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Supply and demand: What's behind the surge in Irish and European energy prices this year?

Demand for gas and electricity has surged this year as economies reopened and businesses ramped back up.

Image: Alamy Stock Photo

WHAT ARE THE main factors behind the rapid acceleration of Irish and European energy prices this year and why have some commentators raised concerns about a winter crisis?

There really isn’t a single, underlying issue to blame for the phenomenon. 

If you had to oversimplify it, you might say that a mismatch between supply and high levels of demand has forced energy prices across the continent upwards with benchmark European gas prices, in particular, tripling this year even before the arrival of winter.

The issues are particularly acute in the UK’ where rising wholesale gas prices are forcing energy suppliers out of business in a crowded market.

But Ireland is grappling with its own set of issues as winter sets in.

  • Our colleagues at Noteworthy want to investigate why we are facing an Irish electricity crisis. Support this project here.

So what’s going on, what does the Government plan to do about it and how will it impact consumers?

Surging demand

Well over half of Ireland’s electricity is powered by gas at the moment.

This poses two immediate difficulties in the run-up to winter — the first is the skyrocketing cost of natural gas across the world.

Demand for gas and electricity has surged this year as economies reopened and businesses ramped back up following the disruption of the past 18 months or so. 

“One of the normal rhythms of gas is that that there’s higher demand in the winter, so the price goes up and there’s lower demand for gas in the summer, so the price goes down,” explains businessman Fintan Whelan, former corporate finance director at Airtricity 

“The guys who own gas storage capacity wait until the summer to stock up at a low price. Then they release that gas to the market during the winter when the price goes up and they live on the difference.”

The trouble this year, however, is that demand for gas didn’t decline this summer and neither did wholesale gas prices.

Inventories have been drained because of the lack of a “storage buffer”, Whelan explains.

At the same time, European energy supplies have been constrained due to a host of problems.

For example, low wind speeds have forced European utility companies to fall back on coal, “depleting stockpiles of the dirtiest of fossil fuels“, as Bloomberg reported earlier this week. 

Meanwhile, Russia is sending less natural to Europe and sourcing alternatives has proven tricky, with US exports curbed by a series of storms and extreme weather events in the Gulf Coast over the past eight months.

All of this has meant that in August, soaring energy costs added significantly to Eurozone inflation figures, helping to push the annual rate of increase to 3%, well above the European Central Bank’s 2% target.

In the UK, the crisis has been amplified by a fire at a key converter station linking the French and British grids. It could take a month for the station to come back online, according to reports this week.

Power stations

On this side of the Irish Sea, many of these factors have conspired to push electricity, fuel and gas prices up by around 19.6% in the year to the end of August, the Central Statistics Office showed recently.

The problems have also been compounded by another issue — the temporary closure of a pair of vitally important gas-fired electricity power stations: Bord Gáis-owned Whitegate in Cork and Energia-owned Huntstown in Dublin.

These two stations have been shut down for maintenance most of 2021 due to what the national grid operator, EirGrid, described as “unexpected and significant failure of equipment.

The closures have been blamed for short-lived electricity supply shortfalls in recent weeks that resulted in the issuing of two separate amber alerts by the Single Electricity Market Operator (SEMO). 

Concerns have been raised that such shortfalls could snowball, resulting in blackouts and power cuts over the coming months as more demands are placed on the grid.

Speaking this week, Minister for the Environment Eamon Ryan said he doesn’t expect blackouts to be a feature of the Irish winter.

The Government expects the plants to be operational again within two months — but Whelan believes the difficulties could be prolonged.

“Ryan has accepted the assurance of both operators that they will be back in time,” Whelan says. “Maybe they will, maybe they won’t” but in the meantime, winter is approaching and there remains major “uncertainty” about supply.

As a result of that uncertainty, the Government has had to come up with solutions that have run counter to its stated agenda on climate change, Whelan explains.

Recent figures from Gas Networks Ireland showed that at peak times in July, up to 25% of Ireland’s electricity demand was met by coal-burning power stations.

This is “really dispiriting”, Whelan says — particularly given strides made since the 1990s to move away from dirty fuels like coal and peat and towards cleaner ones like gas.

Renewable energy

Whelan and others believe that accelerating the switch to renewable energy, like offshore wind, will help to make Ireland’s energy supply more secure.

With the Government aiming for 70% of Ireland’s electricity to be generated from renewable sources by 2030, experts like Muireann Ní Loinsigh — an economist with the ESRI specialising in energy — agree.

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But offshore wind isn’t a panacea for all of Ireland’s energy problems.

“Wind obviously only generates electricity,” Ní Loinsigh says on the latest episode of The Explainer podcast by The Journal.

And one of the things that people kind of forget is that electricity is only one source of energy demand. It’s only about 20% of our total energy demand. We still have to heat our homes on our buildings or commercial buildings, we still have to transport ourselves around the place.

Overall, she says Ireland needs to diversify its portfolio of renewable energy sources to meet the economy’s needs and as insurance against weather-dependent sources like wind.

Green hydrogen is another type of renewable that needs to be seriously considered as a way of improving Ireland’s energy security, she and Whelan believe.

“Ireland is much, much further behind the curve than UK and Europe on this but it is a hot topic in the industry. We’re not seeing any concrete steps yet though,” Whelan says.

Ni Loinsigh says that Ireland’s Climate Action Plan is “somewhat unusual” in a European context given its focus on electricity.

If you look at the Climate Action Plan, there’s kind of only one game in town, which is you shift as much of our transport as possible to electric, you shift as much of our heating as possible to electric. And then you just get the electricity itself to be renewable,.

“There really hasn’t been much of a question over things like renewable hydrogen, should we maybe try to get some renewable gas into our network?” 

But “there’s no point in talking about more offshore wind this winter”, Whelan says.“There’s no point in talking about adding additional interconnectors or even new gas plants this winter.”

The immediate question for politicians this winter is how to make the system work without cannibalising Ireland’s climate change response.

Winter bills

In the meantime, consumers are being urged to shop around to save money on their electricity bills this winter.

Speaking to The Journal this week, Darragh Cassidy, a spokesperson for price comparison site Bonkers also urged consumers to think about how they can conserve energy to cut costs.

“Installing energy-saving lightbulbs, switching off appliances at night, not overfilling the kettle… I’d encourage readers to research and put a little time and effort into how you can use less energy around the home, because it can all add up,” he said.

The way the energy market works is that all the suppliers offer discounts to attract new customers. The same way you switch broadband or mobile provider, the energy market is no different.

“The suppliers offer discounts of around 30-40% for the first year to people who switch. You could save around €500 a year on your bills.

“With prices increasing, that discount is going to be off a higher price, but it’s still a discount.”

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