Why are Irish gas and electricity prices going up?

Cliff Taylor: Ukraine war has intensified existing pressures – and further price rises may lie ahead

The big increase in gas and electricity prices announced by Bord Gáis on Tuesday reflects increases on the wholesale market for gas – where Irish suppliers buy their natural gas and where prices have been rising since late 2020.

The war in Ukraine has intensified these pressures. On the basis of trends last year, price increases were probably on the way before Russian troops moved in to Ukraine, but the Bord Gáis statement refers to expectations that prices would remain high and volatile as one motivation for the increase.

Ireland's gas supply comes from two sources. About 30 per cent comes from the Corrib field. The rest comes from the UK via interconnectors – this is largely Norwegian and UK gas, with Ireland not reliant on direct supplies of Russian gas to any significant extent.

Price

So effectively, as the cost of the gas they buy is rising too, we can expect other gas suppliers to follow the Bord Gáis lead. And as gas is responsible for fuelling some 50 per cent of electricity generation, electricity prices are now rising too.

Power companies like Bord Gáis, owned by UK giant Centrica, would typically buy gas six to 12 months in advance. But in time higher prices feed through. Bord Gáis has announced changes which will add 39 per cent to the average gas bill and 27 per cent to an average electricity bill.

The wholesale price of gas makes up about 30 per cent of the consumer bill – the rest is network charges, tax, and the costs faced by suppliers and their margin. The background is that this wholesale price was about €14-€16 per megawatt hour for many years, before rising about fivefold from late 2020 to late 2021, driven by increased demand as industry restarted after Covid disruption, as well as by supply shortages, partly due to a reduction in Russian supply.

This would have been partly reflected in the string of increases in prices from energy suppliers in the second half of 2020 and 2021, but now prices are on the rise yet further for consumers and business.

Could prices go higher still, after the other suppliers follow what Bord Gáis has now done? Absolutely, although the outlook is very unclear. Wholesale prices have been hugely volatile.

They have gone from €70 per megawatt hour just before the Russian invasion to well in excess of €300 at one stage since, and are now trading at about €117.

Any disruption of supply from Russia would send prices shooting higher, as Russia supplies up to 40 per cent of the EU's gas. On the flipside, a breakthrough in negotiations on the Ukraine conflict and a lessening of tensions could see prices fall back. But even if prices hold at current levels, further rises might well come in the months ahead.

Pressure

The latest news will increase pressure on the Government to support households, particularly less well-off ones, by boosting welfare payments or perhaps extending the period of the year for which the fuel allowance is paid.

Businesses are also looking for help, with the Irish Business and Employers Confederation (Ibec) saying that without such aid, firms and jobs will be lost.

The European Commission is looking at ways to allow this, or other measures to hold down energy prices. But with wholesale prices, whatever is done is likely to require intervention and spending by governments.

What if Russian gas supplies are cut? Then, even though the State does not buy directly from Russia, EU protocols are that energy must be shared to ensure that priority customers are served.

So, for example, some of the gas we get from Norway could be redirected. Any need to ration supply would be a heavy hit both socially and economically. The outlook for supplies – and for prices – hangs in the balance.