Why are energy prices increasing?

It hasn’t been a great few months for energy customers in Ireland. 

In 2021 there were over 35 price hike announcements. And so far in 2022 all the big suppliers such as Bord Gáis Energy, Electric Ireland, SSE Airtricity, and Energia have announced yet more huge price increases. This has left gas and electricity prices in Ireland, and indeed elsewhere in Europe, at a record high.

Energy prices in Ireland are already among the most expensive in Europe and with ‘free’ renewable electricity at record output levels, many might be wondering why prices are increasing? 

Prices updated as of December 2022. 

* inclusive of VAT at 13.5% and based on supplier's 24-hour urban rate and a household using an average amount of gas and electricity as defined by the CRU. Increase also factors in changes to daily standing charge.

Why are energy prices increasing?

There are three main reasons why the price of gas and electricity is increasing. 

1. The price of fossil fuels on wholesale markets has skyrocketed 

Although the amount of electricity being generated from renewable sources has increased hugely in Ireland in recent years, over 40% of our electricity is still generated from burning gas and up to 10% or more from burning coal and oil. 

This big dependency on fossil fuels means we’re highly susceptible to any changes in their price, which can often be quite volatile. It also means that when the price of gas goes up, it also affects our electricity bills.

And the price of gas in particular has increased hugely on wholesale markets in recent months. It's been up by between 10 and 15 fold compared to 2020 for example.

For most of 2021 prices rose largely as a result of Covid. The pandemic forced many industries into lockdown and this disrupted delicate supply chains. So as restrictions eased and economies reopened, severe supply chain bottlenecks arose and put upward pressure on prices in industries everywhere, in particular the energy market. What’s more, a cold winter in Asia in 2020 depleted many countries’ gas reserves and led to an increase in demand for it in 2021 as countries rushed to replenish their supplies. This all led to upward pressure on prices.

Then in the spring of this year, the war in Ukraine and wider geo-political tensions sent prices shooting up even more.

Russia supplies around 40% of Europe's gas so any embargo on Russian gas will have a huge impact on gas (and electricity) prices. Ukraine is also an important transit route for gas into Europe.

And although oil only makes up around 2 to 3% of our electricity generation these days, the price of a barrel is now back to a multi-year high of over $100. 

Also of note is that the cost of building, operating and maintaining the country’s gas and electricity networks has been increasing in recent years.

For electricity, the network consists of the high voltage wires, pylons and electrical lines that transport electricity around the country and into people’s homes. For gas it’s the network of pipes, large and small, that connect the country’s towns and cities and transport gas into people’s homes and businesses. 

The electricity network in Ireland is made up of the transmission network (or grid) and distribution network, managed by EirGrid and ESB Networks respectively.

The gas transmission and distribution network is managed by Gas Networks Ireland.  

All suppliers must pay EirGrid and Gas Networks Ireland so-called Transmission Use of System (TUoS) charges (or tariffs), while the charges suppliers pay ESB Networks and Gas Networks Ireland to distribute electricity and gas to our homes and businesses are called the Distribution Use of System (DUoS) tariffs. 

Our TUoS and DUoS tariffs are around the third highest in the EU and combined make up about one-third of a typical household’s energy bill and ultimately these tariffs are passed through by energy suppliers to all customers in their bills. 

In October 2020, the CRU, Ireland’s independent energy regulator, announced an increase in these charges for electricity customers to help finance investment in the grid, which it said at the time would add around €29 to the average household’s annual bill. 

Of course, it was up to the suppliers as to whether they wanted to pass on these charges to their customers. However most did. And this has been leading to increased energy bills also.  

2. Several power plants have been out of action

Power plants regularly go out of action from time to time for maintenance reasons. However in recent months a higher number than usual have been out of action, and for longer than usual, due partly to Covid. This included two of the country's biggest gas-fired plants at Whitegate in Cork and Huntstown in Dublin, which together usually supply about 15% of the country's entire electricity.

This has reduced the supply of electricity to the grid at times, which coupled with high demand from a resurgent economy, is putting huge upward pressure on electricity prices and also leading to concerns around potential power outages.

However the Hunstown plant finally came back on stream last October, which has helped alleviate things.

3. There has been a lack of wind output

There has also been a lack of wind output in recent months. For example, according to the World Climate Service, June and July 2021 was the least windy period since at least 1960 in parts of Ireland, the UK, and the North Sea. And according to Met Eireann, 2021 as a whole was the least windy year nationally in over a decade, and the least windy year since 1959 in Dublin.

Indeed, on some days during last summer, over 90% of our electricity had to come from burning fossil fuels as there simply wasn't enough wind power being generated. 

The vast majority of Ireland's renewable electricity comes from on-shore wind farms, so when it's not windy on land, gas and coal-fired power plants have to take up a lot of the slack. But as mentioned, gas has skyrocketed in price (partly because it's in high demand due to lower wind output) while some gas-powered plants are out of action - all creating the perfect storm for an energy crisis. 

Why hasn't renewable energy led to cheaper prices?

​​Ireland’s level of renewable energy output has increased hugely in recent years and consumers often wonder why this hasn’t led to more downward pressure on electricity prices. 

Wind is 'free' after all, no?

It’s a controversial topic but we need to remember that renewable energy isn’t free. It’s far cleaner and better for the environment of course, but it costs money to build the turbines, solar panels and hydroelectric plants, convert the wind, sun and water into electricity and then distribute this energy into people’s homes.

And in Ireland, this seems to cost way more than many other European countries. 

For example, Conall Bolger, chief executive of the Irish Solar Energy Association, said the average cost for every unit of solar power generated in Ireland is more than double what it is in Spain, largely due to the big fees Eirgrid charges for connecting renewables to the grid.

Also, a lot of wind energy in Ireland gets wasted as the grid can't handle it all. This forces wind farms to charge more for the power they can produce and sell.

And without getting too technical, renewable energy creates very different demands on the electricity network than fossil fuels and the two don't mix well together, meaning generating more renewable energy requires big investment in the national grid.

And this isn’t going to change in the near future. 

Indeed, under the Government’s Climate Action Plan, up to 80% of Ireland's electricity is to be generated by renewable means by 2030, with most of this to come from wind and solar. But for this to be possible, there needs to be considerable investment in the national grid.

Depending on which approach is taken, that could cost between €500mn and over €2bn. And this money will most likely be recouped through higher TUoS and DUoS tariffs. Which in turn will be passed on to consumers.

The increase in the number of data centres in Ireland also needs to be recognised. These centres consume vast amounts of energy. And a report from Moody’s as far back as 2018 said the continued growth of data centres in the Republic would “significantly” contribute to a rise in electricity demand over the coming years, thereby putting upward pressure on prices.  

The final point is that renewable energy is volatile – we can’t tell very far in advance how windy or sunny it’s going to be and therefore how much energy will be generated. As a result, back-up power plants which generate their electricity from fossil fuels are still needed, and will be for a long time, for when renewable energy dips. But turning these on and off at irregular intervals depending on how windy or sunny it may or may not be isn’t very efficient and can add to costs too.

In short, while the move towards renewable energy promises the potential for far cheaper prices in the long term, over the short to medium term, consumers may have to deal with higher prices.  

Are we being ripped off with our energy prices?

The latest figures from Eurostat, the EU statistics agency, show that Irish electricity prices are the fourth highest in the EU at around 26% above average, with only Denmark, Germany and Belgium having higher prices. Gas prices are around the eighth most expensive in the region.

Things like wages and business overheads also get factored into the price of supplying energy and these costs are also higher in Ireland than other European countries.

However when you strip out the effects of taxation, Irish electricity prices are actually over 50% above the EU average and are the most expensive in all of Europe, which suggests inefficiencies in the cost of generating electricity in Ireland. 

Switch and offset the price increases

For those seeking better value the best option at the moment is to switch. 

Despite the rising prices, there is huge competition among energy suppliers for new customers. In fact, the average household could save around €500 a year right now by switching.

You can compare gas, electricity and dual fuel tariffs across all suppliers right now using our energy comparison service. 

Secondly, consumers should also look at ways to reduce their energy consumption. Whether that’s installing energy-saving light bulbs or remembering to unplug appliances at night, there are lots of little things we can do to use less energy around the home. Check out these 15 ways to use less electricity and save money and these 10 ways to heat your home for less for more helpful tips.

Looking for more information?

If you’re seeking more information on energy price increases or help regarding switching, take a look at the following:

• We recently appeared on C103 to discuss the reasons why energy prices are increasing. You can listen back here.
• If switching suppliers is something you’re considering, here are 7 important things to keep in mind during the switching process.
• We’ve compiled a list of the most common questions we get asked about the energy switching process here so that you can switch with ease.
• If you’re still in contract but want to switch, you may be subject to an early exit fee. Learn more about energy cancellation fees here.

You can stay up to date on saving tips and recent energy news with our blogs and guides.

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