Ireland’s energy future
An ESRI report has reviewed the economic research on energy in Ireland and attempts to identify the full implications of the policy choices we are currently facing. Meadhbh Monahan reports.
Described by Energy Minister Pat Rabbitte as having “a lot of sensible substance”, the ‘Review of Irish Energy Policy’ was written by Professor John FitzGerald.
The Minister told eolas that he is “minded” to take account of FitzGerald’s proposition that Ireland should continue to enhance its involvement in onshore wind (see pages 16-19). He finds it “hard to argue with” the analysis that offshore wind technology needs further development to “bring down cost” and to deal with the problems of maintenance and reliability. However, Rabbitte doesn’t believe this is “an argument against us pursuing our discussions with the British Government about their very ambitious plans that may in the future hold some possibilities for this island.”
Setting the scene
Economic crisis, the evolving EU policy context and recent developments in technology require new approaches to domestic energy policy, FitzGerald writes.
The recession has reduced the need for further electricity generation over the next 10 years, the report states. A lower level of renewable generation and higher interest costs are likely to slow the replacement of capital stock such as cars, slowing the rate at which environmental and efficiency improvements are incorporated into the vehicle fleet.
In addition, the cost of capital will rise, making renewable projects less attractive to Irish firms which are reliant on the Irish banking system, thereby favouring larger international firms which have easy access to finance on European markets.
Oil price remains high as a result of growing demand in China, India, Brazil and other newly industrialised countries, therefore investment will be required in new renewable technologies.
Shale gas, a natural by-product from shale rock, is currently being developed in North America and is cutting the cost of natural gas there. However, because the US is now less focused on liquefied natural gas (LNG), its price has fallen.
The report explains: “The combination of the serious recession in Europe, the fall in LNG prices and the changed expectations about world gas supplies has seen a major reduction in European spot prices for gas. This had significant benefits for Ireland by reducing the price of gas, and hence, the price of electricity.” However, any developments in shale gas in Europe won’t translate into reduced gas prices until 2020.
Similarly, tidal energy “will not be economic or play a major role in Ireland before 2020 at the earliest” because of its high level of intermittency.
It will be 2030 before electric cars begin to have an impact on energy demand because the technology “has a long way to go” before it is economic.
Nuclear energy is not likely for Ireland either because it would face major opposition and nuclear plants are not built for the smaller scale production that Ireland would require.
The cheapest and “most satisfactory” way of ensuring security of supply in the medium term is to ensure that the Corrib gas field is brought into production as soon as possible, because it won’t cost the Irish tax-payer anything and will reduce Ireland’s dependence on imported gas, according to the report.
While Ireland’s policy objectives remain the enhancement of competitiveness, ensuring a secure energy supply and tackling the problem of climate change, the changing external context requires some new solutions, FitzGerald states.
EU policy
As the EU is “rapidly” moving ahead with plans for an integrated electricity supply market, there is a risk that the new rules may not be consistent with the Irish SEM and could force its abandonment.
The SEM has been a key success in Irish energy policy because it has ensured security of supply at a competitive price since 2007. It is important that policy- makers know whether the SEM will continue to operate under new EU rules and, if not, what the alternative will be, the report notes.
The credibility of the Irish market, could be “fatally undermined” if a new regime is put in place. “This would make investment much more difficult to finance and, hence, more expensive,” FitzGerald warns.
In addition, if the Irish electricity market had to be radically changed to conform to a new EU trading regime, it could involve very high costs. For example, it costs €100 million to develop and implement software to allow customers to change electricity supplier.
The Emissions Trading Scheme (ETS) is also likely to be reviewed and this will determine the nature and timing of new investment in energy in the electricity sector. In addition to the ETS (which covers emissions from electric power generation and large manufacturing users such as cement), EU limits on CO2 from other sources will also put pressure on companies, the report claims.
Ireland will find it very difficult to meet the targets unless it is allowed to purchase ETS permits from other countries (a previous request by the Government was declined).
The practice of ‘grandparenting’ emissions permits occurs when those who have previously emitted greenhouse gases can continue to do so without incurring significant costs (windfall gains). FitzGerald believes that this provides the wrong incentive because the subsidy is only payable if the plant continues to produce. In addition, the use of windfall gains in 2009 to provide subsidies to energy users was “unwise from the point of view of energy policy and Irish competitiveness”, and should have been given to the exchequer. As windfall gains are important in electricity generation and cement production, they should be recaptured by society through the tax system, according to FitzGerald.
The REFIT (Renewable Energy Feed-in Tariff) scheme, which was introduced in absence of a floor price for carbon and guarantees a floor price for electricity produced from onshore wind, it is “too generous”. It has created a situation where investment is not driven by policy goals such as security of supply, greenhouse reduction or the renewable requirement, but by REFIT incentives and returns from the SEM, the report claims.
FitzGerald believes that while the floor price for on shore wind in the REFIT scheme is “broadly appropriate”, it is expensive to pay a continuing subsidy when the market price rises above the floor price and could result in substantial unnecessary costs falling on Irish consumers.
He suggests that this aspect of REFIT be eliminated for all new investors and that incentives for offshore energy wind, wave and tidal generation should be ended altogether.
Next stage
Ireland must contribute to a re-evaluation of EU policy to ensure that it will deliver the required reduction in greenhouse gas emissions at the least cost to the economy, the report states. Domestic policy on climate change needs to be developed in a manner that minimises the cost of compliance and a decision on what will replace the Moneypoint coal-fired generation station after 2020 needs to take account of security of supply considerations. A national emergency response policy needs to be developed because Ireland is currently reliant on other countries for its gas supply and the potential effects of high levels of wind generation on the economics of other generators need further research, the report concludes.
