Does Ireland have Low Cost Renewables ?

A recent report by the Council of European Energy Regulators (CEER) has been rolled out lately by the Department of Energy as evidence that their policy of more and more wind energy is a low cost one. According to the report, Ireland has a renewable support of € 2.03 compared to the EU average of € 13.68. Sounds pretty good, right ?

Well, once again, the data refers to the year 2012, just like the SEAI report that is also rolled out by wind energy proponents. Somewhere around 600-700MW of wind has been added since then. The report also looks at 2013 but curiously there is no data for Ireland for this year. 

So why is 2012 chosen and not any of the subsequent years ? Well, the wholesale price of electricity was high in this year. Why is this relevant ? The higher the wholesale price, the lower the renewable subsidy required and vice versa. The level of support was calculated by subtracting the REFIT (or subsidized) price from the wholesale price for 2012 :

In the case of FITs [Feed-in-Tariffs], the level of support was estimated by subtracting the average wholesale electricity price from the overall tariff and therefore is not the same as the full FIT granted to producers.

CEER used a wholesale price of € 63.20 for 2012 (click on graph to show wholesale price) :

But if we look at a recent day, the wholesale price is now between € 20 and € 40 : 

The Energy Regulator (CER) calculates the annual cost of renewable supports each year, taking into account the wholesale prices and the installed capacity of renewable generators. This is then used to calculate the PSO Levy to be applied to energy bills.  Back in 2012, the PSO Levy was still in it's infancy with a total cost relating to renewable energy (mainly wind) of  just € 37 million. 

But by 2016, the CER had calculated total renewable supports (again mainly wind) of € 181 million, almost five times the cost for 2012.  The CER cite lower wholesale prices, lower capacity payments and more renewables, mostly wind, as the drivers in the increase. 

Demand is now around 26,500 GWh so if we work out renewables support per unit of electricity consumed we now get € 6.83 for 2016, over three times the cost for 2012 that CEER have calculated.

Evidently, this is only the direct cost of renewables like wind. There are other, mostly hidden, system costs that are subsidized by consumers. The CEER report acknowledged this point in relation to the grid costs in Ireland :

In addition, in Ireland, the generator pays 100% of the construction of the Least Cost Connection physical connection to the transmission system i.e. the shallow connection works. Any deep reinforcements required to facilitate the connections are not charged to the generator. 

We can throw in another € 4 billion plus for that. 

When Ireland goes offshore, the experience in other EU countries tells us that it will require a higher subsidy that onshore wind, so the cost of renewables will rise further again. In 2012, many other EU countries had offshore wind whereas Ireland did not.

It is also interesting to note that certain EU countries like Poland, Belgium and Sweden never introduced tariffs or subsidies for renewables, instead opting for Green Certificates. Are we really comparing like with like here ?

Lastly, have a look at pages 57-67 of the CEER report. Spain, Portugal, Greece and Ireland all opted for exclusively feed in tariffs supports. Italy used a mix of supports including FITs. Then if we add the total cost we get Spain € 6 billion, Portugal € 700 million, Greece € 1.1 billion and Italy € 9.5 billion. The PIIGS countries spent over € 17 billion on renewables supports in 2012, at a time when their banks and economies were going down the drain. Most of these countries are still in financial distress. 

Were the likes of Sweden, Romania, Poland and Belgium craftier when they opted for Green Certificates rather than fixed subsidies like Ireland and Greece  ? I can't really say for sure, but I have a hunch that they were.

References :

CEER Status Review of Renewable and Energy Efficiency Support Schemes in Europe in 2012 and 2013 (January 2015)

PSO Levy Paper for year ending 30th September 2012 - see page 19, cost of REFIT and AER schemes.

http://www.cer.ie/docs/000077/cer11130.pdf

PSO Levy Paper for year ending 30th September 2016 - see page 4.

http://www.cer.ie/docs/001034/CER15142%20PSO%20Levy%202015-16%20%20Decision%20Paper.pdf

Energy Minister Bluffers - Pat Rabbitte

Two years ago, Energy Minister Pat Rabbitte justified the building of more wind farms by claiming they would be a hedge against high oil prices. But oil prices have since fallen almost as fast as support for the Labour Party. And the PSO for wind has shot up from € 50 million to € 180 million.

It's the extra wind farms that have kept energy prices high when instead we should all be availing of cheap electricity.

Now the justification for more wind farms is the threat of fines from Big Brother. When that threat is lifted (and we all know it will), another irrelevant one will be thrown out. Every justification will be given but the only one that matters - the benefits outweigh the costs (in this case it looks like they don't).

The Labour Party have bluffed their way into and throughout their term in Government. Now it looks like they will pay the price in the upcoming general election. 

Hydropower - how environmentally friendly is it ?

A Dam in the USA blocks the upstream and downstream movement of fish. Here, sturgeon congregate at the base of a dam that is preventing them from swimming upstream to spawn (Photo by USFWS)

Many green campaigners would have us believe that hydro power is easy on the environment but just how environmentally friendly is it ?

Amy Kober has written a thought provoking article on it :

If hydropower is not done right, it can be destructive for rivers and the fish and wildlife that depend on them. It damages natural habitat and prevents fish from reaching spawning grounds. It can dry up entire stretches of river. It’s the only renewable energy source that drives species toward extinction.

One could argue that wind turbines and solar panels could drive certain bird species towards extinction. There are environmental drawbacks with most renewable technologies just like there are with most conventional generation technologies i.e. there are no easy lunches. 

In Ireland, our main hydro plant is Ardnacrusha operated by ESB. According to Dr William O'Connor, just 500 salmon passed through the fish pass there in 2013. I fully agree with him when he states that :

It is a national disgrace that salmon escapement through the Shannon dams has fallen so low, when measured by successes on other European Rivers with many more problems than the River Shannon has (i.e. Rhine, Thames, and Seine). There should and can be salmon in the upper Shannon.

Personally, I would not mind paying the PSO Levy if it went to compensate ESB for curtailing generation during times of peak upstream Salmon migration. Sadly, the PSO is going to less efficient and reliable sources, while salmon numbers in the Shannon continue to dwindle.

PSO Levy: wind energy prevents consumers from seeing a large reduction in energy bills this winter

Increases in wind capacity and lower wholesale prices have shoved PSO Levy back up close to last year's levels.

On Friday, the proposed 2015/16 PSO Levy paper was published. In January, this blog predicted that the PSO would have to rise this year, due to lower gas prices and this has come to fruition :

Lower wholesale prices. The benchmark price, which is the estimated wholesale System Marginal Price (SMP) in SEM for the 2015/16 levy period, is €53.52/MWh, down approximately 6% on the €57.17/MWh used to determine the levy for the current PSO period. A lower wholesale price for next year results in the PSO plant 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. The lower estimated wholesale price for next year is reflective of a trend in the SEM since the first half of 2014 of lower spot prices, related to lower gas prices;

We have also added more wind which needs to be funded through the PSO. The cost of supporting renewables, mostly wind, has risen from €94 million to €174 million :

More renewables. An estimated 2,080 MW of renewable generation, mostly wind,will be supported by the PSO next year. This is 206 MW, or 11%, more than the 1,874 MW supported in the current PSO period, hence driving-up the levy

Last year, wind received supports of € 313,260 per MW from the PSO¹. This year it has gone up to
€ 386,400 per MW due to the lower gas prices², a 23% increase.  Absolute madness - when the price of fuels go down, consumers have to pay more. 


However, due to reductions elsewhere we are not seeing the full impact of these increases this year. This should begin to bite next year. For this year, the PSO Levy has actually gone down by 9% due to the "security of supply" gas plants having their support cut by € 68.5 million and other reductions (including Cfds, R-Factors, admin and inflation) of € 41 million.

The chart below shows where the PSO Levy has gone in the past few years :




We can see that for the first time renewables, mostly wind, has overtaken peat and is now the largest recipient of the PSO Levy - 57% of the levy is going to renewables for the year 2015/16.

So if wind is receiving € 386,000 per MW this year from the PSO, what will future PSO increases look like ? The IWEA announced yesterday that circa 250MW of wind would have to be added each year by 2020. So that means that the PSO Levy will have to be increased by € 96.5 million per year for the next four years. That's a total increase of € 386 million - well over double the proposed PSO Levy for this year of € 304 million.  Thats a lot of money to spend on infrastructure that cannot replace a single traditional power plant in the country and requires large scale grid upgrades. Contrast this with subsidizing biomass which can replace the existing coal power station at Moneypoint and does not require additional grid infrastructure.

We are often told that we are small island, last on the gas pipelines, and therefore cannot expect low electricity prices. But back in the 90s, we had lower energy prices that the UK. The fact is that it is the Irish government who keep electricity prices high, not the Norwegians or the English.

Responses to the PSO Proposal Paper can be sent to jlynch@cer.ie by 3rd July 2015.


¹ 138MW of new wind generation required € 43.23 million (94.3 less 51.07) from PSO last year. So    € 43.23m / 138MW = €313,260 per MW

² 206MW of new wind generation required € 79.6 million (173.9 less 94.3) from PSO this year. So    € 79.6m / 206MW = €386,400 per MW

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 :

http://irishenergyblog.blogspot.ie/2015/01/pso-levy-set-to-soar-this-year.html

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.

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. 

_________________________________________________________________________________

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