Powering the economy: a new energy focus

Powering the economy A new energy focus

The energy sector is the heartbeat of the all-island economy. The figures for the contribution of the sector — a contribution of €5.4 billion, nearly 48,000 jobs in all parts of the island and €725 million of tax paid each year — speak for themselves. However, the economic contribution does not stop there. Households and businesses across the country rely on energy to support their day-to-day activities. The ability of the sector to continue to provide a secure and reliable supply of energy is therefore fundamental to our economic prosperity.

The strong contribution of the sector to the economy is taking place against a sometimes challenging backdrop as geopolitics, technological developments and climate change have pushed energy to the centre stage of government policy across the entire developed world. However, the energy sector on the island of Ireland is in very good health. This can be seen right across the energy system. For example:

• While energy costs remain a concern for many consumers, prices in the Republic of Ireland (ROI), according to Eurostat, are close to or below the Eurozone average for the average domestic customer.

• Security of supply across the island of Ireland is currently sufficient in terms of quality of network, generation margin and interconnection with Great Britain, which is a direct result of significant investment by the industry over the last decade.

• ROI and Northern Ireland (NI) have made strong progress against their ambitious targets to increase the penetration of renewables into the generation mix to 40% by 2020 and to reduce dependence on imported fossil fuels. This stretching objective is broadly supported by the electricity industry and will mean that the island of Ireland will have one of the highest penetration rates of renewable energy across all of Europe.

• In the last 15 years or so, the sector has developed a strong competition ethos in generation and supply coupled with objective and robust regulation of electricity networks. Furthermore, those areas of the sector, where competition is the primary driver, remain subject to robust and objective regulatory oversight to ensure that prices paid by customers are cost reflective and efficient.

While the sector has responded positively to both energy policy and competitive challenges, this was not inevitable and should not be taken for granted. There are a number of structural factors which militate against this, such as the lack of economies of scale in our relatively small market, reliance on imported fossil fuels, and the transmission and distribution network pressures created as a result of the relatively dispersed population on the island.

Moreover, investment by utilities to deliver secure, reliable and progressively decarbonised electricity supplies has also been critical in attracting high levels of foreign direct investment and the economic benefits and jobs that arise as a result.

As we look to the future, the energy sector across the globe will continue to undergo substantial transformational change in how electricity is generated, how it is transported and how our customers use it. In many ways, the sector is facing a paradigm shift as it tries to address climate change through decarbonisation while developing new technologies across the value chain. Ireland is fortunate to have access to renewable resources, and these should prove to be increasingly important in decarbonising the sector as we move towards our long-term goals. However, successfully delivering the transformation to the sector will require a number of things, including:

• A policy framework across the island which balances competing priorities of cost, security and carbon reduction

• Companies with financial and technical capability and the motivation to drive the substantial financial and intellectual investment required into the future

• A comprehensive and trusting engagement with customers and stakeholders to ensure a full understanding of the challenges and options available

In commissioning Powering the economy, I wanted to be able to highlight both the contribution that the energy sector is making to the growth and prosperity of the all-island economy and also the way in which energy firms are positively responding to the major challenges they are facing. I hope that it will prove to be a useful addition to the energy debate.

Foreword

Owen Wilson Chief Executive Electricity Association of Ireland

www.ey.com/ie/energy

The economic importance of the energy sector

Investing in a secure and

sustainable future

Energy and consumers

The energy sector’s broader contribution to the all-island economy

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Contents

Executive summary

The energy sector is a key enabler of the all-island economy, to which it contributes. It invests in infrastructure to improve reliability and price competitiveness and strives to create a future for the energy sector that is both sustainable and competitive. This success story was neither inevitable nor accidental. It is the result of effective and foresighted decisions made in the Republic of Ireland (ROI) and Northern Ireland (NI) over many decades. The legacy of this foresighted policy – our world-class generation, transmission and distribution capacity – will be critically important to the all-island economy over the coming decades.

The competitive global economic environment, combined with the evolving requirements of customers and policymakers, has created fundamental new challenges for the sector. This report has been commissioned by the Electricity Association of Ireland (EAI) to highlight the achievements of the sector to-date, to clearly identify the challenges facing the sector and to highlight the opportunities that need to be grasped in order to safeguard the future of the energy sector. The future of the industry requires that we successfully balance increasing demand, rising input costs, greater competitive price pressures, and the imperative to move towards an efficient and sustainable energy system.

The report focuses on four key themes:

• The direct and indirect contribution of the energy sector to the all-island economy

• The sector’s importance as an employer in every region across the island

• The very significant level of investment being made by industry participants in pursuit of a competitive and sustainable future

• The trend towards empowering consumers to manage their own energy requirements and costs

These themes are examined in the context of the need for a competitive and renewable-based energy sector in the future.

The energy sector is fundamental to the growth and prosperity of ROI and NI. The combined activities of electricity and gas suppliers contributed €5.4bn to the all-island economy in 2013. In the same year, almost 48,000 people were employed directly by energy firms and by other enterprises in the energy supply chain, not only in Dublin and Belfast, but right across the island.

The broader contribution of the sector to the economy is far greater, as every public and private organisation relies on energy to support their activities. The availability of a reliable and secure energy supply has been a significant factor for the multinational firms who have chosen to invest on the island and contribute to employment and growth.

The island’s energy infrastructure is the result of billions of euros of investment over many decades. Energy firms continue to invest in the sector, to deliver secure, low-carbon and affordable energy supplies. In 2013 alone, the sector invested €1.3bn in new generation, networks, supply and energy efficiency. The sector is also investing in innovation and R&D to put ROI and NI firms at the cutting edge of the new technologies, such as smart grid, energy storage and demand-side management, that will be required in order to manage the secure, low-carbon energy system of the future.

The island’s long-term climate and energy targets are ambitious and will require energy firms to continue investing. Our survey of energy sector firms found that three-quarters of respondents intended to increase their level of capital investment over the next three years. However, many firms emphasised the importance of appropriate policy and regulatory factors in their decisions and the need for a stable and predictable regulatory framework to encourage new investment.

Investment in the energy system should lead to cost efficiencies in the longer term. However, it is difficult to reduce these costs, and the level of cost that needs to be recouped through energy prices, in the short term without undermining the security and sustainability of energy supplies. In spite of a range of factors that should increase the costs of supplying energy, electricity and gas prices in the all-island market are below the Eurozone average, which has been driven in part by the investment that firms have made in facilitating greater competition. Over recent years we have seen the energy supply landscape evolving with new firms entering the retail market, which has resulted in greater choice for consumers. The all-island retail markets are now among the most active in the world in terms of customer switching activity. Furthermore, the sector is working with business and domestic consumers to help them to understand and manage their energy costs. This includes measures such as providing consumers with better information about their energy usage, smart heating controls and support for energy efficiency measures.

The scale of the challenge facing the sector is unprecedented. Developments in technology, information systems, market design and policy are progressively removing past certainties. In this environment, policymakers, who represent many stakeholders, are required to make difficult decisions when formulating policy for the energy sector. This report will be a valuable tool for all stakeholders in formulating fact-supported policies to bring about a better economic future for everybody on the island.

11 Powering the economy | A new energy focus

2

Two-thirds of FDI companies view

‘high-quality’ electricity supply as

‘very important’ to operating in Ireland

Shining light on the future

80% of industry is expecting to make greater investments from 2015 to 2018

75% of energy companies expect

employment to increase over the

next 3 years, mainly within engineering and IT

A reliable source of growth for the island

In 2013 the Irish energy sector ...

This contributed €5.4bn to the island’s economy.

... invested

€1.3bnin generation, networks,

supply and energy efficiency, exceeding the

investment in roads and public

transport

... contributed

€725mnto tax revenue in

NI and ROI

... ranked in the

top 20 among 151 countries

based on the quality of electricity supply, ahead

of Sweden, Germany, Italy, Spain and

the USA

... employed

47,600people, equivalent to 1in every 55 jobs in NIand ROI combined

To meet EU 2020 carbon reduction requirements, 40% of electricity needs to come from renewable sources — the sector has already increased the use of renewables from 6.8% in 2005 to 20.9% in 2013

The energy sector makes a very significant contribution to the economies of the ROI and NI. This contribution can be measured not only in terms of economic activity, but also in terms of employment and contributions to the exchequers.

The sector is delivering this contribution against a challenging backdrop as firms are required to strike a balance between the three main pillars of energy policy: security, sustainability and affordability. The challenge in balancing these objectives continues to increase in complexity in the face of increasing fuel supply and economic and environmental pressures.

1 The economic importance of the energy sector

Highlights• The energy sector contributed €5.4bn to

the all-island economy in 2013, of which €2.8bn was generated directly and an additional €2.6bn elsewhere in the economy.

• ROI energy firms contributed around €505mn in tax revenue in 2013, while in NI energy firms contributed around €220mn (£183.5mn) to the UK exchequer.

• The energy sector supported 47,600 jobs in 2013, equivalent to 1 in every 55 jobs in NI and the ROI combined.


Economic contributionIn 2013, energy firms directly contributed around €2.8bn in direct Gross Value Added (GVA) to the all-island economy through their activities to generate, transport and supply electricity and gas to homes and businesses.

The energy sector purchases many goods and services from other sectors. For example, electricity generation relies on a range of inputs such as fuel, construction and IT services. This additional economic contribution through the supply chain is known as the 'indirect effect'.

The wages paid to energy sector employees generates an additional economic impact through increased consumption, which is referred to as the 'induced effect'. In 2013, the combined indirect and induced effect of the energy sector was €2.6bn. This means that every €1 of economic value generated directly by an energy sector firm generated an additional contribution of almost €1 elsewhere in the economy. The energy sector’s total economic contribution, combining direct, indirect and induced, was €5.4bn in 2013.

This economic activity is a stable source of wealth for the island, because, unlike many other industries, which can locate production facilities abroad, energy firms must locate within the domestic economy. Figure 2 shows how the energy industry has provided a sustained and stable source of value between 2008 and 2013 (in spite of fluctuations in the wider economy).

The contribution of energy firms in ROI and NI extends beyond these direct, indirect and induced impacts, because organisations across the public and private sector rely on energy as a key input to support their activities. In this context, a secure and reliable supply of energy facilitates all economic activity and is key to the continued growth and prosperity of the all-island economy. We will return to this topic in the next section.

0

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GVA

TotalIndirect Direct Induced

Figure 1: Economic contribution of the energy sector to Ireland in 2013 (€ billion, 2013 prices)

Source: EY analysis, CSO, ONS, Eurostat

0.0

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Tota

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Total enegy Total GVA

2009 2010 2011 2012 2013

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195

Figure 2: Energy sector direct GVA versus total GVA, 2008-13 (€ billion, 2013 prices)


What is Gross Value Added (GVA)? Gross Value Added (GVA) is a measure of the economic contribution of an industry or sector. It is calculated as the difference between the value of outputs and the cost of inputs that are required to make those outputs. In the energy sector, a significant proportion of these input costs are comprised of the cost of imported fossil fuels. The GVA of all sectors in the economy add up, with some adjustments, to the Gross Domestic Product (GDP) of the economy.

Powering the economy | A new energy focus 4

Sector employmentThe economic activity generated by the energy sector supports a significant number of jobs across the island of Ireland.

In 2013, energy firms employed approximately 15,600 people directly. When the indirect and induced employment is taken into consideration, the energy sector supported an additional 32,000 jobs elsewhere in the economy. This means that 47,600 jobs were supported by the energy sector in 2013, which is equivalent to 1 in every 55 jobs in ROI and NI.

The energy sector supports jobs across all regions, and the pattern of employment is structurally different from that of many other sectors. For example, only a relatively small proportion of energy jobs are located in and around the Dublin area. Em

ploy

men

t sup

port

ed b

y th

e en

ergy

sec

tor

0

10k

20k

30k

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Direct TotalIndirect Induced

Figure 3: Jobs supported by the energy sector in 2013


Distribution of jobs in energy services sector


0%

45%

Powering the economy | A new energy focus5

Exchequer contributionIn addition to the GVA and employment contribution to the economy, energy firms pay a significant amount of tax. In 2013, energy activities in ROI contributed approximately €505mn in tax revenue, while in NI energy firms contributed approximately €220mn (£183.5mn) to the UK exchequer. This contribution includes:

• €405mn of income tax and social contributions, representing €255mn in ROI and €150mn (£125mn) in NI.

• €80mn and €30mn (£25mn) was paid in corporation tax to the ROI and UK governments respectively.

• The dividends from Irish semi-state energy firms to the ROI government were approximately €120mn.

• The Climate Change Levy, a tax on energy delivered to non-domestic users in the United Kingdom, resulted in €30mn (£25mn) of exchequer revenue from the NI energy sector.

• The sale of EU Emissions Trading Scheme (ETS) allowances resulted in an additional €50mn and €10mn (£8.5mn) of revenue paid to the ROI and UK governments respectively. 1

In addition, many energy firms have large capital assets, such as electricity generation plants and networks, and pay significant amounts to local authorities through property rates. Energy firms also pay excise duty on fuel inputs imported into the domestic market and VAT on other inputs.

1. The EU ETS is a 'cap and trade' scheme that requires participants to surrender an EU Allowance (EUA) for every tonne of CO2-equivalent that they emit. All large electricity generators are required to participate in the scheme. These generators source a large number of their allowances EUAs through government-run auctions.

50

55

50

80 120

150

Carbon taxes

Labour income tax

National insurance employee

National insuranceemployer

Corporate tax

Dividend from SOE

€mn

Figure 4: Tax paid by ROI energy firms in 2013


10

30

70

30

35 45

€mn

Carbon taxes

Labour income tax

National insurance employee

National insuranceemployer

Corporate tax

CLL

Figure 5: Tax paid by NI energy firms in 2013



The contribution of the energy sector to the all-island economy goes well beyond the €5.4bn it contributes to total GVA. Organisations across the public and private sector rely on a secure and reliable supply of energy to support their activities. The quality of energy infrastructure is therefore a key factor for investors considering foreign direct investment (FDI) on the island.

The investment that firms have made in energy infrastructure over many decades has been crucial in delivering a high-quality and reliable energy supply and providing NI and ROI businesses with the certainty that they need in relation to their energy supply. This investment has also resulted in the progressive decarbonisation of electricity generation. We will revert to the issue of investment in the following section.

The energy sector’s broader contribution to the all-island economy2

Highlights• The energy sector supports all economic

activity on the island, and the sector plays an important role in promoting NI and ROI as an attractive location for businesses.

• Two-thirds of indigenous and multinational companies view access to a high-quality electricity supply as 'very important' to their continuing operations in Ireland.

• The quality of electricity supply in the all-island market is high — NI and ROI are ranked in the top 20 among all 151 countries surveyed for quality of electrical supply, ahead of Sweden, Germany, Italy, Spain and the USA.


Contribution to economic competitivenessFirms consider a number of factors when making the decision about where to locate their business, such as the size of the market and its proximity to other markets, the availability of a skilled and flexible workforce, and the local tax regime, but the quality of infrastructure is an important factor for many firms (see figure 6). This is particularly the case for energy-intensive firms, whose energy costs make up a significant portion of their overall costs.

A study undertaken by EirGrid, which surveyed both indigenous and multinational companies, showed that two-thirds of respondents viewed access to a high-quality electricity supply as 'very important' to their continuing operations in Ireland. 2

Both ROI and NI have an enviable record for system reliability. Figure 7 shows the trend in ‘unplanned interruptions’ in electricity supply in Ireland. This shows that the reliability of the systems has improved dramatically over the past decade – with the number of minutes lost per customer per year reducing by over 60% between 1999 and 2011.

2. EirGrid Evaluation of the Wider Economic Benefits of GRID25 Investment Programme 2013

Figure 6: Drivers of FDI

Source: World Bank

0 5 10 15 20 25 30 35 40

Natural resources, real estate

Quality of life, language skills

Technology and R&D infrastructure

Lower costs

Infrastructure and logistics

Presence of cluster, partner or supplier

Availability of skilled workforce

Investment climate

Proximity to markets or customers

Domestic market growth potential

Key factors in the determination of location (% in total)


50

100

150

200

250

1998 2000 2002 2004 2006 2008 2010 2012

Min

utes

lost

per

cus

tom

er p

er y

ear

Figure 7: Unplanned interruptions in electricity supply

Source: CEER

Surveys carried out by the World Economic Forum for their Global Competitiveness Report show that ROI and NI both rank highly in terms of the quality of electricity supply compared to many other countries. The survey asked participants about the reliability of electricity supplies in their country, specifically in terms of the lack of supply interruptions and the lack of voltage fluctuations. The results show that the quality of electricity supply in the all-island market is high, with NI and ROI ranking 17th among all 151 countries surveyed, ahead of Sweden, Germany, Italy, Spain and the USA.

The high quality of the electricity system plays an important role in the competitiveness of the all-island economy. The value of investing in the electricity system, in terms of attracting investment and creating employment, is illustrated in Box 1.

Box 1: Attracting FDI through reliable electricity supplies

Intel has been in operation in Ireland since 1989 and has grown from beginnings in a garage in Dublin to running a cutting-edge 360-acre campus in Leixlip, Co. Kildare. Intel conducts operations and diverse activities representing the spectrum of its global business and currently directly employs over 4,500 people. Since 1989, Intel has invested over $12.5bn in its Leixlip campus, an investment which has kept it at the forefront of a cutting-edge industrial technology sector. The impact of this capital investment on the Irish economy has been enormous, representing €1.2bn annually and indirectly supporting 9,000 equivalent full-time jobs.

Fab 24, which is one of Intel's most technologically-advanced, high-volume manufacturing plants in the world, produces 300mm wafers using 65-nanometer and 90-nanometer process technologies. A stable, high-quality power supply is critical to Intel’s operations in Ireland. John Weir, Head of Electrical Systems at Intel Ireland, stated that "power continuity is vital for us – making sure that we have a good, clean power supply is very important. Our facility is the most technologically advanced in the world and operates 24 hours a day, 365 days a year, and we rely on an uninterrupted service”.

In 2014, Intel announced that it had made an investment of $5bn on an ongoing construction upgrade, further underpinning its manufacturing and R&D activities in Ireland. The initiative represents the largest single private investment in the history of the State.

Source: Intel, IDA, EirGrid


Figure 8: The quality of Irish electricity supplies

In your country, how would you assess the reliability of your electricity supply? [1 = not reliable at all; 7 = extremely reliable]

0 1 2 3 4 5 6 7World ranking

Finland3

Austria7

Netherlands9

Luxembourg10

France14

Belgium16

Ireland17

Portugal18

Spain21

Slovenia30

Slovak Republic32

Germany33

Italy35

Lithuania41

Cyprus43

Estonia53

Greece55

USA24

Malta77

Source: Global Competitiveness Report 2014-15, World Economic Forum


The significant contribution of the energy sector to the all-island economy is built upon a strong record of investment in infrastructure. In 2013, NI and ROI energy firms invested €1.3bn in generation, networks, supply and energy efficiency technologies. This figure exceeds the amount of exchequer investment in roads and public transport for that year. This ongoing investment contributes to economic development, quality of service, competition and the sustainability of the Irish energy system.

Investing in a secure and sustainable future3

Highlights• The energy sector has made substantial

investment across the energy value chain over recent decades in order to maintain a secure and sustainable supply to consumers. In 2013, energy firms invested €1.3bn in new generation, networks and supply infrastructure.

• The sector is rising to the challenge set by EU carbon reduction and renewable energy targets which will require substantial additional investment. The industry is also developing innovative technological solutions, such as smart grid, storage and electric vehicles, that facilitate the transition to a low-carbon future.

• Regulatory and policy factors are the most important criteria when energy sector firms are making investment decisions, with almost 60% of respondents to an industry survey identifying this as the main driver of their investment decisions.

• Investors may hold back on investment due to:

• Public policy uncertainty with regard to the Integrated Single Electricity Market (I-SEM)

• The uncertainty regarding future renewable energy policy

• Planning policy


Investing in the transformation of the energy sectorEnergy firms have already invested billions of euros in the transformation of the energy sector to a lower-carbon future. This change is driven by the requirement to meet EU 2020 climate and energy targets, to reduce greenhouse gas (GHG) emissions and increase the amount of energy from renewable sources. These targets require ROI to reduce GHG emissions by 20% by 2020, relative to 2005 levels, and increase the level of energy consumption from renewable sources to 16% by 2020. NI has a similar set of targets. The European 2020 climate and energy targets place binding obligations on ROI and NI. Failure to meet these targets would most likely result in financial penalties being imposed and would also create reputational damage for both administrations. In addition, future EU policy is being formulated in relation to 2030 and is likely to maintain the current direction.

Attaining these targets will require a contribution from many sectors of the economy, but it is recognised that the energy sector will bear a larger share of the overall burden, because it can reduce emissions in a cost-effective manner.

The climate and energy targets are challenging for all EU member states, but they pose some particular challenges for ROI and NI due to:

• The structure of the all-island economy: The agriculture sector in ROI and NI is a relatively large source of total GHG emissions. Agriculture makes up 30% of emissions compared with an EU average of 10%. However, it is costly to reduce emissions from agriculture, a factor which puts pressure on other sectors of the economy to reduce emissions at a faster rate — for example, through the ‘electrification’ of transport and heating.

• Managing an increasing amount of intermittent generation in a relatively isolated system: ROI and NI have ambitious targets for renewable electricity, and these targets will be largely met through the development of wind energy. Electricity generated from wind is inherently variable, and this variability needs to be managed so that the demand for electricity is met at all times. The technical challenge of managing a system with a high level of renewable penetration is made more difficult due to the fact that the all-island electricity market is relatively isolated, as there is relatively little interconnection capacity linking the island of Ireland to Great Britain or EU networks.

Annex A of the report provides further information on the EU climate and energy targets and the specific challenges facing ROI and NI in meeting those targets.

Energy firms are rising to the challenge of meeting the climate and energy targets. This can be seen in terms of the level of investment in new infrastructure that is being brought forward but also through the development of a range of innovative technological solutions that are needed to manage the transition to a sustainable and secure energy future. In the following sections we examine recent investment activity across the different components of the energy system.

Firms will need to continue investing in order to build on the progress that has already been made. In doing so, energy firms will need to continue to balance the need to move towards a reliable and low-carbon system with the requirement to minimise the cost of that transition on consumers. Government will also play an important role in the transition through creating a stable and transparent policy framework that incentivises firms to meet the climate and energy targets in the most cost-effective manner.

Conventional generationApproximately €130mn was invested in conventional generation in 2013, primarily as part of the construction cost of the 460MW Great Island Combined Cycle Gas Turbine (CCGT) plant in Co. Wexford, by SSE Airtricity. This generating plant will replace the three existing carbon-intensive oil-fired plants on the site. The new plant is expected to be operational by early 2015 and should produce sufficient electricity to meet the demand from almost half a million homes.

There will be a continuing need for investment in conventional power sources in order to provide flexible generation capacity as backup to the increased penetration of renewable energy sources and electricity imported through interconnectors. However, market conditions for conventional generators will be challenging, since the increased share of wind energy in the generation mix will reduce both the wholesale electricity price and the amount of time that a flexible plant would be scheduled in the market to meet demand. These factors make the prospect of building new flexible generation plants more challenging for potential investors. The challenge of incentivising flexible plant investment, in a system with a high penetration of intermittent wind generation, is being addressed by the Regulatory Authorities through re-design of the market (the I-SEM project) and EirGrid and SONI through the Delivering a Secure Sustainable Electricity System (DS3) project.


Transmission and distributionThe upgrade and reinforcement of the electricity transmission and distribution (T&D) infrastructure is a vital step to ensuring that the network can cope with both rising levels of electricity demand and the increasing penetration of renewables. In 2013, around €550mn was invested in the electricity T&D network, while around €120mn was invested in the gas network.

The EirGrid Grid25 strategy sets out how €3.2bn of new investment in T&D infrastructure will be required in the period up to 2025. The North-South Project — which proposes a new 400kV high-capacity electricity connection between the power systems of ROI and NI — aims to increase the capacity and reliability of the two power systems to enhance security of supply and to reduce transmission constraints. This infrastructure is key to ensuring that the two networks can operate more efficiently and that private consumers and businesses benefit more fully from the all-island market for electricity.

Future investment in T&D will increasingly be driven by the move towards a 'smart grid', and electrical network companies have shown a real desire in recent years to increase their level of activity in this space. The following case study sets out an example of how smart grid infrastructure is being employed to facilitate the uptake of electric vehicles.

Electric Vehicle ProgrammeUnlocking the potential of eCars

ESB Networks and NIE are installing a network of electric vehicle (EV) charge points across the island consisting of domestic, on-street and fast-charge points. There are currently 1,530 publicly accessible EV charge points, providing reliable low-carbon transport options for drivers. The public charging infrastructure is ‘smart’, with integrated communications and management capabilities that enable EV drivers to charge their vehicle anywhere on the island of Ireland.

Over the average life of an electric vehicle, individual drivers can expect to save up to €17,000 when accounting for the savings related to fuel, maintenance, insurance and motor taxation, as well as avoiding approximately 12 tonnes of CO2 emissions. In the context of the ROI target of 250,000 EVs by 2020, this would equate to nearly three million tonnes of avoided CO2 emissions and over €4bn savings for the general public. Electric vehicle charging can be used to provide a flexible electricity demand, assisting grid operators in managing the power system.

At an all-island level, the development of the EV industry will reduce the need for imported fuels, thereby improving the balance of payments and providing export and job opportunities for indigenous firms to develop and sell products and expertise abroad.

Already, as part of the Enterprise Ireland 'eCar Cluster', companies including M2C, EC Charging, JTM and Carra have developed and brought EV products and services to market in ROI and overseas.

Source: ESB

Case study


Renewable generationThe proportion of renewable energy in the all-Island generation mix has been advancing rapidly over recent years, and electricity generated from renewable sources increased from 6.8% in 2005 to 20.9% in 2013. Around €490mn was invested in new renewable generation capacity in ROI and NI in 2013. Figure 9 shows that the vast majority of new investment is in wind energy.

ROI and NI have made good progress in increasing the level of renewable electricity and are currently on track to meet their mandatory renewable energy targets. However, there is still some way to go. It is expected that ROI and NI need to install a combined 350MW of wind generation each year until 2020 in order to meet the 40% target for electricity from renewable sources. The rapid increase in the level of intermittent renewable energy generation that will be required to meet the 2020 target presents a challenge in terms of managing and balancing the electricity system. Meeting this challenge will require sufficient flexible back-up capacity to meet demand during periods when wind output is low, as well as the adoption of technical solutions that build flexibility into the power system, such as storage technology (see the case study on the following page) and demand-side response (see below).

Harnessing demand managementIreland is at the forefront of initiatives to develop innovative technical solutions to facilitate the uptake of intermittent wind energy into the generation mix. The Quantum Greenway demonstration project represented a collaboration between heating manufacturer Glen Dimplex, EirGrid, System Operator for Northern Ireland (SONI), BGE, Electric Ireland, SSE Airtricity, and a number of organisations such as the Dublin Institute of Technology. The goal was to test how storage heaters can be used as a 'demand-side management tool'.

Specifically it tests how storage heaters can be turned on and off remotely in order to help cope with fluctuations in the level of generation from renewable electricity. In this system, the storage heater is a source of distributed energy storage that can be instructed to charge during periods where wind output is high and not when wind output is low. This will help to reduce the stress on the electricity system during periods of high demand and low wind output. Stage one of the study involved rolling out the technology to 140 households.

In December 2014, a pan-European consortium, led by Glen Dimplex, including SSE Airtricity, ESB Networks and EirGrid, received a €12mn grant from the EU Horizons 2020 Fund to undertake a significantly larger pilot through which Glen Dimplex storage heating systems will be installed in 1,250 homes, not only in ROI and NI, but also in Germany and Latvia.

Source: Glen Dimplex

485

Biomass & waste

Solar

Wind

14

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Figure 9: Total capital investment in renewable energy in ROI and NI in 2013

Source: Bloomberg

Case study


Northern Ireland Energy StorageInnovative ways to store excess energy, releasing it when demand is high

There are various energy storage projects being developed in NI and ROI, including the AES facility in NI and the Gaelectric facility in Larne.

AES — battery storage

Managing the integration of the high levels of renewable generation required to meet the 40% renewable targets for 2020 is a challenge for power system operators. To ensure system stability, the instantaneous level of wind generation that can meet demand is currently capped at 50%. This means that if more wind energy than can be accommodated is available, its output must be limited and an alternative source of generation used, such as a gas- or coal-fired plant, in order to maintain system security.

The growing levels of variable renewable generation on the all-island system require new, innovative ways to manage their integration. Energy storage is one way to offer a flexible source of both generation and demand which can allow grid operators to ensure fast response to changing power system conditions while ensuring system operation remains within secure limits.

AES has proposed to build 100MW of grid-scale lithium-ion battery storage in NI, which would make it the largest of its kind in Europe. AES’s storage solution is able to charge/discharge at 100MW, providing 200MW of flexibility. Unlike a conventional generator, batteries can contribute to system security 24/7 with no emissions or minimum generation level. It is estimated that there is the potential for savings of up to €11mn and onsite savings of 122,000 tonnes of CO2 each year from the AES facility.

Gaelectric — compressed air energy storage (CAES)

Gaelectric Energy Storage (GES) has recently agreed a connection offer with SONI (System Operator for NI) for 268MW of generation and 200MW of demand onto the system, as part of its Project CAES Larne flagship project in NI.

A CAES facility stores excess energy off the grid by converting it to compressed air which is stored underground in a geological cavern, from where it can be released through an electricity generator for later use.

Larne will be the first CAES facility in the world to be optimised for the integration of high levels of intermittent renewable energy and is the only CAES project with Project of Common Interest (PCI) designation.

CAES can provide many of the products under consideration by the regulatory authorities and the system operators under the DS3 programme which is targeted at supporting the safe and secure operation of the power system with increasing levels of renewable energy.

There are several potential positive economic impacts both within and external to NI, including reduced reliance on imported fossil fuels and reduced energy prices leading to increased competitiveness for NI.

Project CAES Larne will create 470 full-time jobs during construction and 49 during operation. Cumulative CO2 emissions have the potential to fall by 1% as a result of the operation of the plant.

Source: AES & Gaelectric

Case study


InterconnectorsThe electricity interconnectors that link Ireland to other countries improve security of supply by providing access to other markets in which to buy and sell electricity. The role of interconnectors will be important as electricity demand grows over the next decade and will help to facilitate the higher penetration of intermittent renewables, such as wind-generated power. 3

The current level of interconnection capacity linking ROI and NI to other markets is in line with the EU objective of 10%. However, further expansion will be required to meet the proposed 2030 objective of 15% and to support renewable penetration. While there was no investment in new interconnection capacity in 2013, there are a number of projects under consideration or set to start. This includes the Celtic Interconnector, which is a joint project between EirGrid and its French transmission system counterpart Réseau de Transport d'Électricité (RTE). Both parties are currently undertaking feasibility studies on a possible 700MW electricity interconnector between the south coast of Ireland and the north-west coast of France.

The majority of Irish gas supply comes through the Moffat gas interconnector, which links Great Britain to Ireland, and the Scotland Northern Ireland Pipeline. A small proportion of supply to ROI flows onto the system at the Inch entry point on the south coast. In terms of new investment, the commissioning of the Corrib gas infrastructure has commenced, and gas from the Corrib gas field is expected to flow by mid-2015.4

The South West Scotland Onshore System (SWSOS) Twinning Project is a proposed project to reinforce 50km of the Moffat gas interconnector pipeline in south-west Scotland in order to meet anticipated future demand and to protect security of supply. The project is sponsored by Gas Networks Ireland and has been designated a Project of Common Interest by the EU.

Energy efficiencyImproving the energy efficiency of buildings and manufacturing processes helps to reduce carbon emissions, improves energy security and, from a consumer perspective, helps to reduce energy bills both now and in the future. Significant progress has been made in terms of upgrading Irish housing stock in recent years. SEAI estimates that between 2006 and 2011, energy efficiency upgrades were carried out on 11% of Irish housing stock. It also estimates that this saved 900GWh in 2011 alone, equivalent to the energy required for 170,000 homes, and is equal to an energy bill saving of around €55mn to householders.

3. Demand is expected to increase by 12% between 2014 and 2023, All-island Generation Capacity Statement 2014-2023

4. Gaslink Network Development Plan 2014

Much of the energy efficiency investment in the ROI housing stock has been funded by the ROI government, through SEAI-administered schemes which provided grants worth €85mn to support the upgrade of 26,400 homes in 2013. However, a greater share of future investment will be delivered and funded by the energy sector through the Energy Efficiency Obligation Scheme (EEOS). EEOS imposes energy savings targets on energy retailers. Obligated retailers will meet these targets by delivering energy efficiency improvements to energy users, or by trading compliance with other obligated parties.

Energy suppliers in NI also provide funding for energy efficiency upgrades through the Northern Ireland Sustainable Energy Programme (NISEP). This programme provides grant funding for energy efficiency and renewable energy, largely aimed at vulnerable households, and it is funded through a Public Service Obligation (PSO) on electricity prices. In 2012 and 2013, the programme delivered over 60,000 efficiency upgrades and over 2,000 heating upgrades with a budget of around €10mn (£8.5mn).

Challenges to long-term investment plansThe previous section set out how the energy sector is rising to the challenge of transforming Ireland’s energy infrastructure through investing across the energy value chain in order to meet energy and environmental objectives.

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Figure 10: Outlook for energy sector investment over the next three years

Source: EY survey


However, the energy sector will need to continue investing in both infrastructure and R&D in order to meet the EU 2020 and 2030 energy and climate targets. We undertook a survey of energy sector firms in order to understand the drivers and outlook for this future investment. We asked participants about the investment challenges and opportunities that they perceived and asked about their capital investment plans over the next three years.

Energy firms in ROI and NI are optimistic about the prospects for investment over the medium term. The majority of respondents intend to increase their level of capital investment over the next three years. This result was most pronounced amongst electricity generators, with 80% of respondents expecting to make greater investments over the 2015 to 2018 period than they did during the previous three years. Regulatory and policy factors were by far the most important reason for generators in determining their investment decisions, with almost 60% of respondents highlighting this as the main driver of their investment decisions. A number of respondents flagged the timescale of the ROI renewable energy support scheme (REFIT2) as a key driver for investment decisions over the medium term.

Respondents from the retail and demand-side sectors also expected increasing levels of investment over the medium term. This is not unexpected, given the combination of rising demand, the requirements to deliver energy efficiency measures, the proposed roll out of smart meters, and the increasing level of activity that will be required to manage energy demand in the face of the increasing level of intermittent generation. The survey results emphasise the importance of company strategy, as well as policy and regulatory factors in investment decisions.

A number of respondents across the energy value chain sounded a note of caution about the impact of policy uncertainty on investment decisions. Respondents point to a range of sources for this, including reform of energy markets through the Integrated Single Electricity Market (I-SEM) and questions surrounding renewable energy and planning policies, creating a more challenging environment for investors. This highlights the importance of a stable and predictable policy framework in order to ensure that investment continues at the level required to transform the energy sector to meet long-term climate and energy targets.

Strategy/business plan

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14%

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Figure 11: Key drivers of energy investment in generation

Source: EY survey



56%

22%

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Figure 12: Key drivers of energy investment in retail

Source: EY survey


Respondents were optimistic about employment prospects within the sector over the medium term. The majority of firms operating in the generation and retail sectors, as well as all of the firms in energy efficiency and demand management sectors, forecast that their staffing levels will increase over the medium term. Respondents suggested that there were a range of drivers responsible for this increase in employment, including increased customer demand, regulatory and policy factors and their company business plans.

Participants indicated that they will seek employees with a broad range of skills. Many firms flagged that they will seek to recruit staff in the fields of engineering and IT. This focus on recruiting staff with a high degree of technical expertise is not a surprise given the complex challenges that the industry faces. The sector is also engaging proactively with research organisations in order to build the skills and knowledge base required to support the industry (see Box 2).



Availability of financial resources

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Figure 13: Key drivers of demand-side energy investment

Source: EY survey

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Figure 14: Outlook for energy sector employment over the next three years

Source: EY survey

Box 2 — Investing in research to support the energy sector

The energy sector is supporting academic partners who are working on innovative new approaches to the future of energy on the island of Ireland. The Electricity Research Centre (ERC) at University College Dublin is a collaboration between academia and major firms in the electricity industry to tackle a number of fundamental and applied research questions, which underpin the development of a sustainable electrical energy system.

The Sustainable Electrical Energy Systems Cluster (SEES) is one of the major project initiatives led by the ERC which brings together the Irish electricity sector and key industrial partners. It is a collaborative research programme including researchers in University College Dublin, Trinity College Dublin, the Economic and Social Research Institute, University of Limerick and NUI Maynooth. It has the financial support of Science Foundation Ireland.

Source: ERC


The amount that consumers pay for their energy is determined by a range of factors. This includes the cost of different fuels on world markets; the cost of investment that the industry is making in generation, networks and supply in order to maintain secure and sustainable supplies of energy; and levies and taxes that are determined by government. In addition, the price paid by consumers also depends on the degree to which the energy market design promotes effective competition.

Energy prices in Ireland are at or below the Eurozone average, although Eurozone prices remain somewhat higher than the average for all 28 EU member states (EU28). This fact is striking given that the all-island market faces a number of structural disadvantages compared to some other countries that increase the cost of supplying energy to end users – such as the lack of economies of scale in supply and the existence of a relatively dispersed customer base.

Beyond the issue of pricing, there are a range of other factors that affect energy bills. The consumer’s demand for energy, which in the household sector is in part determined by the energy efficiency of dwellings and appliances, is an important driver. Energy firms are actively engaged in supporting consumers to improve energy efficiency and manage their energy costs.

Energy and consumers4 Highlights• The price of energy is driven by a range

of different cost drivers and also by the extent of competition within energy markets.

• The energy supply landscape is evolving which is resulting in greater choice for consumers. The Irish market is now among the most active in the world in terms of customer switching activity.

• In spite of a range of structural factors that should increase the costs of supplying energy, the price of electricity and gas on the island of Ireland is below the Eurozone average.

• Energy firms are working on a number of fronts to help their customers to understand and manage their energy costs.


What determines the price of electricity and gas?In the following sections we explore the drivers of electricity and gas prices in the all-island market. We also examine competition within the energy market and how this provides consumers with the option to reduce their energy costs by switching their energy supplier.

Retail electricity prices Electricity prices are largely driven by four broad categories of costs: wholesale costs, network costs, supply costs, and costs and levies resulting from government policy. Figure 15 shows the split of the electricity price in ROI across these different elements as well as ‘imperfections costs’.5

5. Imperfections costs are a set of costs recovered through the imperfections charges paid by suppliers in SEM. They are made up of a number of components, including constraint costs, ‘make whole’ payments and generator testing charges. The largest component of Imperfections is constraint costs, which are the costs incurred in managing transmission constraints and in ensuring that adequate levels of reserve are carried in order to maintain system security.

Wholesale costsThe Single Electricity Market (SEM) is the wholesale electricity market for the island of Ireland and has been in operation since 2007. The wholesale price of electricity — also known as the system marginal price (SMP) — is heavily dependent on the prices that generators bid into the pool, based on their fuel and other short-run operational costs.6 The energy regulators set down strict rules on which costs those generators are allowed to bid into the market, thereby minimising the risk of abuse and ensuring cost reflective bidding as well as price transparency.

The electricity generation mix in the SEM, which sets the wholesale price of electricity, is comprised of low-cost 'in-merit' generation, mostly from coal, gas and interconnector imports. It is also comprised of price-taking 'priority dispatch' generation7 which is generation from wind, hydro, combined heat and power (CHP), pumped storage, biomass and peat. This latter tranche of generation does not directly set the price in the market but influences it by reducing the amount of generation required from coal, gas and interconnector units.

6. Bidding Code of Practice AIP-SEM-07-430

7. As defined under EC/2009/281, known as the Renewable Energy Directive, and subsequently transposed into law by member states

VAT

Supply costs

Network - Distribution

Network - Transmission

PSO Levy

Imperfections costs

Wholesale price (Energy and capacity)

40%

25%

11%

4%

3%3%

14%

Figure 15: Breakdown of domestic electricity prices – ROI

Source: Energy Green Paper, 2014

I-SEMThe I-SEM is the new wholesale market currently being designed for ROI and NI. The new market must comply with the EU Target Model, the common European electricity market, which seeks to align trading across borders throughout Europe. The aims of the market are to harmonise trading and make more efficient use of interconnection, with the aim of reducing prices for households and businesses.

The regulatory authorities, along with the market and system operators, are currently involved in the detailed design phase of I-SEM, following the decision on the new market’s high-level design in 2014. The electricity industry and its customers are being consulted on the detailed design over the course of this process, and it is anticipated that I-SEM will begin operation in late 2017.


In 2013, gas-fired plant accounted for around 44% of the generation in SEM.8 Due to the mix of generation plant in the market, electricity generated from gas is frequently the marginal generation unit and therefore sets the price. Figure 16 and 17 present the generation mix in the SEM with the average mix amongst Eurozone countries plus the UK. The comparatively high level of gas generation in the all-island market means that electricity prices in the SEM will tend to be more exposed to movements in international gas prices compared to other European countries, some of which have large nuclear and coal units driving prices.

8. CER Fuel Mix Disclosurer Report 2013

The link between the wholesale price of electricity (SMP) in SEM and the international price of gas is shown in figure 18. The close correlation between the SMP and the traded price for gas indicates the effectiveness of the wholesale market design (and particularly the regulated bidding rules). The majority of fossil fuels – including gas, coal, heavy fuel oil and distillate oil – that are used to generate electricity in SEM are imported.9 This means that the wholesale price of electricity prevailing is highly exposed to fluctuations in international fuel costs and also to currency variations.

9. CER Electricity Security of Supply Report 2014

Other

Peat

Coal

Renewables

Gas

44.1%

30.2%

18.4%

6.5%

0.8%Figure 16: All-island fuel mix

Source: CER & NIAUR

30%

23% 21%

22%

3% 1%

Other

Petroleum and Products

Renewables

Gases

Solid Fuels (e.g., coal, lignite)

Nuclear

Figure 17: Eurozone fuel mix

Source: Eurostat


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Figure 18: Gas prices versus SEM wholesale price

Source: SEM-O.com, Bloomberg


Network costsThe costs incurred by the transmission and distribution network operators in operating and maintaining the power networks are regulated – both in terms of the level of investment required and the return that network operators are permitted to earn on these investments. The level of investment is set by the respective regulatory authorities – CER bears this responsibility in ROI and NIAUR in NI. Network charges pay for the day-to-day operation of the power system and are also used to fund network upgrades and finance the building of new power lines. These costs are passed through to consumers in the form of Use of System (UoS) charges. The relatively low population density on the island and its relatively wide dispersal mean that the length of networks required per customers is approximately double the average for Europe.

Supply costsThese represent the operational costs of electricity supply, including the costs of billing, advertising, customer service, bad debts and other expenditure in running a supply business. In ROI, since the deregulation of the electricity market in 2011, these costs are not subject to regulatory oversight, although overall retail electricity prices are monitored by the CER. These supply costs are subject to market competition between different energy suppliers (we explore this issue further in the following section). In NI, Power NI is currently still subject to a regulated tariff, as NIAUR has determined that it still holds a dominant position in the market.10

Government policy, levies and taxesAs we saw in the previous section, energy policy in the SEM area is focused on renewable energy and energy efficiency as a means of decarbonising and reducing dependence on fossil fuel imports. The cost of delivering many of these policies impacts on electricity costs.

10. The 2014 Power NI Price Control

The relationship between retail and wholesale electricity prices

Energy prices offered to customers are often fixed for a period of time. This means that customers have a degree of certainty about the level of their energy costs over the immediate future. However, this can give the impression that retail energy prices are unresponsive to changes in both the wholesale price and the underlying fossil fuel prices.

Wholesale electricity prices only account for approximately 40% of the total price of electricity paid by customers. Other costs, such as regulated network costs and government levies and taxes, which are relatively more stable than wholesale electricity prices, account for approximately 50% of the overall price customers pay. Therefore changes in fossil fuel prices are not reflected one-for-one in the prices that customers pay for electricity.

As can be seen from figure 18 on the previous page, there is considerable variability in the price of gas and consequently in the wholesale price of electricity. Both electricity generators and suppliers look to manage this variability on behalf of customers by hedging their purchases of fuel and wholesale electricity, typically over a period of up to 24 months. This enables suppliers to offer customers stable and predictable energy prices. Were the fuel price variations to be passed on to final prices it would result in considerable uncertainty for customers which some (particularly those on low incomes) may find difficult to manage.

Consequently, given that electricity and fuel are hedged, typically over a period of up to 24 months, the price on a given day does not reflect the cost of delivering electricity to a customer on that day. It normally takes a period of time for sustained fuel price changes (increases and decreases) to feed through to the electricity price charged to customers.


In ROI, the Public Service Obligation Levy (PSO) is added to the bills of all electricity customers. It is made up of a number of elements and is designed to support the national policy objectives of security of supply through incentivising additional generation capacity, supporting indigenous fuels — such as peat and biomass — and renewable energy sources in electricity generation.11

In NI, the Renewable Obligation places an obligation on energy suppliers to source a proportion of electricity from renewable sources. Suppliers meet this obligation by purchasing Renewable Obligation Certificates (ROCs) from generators. The cost of these certificates is then added to the electricity price charged to customers.12 In addition, electricity is subject to a number of taxes, including VAT and the climate change levy, which is charged on supplies to non-domestic users in NI.

The requirements to meet the 2020 and 2030 climate and energy targets means that energy firms will need to continue investing in the transformation of the sector. It will be important therefore that policymakers create a regulatory framework that strikes the right balance between meeting the objectives of policy and protecting consumers from the costs of those policies. In particular, it is important that the policies that are put in place allow firms to continue making prudent and cost-effective investments in a manner that minimises the costs passed on to households and businesses.

Retail gas pricesThe price paid by consumers in ROI and NI for gas is determined by the price of gas on international markets as well as the cost of networks, supply and taxes.

Gas prices are largely driven by movements in the price of gas on the British gas system. The majority of gas consumed in ROI is imported through Moffat in Scotland and is transported to Ireland through two underwater Interconnectors, IC1 and IC2. A small percentage is provided by the Kinsale Gas Field.13 Gas is imported into NI through the Scotland Northern Ireland Pipeline (SNIP) through the Moffat entry point. In 2012 and 2013, NI received 100% of its gas supply through the SNIP. Future gas supplies will also be met from the Corrib gas field when it becomes operational.

11. Public Service Obligation Levy 2014/15, CER14/125

12. NIAUR Annual Energy Retail Report 2014

13. Gaslink Network Development Plan 2014

ROI and NI are, and will remain, highly dependent on imports of gas from the British system. The price paid by gas suppliers and industrial users, as well as gas-fired electricity generation plants, is determined by the prices on the British system (and tends to be higher than in GB due to the additional costs of transporting the fuel). As is the case with electricity, the costs of the gas network infrastructure are regulated and are passed on to gas consumers, together with the cost of the gas suppliers’ operational activities.

The impact of competitionThe structure of an energy market and the extent of competition between energy suppliers can also be an important driver of energy costs. In both ROI and NI the industrial and commercial segments of the retail energy markets have been deregulated for some time, a process which has been completed more recently in the domestic retail market in ROI. Electricity and gas customers are able to purchase their energy from a range of different suppliers and the industry has invested heavily over recent years in promoting market competition. This can be seen both in terms of the level of switching activity that is taking place and also through the number of new firms that have entered the domestic retail market.

The level of switching between suppliers is a metric that is sometimes used as an indicator of competition and consumer engagement in the retail markets. In ROI, customers continue to switch in both the electricity and gas markets and annual switching rates are above 10%. Levels of switching in NI are similar, with annual electricity and gas domestic customer switching levels both at 9% in 2013.14

14. NIAUR Retail Market Report 2013


Whilst the level of switching activity has fallen since the market was first deregulated, it remains high by international standards. According to the VaasaETT World Energy Retail Market Ranking report – which compares the level of customer switching activity across a range of deregulated energy markets – the ROI and NI electricity retail markets are considered 'warm active markets', and the Irish gas market is considered to be a 'hot market'.15 This suggests that consumers in NI and ROI are among the most proactive in terms of engaging with the energy market to find the best deal.

15. VassaETT World Energy Retail Market Rankings 2012

Furthermore, the energy supply landscape has been evolving. A number of new firms have recently entered the domestic market, such as Budget Energy, Energia, Pinergy and PrePay Power, and many offer different tariff plans and pre-payment options. This has meant that consumers have been able to choose to purchase their energy from a greater range of suppliers and has resulted in significant growth in the market share of the new entrants. For example, at the end of 2009, the dominant supplier, ESB – rebranded as Electric Ireland following deregulation of the market – accounted for 80% of domestic market share by number of customers.16 In the most recent CER Electricity and Gas Retail Markets Report for Q2 2014, Electric Ireland now accounts for 62% of the domestic market by customer numbers in ROI.

16. CER Review of the Regulatory Framework for the Retail Electricity Market Competition Review Q1 2010 CER/10/059

Figure 19: Annual customer switching rates in liberalised energy markets

Source: VaasaETT, World Energy Retail Market Rankings 2012

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Australia - Southern AustraliaIreland

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FinlandCzech Republic

GermanyDenmark

Belgium (Brussels)Slovenia

FranceSpain

ItalyAustriaPolandGreeceIceland

LuxembourgPortugalRomania

LatviaLithuania


How do prices compare to other countries?There are a range of structural characteristics of the energy system and economies in Ireland and NI that could lead us to the conclusion that prices should be higher than in other comparable economies. For example:

• Economies of scale: the overall size of the power system means that generation plant on the island is generally smaller in scale (typically less than 500MW) compared to the most operationally efficient plant (which is typically 1200-2000MW across Europe). There is a similar story in terms of supply, where the largest supply companies on the island serve between 0.4 million and 1.4 million customers. These companies may not benefit from the economies of scale that are enjoyed by some European counterparts, who will typically supply several million customers.

• Lack of indigenous fuel production: in advance of the commissioning of the Corrib gas field, the vast bulk of fossil fuels used by generators in the SEM are imported. This results in additional transport costs when compared to some other regions and countries (as we saw in the previous section, the price of gas imported into the island of Ireland market is higher than in GB due to the additional costs of transportation).

• The relatively dispersed population: the low population density on the island and its relatively wide dispersal means that the length of networks required per customer is approximately double the ‘length’ compared to the European average, which naturally results in higher network costs. For example, the length of distribution network per customer in ROI is approximately 76m, one of the highest in Europe and significantly above the average of approximately 39m per customer.17

In spite of the challenges, electricity and gas prices are in line with the Eurozone average (although remain above the EU28 average) – figures 20 and 21 shows the average residential electricity and gas prices in ROI compared to Eurozone countries.

17. Based on data from Eurelectric’s Power Distribution in Europe: Facts and Figures Report

SEAI’s Better Energy Communities schemeSupporting customers to manage their costs

All suppliers are working on a number of fronts, including in partnership with local and national agencies, as well as county councils and SEAI, to help customers to understand and manage the energy that they are using in the home. The aim is to reduce customers’ bills by increasing energy efficiency in their homes.

Under SEAI’s Better Energy Communities scheme Electric Ireland, SSE Airtricity and Bord Gáis Energy have worked with a number of local authorities, including Limerick, Wexford, Fingal, Dun Laoghaire-Rathdown, Cork and Galway County Councils, to retrofit some 3,500 homes in 2013, of which some 80% were in fuel poverty. The number of retrofits of homes in fuel poverty approximately trebled in 2014. Retrofits included a range of measures, including cavity and wall insulation, loft insulation and heating control, and boiler replacements. These suppliers were joined in their activities by Energia, which entered the domestic retail market in 2014.

Suppliers are also offering a range of other measures to assist customers to understand and manage their energy use. For example:

• The Electric Ireland website hosts a number of services including the ‘Energy Efficiency House Guide’ and ‘Lighting Guide’ as well as an ‘appliance calculator’ smartphone application.

• Bord Gáis Energy has launched a scheme to provide free digital heating controls to local authorities and community-based organisations.

• Electric Ireland also provides smart heating controls – such as Climote and NEST – to customers, which allows them to have remote control over their heating system from a smartphone. These types of controls allow customers to reduce their heating costs by ensuring that the home is only heated when required.

Suppliers are also introducing measures to help private residential customers improve the efficiency of their dwellings. For the private residential sector in 2014, an Energy Efficiency Incentive was introduced. This is designed to incentivise customers — through a credit on their energy bill — to install energy efficiency measures. This incentive, along with SEAI’s grants, can significantly reduce the up-front costs of improving the energy efficiency of the home.

Case study


Figure 20: European residential electricity prices – January-July 2014

Source: SEAI and Eurostat

€/100kWh €5 €10 €15 €20 €25 €30 €35

Italy €30.06Germany €28.29

Netherlands €22.62Cyprus €22.34

Ireland €20.79Portugal €20.58

Greece €19.13Belgium €18.85

Malta €18.79Austria €18.48

Luxembourg €16.00France €14.57

Slovenia €14.46Latvia €14.03

Finland €13.72Slovakia €13.37

Euro 28 €19.55

Estonia €12.29Lithuania €12.90

Spain €19.60

Euro Area €21.31

Figure 21: European residential gas prices – January-July 2014

Source: SEAI and Eurostat

€2 €4 €6 €8 €10 €12

Portugal €9.34Netherlands €7.98

Italy €7.97Spain €7.52

Austria €7.48Euro Area €7.28

Greece €7.23France €7.01Ireland €6.81

Germany €6.78Slovenia €6.67

Belgium €6.58Lithuania €5.59

Luxembourg €5.32

Estonia €4.91

EU 28 €6.66

Latvia €4.84

€/100kWh

Slovakia €5.08


Helping customers to manage their energy costsThe energy sector appears highly competitive by international standards and is supplying energy to consumers at prices that are typical compared to the Eurozone average. Nevertheless, there remain some customers who will struggle to afford their energy bills. Energy firms are actively engaged on a number of fronts to help their customers to understand and manage their energy costs. For example, the Energy Engage Code (see box 3) is helping customers – particularly more vulnerable customers — to communicate with their supplier, when they may be struggling to afford their bill.

Suppliers are also helping their customers to manage their energy costs through better energy efficiency initiatives such as the Energy Efficiency Obligation Scheme in ROI and the Sustainable Energy Programme in NI. In addition, many energy suppliers also offer a range of options to help consumers to understand and control their energy bills, including appliance usage calculators, smartphone apps, household energy efficiency advice and online energy monitoring services. The case study on page 26 sets out some of the initiatives that are currently underway.

Box 3 — Energy Engage Code

The Energy Engage Code increases customer engagement with suppliers through a coordinated industry-led programme of measures. Energy suppliers recognise that from time to time and for a variety of reasons, some electricity and gas customers experience difficulty in paying their bills.

Suppliers will make use of the measures in the Energy Engage Code to encourage customers who are in arrears and who are at risk of disconnection to engage with them to ensure that they remain connected to their energy supply. The key principle underpinning the programme is a firm commitment by suppliers that they will never disconnect an engaging customer.

The aim of the Energy Engage Code is to ensure that, while difficult circumstances for customers will inevitably continue to arise in the future, the number of electricity and gas disconnections will be reduced to an absolute minimum.

The code advances the challenge of addressing arrears and disconnections in five key areas:

• A coordinated approach between suppliers

• A commitment from suppliers never to disconnect an engaging customer and provide every opportunity to avoid disconnection

• An agreement to develop new, early ways of identifying customers at risk and to initiate targeted communication with these customers to encourage early engagement

• A commitment from all suppliers to introduce a new individual case review in advance of any customer being disconnected

• A programme to raise awareness of the code and its processes.


ROI and NI face a number of challenging EU targets relating to climate and energy issues. Among the most important are the EU 2020 and 2030 climate and energy packages. These agreements set binding limits on greenhouse gas (GHG) emissions from member states. They represent milestones in the path towards the EU’s objective to reduce emissions to at least 80% below 1990 levels by 2050, as well as targets for renewable energy and energy efficiency. These targets are particularly challenging for ROI and NI due to the composition of the all-island economy and energy market.

The EU 2020 Climate and Energy PackageIn 2009, the EU heads of state agreed on the 2020 Climate and Energy Package, which committed EU member states to binding GHG and renewable energy targets, as well as to indicative energy efficiency targets. This agreement requires that ROI:

• Reduce GHG emissions in the sectors of the economy not covered by the EU Emissions Trading Scheme (ETS) by 20% by 2020, relative to 2005 levels.

• Increase the level of energy consumption from renewable sources to 16% by 2020.

• Set an indicative target for energy savings that is commensurate with the overall EU objective of 20% energy saving target by 2020, relative to a baseline projection for 2020.

Similar targets apply to the UK and have been delegated to the NI Administration.

Meeting this target will require contributions from all sectors but there is a recognition that certain sectors – particularly those where emissions can be reduced in a more cost-effective manner — will need to shoulder a larger share of the burden. For example, the EU’s 2050 low-carbon roadmap suggests that meeting the 80% target will require that the EU electricity sector reduce emissions to almost zero by 2050. In contrast, the EU agriculture sector is expected to reduce emissions by just 49% relative to 1990 levels.

These high-level targets will be met through a range of policies implemented both at the EU and member state level. The EU ETS is the main policy instrument for reducing emissions from electricity generation and from energy-intensive sectors, which are collectively known as 'the traded sector.' The ETS creates an EU-wide binding cap on emissions from these sectors, where the level and trajectory of that cap is set at the EU level. The policy establishes a price for carbon and encourages abatement to take place where it is most cost-effective. Member states are accountable for reducing emissions from other sectors, which include agriculture, transport, domestic sector excluding electricity and the commercial sector, collectively known as the 'non-traded sector.' They have significant flexibility in the measures to be adopted and the manner in which the overall non-traded sector target will be delivered.

Member states also have some flexibility in the way in which they meet their renewable energy targets. However, the energy sector is expected to deliver a significant share of the overall target, reflecting the fact that it is more cost-effective to use renewable technologies in electricity generation than in other sectors such as heating and transport. It has been decided that meeting the 16% renewable energy target in ROI will require that 40% of electricity will need to come from renewable sources by 2020, whereas 12% of energy for heat and 10% of energy for transport are expected to come from renewable sources by that date.

NI faces similar pressures to decarbonise, to increase the level of renewable energy and to improve energy efficiency. As part of NI’s contribution to the UK target, the Northern Ireland Executive has set targets for 40% of total electricity consumption and 10% of total heat consumption to be provided by renewable sources by 2020.

Annex A — climate and energy targets on the island of Ireland


The 2030 Climate and Energy PackageIn October 2014, European leaders agreed on the 2030 Climate and Energy Package. This builds on the 2020 agreement with a new set of targets to further reduce GHG emissions, improve energy efficiency and increase the uptake of renewable energy. Specifically, the agreement requires:

• A target to reduce GHG emission by at least 40% by 2030, relative to 1990 levels. This target will be split between those sectors covered by the EU ETS (which will be required to reduce aggregate emissions by 43%) and the non-ETS sectors (which will need to reduce aggregate emission by 30%). The target for non-ETS sectors will be translated into individual member state targets through a burden-sharing agreement.

• A target for renewable energy of 27%, which will be binding at the EU level.

• An objective to improve energy efficiency by at least 27%.

Alongside these targets, there will be reforms to the EU ETS in order to deliver a more robust carbon price.

Meeting the 2030 targets will represent a further challenge for member states and a large share of the burden of meeting these targets will fall on the energy sector. However, a binding target for renewable energy at the EU level represents a more flexible approach compared to the 2020 package as it allows member states greater flexibility in how they meet their GHG targets. This potentially allows for the GHG targets to be met at a lower overall cost.

Meeting the climate and energy targets: the challengeMeeting the 2020 targets will require all EU member states to transform the way energy is produced and consumed. The key challenge for governments and energy firms when meeting these targets is to ensure that sufficient investment is delivered in order to reduce GHG emissions whilst ensuring that energy supplies remain secure and affordable.

The climate and energy targets pose some particular challenges to ROI and NI because of the structure of the all-island economy and energy sector. For example, there is a significant technical challenge associated with in the growing level of 'non-dispatchable' renewable generation in a relatively isolated system. ROI and NI have highly ambitious targets for renewable electricity, and the target will be largely met through wind energy. Managing such a system with a high level of wind penetration is challenging given that electricity generated from wind is inherently variable, and this variability needs to be managed so that the demand for electricity is met at all times without causing instability in the network system. Interconnectors can help to facilitate a greater penetration of intermittent renewables by providing access to a larger market in which to buy and sell electricity. However, there is currently limited interconnection capacity linking the island of Ireland to the market in Great Britain or to other EU markets.

In addition, the island of Ireland has a relatively large agriculture sector compared to many other EU countries. Statistics for 2012 show that 30% of emissions in ROI are from the agriculture sector, which represents 44% of total emissions in non-traded sector in ROI. This compares to an average of 10% across the 28 member states of the European Union. The fact that there are relatively few options for cost-effective emission reductions within the agriculture sector means that NI and ROI will need to make greater emission reductions from other parts of the non-traded sector, such as transport and heating. This is likely to require progress to be made in the decarbonisation of these sectors, such as switching petrol and diesel vehicles for electric or CNG vehicles, at a faster rate than in other EU countries. However, there are a number of barriers which will need to be overcome in order to make this transition in the transport and heating sectors. These include the costs of new technologies and associated infrastructure, the extent to which consumers will embrace new technologies, and the potential tension between GHG and energy efficiency targets. In some cases this could lead to consumers opting for more efficient, but not necessarily the lowest, carbon technologies.


GlossaryCER Commission for Energy Regulation

www.cer.ie

CEER Council of European Energy Regulators

CSO Central Statistics Office Ireland

www.cso.ie

DCENR ROI Department of Communications, Marine and Natural Resources

www.dcenr.gov.ie

DECC UK Department of Energy and Climate Change

www.decc.gov.uk

Direct impact Value added directly by the sector

EEOS Energy Efficiency Obligation Scheme

Electricity sector Sector incorporating generation, transmission and distribution, and retail

ESB Electricity Supply Board

EUA EU Allowances

EU ETS EU Emissions Trading Scheme

EWEA European Wind Energy Association

www.ewea.org

GHG Greenhouse gas

GVA Gross Value Added is a measure of the value of goods and services produced in an industry, or sector. In national accounts, GVA equals the value of output minus the value of the intermediate consumption that is used to produce that output.

Indirect effect The contribution that a sector makes through the consumption of intermediate goods and products in the supply chain. For example, supply chain businesses may work fully or partially with the energy sector and cover a wide range of sectors, including consultancy, engineering, human resources, legal, finance, education and research.

Induced effect Increased consumer spending owing to the initial direct and indirect effects, which may include spending on housing, food, transport, clothing, education and entertainment.

I-SEM Integrated Single Electricity Market

NIAUR Northern Ireland Authority for Utility Regulation

NIE Northern Ireland Electricity

ONS UK Office of National Statistics

www.ons.gov.uk

PSO Public Service Obligation

REFIT Renewable Energy Feed-In Tariff

SEAI Sustainable Energy Authority of Ireland

www.seai.ie

SEM Single Electricity Market

SMP System Marginal Price

SONI System Operator for Northern Ireland

www.uregni.gov.uk


Authors

Colm Devine Partner

[email protected]

Ian Venner Partner

[email protected]

Siobhan McHugh Manager

[email protected]

Jamie Torrens Assistant Director

[email protected]

Enquiries:Danielle O’BrienMarketing [email protected]

Media enquiries:

Barbara NestorHead of External Communications [email protected]

About the reportElectricity Association of Ireland (EAI*) commissioned EY to prepare a report that provides a ‘snapshot’ of the energy sector today and its current contribution to the ROI and NI economies. The report is an all-island economic review of the sector detailing its total economic investment and employment contribution to the island, examining:

• The sector’s contribution to the all-island economy

• Job creation within the island

• Investment in future growth

• The empowerment of energy consumers

The report reviews the available data on the direct economic value created by this sector through a series of key metric including the direct, indirect and induced Gross Value Added (GVA), employment and investment. It also considers the broader contribution of the sector to the all-island economy.

All data used in this report are from publicly available sources — in particular we have extensively used data from the Central Statistics Office of Ireland and the UK Office of National Statistics.

*with financial support from Bord Gáis Energy, Bord na Móna, Energia, ESB and Tynagh Energy Limited

www.ey.com/ie/energy

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© 2015 Ernst & Young. Published in Ireland. All Rights Reserved.

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Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.

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