What makes our electricity prices high?

Ireland has a relatively high minimum wage and good working conditions¹. The cost of services reflect this reality. Purchasing power parity is, according to some, a better way of making electricity price comparisons². According to such a measure our prices are less out of line.

Analysis by the Commission for Energy Regulation points to market size, reliance on gas (and other fossil fuels) and the public service obligation as the main reasons for high electricity prices in Ireland³.

• The size and nature of the market. Small markets as we have in Ireland miss out on economies of scale and as a result overheads are proportionally higher. The Irish market is widely dispersed; our low population and settlement pattern means that the length of wire needed to supply each customer is much longer in Ireland than the UK for example (Figure 7). Thus it is more costly to connect, service and supply customers in Ireland than in the UK⁴. However, our market size increased in 2007 when we became part of an All-island Single Electricity Market (SEM) which has enhanced competition in generation and supply and helped to keep electricity prices competitive.

• The cost of gas relative to other energy sources. We in Ireland are more reliant on natural gas for generating electricity than most others in Europe. Gas-fired generators are the price setters in the bidding process that determines the market price for electricity in Ireland⁵. If gas prices rise, wholesale electricity prices rise and the price we pay also rises.
• The public service obligation (PSO). This charge increased in 2013 and 2014 but fell in 2015/16 (for domestic households the monthly charge decreased from €5.36 per month to €5.01 per month). It is a levy to support the guaranteed prices for certain generators. It includes two peat-burning plants and renewable energy generators such as wind and biomass. Two factors drove the increases – the growing amount of renewable energy (predominantly wind) on the system and the drop in the price of gas⁶.

Another contributing factor was the economic collapse in Ireland. Ireland’s economic contraction was one of the sharpest in the Eurozone. The demand for electricity fell by 9.5% after 2008 and for a time the burden of the fixed costs and overheads of the system increased per unit of electricity (Figure 8)⁷. This gave rise to higher average unit prices since demand was lower but the revenue that was to be collected from generators remained the same ⁸. The allowed transmission and distribution costs to account for 30% of electricity prices and these have risen year on year in Ireland. The figure below shows the electricity requirement for the Republic of Ireland, past and projected.

While these factors explain the reasons for higher prices in Ireland compared with other jurisdictions the system effects are more complex and may have benefits. For example;

• Although it costs money to provide the East-west interconnector service, it contributed to lower wholesale prices⁹.
• The greater deployment of wind on the Irish system intensified competition among other generators for the remaining market and this drove down wholesale electricity prices¹⁰¹¹.
• While the PSO increased for 2014, the largest part of the increase was related to the need to compensate renewable energy and other suppliers for the lower revenues they received because wholesale electricity prices fell¹².