FAQs on Electricity Prices

Wholesale price is not immediately reflected in customer price; indeed wholesale price changes every 30 min and can show huge variation depending on the time of the day (peak (5pm-7pm) versus non-peak (2am-4am). Customers therefore received a blended price that takes account of the daily, weekly and monthly fluctuations in price, the cost of generation and the financing of these costs.

These financing costs include the costs to buy electricity and gas in advance on long-term contracts at fixed prices in order to try and avoid the volatility of prices.  This is called hedging into the future, and it helps maintain steady prices for consumers if there are external shocks in the wholesale market. When the prices dramatically rose in 2021, consumers were protected from the worst of the sharp price increases as it took some time for them to feed into higher costs for customers. For example, while gas prices in that period rose by 1500% the wholesale cost of electricity rose by 300%[1].  Likewise, now that prices have lowered, there is a lag before customers will feel the effects. Suppliers are locked into higher prices due to hedged positions negotiated during a period of high prices sometimes 1-2 years previously.   The overall effect of hedging is a smoothing out the highs and lows of price volatility to yield a more stable price for customers.

[1] Wholesale Price Index 

The EU Council Regulation on an emergency intervention to address high prices (2022/1854) was agreed on the 6th of October. At a high-level the EU wants to decouple final electricity prices from gas prices. They have recognised that this is an exceptional short-term option to temper price spikes by collective European action to ensure security of supply at reasonable prices for next winter and beyond. The Council Regulation includes:

• a temporary solidarity contribution based on taxable profits for fossil fuel production and oil refining.
• a cap on market revenues of for specific technologies in the electricity sector,

and these measures were introduced in Ireland on the 1st of December,  The new revenue cap being implemented by DECC focuses on trying to capture the excess rents achieved by low-cost renewable units that get the high price set by the gas-fired plant and use them for energy supports for customers.

The price of electricity sold will be based on a monthly average of a blend of prices and has set the level of the cap at €120/MWh for wind and solar and €180/MWh for all other technologies. The estimated revenue will be used to insulate business and households from the adverse effects on energy price inflation.  The expected timeframe for Irish legislation is for Q2 2023.

However, given the urgent need for Investment in the energy transition, where electricity market participants will be the primary investor, these market interventions need to be time limited and take into account the high degree of hedging that occurs in the renewable sector.

According to the CRU[1]  as of June 2020, wholesale and network costs comprise circa 70% of electricity bills, with the remainder divided between supply costs, the PSO levy and VAT. For gas, wholesale and network account for circa 62% of the bills, with the remainder consisting of supply costs, the carbon tax, and VAT.

[1] CRU20125 Factsheet Domestic electricity and Gas bills in Ireland

No, the electricity market, which is based on a merit order and marginal pricing system has been designed to European standards and has unlocked major benefits for consumers. The market design is based on the principal that the highest cost generating unit that gets selected (dispatched) to meet demand sets the price for all the other cheaper units that are also dispatched. This high-cost unit is generally a gas plant with high marginal costs.

In 2021 alone, ACER (the European Union Agency for the Cooperation of Energy Regulators) estimated the benefits of cross-border trading to amount to 34 billion euros due to increased dispatch efficiency. It is worth noting that more than a third of these benefits were delivered in the last quarter where energy prices were highest. They also found that the current market design significantly reduces short-term market volatility and estimated that the price volatility would have been around seven times higher in 2021 if national markets had been isolated.

This is a competitive market and prices go down as well as up. In 2020[1]  the Commission for the Regulation of Utilities reported that gas generation in Ireland posted a net margin loss of

–6% and that the average cost per MWh of electricity sold was steady at €77/MWh in FY2020, not changing significantly from FY2019 (see appendix 1).

The EU Commission also had asked ACER to complete a review of the Electricity Market and they concluded their work[2] in May 2022 indicating that:

• whilst the current electricity market design is worth keeping, some improvements will prove key for it to deliver on important challenges, including:
  • Making short-term electricity markets work better everywhere
  • Driving the energy transition through efficient long-term market
  • Increasing the flexibility of the electricity system

[1] https://www.semcommittee.com/sites/semc/files/media-files/SEM-22-021%20Generator%20Financial%20Performance%20for%20FY2020%20Report.pdf

[2] https://www.acer.europa.eu/events-and-engagement/news/press-release-acer-publishes-its-final-assessment-eu-wholesale#:~:text=Overall%2C%20ACER%20finds%20that%20whilst,through%20efficient%20long%2Dterm%20markets