With more than a touch of irony, the energy regulator has decided to cut the Public Service Obligation levy because the prices of oil and gas are going through the roof.
If you’ve given your electricity bill more than a quick glance lately, you’ll have seen something called a PSO levy buried near the bottom in the breakdown. Every household in Ireland pays it and you’ll usually see it as €2.73 a month or €5.46 for two months. When you add VAT (yup, it’s one of those famous Irish taxable taxes) it comes to about €6.20 on every bi-monthly bill.
It’s not a huge amount, but it’s not peanuts either. With the levy and VAT, we’re all paying €37.20 extra per year for our electricity. When it’s all gathered up, something like €157 million a year goes into this “Obligation” pot. And then the Revenue, of course, creams off an additional €21 million in VAT.
After applying the levy for the first time last year, the Commission for Energy Regulation will cut the levy by 41% in October. It’ll mean that we’ll be paying around €21.94 per year instead of €37.20. Normally you’d reckon a little saving like this would be quite welcome. It is €15 after all I’m sure most of us would be happy enough to have it in our pockets.
The problem is that we’re not going to have an extra €15 in our pockets. Nothing like it. Actually, gas and electricity bills for many of us will go up by about €235* per year which suddenly makes that €15 look rather piffling.
The PSO levy is basically a subsidy to help peat burning power stations and renewable electricity generators. Suppliers like ESB Electric Ireland are required to buy a certain amount of their electricity from these sources and the PSO levy is paid to compensate them for the extra cost.
Generating electricity by burning gas and oil has normally been much cheaper than using peat and windmills, but since the price of wholesale gas and oil keeps rising, energy produced from indigenous and renewable sources has become much more competitive. So now we need less money in the levy pot to make up the difference because the suppliers are forking over tons more cash for their oil and gas. And of course they'll be passing on those extra costs to us.
Another purpose of the PSO levy is to increase the amount of electricity made from Irish sources so we can make our supply more secure. In simplified terms, the idea is that if we don’t have to ship in as much oil, our supply becomes more secure and less affected by outside influences, which would lead to more stable prices for normal punters.
This is a superb objective, and the PSO levy is well supported because of it. Although I'm not so sure that burning off our bogs fits well as a long term piece of this strategy, at least the are our bogs. And you do need something that can provide constant reliable generation capability... which wind can't.**
As we’ve seen though, energy price stability is not yet a reality. The introduction of competition reduced prices and held them stable for a couple of years, but that's over now. The huge energy prices increases we can expect from all suppliers in the coming months are a direct result of our dependence on foreign oil and gas. So in a nutshell, we get a break of €15 because our bills are going up by as much as 15 times that amount.
**It is possible to wean a small country like ours off oil. It takes time and commitment, but it has been done. Denmark generates nearly all its electricity from renewable and indigenous resources and stabilises their supply with a small amount of imported nuclear power. They used to generate nearly all their electricity from oil. The technology they’ve developed along the way has been a huge driver of their economy and they now lead the world in efficiency and wind technologies.
*I'm making the €235 bill hike calculation based on a household with a gas and electricity supply and national average consumption. Here's how I got the number:
On August 1st Bord Gais increased electricity unit prices and standing charges by 12%. This will increase bills by about €115 per year on their Residential tariff or about €100 per year if you take into account the levy reduction. The regulator has provisionally approved a 22% gas unit rate increase for Bord Gais which will kick in in October. That'll add €135 a year to the average household bill. Other suppliers are likely to impose similar hikes.
In order to mitigate at least some of the price increases, it will be essential for customers to make sure they are getting the best deal, as the difference between the cheapest tariffs and the most expensive is likely to greater than ever.