Saturday, 21 March 2015

What's In Your Electricity Bill: Part 5 - The PSO Levy

PSO Levy could increase by € 550 million by 2020

The PSO Levy is possibly one of the craziest schemes ever introduced by an Irish Government (along with electronic voting machines, bank guarantee etc). While the idea is to promote fuel from indigenous sources, the result is bad for competition and bad for the consumer. The levy reimburses generating companies when the wholesale prices are low. It props up peat and wind plants aswell as some idle gas plants. You could be fooled for thinking that the substantial capacity payments already been paid to these plant was for this very purpose, but nothing about the electricity market in Ireland is straightforward.

Imagine if the price of bread was suddenly cut in half but the government slapped a levy on the bread to bring the price back up to normal levels. But instead of the levy going to the government, as happens with petrol, it goes back to the bakery. This would result in a win-win situation for the baking companies and a lose-lose situation for consumers. In effect, it acts as a buffer against market forces. Yet we were told by Minister Dempsey in 2007 that "we are introducing structural changes in the electricity sector that will create a more attractive investment climate for existing and new players, deliver increased competition, reduce the cost of electricity and offer greater choice for consumers”. But in 2010, instead of enjoying the fruits of a competitive electricity market, consumers began paying the PSO Levy which ensured energy companies made profits on certain generators regardless of what happened to prices in the market (Note 1).

It's true that only a portion of the levy goes to wind generation. But a closer look is required to see what is going on.

This chart shows where the PSO Levy goes :

Gas generation

The single biggest beneficiary of the PSO Levy is Tynagh gas plant whose profits soared to €40 million in 2013 :

Tynagh is not run very often but cannot be allowed to close down as this could affect "security of supply" - in otherwords, when the weather does not deliver in terms of wind energy, the good old reliable fossil fuel plant will step in. Lower demand is also a factor because this means the plant receives less income from the market. Tynagh will receive €69 million from the PSO this year - about 21% of the total levy. The Energy Regulator explains :

 This is because most of Tynagh’s allowed PSO costs are fixed rather than related to its output, so the less the plant runs and receives correspondingly lower SEM revenue, the higher the PSO subsidy needed to cover its allowed fixed costs.

But as we can see above, Tynagh does not just recover its fixed costs, it makes substantial profits from the PSO.

Aughinish and Tynagh entered a contract for differences (CfD) agreement with Electric Ireland, whereby EIectric Ireland recovers or returns additional monies paid under the agreement from/to the PSO levy. These arrangements were put in place for a 10 year period, and are accordingly expected to end in 2016, at which
point they will no longer receive ex-ante PSO payments.

It will be interesting to see if the PSO Levy will be extended next year for Tynagh but for the purposes of this blog I will assume that it will extended. Indeed, in Eirgrids recent capacity statement, on page 51, you can see that the plant is expected to remain open up to (at least) 2024.

Peat generation

Peat receives the largest proportion of the levy at 35% but there are no new peat plants in planning. So we can assume that this charge will remain roughly static in the coming years. There will come a time when these peat plants will have to be closed down and replaced as the fuel runs out. Bord Na Mona, the semi state company that runs these plants have now diversified into wind energy. But as wind energy (non dispatch) is incapable of replacing dispatchable peat generation, there will still be a gap in the power generation supply market of about 340MW when the peat plants close down that will have to be met by something else e.g. biomass or gas.

Eirgrid expect the 3 peat plants to still be in operation up to 2024 at least.

Wind generation

Wind energy is given a fixed price plus 15% for electricity generated called REFIT (Renewable Energy Feed In Tariff, it works out at around €80 MWh compared to €43 MWh for gas). The PSO levy finances REFIT by making up the shortfall wind receives from the market.

Wind makes up 27% of the levy but this is one to watch as 1,000's of new MWs are planned. I have seen various reports of the amount of planned wind farms ranging from 4,000MW to 6,000MW and even more than that. But Eirgrid seem to think around 4,000MW is required to meet the targets. So that means that about 2,000MW more is due to be built by 2020. So how much will this cost the consumer in terms of PSO Levy ?

Let's look at this step by step :

  1. The allowance for REFIT increased from € 51.07 million to € 90.5 million this year. This is a hike of € 39.43 million.
  2. We are told that "Overall the amount of renewable generation, mostly wind, estimated to receive the PSO levy next year is 138 MW more than the current year (due to REFIT 2 primarily), hence increasing the levy". So we will be building approx 14 times more than this amount by 2020 (138 x 14 = 1,932MW).
  3. So 138MW of new wind generation requires € 39.43 million from PSO. We are building 14 times this capacity between now and 2020. Multiplying 14 by € 39.43 million gives us € 552 million additional PSO required for wind (39.43m x 14 = 552m).

So we will have to increase the PSO Levy by € 552 million to pay for all this additional wind. So who will pay for this ? Well page 32 of the PSO Levy Decision Paper shows how much extra each consumer type pays for the current PSO increase.  So we can deduce from that how much the € 552 million will cost for each consumer type (Note 2) : 

+ 2,000MW wind = + € 552 million PSO by 2020 paid for by :

Domestic customers  = + € 300 per customer per year
Small commercial customers = + € 1,285 per customer per year
Medium/large customers = + € 220 per kVA

As you can see a €300 increase will drive many families into fuel poverty. As for SME's, a near 
€ 1,300 hike in their bills will put a lot of them out of business. Large industry will simply look elsewhere to locate their plant - Poland, USA, India or perhaps China. 

It will be argued that this increase will be offset by savings due to more wind generation. But there are more system costs due to more wind apart from the PSO Levy as the Energy Regulator recently pointed out  :

So it's hard to see much savings, if any, from adding more wind at this stage. 

Our government has locked society into high electricity bills for many many years to come. The combined social impact of this along with the other charges recently introduced for water etc and carbon taxes will change the lives of many Irish families whose lives revolve around access to relatively affordable electricity. 

Disconnections will bring home to many people the true nature of the energy policy devised by the previous government.  But by then, like the banking collapse of 2008, it will be too late. 


Note 1

Noel Dempsey (Fianna Fail) was Minister for Energy from September 2004 till June 2007. He was succeeded by current Green Party leader Eamon Ryan who held the position until January 2011. So the question as to what happened between the time Noel Dempsey brought in the "structural changes" and Eamon Ryan's tenure ended could be the topic of another article or indeed a book to do it full justice.

Note 2

Workings based on information provided in CER PSO Levy Decision Paper 2014/15 - page 32

14 is the multiple of wind generation required to get to 4,000MW as per Step 2 above.

Domestic : €42.87  - €64.37 = €21.50 increase this year. 
€21.50 * 14 = € 301 per customer per year

Small commercial customers : €129.83 - €221.66 = €91.83 increase this year. 
€91.83 * 14 = € 1,285 per customer per year

Medium and large customers : €18.47 - €34.20 = €15.73 increase this year. 
€15.73 * 14 = € 220.22 per kVA


  1. This is a scandal! If people knew the extent of this conspiracy they would be on the streets. How come no journalist has taken up the subject? RTE journalists are probably told to avoid the subject given the advertising revenue they receive from the power companies.

    1. The PSO/REFIT scandal is an order of magnitude greater than the water charges, and it is perhaps this scale that defies public belief. There are surely few amongst us that would suspect that out leaders would take us up another disastrous blind alley after the debacle of 2008. Sadly, we appear to be unable to learn from the mistakes of the recent past, and are therefore doomed to repeat them. What poor fools we are!

    2. Quite a few media outlets in Ireland are sponsored by energy companies so yes that is a big problem

  2. This is a true story, I know about it and visited the location in a remote part of rural Ireland. I know the man in question and I know his neighbours and friends. My own father the late PJ Martin used to laugh at men who tried to make electricity out of nothing. He thought it was funny to see the degree of delusion and ignorance. I disguise the location and man’s name to avoid him embarrassment, but I assure you he is alive and well right now.
    Mick Salt is now 83. He went in England to work on road building and ran a quarry and a hire operation in Ireland where he hired plant to the council. He made a living at it and is otherwise normal and functional.
    He always had a burning ambition to invent and prove a perpetual motion machine.
    In the late 1980’s he built a gantry about 40 meters long, and 35 meters high out of structural steel. He then made 1 meter diameter balls. They had an outer shell of welded steel and an inner fill of concrete. A centre of lead was added to increase weight. The balls were lined up in a row on a narrow railway on top. It had a slight incline. The idea was that the balls would roll off the end and fall to impact on a plunger at the bottom. The ball would compress the plunger and compress oil in a chamber underneath. This oil would operate a hydraulic motor and this would drive an electrical generator. The plunger was spring loaded causing the balls to bounce up a railway running diagonally to the top. He reasoned that the balls would find it easier to make their way up diagonally than vertically. After spending £64,000 Irish punts, (75,000 euro) he was finally forced to abandon the project. He never accepted it could not work and maintained that if only it could be built large enough, it could be made produce electricity out of nothing, until it wore out. He eventually was forced to terminate the idea but the machine is still in situ.

    Next he connected a large 3 phase electric motor to a 3 phase electric generator. As far as I can find out, he does not know and will not accept that a motor and generator is the same thing. Both will generate and motor. The only difference is the speed they run at. Needless to say this failed. Next he placed a flywheel between the motor and generator believing that the inertia would allow the whole unit to generate electricity perpetually. That failed. Now in 2015, at 83 years of age, he is in the process of building a very large flywheel in the belief that it will finally work.
    Jack Smith is a witness who told me himself “he connects the mains power to the motor which puts the flywheel and generator spinning at high revvs. He then removes the power. Left like that it will spin for a long time before eventually stopping. When he puts a load on, such as an electric heater, the flywheel slows down drastically and stop in about one minute. A welder stops it in 10 seconds.
    The laws of physics/thermodynamics are clear, energy can be converted from one form to another, but it cannot be made out of nothing. I claim that industrial scale wind turbines connected to the grid system are nothing more than elaborate perpetual motion machines. I accept that the wind does cause then to produce power some times, but that power is so incompatible with the operational requirements of the grid systems of the world that it is useless. There is one common indicator of all these failed ideas. The deluded inventor claims the cause of failure is SIZE. If only I could afford to build my machine bigger, it would work. Why are wind turbines getting ever bigger? The biggest delusion ever – industrial wind farms.