on renewables like wind and solar. A recent report by the energy consultancy Cornwall Insight Ireland predicted winter electricity prices will fall towards the end of the decade as offshore wind reduces our dependence on gas-fuelled power stations.
Ratnottama Sengupta, one of its analysts, says that while wholesale electricity prices have fallen, they are still relatively high. She predicts that the price of electricity will drop around 2025-26 as gas prices go down and more renewables come on stream, and that prices should be rock bottom after 2031.
Among the biggest winners from soaring energy prices were the two principal owners of the Corrib gas field. Since the gas project started in the early 2000s, it has passed through different ownership.
The current operator is Vermilion Energy, whose parent company is based in Calgary in Canada, and it is set to become the majority shareholder. Another big shareholder in the Corrib field, Nephin Energy, also has a Canadian backer, the Canada Pension Plan Investment Board. The state-owned board invests funds for future Canadian pensioners.
Spiralling European gas prices during the summer helped Vermilion energy’s revenues from the Corrib gas field to double during the first nine months of 2022 to €190m. But the owners of the field are prepared to take a hit from Ireland’s long-delayed windfall tax, which is due to be implemented by Eamon Ryan.
The tax, which is being implemented under an EU regulation, is calculated based on the portion of a company’s taxable profits that are more than 20pc above a certain baseline. The baseline will be the average taxable profits for the company for 2018 to 2021. Profits that are more than 20pc above the baseline will be taxed at 75pc.
Vermilion Energy declined to comment when contacted by the Irish Independent, but in a public statement in January it announced that it estimated total windfall liabilities of €380m in Europe for 2022 and 2023. It is not clear how much of this estimated liability is attributed to the Corrib gas field.
Sources close to the company say the windfall tax at 75pc will be significantly higher than in other EU countries, and there is a worry that the tax will have a negative effect on investment.
However, those who defend the tax suggest that it targets exceptional revenues that would not have been anticipated by investors.
Ireland’s long-awaited package of windfall tax measures will also include a cap on the wholesale prices that can be charged by non-gas electricity generators.
Certain wind power generators have been able to make enormous profits generating electricity because the wholesale price has been set by the price of gas under EU rules.
Ryan has estimated that these windfall taxes will generate between €280m and €600m, depending on wholesale energy prices.