Ireland’s electricity system is an unseen but hugely important national asset.
The balance sheet of the ESB at the end of last year showed physical assets at undepreciated cost of about €23.4bn, and tens of billions more in generation assets belong to other companies in the Republic. The system is operated on an all-island basis and the Northern Ireland assets add up to further tens of billions.
Replacement costs are higher than the historic figures and many of the older assets are due for replacement — about one-fifth of the existing generation plant will close in the next decade because of excess emissions alone.
Demand is due to increase as part of the climate change strategy, with home heating and road transport due to be switched over from fossil fuels towards electricity.
There will be a substantial bill for extra generation capacity. Much of this will be renewable, predominantly onshore and offshore wind, as well as new gas-fired stations to provide continuity in power supply.
There are to be new interconnectors, the first link to France and a third to Britain. The all-island grid will need major investment too.
The network of transmission and distribution lines costs as much as the generation of electricity and today’s network is not adequate for the future. New renewable units need to be linked into the system and the current configuration reflects a pattern of demand which is shifting.
Electricity is self-financing and costs, including costs of capital, are recovered from customers. If extra capital must be invested at a rapid pace over the next decade, the consequences for electricity prices are critical.
The customer will pay, and prices are already high by European standards. If the costs of climate action are to be contained, the most efficient investments need to be identified and the power system will absorb a substantial portion of the total.
The operators of the all-island system, EirGrid and SONI, its Northern Ireland counterpart, released a report in November which sought to deduce the implications for grid investment of the climate targets.
When the report was being prepared the intention was to aim for 70pc renewables on the Irish system, a target since raised to 80pc. The extra wind capacity, mostly expected to be offshore, would see current wind farm capacity almost double.
There has been some excited commentary about Ireland’s Atlantic wind resource, but the EirGrid/SONI report takes a different tack. They expect most offshore development will be in the Irish Sea rather than the Atlantic.
There are two reasons for this. Shallower waters enable the construction of less costly turbines — the floating technology which would be needed off the west coast is expensive.
It is for this reason that offshore development in the UK is expected to focus on the North Sea rather than off the west coast of Scotland.
The main centres of demand are in the eastern parts of the island of Ireland, and this means new production in the Irish Sea can be brought to market through maximising the use of transmission assets which already exist.
An exception may turn out to be the Shannon estuary. The Moneypoint coal-fired station, Ireland’s largest, will close within a few years but the two high-voltage lines which connect to the Dublin area are valuable assets and will facilitate offshore wind farms nearby. There is no existing capacity on the grid to encourage similar developments off Mayo or Donegal.
In order to minimise the total cost of decarbonising electricity, developers of power stations and new sources of demand need to be incentivised to make the best location decisions. It is not clear that our current arrangements are well suited to this task.
A new generation unit, given the capacity limits which are emerging in the transmission system, can add cost additional to the immediate link-up. These are called ‘deep’ connection costs and arise also with new demand loads from data centres.
It is fair to ask whether Ireland’s surprising popularity as a data centre location derives in part from the absence of full connection charges in Ireland’s electricity tariff.
The rewards to power generation companies have become arbitrary in recent months. The market designs used in most European countries pay them in line with the price of the marginal producer and that has meant wholesale prices have sometimes soared in line with the gas price.
There have been unintended windfall profits for some power companies and the Spanish government has responded with an ad hoc tax. When the dust settles there will be pressure for the European Commission to think afresh about the design of electricity and gas markets.
The Government has acknowledged gas-fired generation is an unavoidable component in the new electricity system. The greater the reliance on intermittent renewables, mainly wind, the greater the need for reliable back-up. There are plans to retain existing gas units and to build some new ones.
The Corrib field off Co Mayo is Ireland’s only domestic source of gas, and it will be depleted inside a decade, having enjoyed a far shorter life than the Kinsale Head field off Cork. Discoveries of smaller adjacent deposits helped extend the productive life of Kinsale at low incremental cost and this may prove possible at Corrib too.
Sole reliance on gas interconnection, via Britain, to the European market would also be mitigated should the Government change its mind about permitting the construction of a liquefied natural gas (LNG) terminal. As well as diversifying supply, an LNG terminal adds storage capacity.
Both Ireland and Britain are poorly served with natural gas storage — Ireland has virtually none and every option needs to be explored. A reliable and low-emission power system needs secure supplies of gas.