This document provides an overview of gas and electricity price trends in Ireland and their relationship to the euro-sterling exchange rate. It notes that 90% of Ireland's gas needs are sourced from the UK market and priced in sterling, so the euro-sterling rate impacts Irish energy prices. Short-term currency fluctuations are small compared to gas price volatility, but longer-term trends can be significant. Factors like supply and demand fundamentals, weather, politics, and central bank actions influence both energy costs and currencies. Overall, floating tariffs are recommended over fixed tariffs due to current bullish supply conditions and the need for large price moves to significantly impact bills.

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Outlook – June 2015
For this month’s edition of the newsletter I want to talk about gas/electricity price trends and their
relationship with euro sterling prices. We often get asked questions about this particularly since we
recommend the floating tariffs in our procurement group (the fixed tariffs favoured by suppliers
carry premiums which we like to avoid). The latter recommendation often raises concerns about risk
of energy price surges so I will try to allay this concern. For those interested in further reading, I have
linked some relevant articles.
Lets first look at the background to both energy prices moves and currency moves (in terms of Irish
energy prices).
As an aside; some interesting data on Ireland’s energy usage can be found on
http://statistics.seai.ie/

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Irish Energy price Drivers
90%+ of Ireland’s gas requirements are sourced on the UK National Balancing Point (NBP) market
which of course has to be bought in Sterling with Irish Euro. In turn, the UK market sources natural
gas from the North Sea and European sources, the largest of which is Norway. Some Russian gas
comes via Belgium. Liquid Natural Gas (LNG) which helps to smooth out prices comes mainly from
Qatar.
So what factors drives energy prices? Many drivers are incorporated into spot and forward prices for
gas and oil and space only permits us to touch the surface here; Weather patterns, demand,
production flows, oil & coal prices etc. Gas Market prices are seasonal and can be very volatile.
Oil/Coal prices and Electricity markets all interact with gas prices. European gas prices are largely
driven by direct indexation with oil prices but not LNG prices as Centrica (the British electric and gas
utility) likes to sign multi-year deals for LNG supplies with Qatar at fixed prices.
Irish electricity prices remain closely correlated with UK gas prices which is why most Suppliers offer
a index product linked to EURGBP and UK gas.
Currency effect on Irish energy prices
For Irish energy prices buyers EURGBP is of interest as we buy the gas in the UK. Typically gas prices
are much more volatile than currency prices both from day to day and month to month.
Useful link from Central bank of Ireland website:

3. http://www.centralbank.ie/polstats/stats/exrates/Pages/default.aspx
which shows EURGBP trended from 0.8267 to 0.7217 from Jan 2014 to the present day.
The short term effect of currency moves are hidden by the fact that gas prices are much more
volatile in the short term (on a very volatile day the gas price can move 3% whereas EURGBP might
move 0.5% on a big day). The trend effect can be significant over the longer term but hedging
against longer term timeframes is tricky given the difficult of pricing long
that most budgets are yearly driven.
To help understand currency moves outside of the noise of energy price volatility,
currencies move...
• Short term currency moves (ie day to day, week to week) are driven by t
working their order book for large corporate clients.
• Longer term currency prices (month to month, year to year) are mainly driven by the
outlook for interest rate differentials.
• Political developments such as the recent threats by Scotland
announcements from central bankers on items such as QE (quantitative easing) add greatly
to volatility in currencies and are usually precursors to trends.
Expectations for Gas prices/currency going forward
Before we answer that it is very important to understand that nobody knows for sure where prices
are going. (That is unless somebody foolishly believes they can predict the future). All we can do is
make a directional bet based on the best info we have availa
p://www.centralbank.ie/polstats/stats/exrates/Pages/default.aspx
which shows EURGBP trended from 0.8267 to 0.7217 from Jan 2014 to the present day.
The short term effect of currency moves are hidden by the fact that gas prices are much more
he short term (on a very volatile day the gas price can move 3% whereas EURGBP might
move 0.5% on a big day). The trend effect can be significant over the longer term but hedging
against longer term timeframes is tricky given the difficult of pricing long term hedges and the fact
st budgets are yearly driven.
To help understand currency moves outside of the noise of energy price volatility,
Short term currency moves (ie day to day, week to week) are driven by t
working their order book for large corporate clients.
Longer term currency prices (month to month, year to year) are mainly driven by the
outlook for interest rate differentials.
Political developments such as the recent threats by Scotland to decouple from Sterling and
announcements from central bankers on items such as QE (quantitative easing) add greatly
to volatility in currencies and are usually precursors to trends.
Expectations for Gas prices/currency going forward
ore we answer that it is very important to understand that nobody knows for sure where prices
are going. (That is unless somebody foolishly believes they can predict the future). All we can do is
make a directional bet based on the best info we have available. Right now this suggests
Page 3
which shows EURGBP trended from 0.8267 to 0.7217 from Jan 2014 to the present day.
The short term effect of currency moves are hidden by the fact that gas prices are much more
he short term (on a very volatile day the gas price can move 3% whereas EURGBP might
move 0.5% on a big day). The trend effect can be significant over the longer term but hedging
term hedges and the fact
To help understand currency moves outside of the noise of energy price volatility, let’s look at why
Short term currency moves (ie day to day, week to week) are driven by the bank guys
Longer term currency prices (month to month, year to year) are mainly driven by the
to decouple from Sterling and
announcements from central bankers on items such as QE (quantitative easing) add greatly
ore we answer that it is very important to understand that nobody knows for sure where prices
are going. (That is unless somebody foolishly believes they can predict the future). All we can do is
ble. Right now this suggests

4. Page 4
• Gas prices to remain weak based on increasing supply momentum See http://www.bg-
group.com/480/about-us/lng/global-lng-market-outlook-2014-15/
• It is quite common for gas prices to spike higher on factors such as a cold spell or a supply
outage but given the underlying supply fundamentals the surge usually reverses.
• For oil the IEA’s new five-year global oil outlook forecasts that spare capacity will more than
double next year, from the current three million barrels a day to more than seven million
barrels a day next year. See https://www.iea.org/oilmarketreport/
• EURGBP is expected to decline further to the 0.700 zone. However this is complicated by the
fact that potential UK developments such as talk of leaving the Eurozone makes the EURGBP
trend uncertain and difficult to call.
So to go back to our initial point above. Why do we currently favour floating tariffs over fixed tariffs?
1. Fairly large moves are needed before they start showing up on your electricity bill - it is
worth noting that for large consumers (ie DG7 above 525kVa) about one third of the bill (not
incl. the VAT) is fixed charges from ESB networks and taxes. For smaller consumers e.g. a
DG6 level (a typical hotel for example) approx half the bill is fixed charges and taxes (and
that is even without the VAT). The other two thirds is open to market volatility but typically
the price would have to move by more than 10% to even start eating into the premiums the
suppliers regularly charge.
2. The supply situation is bullish per the above comments with the caveat that volatility could
also increase fed by political developments e.g. Russia/Ukraine, Middle East conflicts etc.

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Bloomberg news reported that the world is now adding more capacity for renewable power each
year than coal, natural gas, and oil combined. This is really great news as renewables are
contributing to generation at those periods when we would have see prices spiking in the past. (cold
dark windy weather in Ireland, and in hotter countries the solar boost perfectly coincides with
maximum air conditioning demand).
http://www.bloomberg.com/news/articles/2015-04-14/fossil-fuels-just-lost-the-race-against-
renewables

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About SmartPower
Our range of activities include;
Review current contracts to make sure your business is tied into the lowest cost connection level
agreement.
Making comparisons between tracker and fixed electricity tariffs more transparent, so better
procurement decisions are made.
Providing daily/hour gas price updates on the forward markets, so that gas & electricity prices can be
hedged forward at competitive rates.
Scheduling load to use lowest priced times and switch off non-critical load during high cost periods.
Allowing a (non-critical) portion of the electricity profile to be switched off or an on-site generator
started remotely by the National Grid (via an aggregator known as a Demand Side Unit) allowing you
to receive capacity payments in compensation. This is also applicable to sites with a Diesel
Generator.
Providing an independent expert review and paybacks of energy saving capital projects, including
wind turbines, led lighting retrofits and solar photovoltaic panels.
For CHP owners, access market information to optimise run hours so that power is imported
(purchased) when the import cost is lower than the running costs of the generator, and if there is an
export potential, then better returns can be invariably be obtained using a time of day tariff model.
See www.smartpower.ie for more details. If you have any questions please contact me at
mailto:<peter.brennan@SmartPower.ie>or direct dial at 01 482 4551 or my mobile 086 8402190.
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