In the presentation which I hope will not take long I will focus on the main determinants of prices and the next set of processes in which the Commission for Energy Regulation will be involved.
I have a number of slides, the first of which shows the main determinants of electricity retail prices. Transmission, supply and distribution costs are all, in some sense, controllable but the predominant share of the entire set of electricity prices is taken by generation costs. Approximately two thirds of the cost of electricity is determined by generation costs. These are predominantly determined by the price of fuel, whether coal, oil or gas. A similar situation applies to gas prices. The price is also determined by transmission, supply and distribution costs but roughly 60% is determined by the price of gas itself. It is an internationally traded good and Ireland, being a small economy, must buy it at a fixed price. Those are the main determinants of electricity and gas prices.
The next slide illustrates the generation-fuel mix. It gives a general sense of the typical fuels on which electricity generation relies. By far the predominant fuel is gas. More than 50% of electricity in Ireland is generated using gas. The next biggest fuel source is coal, followed by wind energy, the importance of which will rise in the next few years. Oil accounts for a tiny fraction. The main importance of the oil price to the price of electricity is through its indirect influence on the price of gas.
In regard to past and future movements in energy prices in Ireland, I will first deal with last year. In 2007 there was a decrease in prices of 11% in gas and approximately 6% in electricity. The main driver for this decrease, and for most decreases or increases from year to year, is energy costs. Last year there were lower international gas prices than in the year before. There was a slight reduction in network costs but again the main thing that happened last year was that energy prices were slightly cheaper via lower fuel prices. The diagram here looks a little messy but what we are trying to show is the sense of how generators, in particular the ESB and its customer supply, buy their fuel. As is only right and sensible and, as happens in pretty much every regulatory jurisdiction, the ESB hedges by buying its fuel supplies in advance to protect itself and ultimately its customers from risk. We see that last year the hedging window was in June and July. We can see the forward prices of the main fuel items. Obviously coal and gas are the most important. Last year was a very good time to buy around that time when prices were locked in and suppliers started to hedge risk. As can be seen, prices increased afterwards.
Since then the general wholesale prices of pretty much all fuels have increased dramatically. Between April last year and September this year there has been a strong secular increase in all three main prices. Oil has spiked the most but gas has also increased and, as I noted earlier, gas is particularly important. We can put numbers on this. Between the two cycles of hedging where pricing is locked in, gas increased by 130% since the year before, coal by 100%, and oil by a little less. Oil prices have fallen a little recently but gas prices have not fallen so much. There has been some light fall but as of now, compared to a year ago, fuel prices have increased a great deal.
Technically the next tariff period starts tomorrow. Hedging by the supply companies was done in May and June. That was at a point when fuel prices were increasing, though they increased afterwards and it was a reasonably good time to hedge, certainly compared with having to do it a month or so later. The price of gas and coal, the two main constituents, are continually rising.
What does this mean for the CER and for future retail prices for Irish consumers? We had an interim price increase a couple of months ago. It was announced on 1 August and implemented on 1 September. There was a 17.5% increase in the price of electricity and a 20% increase in the price of gas. That is without VAT which is charged at 13.5% in this jurisdiction. There is a sense here of what the average annual bill is for electricity and gas for consumers. This pattern of increased fuel prices and the effect it will have on energy prices is happening in many jurisdictions.
We have here some data on recent price changes in Northern Ireland, which is particularly relevant because we now have a single energy market in generation between the North and the South. There were two significant price increases of more than 50% there in electricity and gas. In the UK we see a variety of increases. The UK market is not directly regulated any more so there is a variety of significant increases in the price of electricity and particularly high increases in the price of gas.
What will this mean for us? The second phase price increase — and there is no doubt that there will be an increase — for electricity and gas is due to be implemented on 1 January 2009. As has been noted, fuel prices have softened somewhat since their peak during the summer, particularly in oil, less so in gas. However, there has been locking in of prices and hedging forward, which is absolutely the right thing for any supply company to do because it protects the company and its consumers against risk. Because of that, and the fact that the ESB customer supply has locked in the vast majority of its prices, the recent fall in prices will only have a minor impact on the actual increase required in the next price change. The ESB has already contracted for the majority of its gas, though not all of it. The decrease in prices for oil and gas will only have a small effect as most has been bought in advance.
As for the timetable, there were interim increases in August and September. At the end of October both the ESB and Bord Gáis will make tariff submissions to us for the next potential price increase and they will be published on 3 November for public consultation, which will last one month. On 10 November there will be an open forum in which any interested party can come along and comment on submissions and on the general price of energy. The CER will facilitate the forum and will be present to listen to what everybody has to say. In early December the CER will make a final decision on electricity and gas tariffs and on 1 January any new tariffs will come into effect.
Members will notice that we referred to the rebate of €300 million, which was also flagged up a few months ago and which should be provided to all electricity customers. The CER has requested the ESB to provide a rebate in the form of a credit of €300 million to all electricity customers. This will protect customers to some extent from the second phase increase and we calculate it will do so to the tune of between 8% and 10%. Whatever the second phase increase is, it will be between 8% and 10% smaller than it would have been without the rebate. It will be spread out among all electricity customers from January 2009.
Although it is not formally our function, I will remind members of the protection in place for vulnerable consumers. The Department of Social and Family Affairs has various protections in place in respect of electricity and gas. In respect of electricity a very large number of customers are in receipt of the allowance. It covers the standing charge and a fixed quantity.
