EUROPE’S RELIANCE ON Russia for energy has been a “glaring policy mistake” but volatility in energy prices predates the war in Ukraine, according to a new report.
A second interconnector between Ireland and France would help keep prices down, as well as improve supply security and exports, the report recommends.
The Institute of International and European Affairs (IIEA), an Irish think tank, has studied the ‘extreme’ volatility – that is, the dramatic changeability – of energy prices in recent years.
The paper, which is called Europe’s Long Winter: Escaping the Energy Crisis, examines policy responses to energy price volatility in Europe. It highlights that energy prices have fluctuated considerably since the beginning of the Covid-19 pandemic – well before Russia’s invasion of Ukraine.
Co-author Daire Lawler said that “extreme market volatility has led to a surge in consumer prices for energy, and while this is not solely a consequence of the war in Europe, the EU’s reliance on Russian energy imports can now be seen as a glaring policy mistake”.
“In the context of rising energy prices and a cost-of-living crisis, a more durable response to inflation is urgently needed from Irish and EU policymakers, which must address structural factors in the energy system,” Lawler said in a statement.
“Regardless of whether the measures announced by the Irish Government have their intended impact, and given that at the very least, energy prices are expected to remain close to current levels over the coming months, the Government will face political pressure to maintain its current fiscal supports.
“While these supports are necessary in the short-term, reducing energy prices requires a long-term approach.”
The report recommends that EirGrid, Ireland’s electricity grid operator, propose the development of a second interconnector between Ireland and France.
The first link – the Celtic Interconnector – was approved in May 2022 and is expected to be operational by 2026, connecting Ireland and the EU undersea.
It suggests that the EU should develop an initiative for joint gas procurement, which would allow it to import gas as a single buyer, “without delay” – a policy included in a European Commission proposal called REPowerEU.
This would help the EU to reduce its dependency on Russian gas and to avoid energy shortages in member states this winter, the report authors said.
Additionally, the report recommends that political leaders in the EU must consider reform in how electricity is priced and that a system of locational marginal pricing would improve the functioning of the wholesale electricity market.
Under an LMP system, the price of electricity would vary to reflect its value in different locations, accounting for the local balance of supply and demand.
Co-author Luke O’Callaghan-White said: “Only significant action taken at European level to address structural flaws in EU energy markets can counteract price volatility, in turn reducing the cost-of-living crisis impacting people across Europe.”
“A second interconnector will be necessary to manage security of supply and to help keep consumer prices down and enable Ireland to export wind energy as the Irish wind economy grows across the next decade,” he said.
“Yet at present there are no plans to develop another electricity interconnector between Ireland and France.”
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