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Can the cost of power fall much further?

Last updated on 11/05/2016
While electricity prices these days never present a static picture thanks to the entry of new suppliers, the landscape should be clearer when Power NI’s price cut comes into effect on Thursday, April 1.

The company, which still retains the loyalty of three in four of those households who pay for their power in arrears, will be cutting its charges by just over 10 per cent. That won’t make it the cheapest supplier. That honour goes to Open Electric. But the move is positive news for those consumers who resist all encouragement to switch supplier and end up staying with the same firm they’ve always relied on for electricity. 

Incidentally the company’s parent firm Viridian has just been taken over by New York based investment firm I Squared Capital for a reported one billion euro. The change in ownership which is due to go through before the end of June will have no effect on the company’s domestic and small business tariffs which are regulated by the Utility Regulator. It probably won’t make any difference either to the pricing strategy for bigger business customers but there is the scope to do so since that market is unregulated.

Though I said prices are likely to settle down for a while, the market will be shaken up again when SSE Airtricity introduces a 10 per cent price cut in June. And of course there is the scope for other smaller suppliers to make changes too.

Overall however there is limited scope for further significant reductions in electricity charges. Generation costs have come down partly with a fall in the price of oil, but also and more significantly, with a drop in the wholesale price of gas. The main reason for these price decreases being a glut of both commodities on world markets. Now however that oil prices appear to have bottomed out, that’s likely to discourage further major reductions in gas prices. 

To explain this in more detail, we need to see what contribution the wholesale gas price makes to the cost of what we pay for power. Currently the wholesale cost of gas is around 30 pence a therm or about 1 penny a kWh. It takes two kWh of gas to create one kWh of electricity, which means the cost of gas needed to generate one unit of electricity is just two pence. What means means is that, all things being equal, it would take a fifty per cent cut in the price of gas to deliver a one penny drop in the cost of power for households. If you're wondering, most of what we pay for power is down to other wholesale costs plus network charges and levies including VAT.

In conclusion, cheaper electricity has arrived but it’s not likely to get much cheaper unless there’s a massive downturn in the world economy which would be a pretty big price to pay for lower cost energy.

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