BY JOHN ELLIS, FINANCIAL ADVISOR
With inflation increases, interest rate hikes and the continuing energy crisis, 2022 was a tough year for many of our readers. Areas that affects us all are the cost of electricity/gas and petrol/diesel.
Late last year the cost of energy began to fall, but the cost of gas, for example, is about 63% above the average price for 2021. Ireland imports 75% of its gas from the UK which trades somewhere up to “200 pence per therm”, whereas 18 months ago, it traded at the 50/55 pence level. According to Daragh Cassidy of Bonkers.ie we need to remember “that the price households pay for their gas and electricity is usually an average price of the cost of energy on wholesale markets over the course of around a year or two as suppliers buy most of their energy months in advance through hedging.
‘This is to try to ensure households aren’t faced with extreme swings in the price of their energy on a weekly or monthly basis.”
In 2022 wholesale gas prices were up by more than 1,000% during the summer while electricity prices were up by over 400% during the spring. Our costs did increase, but not by those astronomical amounts. This was due to hedging.
Energy hedging is a buying strategy that protects energy suppliers from the risks of ‘price-volatility’ in the wholesale energy market. They buy ‘energy’ in small amounts, frequently, which allows them to take advantage of any dips in price while not leaving themselves vulnerable to further falls in price. Buying ‘in advance’ also means suppliers can be sure they have enough energy to meet their customers’ demands.
The problem of ‘hedging’ is that falls in the price of energy aren’t immediately passed on us, the consumer. To benefit there will need to be a sustained reduction in the price of energy on wholesale markets for several months before we can see a reduction in our energy bills.
It seems odd though that two different sources of energy would affect the overall electricity price in Ireland. However, the reason is down to a pricing mechanism called marginal pricing.
According to David Tate of Selectra.ie marginal pricing means that the price of electricity is always priced to the most expensive energy source that is needed to satisfy the demand. For example, if the demand is low and renewables are sufficient, then the price of electricity is also low. However, if the demand is high then more expensive sources are needed to satisfy demand and therefore the price is set at that more expensive price.
Currently demand is very high, and we are reliant on gas-fired power stations to satisfy demand and the price of gas is currently the most expensive and therefore also sets the price for the rest of the electricity market.
Petrol and diesel reached a record high of over €2 a litre as oil rose to over $120 a barrel due to the outbreak of war in Ukraine and sanctions on Russia. But oil is also priced in dollars and when the euro plunged in value against the dollar, it made a barrel of oil even more expensive for us in Ireland. Include too supply chain bottlenecks, oil refinery disruptions leading to a reduction in the supply of diesel leading to diesel becoming more expensive than petrol.
Since then, oil has fallen back and, at the time of writing, stands at $85 a barrel. The euro has risen above parity against the dollar, and supply chain disruptions have eased, so hopefully petrol and diesel prices will remain well below the record highs seen last year.
But the Government will likely come under pressure from the Green Party to reverse the excise rate cut (20 cent a litre on petrol and 15 cent on diesel) over the coming months, which, if implemented, would see prices creep back closer to €2 a litre again.
Hopefully 2023 will see no further gas or electricity price hikes and the outlook seems better than it was even a few weeks ago.
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