Gas Prices Rise and Fall but Energy Bills never get Cheaper

People's memories are short in Ireland so now is a good time to remind them that gas prices rise and fall but energy bills never get cheaper. This is a quote from an Irish Independent article from 2015 :

 

 "Irish consumers pay the fourth-highest energy bills in Europe, according to EU statistics. Little of the large recent falls in wholesale gas and oil prices have been passed on to consumers".

The energy industry and politicians are now blaming high gas prices for the massive rise in electricity prices. In a properly functioning market, falls in wholesale prices would lead to lower bills. It has to work both ways. This clearly did not happen. 

Record Prices hit the Irish Electricity Market

 On Thursday the 9th September, prices in the All Ireland Electricity Market hit record highs of €4,680 per MWh, well over 20 times the normal price :

The scale here is from €0 to €5,000 MWh

What a normal day looks like, prices rise to about €150 MWh

These prices may have had something to do with the UK switching on coal plant that same week, the cost of which can be very high. Margins are set to get even tighter in the UK as this week one of the interconnectors to France went on fire causing wholesale prices to rise even higher there. Low outputs of wind energy have plagued both Ireland and the UK for many months now. In essence, high prices in the electricity market go hand in hand with low amounts of reliable generation.

There have been three Amber Alerts and seven Notifications of Tight Generation Margins issued this month in the Single Electricity Market (SEM). An Amber Alert means there was expected to be enough energy to meet demand, but possibly not enough in reserve should something go wrong. They can also be issued if there are significant frequency / voltage deviations which can happen when there aren't enough large power stations on the grid. The notification of Tight Generation Margins seems to be a prelude to an Amber Alert. 

System Alerts can go from Alert (Amber) to Emergency (Red) to Blackout (Blue) and finally to a Restoration state. Up to the end of August of this year there have been six system alerts on the grid. In the previous decade, they averaged just one per year.

Three Reasons Why Wind Energy Policy Needs to be Reviewed

By Owen Martin 

1) Wind has had a Negative Impact on Electricity Prices - many energy companies have stated recently that they will be increasing the price of electricity due to a rise in wholesale prices. Yet, we were repeatedly promised by the powers that be that more wind energy would lead to a reduction in wholesale prices and help reduce dependence on the fluctuating international fossil fuel markets. The fact is that the fall in wholesale prices was barely passed on to the consumer (see graph below). When fossil fuel prices were low, as they were in the past few years (oil hit $40 a barrel in 2016), consumers barely saw a reduction in their bills. Did you notice any reduction ? I sure as hell didn't. We all saw a noticeable difference at the petrol pumps. Why hasn't there been an investigation into this by the Energy Regulator ?

What impact have the 1500 or more wind turbines scattered around the country had on electricity prices ? As far as I can see, they've contributed to higher prices, with hikes in visible taxes like the PSO levy and unseen levies such as the extra grid costs required to transport all this "free energy" around the country.

2) Climate Change - Met Eireann warned last month that more extreme weather is on the way and that another heatwave summer is now twice as likely because of climate change. Other people like Professor Sweeney of Maynooth have said that these events might be even four or five times more likely. Regardless of what you think about climate change, there's an obvious question that needs to be asked - weren't the 1,500 plus wind turbines that we've built supposed to lessen the impact of climate change in Ireland by reducing the burning of fossil fuels and  carbon dioxide emissions?

If you've ever read through a planning application for a wind farms, you will see that climate change is regularly used as justification for the project.  Have you seen less storms recently or less prolonged dry/wet periods ?

Surely we should be seeing some kind of decline in these extreme climate events after spending around €5 to €6 billion on wind energy projects and another few billion on the supporting infrastructure.

Greenies can't have it both ways - if climate change is getting worse then wind energy is obviously not the solution based on past performance.

3) Prolonged Calm Periods - This summer has been catastrophic for wind energy with prolonged periods of little or no wind. If we are to believe the climate experts, more heatwaves are on the way in the future bringing with them anticyclonic regions of persistent high pressure. If wind has made little difference to electricity prices or climate change now, it will have even less in the future as they operate at lower and lower output.

Wind energy has not been very profitable in Ireland with many companies struggling to make money and exiting the market. This can only get worse in the future. Who is going to bail them out ? Of course, we all know the answer.

Wind Energy and Wholesale Price - Part 2

Wind Energy is Not Reducing the Wholesale Price of Electricity

This article compares the impact of wind on the wholesale cost of electricity in the years 2010 and 2015. The results show that the price of gas remains the single biggest influence on wholesale electricity prices in Ireland, while wind energy has very little effect, if any.

From SEMO	2015	2010	Difference
Energy costs	1,854,589,637	1,752,491,743	102,097,894
Constraint costs	155,810,069	119,184,928	36,625,141
Total Wholesale Costs	2,010,399,706	1,871,676,671	138,723,035

Figure 1: Wholesale Electricity Costs for Irish Electricity Market : 2010 and 2015

The Irish electricity market year runs from October to September.  The wholesale price of electricity is made up of energy payments and constraint payments (I'm excluding capacity payments because that is influenced by the number of generators in the system so will distort comparisons between years). We can see from the above diagram that wholesale electricity costs were higher in 2015 than 2010 by about 7%. 

Electricity Demand was still somewhat higher in 2010 as the effects of the recession had not fully bottomed out at that stage. Also, the very cold winter of 2009/10 increased peak demand for that year. Yet, wholesale prices were still lower in 2010, which as we shall see was likely due to lower average gas prices.

Figure 2: Electricity Demand in Ireland

The Impact of Gas Prices on wholesale price

The National Balancing Point, commonly referred to as the NBP, is a virtual trading location for the sale and purchase and exchange of UK natural gas. The Irish electricity price normally follows the NBP (the green and purple lines below) :

Source : European Commission

The Irish wholesale electricity price generally follows the price of gas because gas generators 
are normally the last generators to be called on after wind, coal and peat as explained in a 
previous blog article.

The NBP i.e. price of gas in the UK, in the latter part of 2015 had dropped to 2010 levels :

• European hub prices showed a slightly decreasing trend as low oil prices, steady LNG supply and increasing pipeline imports put downward pressure on prices. Gas prices have reached new lows. Excepting the temporary price drop in the summer of 2014, the average NBP price in October 2015 was the lowest since 2010 (European Commission).

So gas prices were similar in both years but 2010 had lower average prices over the whole year : 

The above graph declines sharply at the end (not shown) as gas prices fell further in September and October of 2015. So this leaves us with slightly higher wholesale prices in 2015 when compared to 2010 and explains Figure 1. But what about wind energy ? 2010 was a bad year for wind and haven't we had much more wind energy since then ?

Wind Energy

By the end of 2010, according to the SEAI, there was 1,440 MW of installed wind capacity. By the end of 2015, there was roughly 2,300MW. So we have had a 60% increase in wind farms between the two years. The Irish Times reported recently that :

Wholesale electricity prices were down 21 per cent in November 2015 compared to the same month last year, or 7.5 per cent when compared with October. Vayu said the drop was attributable to strong wind generation and lower prices for gas.

While Vayu are right about lower gas prices, strong wind generation doesn't seem to make any difference to wholesale prices. If it did, we should see lower wholesale prices in 2015 when

compared to 2010, but instead we see the opposite.

Indeed, it's quite possible that more wind energy contributed to higher wholesale prices because it led to increased reliance on expensive fast acting back up plant that otherwise would be rarely used.

Conclusion

Despite having wind capacity equal to half of our peak demand, we still have an electricity system almost entirely dependent on fossil fuels, mainly gas. These gas generators recover their costs by setting the wholesale price of electricity. Despite large investments in wind energy, Ireland is still exposed to fluctuations in the price of gas in the UK. With gas prices at their lowest since 2010, we should be availing of cheap electricity. Instead, wind energy is still receiving a fixed price above the low wholesale prices keeping electricity prices higher than they should be.

IWEA told us two years ago that fossil fuel prices were rising

More wind on the system will provide a hedge against rising fossil fuel prices, resulting in lower and more stable energy prices for consumers while helping us achieve our energy and emissions targets - IWEA, 2013, Submission to Tipperary County Council.

In 2013, the Irish Wind Energy Association told us that wind would provide a hedge against rising fossil fuel prices.

But last time I went to the petrol pumps, fuel was so cheap, I was able to fill up my tank for the first
time in many years.

However, when my last electricity bill came through the door, I was barely able to pay it.

Why do our Government continually listen to people backing the wrong horse ?

Gas Prices Hit Six Year Low but still Electricity Bills rise

The above diagram gives a good indication of where gas prices in the EU are at. It reveals that gas prices have hit a six year low i.e gas prices have not been this low since 2009. Gas power is usually the last generator called on by the National Grid in Ireland so this is the one that sets the wholesale price of electricity for all generators (under the merit order system).

If we look at a recent wholesale price (SMP) profile we can see that it is well below € 50 / MWh, at about € 30 / MWh :

Indeed, we can see that back in February this year it was up around the € 50 / MWh mark :

But still electricity bills are not getting cheaper. This amounts to an abuse of the free market, a market all consumers should be entitled to participate fairly in. The excuse of rising prices for fossil fuels is often used as a justification to hike bills but the opposite doesn't happen here in Ireland, the land where the electricity consumer can be milked till the cows come home.

The guy supposed to be regulating this can be contacted at info@cer.ie

PSO Levy set to soar this year

As pressure mounts on Energy suppliers to cut bills (some cuts have this week been announced), consumers will be expecting to see some extra change in their pocket in the coming months as some of the reductions in gas and oil wholesale prices are passed on. But there will be a sting in the tail come July.  Each July, the Energy Regulator (CER) calculates the PSO Levy required for the coming year, which begins in October. The PSO Levy recovers some of the costs for wind, peat and idle gas plants. Last year saw a rise in the PSO Levy of over € 100 million, mainly due to lower gas prices.

The PSO levy of €335.4 million for 2014/15 compares with €210.9 million allowed for the current 2013/14 PSO period. The biggest drivers for the year-on-year increase are as follows : 

Lower wholesale electricity prices. The estimated average wholesale electricity price in the all-island Single Electricity Market (SEM) for the 2014/15 period is €57.17/MWh. This is down circa 11% on the €64.28/MWh used to determine the levy for the current PSO period. A lower wholesale price for next year results in the PSO plants needing more PSO money to cover their allowed costs, to offset the lower money they are predicted to receive from the market. This applies across-the-board for renewables, peat and security of supply plants supported by the PSO. It is the biggest single driver of the rise in the levy. The lower estimated wholesale price for next year is reflective of a trend in recent months in the SEM of lower spot and forward contracting prices, related to lower gas prices; [extract from CER PSO Decision Paper  2014/2015]

And the trend since July was one of even lower gas and oil prices, that nobody, let alone the CER, could have foreseen. While we dont use much oil in electricity generation, oil is used in the extraction and transportation of gas so it does have a knock on effect on gas prices. So the CER will have no choice but to increase the € 335 million PSO levy even further next winter completely reversing and most likely exceeding the measly price cuts introduced by energy suppliers. The suppliers of course, it goes without saying, will pass the PSO Levy hike on to consumers, while at the same time, their power generating arms will pocket most of the portion of the PSO Levy relating to wind (most wind farms in the State are owned by the big Energy suppliers such as Energia, ESB, Bord Gais, Airtricity etc. Bord na Mona own the peat plants).

The current energy policy really resembles something from the Communist Soviet Union with the final electricity product incapable of reflecting market realities, rather shareholder interests.

Oil - To invest or not to invest ?

Meanwhile, Eddie O'Connor, CEO of Mainstream Renewables, recently stated in a blog

The fall in oil prices over the past few months has brought a huge measure of reality to energy investors. If production costs are higher than USD70 per barrel then their investment is wasted. Assets which can’t be sold for cost reasons are stranded and the companies which made the investments are in deep trouble. The investors who backed the companies could potentially lose everything.

 But back in 2009 he was warning about the impact of "peak oil" :

How much worse will the panic be when the truth is eventually accepted and we stare down the barrel of a gun at prices of US$200 – US$300 per barrel of oil and all other energies follow in price.

It looks like Prophet Eddie's predictions are about as reliable as his wind turbines.......