What In Your Electricity Bill Part 1 Energy Payments

ENERGY PAYMENTS

This is the first part of a series of blog posts on electricity bills beginning with Energy Payments.

Summary:

* Energy Payments cover costs incurred by generators in power generation e.g fuel.
* Energy Payments were EUR 1.7 billion in 2010 (poor wind year) and EUR2 billion in 2014 (good wind year)
* Wholesale prices have had little effect on the increase in Energy Payments since 2010
* Demand has fallen since 2010 but Energy Payments have increased
* Strong wind output leads to higher Energy Payments because of the subsidies it receives
* Strong wind output leads to lower wholesale prices but higher Energy Payments which are reflected in higher electricity bills
* Capacity Factor is a measure of the output of wind in percentages, It indicates how much electricity a generator actually produces relative to the maximum it could produce at continuous full power operation during the same period. So 100% would be where the wind output would reach its maximum every day for a whole year and 0% where there was no wind output for a whole year.

Energy Payments make up a large portion of most electricity bills, sometimes as much as 50%. This covers fuel costs and other costs incurred by generators during the operation of their plant or wind farm. It is paid to generators based on power supplied to the grid. Theoretically, as wind has no fuel cost, energy payments should be lower in a system with wind than one with fossil fuels only. But in reality, wind energy receives a higher payment from the market than fossil fuel sources do and this has driven up energy payments.

2010 was a particularly poor year for wind in Ireland. Capacity Factors dropped to 24%, the lowest its ever been. So this is a good year to use for comparative purposes as nearly all the electricity was generated by fossil fuel and conventional sources.

SEMO's (the market operator) year runs from October to September but we can still use their annual figures as an indication as to what is happening. The 2014 year was a pretty average year for wind with some of the largest and lowest monthly capacity factors but with the largest installed wind capacity on the system to date. When compared to 2010, there were much higher levels of wind penetration in 2014 with an average capacity factor of 29% for the SEMO year to September 2014.

In 2010, total Energy Payments were EUR 1,752,491,743. In 2014, it rose to EUR 2,029,397,823, an increase of EUR 277 million or 15.8%. Average demand dropped by about 2% in this period so this increase is not because we used more electricity. What about the price of fossil fuel ? The price of fossil fuels, mainly that of gas, is one of the biggest drivers behind the wholesale price, so we can use this a good indicator. The wholesale price rose by EUR 12.28 MWh (23%) between 2010 and 2014 according to the CER (from EUR52 to EUR64.28). So maybe the hike in Energy Payments was because of the rise in fossil fuel prices ?

There are 2 issues here:

1) One of the alleged advantages of Wind energy is that it acts as a hedge against high fossil fuel prices. Installed wind capacity increased by around 50% (700MW) in the period we are looking at and as explained capacity factors (i.e. wind output) were much better. The wind industry will argue that wind energy helped to retard the above growth in wholesale prices, due to the high cost of fossil fuels.

2) The highest wholesale price in recent times was in 2011/12 when it hit EUR 72.72. The following year the price dropped by EUR7.00 MWh (9%). But Energy Payments did not drop in line with this. In fact, they rose by EUR191m (coincidentally 9%). So the reductions in fossil fuel prices did not trickle down into less Energy Payments as one would expect. Instead, consumers paid more.

So what exactly is happening here ? Well, we need to take a "birds eye" view. Generation capacity with priority dispatch is increasing (i.e wind), replacing power from other capacity in the grid. But wind energy is a more expensive way to generate electricity due to the REFIT subsidy given on the market price.

So the cost of using more wind energy is an important factor. The variations in the price of fossil fuels has impacted little over the past few years as can be seen below. The cost of adding more wind has more than offset reductions in fossil fuel prices.

In fact, the capacity factor of wind seems to be the single largest driver in the rise (or fall) of Energy Payments. Take a look at the following graph. I have represented all the above factors as percentages to allow comparison, with the highest of each factor since 2010 shown as 100% :

Energy Payments provided by SEMO. Wholesale Prices provided by CER in PSO Levy papers. Capacity Factors

and Installed Wind Capacity provided by Eirgrid.

There doesn't seem to be much correlation between wholesale prices and energy payments. But the correlation between Energy Payments and Capacity Factor of wind (output of wind) is striking. So when we get a year with good wind speeds, the electricity bills go up.

There does, however, appear to be a negative correlation between wind output and wholesale prices, i.e. when there is a high wind capacity factor, the wholesale prices comes down (and vice versa). But the Energy Payments go up to pay for the additional wind energy.

And the only thing that matters to consumers is the cost of Energy Payments as we have seen in our bills. It is of little consolation to them that wind energy has lowered the wholesale price when retail prices have shot up.