Redesign of electricity market ‘may lead to higher prices’

Consumers may face higher electricity prices once a redesign of the Irish electricity market comes into effect in 2017, the Economic and Social Research Institute (ESRI) has warned.

In a research note, the think tank claims new rules on electricity trading have the potential to make costs and prices less transparent, which will have consequences for electricity consumers.

Currently, the Irish electricity market is one dominated by a single firm, the ESB, whose impact is minimised through regulation and the monitoring of bids by generators.

The market is, however, being redesigned in order to comply with EU regulations regarding electricity trading, essentially how firms sell into the grid.

This redesign, which will be effective in 2017, will have implications for the manner in which competition in the market is ensured, the ESRI warns.

“Specifically, regulation of generators’ bids will become more challenging under the new design, and costs and prices will be less transparent,” it said.

The institute warns Ireland’s capacity for advance trading or buying from cheaper markets - two means by which competition in the current market is maintained - will be “severely limited” under the redesign.

As a result, competitive prices for consumers will have to maintained through the monitoring and regulation of bids from generators, which will be more challenging system, according to the ESRI.

The ESRI also raises concerns about the effect on price of having one dominant player in the market.

“There are changes being made to the way the fixed costs of generators are compensated, by means of a capacity payment mechanism. However, this capacity payment mechanism is vulnerable to the exploitation of market power by a dominant firm,” one of the note’s authors, Muireann Lynch, said.

“Our research indicates that the Irish market has several features that render it unique compared with other European electricity markets.”

"These include a concentrated market with a dominant firm, high levels of wind generation, low levels of interconnection with Great Britain, which is in turn poorly interconnected with the rest of Europe, and low levels of advance trading between generators and supply companies."