Mr. Cillian O'Donoghue:

I am director of policy at Eurelectric, which is the European electricity industry association. Despite being an Irish national, my focus is very much Brussels based and on EU climate and energy legislation. Thus, I will focus more on the European side today. I will talk about the cause of the current crisis, the impacts we have seen so far, the potential solutions which have been proposed at EU level and how we see things going forward.

The first matter I will discuss is the cause of the current energy crisis. It is pretty simple in that it is a gas shortage crisis. The root cause of the crisis is a shortage of gas in the system. This is having major contagion effects on electricity prices given that gas is often the price-setting technology for many hours of electricity. I am oversimplifying, but the electricity price is often just the gas price, multiplied by two and with the CO2 price added on top. This means that when gas prices become extremely high, as we have seen, we get very high electricity prices. To put it into context, gas prices are usually approximately €15 to €20 per megawatt hour at the Dutch title transfer facility, TTF. What we have seen is an explosion in prices. Prices reached more than €300 per megawatt hour in August and are now at €150 per megawatt hour which is ten times higher than they usually are. This is not a result of market dynamics but market manipulation and geopolitics.

Other factors have contributed somewhat.

We had a very hot summer, which means hydro reserves are low. It also makes it harder to transport coal. We have also seen low winds. Concerning nuclear outputs in France, 32 of 57 nuclear plants are not operating at full capacity. That has posed a challenge, but essentially it is a gas shortage issue. We get 40% of our gas from Russia; that is about 155 to 170 bcm. At the moment we are only getting 9% from Russia. Replacing that gas is a major challenge. That is the cause; I will now talk about the consequences.

The consequences have been quite major since this began. Wholesale energy prices have increased by 532% at EU level and retail prices have increased by 84%; there has been quite a dramatic increase. I will break down retail and wholesale. If we look at households, as I said, there has been an increase of about 84%. It is important to understand that for households, much of the electricity is purchased ahead in forward markets. Households are not fully exposed to the cost increase. While customers are already feeling the pinch, they have not been fully exposed. Some 80% of it is hedged and 20% is fully exposed. The price increases are only on the 20% that has not been hedged. We need to be conscious of that - it will come around in a couple of years. To contrast with Spain, it has a much higher exposure with less hedged electricity, meaning that their customers are feeling the pinch straight away at a higher level than in countries like Ireland.

The impact on industry has been quite dramatic. At European level, steel, chemicals and non-ferrous metals have been very much affected. I used to work in the non-ferrous metals sector in aluminium production for about six years - 50% of that industry has shut down since this crisis began. To restart an aluminium smelter costs between €200 million and €400 million. When you close one, it is quite a big deal. Generally, it does not re-open. The reason for that is the price increase. If you are an aluminium smelter in Spain who was paying €30 per megawatt hour two years ago and now you are paying over €300, then you are losing almost €2 million a week. That puts things into context. Electricity is 40% of costs for these industries.

I will now discuss what we have done at EU level. Two main things have been done: we have the REPowerEU strategy and a series of emergency interventions. The REPowerEU strategy was published in June as a reaction to the Russian invasion in February. It has three main pillars, the first of which is to reduce demand. We are going to try to reduce gas demand by 15% and electricity demand by 10%. This is quite a challenge. To put it into context, during Covid-19, when everything shut down, we only managed to reduce electricity demand by 8% to 9%; 10% is a major reduction. For consumers, behavioural campaigns are the best way to go. We need to raise awareness among consumers. For industries, we need to have incentives to reduce their production.

The second element is the need for a big increase in renewables. That is the smart way to go. The Commission said that we need 732 GW of wind or solar by 2030; these are ginormous numbers. To achieve that, we need two things. We need increased permitting and to sort out the bottlenecks in the supply chains. I am not an expert on the Irish market, but I think both of these also apply to Ireland. The final thing is diversifying supplies. We are building more LNG capacity terminals, but these things take time. We have gotten a lot of LNG from the US since the crisis began, but we will not have enough for this or next winter. The other thing we have done is come up with a series of emergency mechanisms, the first of which is transferring money from companies to vulnerable consumers. We need to protect the most vulnerable; that is important. We also put a cap on the price that can be charged of €180 per MWh. Our concern is that it is not EU-wide. One rule is needed for the entire EU. Different patchworks among member states is not good. There is also a solidarity tax from the oil and gas sector, which basically says that 33% of their profits should be taxed and redistributed.

On the outlook, I must be honest and say that this is a big crisis and one we expect to last not just for this winter but also next winter. Gas reserves are full at 91% at European level, but these reserves were filled with Russian gas. Next winter, we will not have that option. We expect two tough winters with high prices. In the medium term, the outlook is much better. If we can have a big buildout of renewables like the Commission is pushing for, that will make a massive difference. I thank the committee for its time.