In Ireland and beyond, the energy crisis that followed the Russian invasion of Ukraine in 2022 brought electricity costs firmly into the spotlight. They have stayed there ever since, as concerns around competitiveness and the cost of living have grown. But what factors are driving the price of electricity, and how might it evolve as Ireland decarbonises its energy system? Policy Manager Clive Bowers shares insights from a new ESB white paper (available to download here).
Breaking down the cost of electricity
Many different factors go into the number that appears on your electricity bill: not just the price of the power itself, but the cost of getting it to your home, and outlay needed to ensure the overall electricity system is stable and reliable.
Energy costs: This is the most straightforward part of your electricity bill – the cost to generate the power. Electricity suppliers purchase electricity on what’s known as the ‘wholesale market’, most typically from renewable or thermal energy generators, but also from battery storage operators or interconnectors that import electricity to Ireland from other countries.
Energy costs are by far the single biggest component of overall electricity charges. Yet it may be surprising to learn that they account for just over half (55%) of the total cost of electricity. The rest is made up of fixed costs related to the electricity network, generation capacity, system operation and renewables support – more on these below.
Network charges: These charges recover costs associated with building, maintaining and operating the electricity network. They cover the transmission network, owned by ESB Networks and operated and managed by EirGrid, and the distribution network, which is owned and operated by ESB Networks. Ireland’s dispersed rural population means we have around twice the length of network per customer as other European countries, which increases the per-customer cost of providing network infrastructure. As network activities are fully regulated, all charges must be approved by the Commission for Regulation of Utilities (CRU).
Capacity and imperfection costs: These fund measures needed to ensure the system as a whole remains reliable and secure. Capacity charges cover the cost of providing additional electricity generation capacity at a system level to meet peak demand. Imperfection costs relate to operation of the transmission network, arising from factors like operational and network constraints, transmission outages, and the need to balance supply and demand in real time.
Other charges: A number of other factors feed into the total cost of electricity. Supplier costs include expenses for staffing, billing, and operations, and also costs related to bad debt or regulatory obligations. The Public Service Obligation (PSO) levy is a government-mandated charge added to customer bills, to support generation of electricity from sustainable sources. And remaining costs come mainly from market operator charges, which cover the cost of running the energy and capacity markets.
What’s driving cost – and how it might evolve
Given the complex make-up of electricity prices, there is no one simple answer as to what causes them to go up or down. However, analysis carried out for a recent ESB white paper on the topic has identified some key drivers that could make a big impact in future.
Wholesale price of natural gas: When explaining the sharp increase in electricity prices in 2022, one factor stands out above all others: the increase in the wholesale price of natural gas. Compared to other countries, Ireland is particularly reliant on gas for our electricity generation – and while gas prices have stabilised somewhat, they are still around three times what they were before the energy crisis. As all gas is imported, the best way to control the impact of gas prices is to use less of it.
This is where renewables come in. As higher levels of renewables come onto the system, Ireland can reduce its reliance on gas, counter the price volatility it brings and reduce expensive imports. The rollout of new renewables should put downward pressure on the wholesale electricity prices in the coming years, provided the system is well equipped to integrate them and flexible demand is available to absorb this variable renewable power.
Boosting electricity demand: After the price of gas, a key driver of the average unit cost of electricity is the level of demand: higher demand translates into lower average unit costs, and vice versa. Electrifying sectors like heat and transport – replacing fossil fuels with green electricity generated by home-grown renewables – will help Ireland decarbonise and reduce import dependency on gas and oil. But it can also help reduce the price of electricity for customers over the long term, as increasing demand offsets investment costs in the system.
Addressing non-energy costs: As described above, non-energy costs make up close to half of the total cost of electricity. Many of these costs are fixed and based on underlying investments in the electricity system. However, there are some non-energy costs that could also be impacted as decarbonisation accelerates.
Imperfection costs are a good example, as these are variable and relate to the cost of deploying electricity system resources to address system constraints – which currently usually means using more gas. The rollout of new system services (like synchronous condensers) for transmission system operation should help to reduce imperfections costs. The North-South electricity interconnector will also be a game-changer: once complete it will enable networks across the island to operate as a single system, removing certain constraints and allowing greater integration of renewables.
Another important way to bring costs down for the long term is moving to more flexible electricity demand. If we can shift demand to times when it’s windy or sunny, we can maximise the use of renewables that may otherwise have to be ‘turned-down’ and go to waste. Ways to do this include greater adoption of time-of-use tariffs, integrating more storage on the system, or using EVs to support the grid.
No simple answers – but many no-regret options
Our white paper also looks at potential policy interventions to manage electricity costs: these could include market interventions, such as engaging with an EU Joint Gas Procurement Initiative; direct exchequer funding interventions; or other options like supports for EV or e-heating adoption, and measures to increase flexibility in electricity demand.
Overall, our analysis underscores the complex make-up of electricity costs. There is no one simple answer to the challenge of how to keep prices competitive in the years ahead. However, there are a number of ‘no-regret’ levers we can pull on: accelerating the move to home-grown renewables in place of costly imported gas; putting in place the technologies and structures that will allow greater integration of those renewables; supporting electrification of heat and transport; and encouraging greater flexibility in demand.
Read our detailed white paper on electricity costs, drivers and outlooks here.