I am pleased to address the joint committee this afternoon, although there is no pleasure to be had in trying to explain the decision to sanction the highest increases we have ever had to face. Last year, we were talking about an increase of just 4% in electricity prices, but now we are talking about closer to 20%. This issue has to be approached in the context of the remit given to the Commission for Energy Regulation by the Oireachtas. The commission, which was established under a statute, has to comply with the requirements of its duties, challenges and functions as set out in the relevant legislation. This year, the commission has followed exactly the same process that it followed in each of the previous years in which it was engaged in this activity. The commission is trying to balance the various competing objectives, which can be difficult, as the committee has heard this afternoon. Everybody has a different perspective. We are trying to balance the interests of all parties with the short-term and long-term interests of the economy. It is difficult to square this circle.
The Chairman asked me to outline the reasons for the increase in gas prices. Almost two thirds of the price paid by the consumer is made up of the price of gas. One third of the final price is made up of costs relating to things like pipes and the process of selling the gas and sending the bill, etc. The gas element has a huge impact on the gas price. As the committee has heard, the gas price has increased by approximately 50% over the past year. As the representatives of Bord Gáis said, that increase has led to additional costs of approximately €150 million, which is the same figure that has been encountered by the ESB. Both parties enjoyed long-term contracts that have come to an end. It seems that led to an even larger increase.
Many speakers referred to the need for prudent purchasing. The Commission for Energy Regulation would like the various interests to engage in prudent purchasing. One cannot buy one's gas for the year on a day-ahead basis. If one tried to, one probably would not get it. If one succeeded in buying it, one would shift the market. It is really not a viable proposition. One has to buy gas in a portfolio manner by buying forward, which is what every gas and electricity company does. Bord Gáis and the ESB have bought quite a bit of gas forward.
The wholesale market has shrunk in recent times. When we originally looked at this market, we looked at a price of approximately 60p for gas. That is an average for the whole year. It is much higher in the winter. As of this morning, yesterday's price for January was 72p per therm and the next-day price was down by 12p or 14p. There is a huge variation in all of these things. If one just looks at the winter, one will look at higher prices.
Generation costs in the whole stream of electricity form more than two thirds of the cost. At present, three quarters of that generation cost for the best new entrant electricity power station is made up of fuel costs because of the increase in such costs. We cannot deny that such costs exist. The ESB uses coal and oil in their stations, as well as hydropower and some renewable energy. The costs of some of them have increased and some have decreased. We recently asked the ESB to meet the same demand with the new prices and to look at the mix of power stations. There has been practically no change because the price of coal that is now being faced by the ESB is higher than the price we assumed in our original cost determination. There are always some ups and downs.
This aspect of the matter needs to be viewed in the context of the success of the economy. We forecast last year that we would have approximately 60,000 new customers this year, but we now expect to have 110,000 new customers this year. People may not be aware that new customers pay just half of the cost of connection. The other half of that cost has to be met by the ESB as part of the network charges. There is a significant degree of diversion of existing wires and lines because so much development is taking place. The wires have to be taken out of the way so that developers can start to build new housing estates. Such costs have added approximately 2% to the price of electricity. I suppose that is ironic, in one way.
Speakers have referred to fuel variation, which currently takes place once a year. I will respond to what the last delegation said in this regard. When the market was rising, which it was in August, nobody wanted price variation. Last year, we set a fixed price for the year because people had argued that they wanted stability — they wanted to know the price they would face for the year. The ESB and Bord Gáis have been taking the hit this year while the price has increased constantly. Nobody said they would like to follow that price. This issue only started to re-emerge when the price started to fall. I have been a proponent of fuel variation and of tracking the market in real time.
A member of the committee spoke about industry. When I mention industry in my presentation, I refer to the consuming industry in general — the IBECs of this world — rather than to the energy industry itself. The paper we published two years ago was unanimously rejected by everybody so we put it away. When we took it out again this year, we dusted it off and took on board what people said. We published it in July and received 14 responses, 12 or 13 of which were against it. It has arisen once more as the price has fallen. We will look at it again, as I said in the paper, to see what it can do. We have to be fair to everybody in this regard, however. We cannot just introduce it now, after people have bought gas on the basis that we would not introduce it, because to do so would be to cut the ground from under people. The decision will probably be based solely on gas, even though the ESB also buys coal and oil. There is a risk there for the ESB as well.
The committee has touched on various other matters that I mentioned in my paper. For example, members spoke about price increases across the water and about the availability of ESB power stations. As Mr. McManus said, we would like many of the poorly performing stations to be closed down and replaced with more reliable modern plants. In fact, in our price determination we have penalised the ESB for the poor level of availability. We cannot continue if there is no increase in availability.
We are part of the UK gas market and the world market for oil and gas and we therefore take those prices. In the United Kingdom, there is no body such as the Commission for Energy Regulation to determine prices and prices are floating free for everybody. We look at the website of Energywatch, the consumer watchdog in the United Kingdom, and note that it has tracked 13 increases so far this year. These are all very serious increases and do not have to be justified to anybody. It is the equivalent of any private company increasing its prices.
Gas prices have increased again in Northern Ireland and this is the third increase in 12 months. Gas prices are still higher in the North than here and electricity prices are still cheaper here than in the North. There is always a timing effect in that if one is six months out, one will be ahead on one occasion and behind on another. Such cycles will never unwind.
If the price decreases, it will be great. We would like to have proper time-of-day pricing in the pricing regime so people would know the real price of electricity at a given time. We are all committed to energy efficiency and the maximum use of the correct amount of energy.
Deputy Eamon Ryan might be interested to know we have not put through the full price of carbon. All we have submitted are the out-of-pocket expenses incurred by the ESB. The private sector will say this is grossly unfair but it has much better buying power and the level of credit it has bought for its carbon is very low. Its usage is changing and it does not need to buy any more — we are left high and dry. The price could be 7% to 8% higher if all the aforementioned factors were included.
We hope the all-Ireland market will shift us away from cost-based regulation into a real market that will determine the prices. We are dealing with the dominance of the ESB and have proposals to deal with it. We will not say what can or cannot be allowed as the market will determine the prices. We hope this works out.
We have tried to remove tariff regulation at the top end of the market. This applies to the members of the IBEC large energy users' group. It does not like the proposal and does not believe it is the right time to implement it. We believed it was the right time.
I did not like to hear the word "victim" used as I do not believe there are any victims. Deputy Fiona O'Malley was perfectly correct that there is nothing to stop people forming a co-operative company to buy gas, build a power station and generate their own electricity. This is an entirely open market. No operators in the residential sector have ventured into this area yet because they do not believe they can make money and they believe the prices are too high. It is difficult to achieve reconciliation.
We will introduce the virtual independent power producer product into the market in the next few days and it will help to secure more capacity. It was said earlier that it will not be available until January but there will also be some available in January.
We are trying to keep the price as low as possible in the circumstances facing us. I will be quite happy to address all the issues the committee wants to raise.
