A further rise in the price of electricity may be necessary later this year because of rising world fuel prices, the Commission for Energy Regulation (CER) has signalled.

The CER, led by energy regulator Tom Reeves, last year sanctioned an average price increase of 9 per cent for ESB customers. The ESB is expected to present a new price application later this year.

In the CER's latest newsletter the energy regulator signals that further increases may be needed. "Fuel prices have remained at high levels in the past year and this may impact on tariff levels later this year," the newsletter states.

The newsletter points out how important fuel is to the cost of producing electricity. "Fuel is a large component of the generation cost, with plant capital and operating costs accounting for the remainder."

Any further price increases are likely to prove controversial with businesses and consumer groups, but with oil prices significantly higher than this time last year the ESB is likely to submit a strong case for a another increase. Fuel is the ESB's largest operating cost, amounting to €732 million a year. This is even larger than payroll costs of €481 million.

While the ESB would be the main beneficiary of any pay increase, it would also allow independent suppliers to adjust their prices upward.

The CER has long argued that electricity tariffs need to be rebalanced, although this process has largely been completed in recent years. Nevertheless, the CER newsletter says every effort must be made to ensure the pricing system is fair.

"The challenge is to recover these costs in as fair a manner as possible, ensuring that customers are charged in an equitable way and that certain customers do not end up paying a higher price to cross-subsidise other customers."

While reluctant to comment on prices generally, the ESB has also spoken over the last year about rising fuel costs and the impact on prices. In its last annual report (for 2003), the company stated: "Fuel markets by their nature are volatile and with transparent cost-reflective tariffs a feature of the new market, customers can expect this volatility to emerge as a factor impacting on electricity prices going forward."

While fuel is exerting upward pressure on prices, the CER is hoping an all-island market may help drive them down. An all-island market should be more efficient because the lowest cost plants will be allowed operate ahead of higher cost plants, leading to potentially lower electricity costs.

The regulators in the Republic and Northern Ireland are currently working on arrangements to merge the two electricity markets.