The Commission for Energy Regulation recently announced that Irish electricity consumers will, for the first time in three and a half years, be required to pay an additional Public Service Obligation (PSO) levy in addition to their 2010/2011 electricity bills. While this move has, not surprisingly, been met with alarm from consumer groups, the PSO levy is the outcome of a complex arrangement of financial supports for certain parts of the Irish electricity sector put in place over the past 10 years.

The Public Service Obligation (“PSO”) mechanism is the principal instrument through which financial support is channelled to the beneficiaries of the electricity industry policy of the Irish government.

The enabling legislation is the Electricity Regulation Act 1999, which allows the Minister for Communications, Energy and Natural Resources to direct the Commission for Energy Regulation (“CER”) to impose “public service obligations” upon the holders of electricity licences. In general terms, this amounts in practice to the collection of revenues from final electricity customers, and the use of these revenues to fund specific contractual arrangements that have been established at the direction of the Minister.

The contractual arrangements that are funded by the PSO mechanism include:

  • contracts that are referable to the output of the Lough Ree (100MW), Edenderry (120MW) and West Offaly (150MW) peat-burning power stations and other plant within the ESB Powergen portfolio, and the Aughinish Alumina (160MW) and Tynagh (400MW) gas-fired power stations; and
  • power purchase agreements in respect of the output of renewable generation, under the AER and RE-FIT schemes.

Most of these arrangements are essentially financial instruments that are struck against prevailing wholesale electricity prices. The “cost” of servicing these contracts will therefore depend upon these wholesale prices – for example, if wholesale prices are high, the prices struck under the PSO contracts may actually be lower than wholesale market prices. While this situation persists, the “purchaser” of the PSO-supported energy is paying less than the prices that it would have to pay in the wholesale market, and the PSO contracts are “in the money” and require no contribution from electricity customers.

Generally speaking this was the situation that existed in relation to the Irish PSO mechanism during the period from January 2007 until September 2010. The relationship between wholesale market prices and the prices under the PSO contracts was such that the CER felt it appropriate to impose a PSO levy of €0 during this period – meaning that no PSO contribution was added to the bills of final electricity customers.

Unfortunately this situation was too good to last – the CER decided on 30 July 2010 to impose an aggregate PSO levy of approximately €156m during the levy period running from 1 October 2010 until 30 September 2011. This levy is spread across the bills of all final electricity customers, so that in respect of the 2010/2011 PSO period, each domestic customer is to pay €32.76, each “small commercial customer” is to pay €99.03, and ”medium and large customers” are to pay €13.82 per kVA (unlike domestic and small commercial customers, PSO payments are levied on medium and large customers according to consumption).

Somewhat predictably, given the difficult economic circumstances, the reaction from consumer groups has not been positive – see for example the responses quoted in “Energy levy will have 'significant impact'' (Ciara O’Brien, Irish Times, Tuesday 10 August 2010) and “How we pay €500 a year in 'green' stealth tax” (Treacy Hogan and Michael Brennan, Irish Independent, Tuesday 10 August 2010).

A common theme to the reportage and comment is the misconception that the positive PSO levy for 2010/2011 is the result of a newly-introduced policy that had set out to impose a precisely-calibrated annual charge on each type of customer. In fact, the levy is the result of changes in forecast wholesale electricity prices, in the context of a structure of financial support arrangements. Just as the PSO levy was not set for 2010/2011 with a specific annual total in mind, there is no assurance that the levy will not continue to increase in subsequent years – assuming the mechanism remains in its current form.

The size of the PSO levy in future years will depend upon a number of factors. While the Irish government’s commitment to supporting a range of renewable energy types, through the RE-FIT scheme, is likely to put upwards pressure upon future PSO levy amounts, far less predictable wholesale electricity prices will continue to be a major determinant of the final calculation. The complexity of the interplay between wholesale electricity prices and the PSO contracts makes it difficult for electricity consumers to assess the full costs of the technologies that the PSO scheme supports – which means that we can be sure of some heated debate, and plenty of forecasting, for many years to come.