When cheap Russian gas supplies were cut off following the invasion of Ukraine, European gas prices rose sharply, with a knock-on effect on the cost of electricity. With a fifth of Europe’s electricity generation dependent on gas, alternative sources of supply had to be found from other continents.
Not only is this other gas more expensive than the previous Russian supply it also generally has to be converted into liquid form to convey it by ship, and back into gas again in Europe, something that isn’t cheap. A shortage of suitable ships has also added a substantial transport cost.
As a result gas prices in Europe are around five times what they are in the US. A consequence is that Europe’s electricity prices are also much higher than in the US.
However, European electricity consumers benefit from a more reliable electricity system than in the US. While households whose power was knocked out during Storm Darragh may find it difficult to credit, on average US consumers suffer four times as many hours of lost supply as Irish ones. And although we are more exposed to high Atlantic winds than France or Germany, power interruptions here are on a par with these EU partners. One way we achieve this is through mutual co-operation on storm repairs – over the last week French crews have helped to reconnect Irish homes just as Irish crews helped last year in France.
Some reduction in EU gas prices is likely next year as increased supplies of liquefied natural gas come on stream. Even so Europe’s gas prices for the foreseeable future will remain much higher than before the Ukraine war.
Because Ireland generates half our electricity from gas, more than twice the EU share, elevated gas prices have had a much higher impact here: Irish electricity prices are among the highest in Europe. However, so far this year renewables have generated over 30 per cent of our electricity. Once wind turbines or solar farms are built each unit of electricity they generate costs virtually nothing – all the cost is accounted for by the capital investment. So in the long run renewables offer the prospect of cheaper electricity.
Unfortunately when the wind is really vigorous the electricity grid cannot handle all that is being generated. So far this year 14 per cent of renewable electricity has gone to waste because the transmission system was not there to carry it. We need to rapidly build more wires to avoid this problem.
As renewables take a larger share of overall generation the problem of their intermittent nature becomes more important. There are many days when either wind or solar produce very little. In extreme winter weather conditions their down time could last up to three weeks. This poses a major challenge for the electricity system. At the moment the gap is filled by using expensive gas when the wind does not blow. In the longer term we need to find green ways to provide the buffer supply when renewables are not available.
One option is to provide more interconnections between Ireland and the rest of Europe, including our neighbour Britain. By 2030 Ireland will have five interconnectors to the UK or France. Such interconnectors are expensive. As Ireland and Britain are subject to the same weather patterns, further connection to the rest of Europe is needed.
At present other options are only in the development stage and still very expensive, such as using waste renewable electricity to generate hydrogen, which can be stored for future generation in the doldrums. That means that gas will be needed as the buffer fuel well into the 2030s.
In the long run a renewables-based electricity system is likely to be cheaper than the current fossil fuel system. Neither will it be vulnerable to the periodic energy price shocks that have been a feature since the 1970s. This reality needs to be reflected in how energy markets are run and prices are set in Ireland.
Today the market structure for electricity means that when the wind does not blow and gas is used the cost of gas sets the electricity price very high. While it makes sense that electricity prices should be high when gas is used to generate electricity, the market also needs to treat wind and solar differently, providing certainty for investors that they will get their money back. In turn that will reduce the investment costs, and hence electricity prices.
An appropriate revised market structure should ensure that as renewables come to dominate the market their lower cost is reflected in electricity prices.
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