Employers and families are likely to face another year of high energy prices, following 18 months of increases that have left some homes paying more than €4,000 a year for gas and electricity.
Even while renewables such as wind and solar contribute up to 40 per cent of electricity, the price of natural gas still determines the ultimate cost. The fuel is responsible for 30 per cent of our total energy needs and generates around half our electricity while 720,000 homes and businesses rely on it directly.
Supplies look set to remain under pressure, despite Europe building up adequate stocks for this winter.
Russia, responsible for around 40 per cent of Europe’s natural gas, continues to squeeze supplies, a response to sanctions imposed by the European Union and other countries following its invasion of Ukraine in February. Markets panicked in summer when Russia initially cut off supplies, sending natural gas futures prices in London to around 650 pence sterling a therm – the unit in which it is sold.
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They slipped back to more “normal” levels in autumn. Once it emerged that Europe had built up what appeared to be sufficient stocks for winter, they dipped below 180p. However, December’s cold snap sent them back up past 330p. Some predictions had them hitting 420p by the end of 2022.
Fuel costs five or six times what it did three years ago, with a direct hit on consumers’ bills
The reality is that prices have been moving up steadily since Covid lockdowns eased in 2021. The fuel costs five or six times what it did three years ago, with a direct hit on consumers’ bills. This looks set to continue into next year as supplies will remain tight.
Launching the Government Energy Poverty Action Plan a few weeks ago, environment minister and Green Party leader Eamon Ryan said it may be two years before utility bills drop, with wholesale gas markets unlikely to come back down for the foreseeable future.
One of the sources that Europe tapped this year in its effort to build up supplies was liquefied natural gas. This can be shipped, so does not rely on a network of pipes for delivery. That opens a range of supplies from the US, the Middle East and Asia Pacific, reducing our dependence on Russia.
However, demand for this is likely to increase next year as China eases back on its existing Covid restrictions, placing extra pressure on these sources. That leaves Europe facing extra challenges when it bids to rebuild stocks following this winter in preparation for the colder months in late 2023 and early 2024.
Earlier this month, the International Energy Agency (IEA) published a report estimating that Europe would need around 400 billion cubic metres (bcm) of natural gas next year to meet demand and ensure a sufficient cushion of stocks. However, the organisation estimated that actual supplies would fall short of this by around 57 bcm.
Europe can partly plug that gap through measures it has already taken, including reducing demand and increasing the supply of renewable electricity. Nevertheless, this will still leave a 27 bcm gap, the IEA calculates.
Tackling that will require the region’s countries, including the Republic, to spend around €100 billion on further steps to cut the need for the fuel. These include boosting the availability of wind, solar and hydro electricity, increased energy efficiency and “behavioural change”, meant to cut demand still further.
The Republic’s exchequer already faces a stiff bill for shielding families and enterprises from the worst of this year’s rising gas and electricity bills
Even with these measures, governments across Europe will have to continue giving cash to businesses and homes to protect them from inevitable energy inflation, the agency acknowledges. However, the IEA argues that these protections should be aimed at vulnerable households and employers, rather than simply handing money out across the board.
The Republic’s exchequer already faces a stiff bill for shielding families and enterprises from the worst of this year’s rising gas and electricity bills. The Government has pledged to give each household in the State €600 over three months against their electricity costs. At the same time, Paschal Donohoe, then minister for finance, allocated €1.2 billion to a scheme to refund businesses whose bills have risen sharply in the past year.
The EU recently approved the scheme under state aid rules, allowing the Revenue to invite applications from organisations seeking the cash, so payments under the plan are likely to have begun by the end of this year, more or less in line with the schedule set by the Government. That scheme runs until next April.
Ireland is in a different situation to much of the rest of Europe. Our gas comes from two main sources, the Corrib field off the Mayo coast, which will provides around 21 per cent of what we will need this winter, and the Moffat interconnector, a pipeline running from Scotland through which we import the rest.
The gas supplied through Moffat comes from Britain and from North Sea fields in Norway. In broad terms, Britain supplies much of the fuel that we import during the summer, when our neighbour tends to export gas, as it has more than it needs during those months. In winter, more of it comes from Norway, as Britain switches to importing during the colder months because many of its households rely on the fuel for heating.
This means that we do not rely directly on Russian supplies. However, as overall demand determines the fuel’s price, it remains expensive. Norway also has the option of exporting to continental Europe, which means that its stocks are subject to the same demand pressure as those in the rest of the region.
According to Gas Networks Ireland, the State company responsible for our supply network, this State’s position is secure for this winter at least. In November, the organisation’s winter outlook said there were enough natural gas sources and network capacity to meet expected demand this winter.
The Republic still faces long-term challenges. One is the supply of electricity itself
The company explained that liquefied natural gas imports to Europe had boosted British supplies. While Gas Networks Ireland acknowledged that the Ukraine war had increased the risk of disruption, it was not forecasting that this would happen in winter 2022/23.
That outlook was limited to this winter. The Republic still faces long-term challenges. One is the supply of electricity itself. In October, national grid operator Eirgrid warned that the margin between demand and supply would be at its narrowest from mid-November through to early February – not surprisingly the year’s coldest months and the period when electricity consumption is at its highest.
Eirgrid warned that there was a “high probability of the system entering the emergency state” during these months, effectively meaning a heightened risk of power cuts. Its report calculated that, on average, electricity customers could be without supplies for about four hours this winter. However, it added that this did not necessarily mean anyone would lose power at any time.
The problem is rising demand and limited supply, largely because pledged back-up power plants, some of which were meant to be ready for this winter, were not built. ESB had contracted to construct these plants, but the company ran into planning delays, some of which were aggravated by Covid lockdowns, delaying their final installation.
As a response, the Government has sought permission under special provisions allowing it to waive some planning law requirements for two emergency generators in Dublin, where demand is heaviest. However, these will only be ready for next winter, meaning the squeeze is likely to continue over the coming months.
If an emergency were to materialise, there is a protocol in place that requires large energy users to take the first hit. Under that system, Eirgrid will mandate fellow State company, ESB Networks, to ask such customers – mostly big industries and data centres – to switch off first, to ease pressure on the system. In general, these organisations have their own back-up power supply although that may not always be the case.
The Republic can also import electricity from Britain, when that country has a surplus, through a line running under the Irish Sea. On 10 occasions last year, we shipped in electricity roughly equivalent to the amount produced by an average-sized power plant through this interconnector.
The biggest energy users also face a hit this year from efforts to ease demand at peak times. A scheme introduced by the Commission for the Regulation of Utilities imposes an extra €100 million charge across the board for use of the electricity network between 5pm and 7pm.
All customers, from businesses to homes, will pay 30 per cent of this,. But a handful of “extra-large energy users”, likely to include data centres and big manufacturers, will cover 70 per cent of the total. There are just 22 companies in this category, although some have multiple connections to the national grid.
By early autumn, there were signs that some of these measures, or rather the focus on the looming power shortage, were beginning to take effect, with some easing of demand. However, at that time Eirgrid was not in a position to say if this was a trend or something more short-term.
As things stand, the Republic looks likely to get through this winter, just about. But the system, along with homes and businesses, faces further challenges next year and probably for several more winters before they are resolved.
