Striking the right energy balance

Ireland must try to make the right decisions on sustainable energy now so we don’t have regrets later

AS A highly export-dependent economy, Ireland must curtail its energy costs if it is to remain internationally competitive. Meanwhile, like the rest of the world, we must reduce our reliance on fossil fuels and cut our emissions of greenhouse gases. Consequently, Irish firms will invest billions of euro over the coming decade to build more efficient and renewable energy infrastructure, much of it encouraged by Government policies and supported by publicly-funded subsidies.

This money needs to be invested wisely and in a way that supports both competitiveness and environmental objectives. Achieving this necessary balance will involve important choices that will have far-reaching consequences. It is vital that time and effort are now put into making the right decisions on sustainable energy, to ensure they are not regretted at a later date. By way of illustration, the €157 million electricity Public Service Obligation levy that consumers will be paying next year is the consequence of policy decisions that stretch back over 10 years.

The need to support renewable energy has increased in recent times. International fossil fuel prices have created huge upward pressure on Irish electricity prices. Also, under an EU mandate, Ireland is legally obliged by 2020 to get 16 per cent of its total energy consumption from renewable sources, and to reduce greenhouse gas emissions by 20 per cent in sectors that fall outside the EU’s Emissions Trading Scheme.

In this regard, Ireland’s National Renewable Energy Action Plan (NREAP), recently published by the Department of Communications, Energy and Natural Resources, raises important questions about the appropriate scale of investment in renewable electricity generation and how it should be funded. The plan outlines two scenarios. In one, we just achieve the 16 per cent renewable energy target by 2020. The other is an ambitious “export” scenario that is contingent on additional investment in energy infrastructure, including offshore wind and marine renewable technologies such as wave and tidal energy. It envisages Ireland going well beyond its compliance requirements, becoming both a net exporter of electricity and a test-bed for these offshore technologies.

This scenario presents great opportunities, but also substantial financial risks. In a hypothetical worst-case outcome, the subsidies needed to establish the infrastructure could turn out to be much higher than those we have experienced to date.

For example, suppose that wholesale electricity prices in 2020 turned out similar to this year’s average. This would imply an annual subsidy of around €800 million from consumers for the additional offshore renewable energy. If, as a result, Irish energy costs increased further relative to those of other EU member states, it would adversely affect competitiveness, inward investment and ultimately jobs. Given the risks, the key policy question is the extent to which Ireland can justify investment in renewable electricity resources, above and beyond that required to meet the EU target.

Certain observers have suggested that the export scenario presents a golden opportunity to fulfil Ireland’s legal obligation to tackle climate change, stimulate new green enterprise and reduce consumer costs.

The first of these arguments is questionable. Increased investment in renewable electricity generation is necessary and it will help Ireland reach its 2020 renewable energy target, but it will not materially contribute to achieving the country’s very challenging national greenhouse gas reduction target. This is because the electricity generation sector falls within the EU Emissions Trading Scheme.

With regard to commercial opportunities that the export scenario might present, there is the prospect of developing valuable technical know-how. Also, any renewable electricity that is surplus to requirements could be exported to other EU states who are striving to reach their own renewable target. These opportunities should be explored, but we do need to be realistic about how much additional offshore electricity we could potentially export and at what price.

In this regard, the ESRI has published an analysis which suggests that nearly 2,000 MW of wind generation might be profitably traded across the Irish Sea. This is a huge amount of power, roughly equivalent to the demand of one million electric kettles. But the study assumes that the wind investment is made predominantly onshore and that further electrical interconnection will be built. The economics of exports from offshore generation may be quite different. Indeed, the NREAP acknowledges that offshore technologies will require substantially higher feed-in tariffs than those offered for onshore wind.

Moreover, renewable generators proposing to export into Britain may require additional support to cover the transportation costs and exchange rate risk. British wholesale electricity prices are unlikely to be sufficient for this purpose. Conceivably, the UK government might agree to subsidise offshore investment in Ireland as a means of offsetting a shortfall against its own 2020 targets – but this will not happen if it can purchase the same amount of compliance more cheaply from elsewhere in the EU.

As to whether the export scenario would ultimately lead to energy cost savings for Irish consumers, it is worth noting that (in contrast to previous subsidy schemes) the proposed feed-in tariffs provide a guarantee of floor prices, rather than fixed prices. Therefore, even if fossil fuel prices rise sharply in future, making these renewable technologies more attractive, the consumer PSO levy would never be negative.

If the Government decides to go beyond our 2020 renewable energy target, it should also consider alternative means of funding that investment. One option would be to set aside a portion of the future revenues from Carbon Tax, not only to reduce PRSI costs, but also as an insurance against the potential competitiveness damaging effects of premium cost technologies.

The issues highlighted above may seem technically complex, but IBEC would welcome an informed public debate on them. Serious questions remain outstanding about any plan that comes with financial risks that have the potential to raise our energy costs and damage competitiveness.

Neil Walker is Head of Energy and Environment Policy at IBEC