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How will Irish energy costs and supply change in the next 12 months?

Analysis: the Ukraine war and the ongoing energy crisis has been felt in our pockets because of how the global energy market operates - Dr. Paul Deane, Senior Research Fellow, Energy Policy & Modelling Group, MaREI Centre/ERI

A year of war in Ukraine has seen our energy bills go up exponentially. Although we don't get gas directly from Russia, the impact of the war and the ongoing energy crisis has been felt in our pockets because of the global energy market. An unseasonably mild winter and a rush to fill gas stores means we didn’t see the shortages we feared.

But by December 2022, consumer electricity prices were 62.7% higher year-on-year, according to the Central Statistics Office. From December 2021 to December 2022, the price of gas rose by 86.5%, liquid fuels (home heating oil) were up 39.9% and solid fuels were up 46.9% in the year. Wholesale gas prices hit their peak in August 2022 rising to a whopping €346 per megawatt hour — a more than 450% increase on prices before the invasion. The price of gas remains high, but has now fallen to a level not seen since the second half of 2021, when we first started to feel the rising costs.

"The low gas prices at the moment, they just stop the existing electricity prices going up, rather than seeing them reduce. That’s because the prices of international gas are dropping because of the weather and because of external, economic factors outside of Europe," says Dr Paul Deane, research fellow at the MaREI, the SFI Research Centre for Energy, Climate and Marine at UCC.

Dane says there's huge uncertainty as to how that will play out into the summer. Energy companies would "hedge into the future," buying gas six, 12 or 18 months in advance, he says, and this is part of the reason why the plummeting price of gas doesn't mean consumers are seeing their bills fall, and why volatility and uncertainty on the energy market will remain throughout 2023. "Those things put upper pressure on prices rather than a downward expectation of where prices will go. The new normal will be high electricity prices."

What do we need to do about the uncertainty in the short-term?

"I think you have to recognise the things that you can control and change the things that you can," says Deane, who adds that the government has done "a really good job in terms of protecting all consumers, right across the economy, from high electricity prices." He outlines that a typical annual electricity bill two or three years ago would have been about €1000 per household a year and that has now risen to €2000 per household per year.

The €600 energy credit has gone some way in covering that gap, along with other financial measures to support businesses, and this will need to be maintained to protect families right across the country, he says, because Ireland can’t control the price of natural gas at a European level and external factors have a much more significant influence. "We can try things like putting caps on gas prices, putting caps on electricity prices, but at a fundamental level it is a market-driven price and the market reacts to things like weather and external factors."

The current cost of the supports put in place is €1.2 billion a year and Deane argues we likely need to move away from giving financial support to everyone towards giving it to those who need it most. We need to follow the principle of giving the highest level of protection to those on the lowest financial incomes, he says. Minister for Finance Michael McGrath recently told RTÉ Radio 1's Today with Claire Byrne that the Government may have to make further interventions to help households cope with the cost of living. He said announcements about potential changes would likely be made by mid-February 2023.

What trends will emerge in the Irish energy market in 2023?

We’re not out of the woods yet, but if you're looking for a small bit of good news, Deane expects to see two trends emerge across the electricity market this year; cash backs and the option for customers to opt for fixed price contracts.

Deane says that if prices stay low for the next few months, companies could begin offering cash back to their customers, as a kind of "solidarity fund" from energy providers. "A company might review their books after five or six months worth of sales, and if they're doing well profit wise, there might be cash backs to their individual customers." Deane says this is a lower risk strategy for companies because it’s a scheme that could be applied retrospectively.

The other thing Deane says we could see, is more energy companies offering fixed-rate contracts for families and businesses. Flogas was the first company in Ireland to do this in January. "What [a fixed-rate contract] does, is it will lock people into a fixed price across the year and that reduces the volatility. But unfortunately it doesn't mean cheap [energy], because we're just locked into a new era of very high prices."

What about the long-term?

Ireland is one of the most fossil fuel reliant countries in Europe and we're largely dependent on imports of both oil and gas. "Most of our electricity is generated from natural gas and again the price of natural gas is something we just can't control in Ireland. All we can control is the consequences of it and maybe have plans to move away from it," says Deane.

"The good news is we know what we have to do, we have the technologies to help us do that. But the bad news is that we're just doing a really slow pace. Renewables is something that's probably Ireland’s greatest strength in terms of the weather. But our greatest weakness is probably the pace at which we're delivering it." As an example, high winds meant 45% of the country's electricity came from wind in October 2022, making it the biggest single contributor to our power needs that month, which set a record.

But when it comes to building our future, Deane highlights planning as a problem area. "We have a planning system which is very congested, with lots of different applications, we have lots of different processes for permitting, for licensing, so we have a lot of paperwork that comes in the way of delivering these things."

Deane adds that in addressing the energy crisis into the future, when we're putting in solutions, we have to be mindful of the environment and of communities. "It's not about railroading these things through, it's about doing them quicker and that's not just an Irish challenge either, we've seen this from European documents as well. "Planning, permitting and licensing are just slowing down the deployment of renewable energy, which helps us move away from this problem. They’re putting in real barriers and slowing things down."