Guide to Electricity price formation in Ireland and Northern Ireland The numbers The average household consumes 4,300 kwh 1 of electricity per annum in Ireland and 4,100 in Northern Ireland. At an average price of 21c/kWh (including all taxes and standing charges) 2 the average consumer In Ireland spends 2.50 per day or 900 per year on electricity. The average unit price in Northern Ireland is approximately 17p/kWh giving a daily cost of 1.90 or 700 per annum. The major components of the price are the cost of generating and of transporting electricity from generating stations to the customer. The remainder is comprised of other pass through costs (collected by suppliers but paid to other bodies), taxation and levies and suppliers costs and profit margin. Electricity supply was fully deregulated in Ireland in early 2011 and customers can choose suppliers who are now free to compete by setting their own prices. In Northern Ireland the former monopoly supplier has its prices set by the Utility Regulator until such time as the regulator deems there to be sufficient competition. Increased competition benefits customers with innovation and choice of tariff type. Customer bills are generally broken down into a unit rate element which depends on the volume of electricity consumed by customers and when it is consumed, there may be a day and night rate, and a standing charge element which does not vary with consumption. The cost components which are included in these elements will vary depending on the type of tariff chosen. Customers are encouraged to shop around to find the tariff most suitable to their consumption patterns. Domestic Customer Tariff Breakdown - RoI Note this is approximate due to tariff and consumption variations Generation Pass Through Distribution Transmission Supply Costs & Margin PSO VAT 1 This is the average consumption figure used in CER/11/168. 2 As quoted in the SEAI s Comparison of Energy Costs January 2013, band DD, http://www.seai.ie/publications/statistics_publications/fuel_cost_comparison/domestic_fuel_cost_compari son_january_2013_pdf.pdf 1
Electricity Generation Costs Suppliers must purchase wholesale electricity in the Single Electricity Market (SEM) operating jointly between Ireland and Northern Ireland. It is governed by the Commission for Energy Regulation (RoI) and the Utility Regulator of Northern Ireland, together known as the Regulatory Authorities, or RAs. The SEM is designed so that the cheapest generators to meet demand are scheduled to generate electricity. The market price (SMP) reflects the costs involved in generating electricity and accounts for roughly one third of the price paid by final customers. Gas is the most commonly used fuel for electricity generation in the all-island SEM market followed by oil, coal, renewables and peat, see Figures 1 and 2 below. Thus the SMP tends to track the gas price, see Figure 3. Gas is an international commodity and prices can be volatile Electricity is also imported (or exported) via the interconnectors connecting the island of Ireland and GB. 14% 0% 20% 6% 0% 6% 8% 45% Coal EU Fossil Gas Nuclear Oil Peat Renewable Waste Energy Figure 1: All Island Q3 2013 Rolling Fuel Mix Disclosure (SEMO) Figure 2: Mix of fuels used to generate electricity - January 2013 2
Figure 3 Gas price and SMP since introduction of SEM to late 2011 The market price therefore varies with demand (Figure 4) and with fuel costs. Both the Irish and Northern Irish governments have set the target that by 2020 40% of electricity consumed will be from renewable sources, mainly wind; this is predicted to reduce the cost of generation and will reduce reliance on imported fuels (and exposure to volatile pricing of these fuels). Figure 4: SEM Energy price 3
The SEM energy price tracks demand. The main component of the cost of generation is fuel but the cost also includes the price of carbon allowances (EUAs) needed to cover CO 2 emissions as part of the EU emissions trading scheme as well as operation and maintenance costs of stations. Suppliers may have strategies in place to try minimise the impact of the volatility of fuel and CO2 costs on prices. Pass through costs - Transport, Capacity, Imperfections and Market Operator Costs Suppliers collect tariffs which they must pass through to bodies involved in the electricity business. These tariffs are set by the CER or RAs. Approximately one quarter of the price paid by final consumers covers the cost of delivering electricity from generating stations to homes. In many ways the transportation of electricity resembles that of water where water pressure (voltage in electricity) pushes water around a network of pipelines cables) which is accessed by the consumer when he or she turns on the tap (switch). The network comprises high voltage Transmission lines mainly supported by metal pylon structures and lower voltage Distribution lines mainly supported by wooden poles. The Transmission Use of System Charge (TUoS) meets the cost of operating, maintaining and expanding the transmission network and is approved by the CER in Ireland and UR in Northern Ireland. The Distribution Use of System Charge (DUoS) goes to operate, maintain and expand the distribution network and to provide metering services and is also approved by the CER/UR. The Transmission network is operated by EirGrid and the Distribution network by ESB Networks. These charges are collected by suppliers and passed directly to EirGrid or ESB Networks as appropriate. The Capacity Charge is based on the size of a customer s connection (i.e. how much electricity they may import) and covers a capacity payment made to generators to cover the fixed costs of their stations and to ensure that there is sufficient generation capacity on the island (i.e. to avoid blackout situations and keep the lights on ). Imperfections Charges recover costs incurred in operating the networks and are approved by the RAs. The Market Operator Charge is set by the RAs and covers the cost of the Market Operator (SEMO) in administering the market. Supplier costs and margin The final element of the price paid by final customers is the cost to suppliers of supplying customers, which includes operations such as billing, accounting, administration, sales, and customer service and supplier margin. Suppliers may, for example, offer differences in tariffs based on the method 4
and frequency of payment. The supplier costs may be included as part of a standing charge or unit rate. Energy companies in Ireland have been given energy efficiency targets; this is likely to impose costs on suppliers which will ultimately filter through to prices for customers. Northern Irish suppliers will receive targets once the Energy Efficiency Directive is transposed. Taxation and levies Suppliers are required by law to recover a number of taxes and levies on behalf of the state; therefore another element of the final price is VAT 3 In RoI, a Public Service Obligation Levy funds support schemes for security of energy supply, the use of indigenous fuels (i.e. peat) and the use of renewable energy sources in electricity generation, as decided by the Government. The Public Service Obligation Levy amount is calculated annually by the Commission for Energy Regulation and appears as a separate item on bills. The renewable support scheme in Northern Ireland places an obligation on energy suppliers to source a proportion of electricity from renewable sources. This obligation is met by purchasing a certain number of Renewable Obligation Certificates. This is included in the final costs charged to customers. Business Electricity prices for business are listed exclusive of recoverable taxes such as VAT and thus appear lower than prices for households. Price Comparisons: Comparisons with other countries can be misleading on account of the variance across national tax regimes and differences in average consumption, tariff structure, costs of transmission, distribution levies and exchange rates. EAI Position EAI is committed to working with government and regulators in both jurisdictions to deliver policy objectives in a manner which minimises costs and maximises the competitiveness of the all-island economy 3 13.5% in Republic of Ireland; 5% in Northern Ireland 5
Links http://www.energycustomers.ie/index.aspx http://www.energy-uk.org.uk/publication/finish/3-factsheets-and-guides/286-energy-uk-factsheetexplaining-energy-prices-2012.html 6