Do we pay a fair price for our electricity?

Electricity prices in Ireland for medium to large industry (Band IC, 500MWh-2000MWh) were the sixth highest in Europe in the second half of 2015¹. Prices in Malta and Cyprus were slightly higher than in Ireland and prices were higher again in Germany, the United Kingdom, and Italy (Figure 2). In Band 1B, which accounts for 32% of business electricity, Ireland’s ranking improves. In the first semester of 2015 Irish prices were 6% and 11% above the Euro area average price for Band 1B and 1C respectively.

Electricity prices, including taxes and VAT, for residential customers in Ireland in the most dominant consumption band (DD) were the sixth highest in Europe in 2015, behind Italy, Germany, the Netherlands, Denmark and Portugal (Figure 3). Residential customers in this band paid 96% of the average of the Euro area price. When taxes and VAT are excluded the basic price for electricity to residential consumers in Ireland was the third highest in the EU, behind the UK and Italy.[1] None of these comparisons are easy or simple to make as the cost of PSO, renewables, and security are recouped as taxes, levies included in the supply cost or other depending on the country approach. In some countries it may be included in the basic price or as in Ireland levied in the PSO.

[1] Ibid.

Taxes and levies as a percentage of the cost of electricity in Ireland in 2015 were the third lowest in the EU (Figure 4). Only in the UK and Malta did domestic customers pay a smaller proportion of their bill for taxes and levies. In the UK the cost of renewables support is carried by the electricity supplier and this may understate the level of taxes and levies compared with Ireland. Taxes and levies are highest in Denmark (65%) followed by Germany (53%), but taxes and levies do not drive high electricity prices in Ireland ^{2, 5}.

Network costs account for 29% of the domestic consumer’s bill in Ireland. This compares with 21% in Germany, 23% in the UK and 19% in Denmark.

Setting taxes and levies aside and comparing the UK, Ireland, Germany, and Denmark we find that network costs (transmission and distribution), as a proportion of energy and supply costs, are lowest in the UK (around a third), one and half times higher than the UK in Ireland (around a half), three times as high in Germany (85%) and four times higher than the UK in Denmark (124%). While the relative share of network costs is also dependent upon access to and the cost of primary energy in these countries, on the face of it, Ireland’s network costs as a proportion of energy and supply costs do not appear to be high compared with the rest of Europe, but they have risen year-on-year in Ireland. The main reason for the rise is the continued investment in the transmission and distribution systems and in delivering ongoing infrastructure projects to allow for the continued roll-out of necessary infrastructure.

While rising network costs are an increasingly important factor in electricity prices in Ireland, the main reason for Ireland’s relatively high price of electricity lies in the area of energy (generation) and supply.

ESB has provided an analysis of its business where end-user prices are decomposed into six elements. In the figure below the cost of electricity generation is seperated into generation and and fuel costs. Thus the largest component of end-user prices is the cost of fuel (29%) followed by Network costs (28%), Taxes (19%) and supply costs (14%).

There are two competitive markets that govern the basic price that we pay for electricity in Ireland – a wholesale market in electricity generation and a retail market in electricity supply to final customers. Open and fair competition in these markets can help to contribute to reducing the price that we pay for electricity.

Aside from the competitiveness of our wholesale and retail electricity markets, the final price that we pay for electricity in Ireland is currently driven by:

• Our high dependence on and the price of fossil fuels, in particular gas (see close correlation between the wholesale electricity and BNP gas price in Figure 6 below)
• The high level of recent investment in networks, generation plant, and renewables such as onshore wind.

On the other hand, due to our high investment in renewable technologies and preference for natural gas (which make up approximately 70% of the electricity we use), Ireland’s electricity system is relatively clean compared with others in the EU. If the price of emission permits rises, as expected in the EU, Irish generators will require fewer permits than others and our price rises on this account will be less.