Moody's: Irish power price will continue to fall amid a climate of heightened regulatory uncertainty

The wholesale power price in Ireland will continue to fall over the next three years in a range between EUR53-58 per megawatt hour (MWh), driven by the continued increase in the number of onshore wind farms says Moody's Investors Service. However, only part of the benefit is likely to be passed onto consumers because the new assets will come with increased subsidy cost. The fall will be at a more gradual pace than the 15% decline between 2013-14, which was largely the result of the sharp decline in global oil and gas prices.

"Continued deployment of onshore wind farms, declining demand on the transmission system, and the return to full service of the Moyle Interconnector will put pressure on prices in the second half of this decade", said Matthew Huxham, Moody's Assistant Vice President and Analyst. "However, the decline will be forestalled by the effect of reduced interconnector imports in 2015 and 2016, and less coal-fired generation from 2016", added Mr Huxham.

The lower power price will reduce earnings for owners of conventional power generation (coal, oil, gas and peat) and non-subsidised renewable generation (hydro), including Electricity Supply Board (ESB, Baa1 stable) and Viridian (B1 stable). ESB is more exposed as its more diversified generation portfolio means that its earnings have further to fall than Viridian, for whom energy market earnings from its Huntstown gas-fired power plant have been very slim in recent years. However, the reduction in earnings should be manageable for both companies at their current rating levels, with ESB better equipped to deal with any other unexpected falls in earnings given (1) its lower leverage; and (2) its stronger business risk including around two thirds of recurrent earnings from regulated network businesses in the Republic of Ireland and Northern Ireland.

Moody's notes that the shape of the electricity market could change significantly from the end of 2017 under the I-SEM framework, which is currently being designed. The reform, prompted by the need for compliance with EU regulation, will ensure greater interconnection between Ireland and Great Britain and could create new commercial opportunities for both ESB and Viridian. However,its radical nature, particularly in relation to the capacity mechanism, could have unintended consequences for system security and could result in prolonged uncertainty if the schedule is further delayed. More generally, the rating agency considers that the greater the complexity of the final blueprint, the more it is likely to benefit incumbents at the expense of new entrants.

Barring a sustained reversal of coal's current cost advantage over natural gas, the greatest risk to the agency's price estimates could come from a successful reform of the EU emissions trading scheme or a change in British policy. A material increase in CO2 costs would be negative for coal-fired power plants, positive for hydro plants and broadly neutral for gas-fired power plants. Despite its diversified portfolio, ESB would be relatively at risk given its ownership of the Moneypoint coal plant and its peat-fired generation. Conversely, power prices could decline faster than Moody's expects in the event of a greater-than-expected installation of new renewables. A decision by the UK Government to remove its Carbon Price Support (CPS) tax would, absent a more general rise in carbon prices, also drive a reduction in the Irish price through increased interconnector flows to Ireland.