Lisa Foley: How the electricity market works in Ireland
The wholesale market determines the price suppliers pay for the electricity they buy from generators, making up approximately 75% of consumers' bills. iStock
Electricity consumers in Ireland have experienced significantly higher electricity bills in recent years, due to the wholesale market, which determines the price suppliers pay for the electricity they buy from generators, and which makes up approximately 75% of consumers' bills.
Prices in the wholesale market are determined by market forces and influenced by supply and demand at a specific times, and by the strategies generators and suppliers adopt to protect themselves from volatility.
The power system in Ireland is still quite reliant on thermal generation, especially at times of low renewable output, and wholesale prices in Ireland are still dependent on international markets for coal, gas, and oil.
During the pandemic, wholesale electricity prices dropped from an average price of €50 per megawatt hour to €37/MWh in 2020, but later spiked significantly to an average of €223/MWh in 2022, as a direct result of the impact on commodity markets following Russia’s invasion of Ukraine.
Over two years later, wholesale prices remain elevated due to Europe’s reliance on international liquified natural gas (LNG) markets to supply gas, leaving generators in Ireland exposed to higher gas prices.
Over the last few months, we have seen a reduction in wholesale prices, with prices in 2023 averaging €121/MWh, mainly due to a milder winter and to lower electricity demand that left gas storage levels over 58% full at the start of April.
Another important reason has been record levels of electricity generated from renewable sources, with on average 40% of Ireland's electricity coming from wind in the first three months of the year. Electricity suppliers have started to reduce their prices to reflect the fall in wholesale prices.
At Cornwall Insight, we model trends in the wholesale market and forecast wholesale prices out 30 years. Our recent report forecasts a further reduction in wholesale prices to March next year, mainly because of record levels of gas storage in Europe, which in turn means European energy markets will be less exposed to international commodities market.
In the near term, our forecast indicates wholesale prices will remain between €90/MWh to €100/MWh, which is higher than historic averages in Ireland. The elevated prices are largely due to our continued reliance on gas imports and electricity imports from Britain and continental Europe.
Towards the end of the decade, as renewable energy levels increase significantly in line with Government targets, we forecast that wholesale prices will gradually reduce further. However, from 2030 as electricity demand increases through the electrification of the heat and transport sectors of the economy, as well as due to higher industrial and commercial electricity demand, we expect a slow but steady rise in prices.
It is vitally important for Ireland to become self-sufficient in terms of electricity generation to reduce reliance on international commodity markets and imports of electricity. So-called flexibility providers, like energy storage or demand-side responses, can complement renewable generation and ensure electricity demand can be met from low carbon sources at times of high and low renewable generation output.
Policy makers must support flexibility providers, as well as renewable generators, to ensure they receive the market signals to support investment. By developing flexible technologies, in tandem with renewable energy generation, will ensure consumers are protected from wholesale price exposure, as we transition to a net zero power system.
- Lisa Foley is principal consultant at Cornwall Insight
