Winter of discontent on way as energy bills rise
We are paying more for electricity and gas due to the State's 'Alice in Wonderland' policies, writes Colm McCarthy
The cost of electricity to households and to industry has been a hot topic in the United Kingdom over the past couple of years and could be a key issue in the general election next May. The Labour opposition has been hammering the Conservative-led government over high energy bills and has promised to take on the energy companies should it win the election. Irish consumers pay considerably more than their UK counterparts for electricity and further increases are on the cards, but strangely the issue has not featured in the Irish political debate.
According to Eurostat, the EU's statistical service, Irish households paid 20pc over the EU average for electricity in the second half of last year while Irish industry paid a premium of 15pc. Prices here, for both households and industrial users, are well ahead of the levels which have caused so much controversy in the UK. With the recent announcement of higher public service subsidies from the Commission for Energy Regulation (the CER), these excess costs for Irish consumers are set to rise further over the winter.
Intriguingly, one of the reasons why the CER has allowed additional charges to customers (called PSO charges, for 'public service obligation') is that the wholesale price of gas has fallen. You might have imagined that lower gas costs, since Ireland imports almost all of the gas used for power generation, would pass through into lower prices for consumers, but not in the 'Alice in Wonderland' of Irish energy policy. The CER is required to compensate certain electricity generators if they cannot recover their costs in the (supposedly free) wholesale electricity market. When wholesale prices weaken, the CER compensates these generators, with the household and industrial customer picking up the tab.
Who, you might ask, are these fortunate generators? They are none other than the wind-farm operators, bringers of supposedly cheap electricity (wind is a 'resource') as well as saviours of the planet; peat-fired generators, those stalwart producers of 'indigenous' Irish energy; and even some gas-fired generators, deemed to be delivering "security of supply". There will be €318m in PSO payments to these generators in the coming regulatory year, revenue additional to whatever they earn from selling their electricity output in the wholesale market.
Of this total, €94m will go to renewable generators, mainly wind farms; €119m to three peat-fired stations, all of which are owned by the State; and €105m to two gas stations deemed eligible under a security of supply scheme dating from 2003.
Wind farms have the desirable feature that their carbon emissions are negligible, the basis for government and EU support for this technology. They are not the most cost-effective means of cutting emissions but have been deemed to possess the best political optics. Peat-fired stations have the highest emissions of any generation plant, higher even than coal, the worst emitter in most countries. Irish policy is thus to subsidise both the lowest and the highest emitters of greenhouse gases. Gas-fired generation sits somewhere in the middle, a medium emitter of greenhouse gases, lower than coal or oil but higher than renewables or nuclear power. Some gas plants get subsidised too, so the policy is complete: under the PSO scheme, consumers get to subsidise low, medium and high emitters of greenhouse gases.
A further justification for the PSO schemes (of which the energy regulator is the instrument rather than the author) is another political pet, security of supply. Back in the 1990s when the old peat-fired generating stations had reached the end of their useful lives, any sensible government would have allowed the peat industry an honourable death. Generating electricity from peat is the most costly conventional technology available, and the ESB's most expensive power has always come from the peat plants. Harvesting the peat requires that large parts of the midlands are turned over to open-cast mining, and burning peat in power stations releases more carbon dioxide per unit of electricity than any comparable technology. If you discovered gold in the midlands, you would not be allowed to extract it the way Bord na Mona extracts dross. This is a prodigious money-loser as well as an environmental disaster. But since the peat is guaranteed Irish, the Government, apparently without any economic analysis, decided to support the construction of three new peat stations in the midlands. All three now belong to the State, one to Bord na Mona and two to the ESB. It is now acknowledged that the peat 'resource' will run out and that these plants must eventually close or be converted, at substantial cost, to some other fuel. They should never have been built in the first place.
How, you might ask, did two gas-fired plants get on the list of subsidy recipients? Briefly, back in 2003, somebody panicked about the adequacy of capacity and the constructors of these plants, both privately owned, were granted 'security of supply' subsidies, notwithstanding their reliance on imported fuel.
The new Energy Minister, Alan Kelly, should take a recent report from the Irish Academy of Engineering on his summer break. The academy is concerned that Irish energy policy continues to mimic an EU approach which has already failed on its own terms and is in the process of revision and possibly abandonment. The EU has been an enthusiastic supporter of wind and solar power, partly in the belief that Europe could acquire technological leadership in these areas and enjoy spin-off benefits in manufacturing. These hopes are no longer realistic, if they ever were, since Chinese manufacturers already dominate these markets. The shale gas revolution in the United States has also served to undermine EU strategy. Coal prices have fallen because of gas competition in the USA and European generators have substituted high-polluting coal for gas. High-efficiency gas units have been mothballed and overall carbon emissions from the European electricity sector have actually increased as a result.
The source of this perverse outcome is the failure of the EU emission trading scheme, which sought to create a high price for carbon emission permits. The scheme was botched because they issued too many permits and there is an inadequate incentive to avoid burning coal. Interestingly, Ireland is using the new Ireland-Wales electricity interconnector to import coal-generated electricity from the UK, displacing lower-carbon and more fuel-efficient gas generators.
Electricity demand in Ireland in 2014 will be about 8pc below the 2007 figure. In that final year of the bubble, Eirgrid predicted a level of demand for 2009 which it now expects to arise in 2023. Roughly 14 years of growth in electricity demand has disappeared. The sensible response to this development is to stop investing in an electricity system which has more than adequate capacity. Instead, investment, all of which ultimately has to be paid for, has proceeded at an extraordinary pace.
Peak demand in the Irish system has been a little under 5,000 megawatts (MW) in recent years. Since the bubble burst, 1,300MW of new gas plants have become available, along with 1,250MW of new wind farms. To cap it all, there is a new interconnector to the UK with a capacity of another 500MW. The inevitable result is that generators are sitting on idle plants and yet the investment splurge continues. The Government is still open to proposals for yet more wind turbines, although investment in unsubsidised gas plants has understandably ceased. The Academy of Engineering estimates that total investment in electricity generation and transmission has reached €4bn in the years since demand reached a peak.
One casualty of this over-investment has been the Government itself. The state-owned BGE sold its new Whitegate gas plant recently for less than it cost to build, and the ESB cancelled its plans to sell its two peat-fired plants, presumably due to a shortage of offers. The Academy of Engineers got this one right too. In 2011 it wrote: "In the event of a future government deciding to dispose of State-owned generating assets, the Academy is greatly concerned that current energy policy will significantly reduce the value of such assets".
The main component in the price the customer pays for electricity is the cost of remunerating the enormous amounts of capital tied up in the generation, transmission and distribution of power. The fuel used in power generation in Ireland accounts for only a fifth to a quarter of the total. Uncontrolled capital spending is causing sky-high electricity prices.