Why are Irish consumers paying the most for electricity in Europe?
No matter what way you look at it, residential electricity prices in Ireland are expensive. When comparing electricity prices across European countries, we can look at direct ‘euro’ price, or we can adjust prices to account for differences in living standards and wages. Either way, Ireland is well above the European average.
The reason electricity prices are higher in Ireland than in other European countries primarily relates to two elements that together constitute about 70% of our electricity bill. These are how we make electricity in Ireland and how we move it to our homes. Ireland has unique characteristics for both.
In producing electricity, Ireland is very reliant on natural gas, which generated about half of our electricity last year. Very few European countries have this level of exposure to natural gas. It’s an important fuel for electricity in Ireland because it fills the gaps when renewables like wind are not sufficient to meet electricity demand. While natural gas is the cleanest of fossil fuels, its price over the past four years has been precarious, and its supply volatile.
The price of natural gas is influenced by geopolitical events such as the war in Ukraine and developments in the Middle East. Because natural gas is also used around the world for space heating, its supply and price are also driven by weather in various parts of the world. At times during the Ukrainian war, monthly European gas prices increased by a factor of 10 and are still twice as high today as the longer-term historic average.
The gas we use nationally is purchased at international prices and, because we use so much gas for electricity, its higher costs is a a primary driver of higher electricity prices. Some might argue that if we had more gas production in Ireland, it would reduce electricity prices. It is true that increased indigenous gas would reduce prices (and improve gas security), but the impact on electricity prices would be very small unless the supplier was willing to sell gas well below market prices.
The second reason Ireland has higher prices than other EU countries is the cost of moving electricity from where it is made to where it is needed. Because Ireland has many rural and remote areas, the length of electricity wires and poles required per person is much greater than in other European countries. This longer infrastructure costs more money and is reflected in our bills.
There is great uncertainty about what our electricity bills will look like over the next five to 10 years, but my view is that electricity bills are more likely to stabilise closer to today’s level rather than return to the prices we saw five years ago. An average annual electricity bill this year is close to €1,400. While this is lower than it was three years ago (about €2,000), it is still higher than pre-Ukraine crisis levels of around €1,000 per year.
As Ireland builds more wind and solar over the next 10 years, this will reduce the amount of gas we need to generate electricity and reduce Ireland’s exposure to volatile gas prices. Building renewables to displace natural gas requires significant investment. However, investment is required whether we build renewables or not, because we have an ageing power system and infrastructure that needs upgrades and refurbishment to meet our future electricity needs.
The economic preference for whether we build renewables or build natural gas power plants to meet our future electricity needs depends on your view of natural gas prices over the next 20 years. Generating a unit of electricity with renewables such as wind and solar in Ireland today is more cost competitive than using natural gas (though not significantly cheaper). But moving that unit of electricity from wind farms around the country will cost more, as we need to build more power lines to remote locations.
If you take the view that natural gas prices over the next 20 years will be higher than today, then renewables are more economically competitive and if you assume gas prices will be lower, then the opposite occurs.
It is my view that the geopolitical, environmental, and national security risks associated with natural gas sourcing and pricing are too high. It makes economic and national security sense for Ireland to invest in our own energy from renewables at home.
However, we must manage our future expectations about the promise of cheaper electricity with great care. Renewables are not likely to significantly reduce electricity bills below today levels, but they will reduce volatility if gas prices spike again. Renewables also offer stable prices rather than “cheap” prices.
The goal for the Irish Government should be to make electricity as affordable as possible, while acknowledging that many families will still need assistance. From a political perspective, this message is important because it means the need for targeted—rather than general—measures to assist families with energy credits will endure.
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