Analysis: wholesale electricity prices have been falling since January 2023 so when can we expect to see lower household bills?
Earlier this month, the European Commission declared an end to the electricity emergency crisis measures it had put in place after Russia's invasion of Ukraine sent energy prices skyrocketing across Europe. Since the beginning of 2023, wholesale electricity prices have decreased across Europe and gas prices have not only fallen but also stabilised. As a result, the Commission considers that the electricity price spikes observed throughout 2022 are "less probable to occur in the upcoming winter".
Across Ireland we have seen petrol, diesel and home heating oil prices fall. However, residential electricity prices remain the obvious outlier and are still at an all-time high.
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From RTÉ Radio 1's Today With Claire Byrne, when will gas and electricity prices fall?
Annual household electricity bills doubled from a typical €1,000 per year in 2020 to now over €2,000 per year. While the Government did a good job in shielding many homes via a €600 credit, bills are very high and while we may soon see some small reductions, bills will unfortunately remain elevated for the foreseeable future.
The differences between energy commodities like petrol and diesel which have come down in price and electricity which has not, relates to who is buying the product, and over which length of time the product is paid for. When we buy petrol or diesel to fill up our cars, we are exposed to the full market price, and we pay for it immediately.
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From RTÉ Radio 1's News At One, Dr Paul Deane on how wholesale electricity prices were down over 40% in April
It is different with electricity. Supply companies such as Energia or Bord Gáis Energy buy the electricity at full market prices and sell it back to us at a different price and aim to balance their books and recover any losses while ensuring a profit margin over a longer period. Electricity supply companies take long-term perspectives on electricity prices to households, typically over a 12 to 20-month period, rather than a short-term monthly or quarterly view when it comes to retail price setting.
This strategy of hedging cuts both ways. It shields us from extraordinary high prices, such as last summer when prices were six times higher than normal. But it also delays the benefit of accessing reduced prices when they do drop (such as now) because the higher prices are still working their way through the market and to our pockets. This means short-term impacts, be they good or bad, take time to translate into market outcomes.
When comparing retail prices charged to customers and wholesale electricity prices paid by supply companies across 2022, most supply companies would have incurred losses across the year (significantly across summer months) and will try to recover those losses throughout 2023. In household electricity bills, the cost of generating electricity or the wholesale costs of electricity represents a little less than half of the full bill with the remainder relating to taxes and charges for the delivery of electricity to our homes.
Even though retail prices for families were extraordinarily high across 2022, they were still not sufficient to cover the costs of purchasing wholesale electricity at the time and in essence are still making their way through the market and into our bills.
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From RTÉ Radio 1's Drivetime, Dr Paul Deane on how data centres account for nearly 20% of electricity used in Ireland
Some companies can use revenue gains from generating electricity to offset losses from selling electricity and this helps. But Ireland's largest supplier, Electric Ireland cannot do this for competition reasons and must return a dividend to the government from the ESB rather than using profits to reduce homeowner bills.
However, wholesale electricity prices have been falling since January 2023. While they are still three times higher than normal, it begs the obvious question; when can we expect to see these lower prices translate into lower bills?
This is challenging to forecast because companies do not have to disclose what portion of their retail price is made up of wholesale electricity costs. My view (which is not shared evenly across the industry) is that we should expect to see small price reductions this summer, more likely towards August. This is contingent on wholesale prices continuing to drop which requires a steady and reliable flow of natural gas to Europe and no significant extreme weather events.
While prices will eventually drop, they will not return to pre-crisis levels
While the timing of reductions is hard to predict, it can be said with higher confidence that reductions will be small, around 10 to 20%. This has important implications for the government as it means the financial supports in the form of energy credits will have to continue for families who are financially struggling for the remainder of 2023. In this regard, the Government must focus on targeted rather than blanket remedial measures and ensure the highest level of protection goes to families on lowest incomes.
While the worst of the crisis is behind us, we are not out of the woods yet. We may have several difficult months ahead and government must prepare to protect struggling families for the upcoming autumn and winter. While prices will eventually drop, they will not return to pre-crisis levels. Russia’s invasion of Ukraine has changed the energy landscape in Europe and Ireland for the long term.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
