Could our electricity prices be lower?

The answer, based on price reports from other jurisdictions, is probably yes; but it would involve alternative policy choices by Government and regulatory action from the Commission for Energy Regulation (CER).

In practice both Government and Regulator are constrained; the Government by EU Energy, Environment and Competition Policy and the CER has to operate within its mandate – a legislative framework and an energy policy set by the Irish Government in conformity with EU law. Thus the room for manoeuvre is limited and lots of interests have to be respected when contemplating major changes.

Achieving the best sustainable price outcome for consumers within the Irish and EU policy framework is the job of the CER. The CER is the economic regulator for the electricity sector. It structures the electricity generation and supply markets for competition and regulates the investments, revenues and tariffs of the electricity network companies in the interests of the final customer ¹. As generation and network costs account for almost 90% of the cost of electricity to small businesses the performance issues are;

i) Is the CER’s market design effective in promoting competition to deliver sustainable and competitive wholesale electricity prices?

ii) Is the CER’s regulation of the grid and network investment effective?

Market design: The table below (Table 3/Figure 9) shows a decline in two important profitability measures for a group of generators representing 75% of the market – return on sales and return on investment ². The steady decline in these ratios since 2010 suggests that competition has put downward pressure on prices and profitability margins. Independent economists such as Fitzgerald believe that the (Irish) Single Electricity Market has worked well for Irish consumers. However, the Irish market design is about to change, conforming to the EU model to facilitate cross-border competition and electricity trading, and care needs to be taken to ensure that Irish consumers are not disadvantaged ³,⁴.

Regulation of network investments: The CER’s regulation of network investments and system operation is carried out in a formal, public and increasingly transparent way. The CER, upon reviewing revenues of the network companies, imposes cuts to the operating expenditure (Opex) required to run the system to ensure more efficient operation from the Transmission System Operator (TSO) and Transmission Assets Owner (TAO). Capital expenditure (Capex) is scrutinised in terms of it being necessary, as well as being procured in an efficient manner. These efficiencies ensure that end-users are protected, while still allowing for the required level of investment to take place.In theory, were capital expenditure on new infrastructure to be postponed prices could be lowered temporally. One downside risk is for Ireland’s electricity system to be found unprepared for growth in demand with a recovering economy or, in the event of delay in new investment when needed, at a greater cost when accelerated investment is required.

While the East-West interconnector has had the effect of lowering our electricity prices, under other circumstances it could have the opposite effect. If electricity prices in Britain were to rise, the interconnector flow would predominantly be from Ireland to Britain and the demand for generation in Ireland would increase. This could push up prices in Ireland as higher cost plant is scheduled to run to meet the increased demand from both Britain and Ireland.

Irish Government and EU policy does impact on fuel choices and prices. The Irish Government retained the power to influence the primary energy or fuel mix in power generation. While security of supply is the primary justification there are important economic, social and environmental issues at stake that concern the Government. Whereas energy policy has to have regard to short term impacts on prices and the economy, its long term focus is on facilitating the smooth evolution of the energy system in line with the evolving global energy landscape and sustainability criteria. Thus energy policy in the EU and Ireland is increasingly reaching out to consumers and investors and is reliant on competition and trading to deliver value for customers.

Ireland, McCarthy points out, has enough generating plant to meet anticipated electricity demand for several years and argues that we need not encourage excessive new investment ⁵. In the absence of changing demands on the system, this would be a strong argument (see point above with demand risk).

However, the deployment of higher levels of wind power is creating new demands and has changed the way the system operates. Some existing plant on the system struggle to cope. New more flexible types of plant are required to compensate for the variability of wind ⁶. The CER has noted that with growing levels of wind energy on the power system, increasing the flexibility of generation and demand resources is a key driver to minimising renewable integration costs ⁷. Energy policy attempts to anticipate these issues (for example the effect of more wind on the system), propose solutions and entrust the Regulator with the resulting responsibilities for economic regulation.

The high energy prices, deep recession in Ireland and fall in demand led to a call for a reassessment of our energy policy ⁸. Others called for a pause in development while a new energy policy suited to our current circumstances was finalised. These calls and the responses to the Green paper contributed to the process of re-evaluation, leading to the creation of an Energy White Paper published in December 2015 setting out Ireland’s approach to energy policy post-2020 ⁹.