Cantillon

Inside the world of business

Benefits should blow both ways

SUSTAINABLE ENERGY Agency Ireland (SEAI) released a report yesterday saying that wind power reduced wholesale electricity costs by €74 million this year, almost exactly the amount of the public service obligation that consumers and businesses pay to support wind energy and peat-fired generating plants.

If the impact is going to be neutral, why are we paying it? The public service obligation is there as an incentive to ensure that wind generators – many of which are owned by State companies – are guaranteed a certain price for the electricity that they produce. This, in turn, allows them to raise the cash they need to develop the wind farms in the first place, from banks who would otherwise be less willing to lend to such projects. It is Government policy to have this incentive to encourage investment.

The fact that it is going to have a neutral impact misses the point, which is that consumers and businesses are paying it in any case. The problem with the charge is that the benefits flow one way. If the market is not willing to pay prices at the level needed to support wind and other renewables, customers have to make up the difference, which is why consumers are paying an extra fiver their bills.

If energy prices rise above the price required to support renewables, which, given oil price trends, they are likely to do, then the charge will be dropped at the end of the year. Consumers and businesses will not have to pay it.

That will be a relief, which allows everyone to forget that when prices increase wind and other renewable energy generators benefit from this more than most as they do not have fuel bills. If we had a functioning free market, they would be entitled to benefit from having the foresight to invest in renewable generation. But we don’t have a free market, as we pay them an artificial incentive to invest in the first place.

It is only logical then, that in periods when prices are high, some of gains made by renewable operators should be returned to customers, meaning consumers and businesses. Call it a public service discount.

Another day, another ratings agency's view

ANOTHER DAY, another ratings agency tells us how to run our affairs. Yesterday, it was the turn of Fitch, one of the big three, on whose every word the mythical markets are said to hang. This time, we were told about the merits (none) of burning the senior unsecured bondholders and, on the other side, the benefits (some, but not many) of cutting a voluntary deal with them. The latter option would clearly be the best of the two in Fitch’s view, while the bondholders in question would presumably choose neither, holding out for the payment in full that still appears to be heading their way. No surprises there, you might say.

There should, equally, be no surprise in Fitch’s observation that these serious affairs of state will, ultimately, be “significantly influenced by political forces outside the country”.