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 :

http://www.irishtimes.com/business/energy-and-resources/tynagh-energy-profit-soars-60-to-40m-after-shutdown-1.2037578

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  :

• Constraint costs for conventional power plant - plant must be compensated for running differently to their schedule which will become more frequent with more intermittent wind - http://irishenergyblog.blogspot.com/2014/12/whats-in-electricity-bill-part-2.html
• Curtailment costs of additional wind - as more wind gets added, more wind farms will have to be shutdown at high winds due to the restriction on exporting electricity to the UK (more on this in a future blog). Wind farms get paid to shutdown or curtail their generation. 
• Increased maintenance of conventional plant - http://irishenergyblog.blogspot.com/2014/10/news-from-germany-and-uk.html
• The cost of upgrading the grid infrastructure to facilitate more wind generation - estimated at between € 3.5 and 4 billion.
• Costs associated with running plant inefficiently - the increasing fuel costs of running conventional plant on low loads to accommodate high wind penetrations.
• The increased costs with maintaining more reserves at high wind penetrations         - http://irishenergyblog.blogspot.ie/2014/12/seais-quantifying-savings-from.html

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. 

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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. 

https://www.cer.ie/docs/000967/CER14361%20PSO%20Levy%20Decision%20Paper%20%202014-15%20%28New%29.pdf

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