Saturday, 18 April 2015

Whats In Your Electricity Bill : Part 6 Conclusions

Diagram 1: Energy Prices by component (Source ESB and Eurostat)

The above diagram shows in very simple terms the factors which are driving up our bills. Energy and Supply is basically the cost of generating the electricity including wholesale costs of fuel, operation costs etc. As ESB noted, only 40% of the electricity price is subject to the competitive market; the balance is set by policy measures and regulated prices. So Energy and Supply makes up 40% and if the costs come down in the wholesale market as they have recently done then this cost comes down. The problem then lies with the 60% - Networks and Taxes and Levies. The main driver in these costs is government policy. 

One of the things to note is that when wholesale costs come down, the cost of energy and supply comes down but levies goes up. This is explained in this blogpost :

So next time you hear about rising electricity prices been blamed on the wholesale cost of gas going up, you will know that this is only 40% of your bill, and so does not fully explain what is going on. Taxes and Levies must be increased to pay for additional wind capacity and network costs must also be increased as explained below. But the situation is even worse when wholesale costs come down, as just like in a weighing scales, taxes and levies must then increase further to make up the larger gap between the market price and subsidy price for peat and wind etc.

Network Costs

While there was always an issue in Ireland with dispersed houses and buildings, thus requiring a larger network than other countries, we can see from Diagram 1 that something else has impacted on this cost since 2008. Between 2008 and 2012 we added about 700MW of wind, driving network costs up to bring this wind energy from remote regions to where it is needed. Two new gas plants were also built in Cork but these were built nearby existing power plants which meant that minimal transmission infrastructure was required. 

We can refer to Eurostat to see what has happened network costs since 2012 (click to zoom in):

Network Costs for domestic customers 

Network Costs for industrial customers 

For households, the cost has gone up from € 0.0669 in 2012 to € 0.0697 in 2014. For industry,
the cost has gone up from € 0.0446 in 2012 to € 0.0455 in 2014. 

For industry, they have had a 47% increase since 2008.

Taxes and Levies

For industrial consumers, taxes and levies have more than doubled since 2012. Hence, why we have industries complaining that they are been unfairly levied. For households, levies have gone up by 35% since 2012. Levies comprise the ever increasing PSO Levy which was discussed in Part 5.

Taxes and Levies for households

Taxes and Levies for industrial customers with consumption between 2,000MWh and 20,000MWh

Taxes and Levies for industrial customers with consumption between 500MWh and 2,000MWh

Taxes have remained static i.e. VAT at 13.5%

Other Costs

Other costs include supplier profit and admin costs to run the electricity market. Of course, the suppliers do make good profits and engineers and staff are paid higher than most of their European counterparts. But anyone that has followed this blog, should know that it is a mistake to blame the high electricity bills coming through your door entirely on capitalism. It is socialist interventionist policies that fixes the price above a certain level.

Admin costs would have also gone up in recent years due to the increased complexity in the market with increased wind and interconnection. What has happened is that the market has now become imperfect. If everyone had perfect foresight, the system would run smoothly i.e. be "perfect". But because nobody can have this level of foresight and can only know what will happen after the fact (i.e. when the wind rushes in unexpectedly or doesn't blow at all), the system runs imperfectly and as Eirgrid point out "less optimal".

To be fair to one supplier, they are not too happy about this situation. After all, one of the benefits of wind energy and interconnection that we were sold by our politicians was that it would reduce energy costs :

Concern was raised by a respondent in which they expressed their disappointment ‘that despite growing levels of wind and recently introduced TSO incentives to reduce dispatch balancing costs, the overall charges are increasing. This increase and the fact that the supplier have no control over these increases does not bode well for consumer perception of increasing energy bills.’

And the CER Response: 
 The RAs expect the TSOs to continue to seek mitigation measures to reduce constraint costs for the betterment of electricity consumers.

In other words, we will keep trying to keep the costs down. Just don't expect it to happen anytime soon.....

Lower fuel costs does not mean lower bills

The year 2008 saw record prices for fossil fuels (see page 8 of this document). 

The SMP is the market price paid to generators and is influenced by international gas prices. So we can see from the below that the SMP was highest in 2008 and in 2013 was lower reflecting the fact that gas prices never recovered fully since 2008. So we would expect that our electricity bills would be lower in 2013 than 2008. 

In 2008, electricity prices were € 20.33 per 100kWh (see also diagram here on Page 15 confirming this figure does include taxes)

But in 2013, electricity prices were higher at € 22.95 :

So despite lower fuel prices, electricity prices were higher.  It was other factors apart from fuel - network costs and taxes and levies - that drove the price of electricity up.

1 comment:

  1. A normal business assessesses its financial performance by a profit and loss account and balance sheet. The P & L account comprises sales less cost of sales. If the cost of sales exceeds sales it makes a loss. Costs of sales comprise "fixed and variable costs". Some external costs are not recorded "law and order", "foreign affairs" "national policy on economic planning" "emergency medical aid" "the education of future staff". These are paid for by corporation tax which varies with profit.
    Wind farm companies do pay some fixed and variable costs, fixed rates, administration, insurance and variable taxation. However, wind requires several services which are socialised (levied on consumers). These include , international interconnection, national cabling, base load generating plant, fasting acting balancing plant in addition to base load plant, capacity payments and constrained payments, administration of the more complex grid. Other socialised costs are , favourable government policy, favourable media, dormant energy regulator. (Favorable government policy is partly paid for by bribes). Society accepts having to pay for certain services, defense, justice, education, foreign affairs, and health. The clever craft of the wind industry is to get their income ring fenced by adding wind farms to the list. They take the income while society pays the a large part of the costs.