February 27, 2011

Ireland’s big hope or just hot air?

John Reynolds, The Irish Times, www.irishtimes.com 25 February 2011

Commitments to wind energy targets look promising but they are undermined by concerns from key energy users – including important multinationals – over a lack of any comprehensive cost analysis, writes JOHN REYNOLDS

A FORTHCOMING REPORT by the Irish Academy of Engineers (IAE) expresses alarm at the lack of any comprehensive analysis of the costs of the country’s current energy policy, while multinationals and other businesses remain deeply concerned about the potential costs of the Government’s commitment to generating 40 per cent of our electricity from wind power.

The IAE, which claims no commercial or political affiliation, claims that the planned development of wind farms across the country to more than three times its current level of 1,500MW could cost more than €10 billion, with households and businesses being hit by higher bills. The organisation says the country has enough wind and conventional power to meet its needs until 2020 so it may be wise to halt all planned development of wind farms for at least five years.

The lack of clarity about the exact cost exists because, although this policy has been part of Ireland’s EU obligations to reduce carbon dioxide (CO2) emissions since 2007, no study has looked at its possible impact on electricity bills as we aim to generate 40 per cent of our electricity from wind power.

Ger Fulham, managing director of Kore Energy, a company that provides energy procurement and risk management services to such businesses as Irish-based multinationals, says a number are increasingly concerned, particularly in light of the recent impact the public service obligation (PSO) levy has had on their bills. The levy, covering peat generation and the support costs of wind generation, will add up to about €157 million this year.

Many multinational companies here now have to include details of energy costs in their reports back to their headquarters, says former ESB International chief executive Don Moore, one of the authors of the IAE report. This was not always the case, and is adding to the concerns of their Irish chief executives and country managers.

“Not knowing the adverse cost impact of the amount of wind energy being brought onto the market is a problem from the perspective of our client base. The costs are not known and do not seem to have been predicted,” says Fulham.

“What is clear is that spark spreads – the margins that represent transmission costs and profit – are higher than in the UK or Europe. The amount available, which may be pure profit, is up to four or five times that found in those markets. On average we calculate it is €32 per MWh (megawatt hour) here, whereas in the UK it is about €11 per MWh,” he claims.

Also affecting billpayers is the issue of capacity payments, paid to all generators of electricity – renewable and conventional – simply for being available to supply electricity to the power grid at a moment’s notice.

Fine Gael plans to reduce these “within two years” as part of its energy policy, but this will come too late for billpayers who have already paid out €1.5 billion in these payments over the past three years, according to Commission for Energy Regulation (CER) figures.

“We calculate that the capacity payment being paid to generators is €17 per MWh, three times the level of what is paid in the UK market. Ultimately it appears to be profit, with no tangible benefits,” says Fulham.

Two hundred and sixty seven people lost their jobs at Irish Cement, Roche Ireland and Shannon Aerospace, businesses that had only months earlier raised their concerns with the CER about the PSO levy.

Irish Cement told the regulator that its bills would rise by more than €1 million, while smaller and medium-sized businesses stated that they would see their bottom line hit by between €14,000 and €300,000 a year.

Many had already implemented pay freezes, cuts, longer working hours and carefully targeted cost-cutting measures. Some had brought in energy efficiency measures in an effort to minimise their electricity bills, only to see any savings wiped out by the new levy.

Another flaw that exists in the Irish electricity market – which notably is different to that of the UK – is that older, less efficient, more polluting power stations can set the market price, which gets paid to all power generators in a given hour.

These plants are needed on the electricity grid so that they can generate power within 15 minutes, in cases where the wind has been blowing but drops, causing wind turbines to stop generating power. Five more of these power stations will be in operation across the country by 2015, according to Eirgrid figures, so it is conceivable that these could further affect electricity prices.

“We have a lot of old, inefficient plant setting the market price, and it is more concentrated in a relatively small market like Ireland. These power stations should have been ringfenced from setting the market price,” Fulham says.

Using market figures, a former industry source calculates that, because of this flaw in the market structure, the difference between the market price for electricity and the average price in 2008 was €870 million – all of which was unnecessarily passed on to billpaying businesses and households.

Between now and 2015, billpayers will also pay at least €1.4 billion in grid development and improvement costs that are necessary for the development of more wind farms, according to grid operator Eirgrid.

In addition, there is the €500 million cost to billpayers of the East-West interconnector, also needed to facilitate more wind energy, it says. A report by consultants Poyry said that interconnectors are not “golden bullets”, because they could result in a situation where Irish billpayers sometimes pay an increasingly high “spiked” price for electricity, itself caused by wind power installed on the British power grid.

Another aspect of all this, perhaps indicating the true total cost of all of this wind energy, is that the ESB in 2008 announced plans to invest €11 billion in the grid and a further €11 billion in renewables and smart meters by 2020, although ESB sources say this strategy may be revised.

If this is the case then even allowing for what may have been spent to date, more than the €10 billion IAE figure may not have yet been spent. Yet there remains no indication of what this would mean for billpayers.

A further cost, according to the IAE, is that of devaluing existing conventional power stations owned by Bord Gais and the ESB, which are in effect State assets. While depreciation is covered by the cost to billpayers and spread over their 40- or 50-year design life, the more wind energy on the grid, the less they will be used to generate power. This is because wind has priority: where possible it will always be used ahead of conventional power stations.

If they were used for half their normal time, they could halve in value the IAE claims. In addition, because all costs of operating a power station are calculated over the operating hours, they also become more expensive to run – and therefore increase electricity costs – if you run them for shorter periods of time.

They also become more prone to being out of service for maintenance, meaning the amount of power available on the grid must also cover that eventuality as well, which adds a further cost.

Aside from the costs of wind, Ireland may be in a relatively fortunate position at the moment, because 62 per cent of our electricity is generated by gas, and gas prices have come down dramatically in the past two years because of the impact of shale gas discoveries on global markets, and particularly on the demand for natural gas imports from the US.

If amounts like the €1.5 billion in capacity payments had been invested in new, highly efficient gas-fuelled power stations, conceivably electricity prices would be even lower than they are now.

In the meantime, while any efforts to reduce costs for billpayers, where capacity payments are concerned, will be welcomed, Fine Gael policy is to invest an unspecified amount of money in wind power through Bord na Móna and Coillte, while conceding that it hopes to save taxpayers €280 million in subsidies for offshore wind power by building more onshore.

This is in spite of their plans to sell the ESB and Bord Gáis, both of which already own and operate wind farms. Those sold will have depreciated, while new ones will likely be more expensive.

In light of these matters coming under increased scrutiny, next month the Irish Wind Energy Association will release a study claiming that if we were to have 45 per cent of electricity from wind power (an estimate higher than the Government’s 40 per cent commitment) it will reduce wholesale electricity costs by 11.5 per cent by 2020.

However, the study only looks at the cost of generating the electricity and does not examine transmission costs or those of conventional power stations being on standby when the wind stops blowing, according to chief executive Michael Walsh.

Neither Eirgrid nor the CER could provide any figures for the projected costs to billpayers of expanding wind energy. The ESB referred us to an Eirgrid document that did not include any figures.

Meanwhile, Eirgrid has received applications for more than 10 times the existing number of wind farms here – 3,900MW of which are awaiting a connection offer while applications to build a further 12,000MW were received outside the existing application process.

If built using medium-sized 2.5MW turbines, that would involve about 6,300 of them.

It remains crucial that any decisions reached by a new energy minister are absolutely the right ones for taxpayers and billpayers in the current economic climate, because we know only too well the consequences of the wrong ones where billions of euros are concerned.

URL to article:  https://www.wind-watch.org/news/2011/02/27/irelands-big-hope-or-just-hot-air/