Yesterday marked the first day of an all-Ireland electricity market, which should cut fuel bills . . . eventually, writes Barry O'Halloran
While you didn't notice it when you switched on the lights or the TV yesterday, there was something reasonably revolutionary happening in the background.
Yesterday was the first day of the all-Ireland electricity market. It was the culmination of more than two years of work by two national grids, two regulators and two governments aimed at merging the two markets.
It was the first day that all the electricity generated in Ireland was traded through a common pool run by an independent market maker.
Energy Minister Eamon Ryan said it would lead to more competition and transparency, and ultimately help to lower prices.
Nobody, however, including the single market operator, claimed it would lead to a sudden drop in the cost of electricity.
At one point, electricity traded in the pool cost £40.92 (€58.92) per megawatt hour, compared with £34.52 in Britain.
The energy regulators north and south will still set electricity prices for two million-plus domestic users. These prices are determined once a year, based on reviews that take into account the cost of fuels used to generate power. According to the Department of Natural Resources, the impact of the single market will be one factor taken into account.
As domestic prices were cut by 6.1 per cent in a pre-planned move yesterday, the single market is not going to have any impact for another year. Even then, it may not lead to a further price cut.
After statements by ESB chairman Tadgh O'Donohue last July, yesterday's price cut was expected to be about 10 per cent. But an increase in the price of coal, the fuel used by the biggest power plant, Moneypoint, meant the reduction fell short of this.
That demonstrates that energy costs are very much tied to what happens with oil, gas and coal prices on world markets. As crude oil passed $96 a barrel yesterday, the overall trend is up.
But if the single market works, it will help to cut prices in the medium term. The system is based on a "pool", which is really a trading mechanism run by a market operator.
Here, the operator is a joint venture between the Republic's national grid manager, Eirgrid, and its counterpart, System Operator Northern Ireland (SONI).
The market operator breaks each 24-hour day up into half-hour periods. The day before they intend selling the electricity, producers bid in the amount of power and the price at which they are prepared to sell for each half-hour period.
The market operator then sets the optimum wholesale price for each half-hour period according to projected demand, availability of power and the prices offered by producers. This becomes the market clearing price, or the wholesale price paid by suppliers, who ultimately deliver power to the customers.
As the cheaper power is despatched first, the theory runs that during periods of low demand, wholesale prices should be lower, while during periods of peak demand, the cost will increase accordingly. Thus, the system should favour cheaper and more efficient producers.
This is complicated by the fact that some power companies will be playing the roles of both buyers and sellers. Alongside this, buyers and sellers of power can enter into contracts for difference (CFD) with each other. These are hedging mechanisms that allow both parties to take a position on future pool prices.
Several players began trading CFDs yesterday. That's the most revolutionary thing to happen, a new financial market treating electricity as a commodity.
