Price puzzle

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Price puzzle

The cost of gas, which is the main fuel used by power stations, has dropped year on year by about 20%. So why is the price of electricity coming down by just 5% as evidenced by the Budget Energy announcement?

Put plainly, wholesale fuel costs are a significant component of the bills consumers pay but they are not as important as many people might imagine.

A report published by Ireland’s energy regulators just before Christmas showed that fuel costs represented half the total revenue received by generators. That revenue is essentially the wholesale part of all bills whether paid by homes or businesses.

In the case of households, wholesale costs represent around sixty per cent of the bill. It therefore follows that fuel element makes up just thirty per cent of domestic charges.

It further follows that a twenty per cent drop in gas prices will only produce a six per cut in household bills.

There are a number of assumptions buried in this back of the envelope analysis, chief of which is that homes pay a roughly similar price per kWh for wholesale energy as businesses. It is not identical because businesses on average burn a greater proportion of electricity at times when power is cheaper such as during the night. I can’t be sure but I doubt if the difference in cost is so large as to invalidate the analysis totally.

Last updated on 11/05/2016

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