The Economic Impacts for Ireland of High Oil and Gas Prices doc

The Economic Impacts for Ireland
of High Oil and Gas Prices
Pathways to risk mitigation and a low carbon future
A research project commissioned by Siemens Limited
Contents
Table of Contents
Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 01
Foreword 03
Chapter1.
OilandGasPricesand

theirDeterminants. 04
Chapter2.
BaselineScenario2025. 07
Chapter3.
EconomicandSocialImpactsof

threeOilandGasPriceScenarios. 09
Chapter4.
Ireland’sdependenceonOilandGas. 15
Chapter5.
Optionsandactionstoreduce

exposuretoHighOilandGasPrices. 18
Chapter6.
Summary,Conclusionsand

Recommendations. 24
EndnotesandReferences. 27
Thispublicationisamanagementsummaryofamoreindepthanalysispresentedbythe

researchers.ThefullreportisavailableonrequestfromSiemensLimited.
Foreword
Foreword
Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 03
O
il and gas prices have been the
subject of considerable interest in
the wake of a particularly volatile
year in 2008 which saw a nominal peak of
over $140 per barrel in July of that year,
with a subsequent collapse to just under
$40 dollars per barrel by December
1
. The
scale of the price swing and the rapidity of
the change stand out from real and nominal
price trends over the past two decades and
serve as a timely illustration of the power of
the unexpected.
As a small open economy, Ireland is
heavily dependent on world demand for
Irish exports and also on our competitive
position within the global marketplace.
Any shock to the global economy that has
a negative impact on global growth will
reduce the demand for Irish exports and
therefore domestic output. Additionally
Ireland’s dependency on imported oil and
gas for the operation of the economy and

society is particularly high and this adds to
the level of national risk exposure.
In this report we examine the macro-
economic impacts for Ireland of three
high oil and gas price scenarios for the
period from 2010 to 2025 and consider the
challenges Ireland may face in the event of
such developments.
The focus is principally on the economic
exposure Ireland and the world maintain
with respect to oil and gas price volatility
and how and to what extent, we can
inuence the rate of dependency on these
fuels in order to mitigate the corresponding
level of impacts.
The report is structured into three core
sections:
1. The development of three high oil

and gas (HOG) price scenarios out
to 2025.
2. An estimation of the macroeconomic
impacts for Ireland for each of the
three HOG price scenarios as compared
with the most recent national Baseline
from the Economic and Social Research
Institute (ESRI).
3. An outline of strategic options that
could reduce Ireland’s reliance on oil
and gas.

Siemens is grateful to Dr Andrew
Kelly of AP EnvEcon Limited for his
contribution to this report. We would also
like to acknowledge the support and input
of the ESRI. Siemens sees itself in the
vanguard of the drive for sustainability.
This report, together with our previous
studies, represents part of our contribution
and commitment to help stakeholders
take informed decisions – decisions that
could have economic and environmental
ramications for generations to come.
Dr Werner Kruckow
CEO Siemens Limited
Dublin, Ireland
July 2010
Oil and Gas Prices and their Determinants
Chapter 1.
Oil and Gas Prices and
their Determinants
T
his opening section of the report
deals with oil and gas prices and has
fed directly into the design of the
three HOG price scenarios tested as part of
the macroeconomic impact analysis. The
purpose of this review is not to identify
the most likely path for oil and gas prices.
Shocks, by their nature, are rarely a feature
of such exercises and as a result, such

an endeavour would no doubt yield a
moderate and steady outlook linked to the
current situation.
2
However, the recent and
unprecedented economic crisis serves as
an unfortunate and timely reminder of the
distinction between the unlikely and the
impossible. As such we choose to highlight
the unlikely. We identify the principal price
determinants, examine historical evidence
of change, and consider long and short run
price outlooks from major international
analytical sources. In essence we gather
evidence for ‘what could be’ and thereby
use this information to set boundaries
for our HOG price scenarios without the
constraint of an international consensus on
‘what seems most likely’.

Oil is an important global commodity
and its price is broadly determined
by the fundamental principles of supply,
demand and market expectations.
3
There are numerous market agents,
however the dominant roles are arguably
held by a handful of operators. OPEC
is the most inuential player on the supply
side while the OECD countries are seen

as the most inuential group on the
demand side. Additionally, emerging
economies, principally China and India,
account for the majority of the increase
in global energy consumption and have
thereby evolved into important drivers of
demand and price change in the global oil
market.
These players and a set of possible
04 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future
Table 1: Examples of oil price inuencing events
  
International conicts and terrorism Population growth
OPEC production rate adjustments Accelerated growth of developing countries
Revisions to national reserve
inventories
Revisions to internationally viable oil stocks
and production rates
Market efciency Speculation and exchange rates
Renewable penetration Other technological change
Unconventional oil and gas Shifts in demand of energy services
Natural disasters
The unknown
Increased penetration of oil
and gas powered technologies
Figure 1: Annual average crude oil price 1970-2010
‘events’ are highly inuential in the
evolution of oil price. Some illustrative
examples
4

of such major price driver events
on both the supply and demand side are
presented in Table 1 below.

Figure 1 presents the historical free market
prices of Illinois crude in both real and
nominal dollars per barrel from 1970 to
2010. The most striking events are the
2008 peak and trough where a threefold
change in price was experienced within the
same calendar year and the signicant and
extended shock of the late 70’s and early
80’s during the Iran/Iraq conict period. The
$120
$100
$80
$60
$40
$20
$0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988

1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Nominal Price Real Price
Annual Average Crude Oil Price (US $)
evidence in this case illustrates quite clearly
that shocks – both acute and protracted
– have occurred in recent history.

In Figures 2 and 3 we present short (1 year)
price outlook condence intervals from
the Energy Information Administration
(EIA) with a view to illustrating the
perceived volatility in the market price
even on this time horizon. Figure 2 is taken
from the time of the oil price peak in July
2008 whereas Figure 3 is taken from the
same publication one year later in July
2009 (when prices had collapsed and were
comparatively stable). In these gures,
the red line represents the upper bound
expectation for oil price, whilst the green

line indicates the lower bound.
Figure 2 gives us a clear indication of
how signicant changes in the current
price can lead to far greater uncertainty
with respect to price outlook. In this
case indicated by the particularly large
gap between upper and lower bound
expectations. Figure 3 then moves
the same methodological assessment
forward one year and shows how the fall
and apparent stabilisation in oil prices,
along with the shorter price outlook time
frame allow for a much reduced angle of
divergence between the upper and lower
bands. It is also of note, that when looking
back at the actual price path in Figure 2,
we see that from the July peak of 2008,
prices actually dipped well below the lower
statistical bound over the course of the
following year.
Whilst this is only one outlook on price,
it serves to illustrate how outlooks and
expectations for ‘plausible’ energy prices
can shift dramatically in a short period of
time– in this case because of the nancial
crisis and the following Great Recession
that took almost everybody by surprise.
In the context of our developed HOG price
scenarios the point here is to note that
unforeseen spikes and collapses in price

can occur and they can do so within a very
short space of time. Additionally, we make
note of how price volatility can debase
condence in the stability of future prices
and can thereby create an environment of
major uncertainty surrounding future price
evolutions.

Forecasting long-term oil prices is
challenging and arguably futile. Forecasts
can respond quite dramatically to current
350
300
250
200
150
100
50
0
Jan
2006
May
2006
Mar
2006
July
2006
Sept 2006
Nov 2006
Jan 2007

Mar
2007
May 2007
July
2007
Sept 2007
Nov 2007
Jan
2008
Mar 2008
May 2008
Sept
2008
Nov
2008
Jan
2009
Mar 2009
July

2008
May
2009
July
2009
Sept

2009
Nov 2009
Actual to July 08

Historical
Lower Bound
Upper Bound
WTI $/BI
Figure 2: EIA NYMEX WTI 95% condence intervals in July 08
Figure 3: EIA NYMEX WTI 95% condence intervals in July 09
250
200
150
100
50
0
Jan
2006
May
2006
Mar
2006
July
2006
Sept 2006
Nov 2006
Jan 2007
Mar 2007
May 2007
July
2007
Sept 2007
Nov 2007
Jan 2008

Mar 2008
May 2008
Sept
2008
Nov
2008
Jan
2009
Mar 2009
July

2008
May
2009
July 2009
Sept
2009
Nov
2009
Actual to July 09
Historical
Lower Bound
Upper Bound
WTI $/BI
Figure 4: International energy outlook: world oil ($2007) for reference cases in 2008/2009
0.0
140.0
100.0
120.0
80.0

60.0
40.0
20.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
IEO2009
IEO2008
$
($2007)

per barrel
Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 05
Oil and Gas Prices and their Determinants
events and changes in expectations. Both
can change quickly as illustrated by the
revised EIA International Energy Outlook
(IEO) for world oil prices presented in
Figure 4.
The trend lines represent the change
in the ‘reference case’ world oil price
($2007)
outlook between the IEO 2008 and IEO
2009 reports. In the space of a year the
price projection – not its condence
interval – has altered signicantly, with
a near doubling of the real oil price
($2007)
in 2025 under more recent analysis
5
.
Adjusting values to nominal prices would
result in a nominal price forecast for 2025
of approximately $220 per barrel from the
2009 outlook, as compared with a nominal
price of over $120 per barrel from the 2008
analysis
6
.
Figure 5 draws on the associated
literature and presents the EIA high and

low world oil price scenarios which frame
the reference case. These alternate price
projections present a real oil price
($2007)
low
of just $50 and a high of just under $200
in 2025.
The boundaries of the high price
scenario described here have been used
in developing the HOG Price scenarios to
restrict the impact of ‘events’ in a given
year to the comparable high price scenario
range. In no case or year do the HOG prices
exceed the EIA high price scenario peak
real value of $200
($2007)
per barrel. The
highest real oil price
($2008)
reached being
06 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future
approximately $175 in the second peak
of the ‘Camel’ HOG price scenario which is
presented later.

The primary conclusion on price outlook
is simply that both moderate change and
extreme shifts are possible and changes in
price can occur within a very short space
of time. There are numerous factors which

may combine to deliver short and sharp
price shocks, as well as more persistent
combinations that could deliver prolonged
changes in price. Similarly, expert
international outlook on price can change
dramatically and quickly for both the short
and long-term.
Into the future, it seems likely that
sustained pressure on available resources
will ultimately lead to increased price
volatility with implications for the market
price. Therefore, we conclude that there
is both precedent and growing potential
for price changes of the scale described in
the HOG price scenarios in Chapter 3 over
longer time frames.
Figure 5: Annual energy outlook: Reference, high and low price ($2007) oil scenarios to 2025
200.00
150.00
100.00
50.00
0.00
Reference
High Price
Low Price
Real $
($2007)
per barrel
1980
1982

1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
Baseline Scenario 2025
Chapter 2.
Baseline Scenario 2025
T
his study models the economic effect
of a series of high oil and gas price
scenarios on the Irish economy.
However, oil and gas prices are just
one component of the macroeconomic

modelling exercise and need to be
mapped against a broader perspective
comprising the many different parameters
and assumptions relating to the structure,
interactions and development of the Irish
and world economies. For this purpose, we
have adopted the ESRI’s Baseline forecast for
Ireland out to 2025
7
as the scenario against
which the HOG price scenarios are tested.

The ESRI Baseline 2025 scenario (hereafter,
Baseline Scenario) takes a lead from the
Recovery Scenarios for Ireland report that
was published by the ESRI in May 2009
8
and
specically the World Recovery Scenario
(WRS) described therein
9
. The principal
assumption is that global economies
recover from recession by the middle of
2010 and then proceed to grow at rates
nearing potential from 2011 onwards
10
with
a corresponding recovery in world demand
for Irish exports. The forecasts for the key

macroeconomic aggregates of this WRS
scenario for Ireland are presented in Table
2 with the principal statistic for average
GNP growth of 3.3 per cent over the period
2015 to 2020 and more moderate growth
averaging 2.7 per cent over the period
2020-2025. An ESRI ‘storyline’ for this scenario
is presented under the next heading.

Weak domestic demand and the recession
in the international economy leads to a
substantial fall in output in the
manufacturing and market services sectors
with overall GNP expected to fall by 9.0
per cent in 2009 and by almost 2 per cent
in 2010. The increase in unemployment
associated with the contraction in
Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 07
economic activity over the period 2008-
2010 is expected to lead to signicant
wage moderation in both the public and
private sectors. The macroeconomic model
suggests that nominal wage rates in the
economy as a whole could decline by 6.6
per cent in the period 2009-2011. As a result
of the world recovery and the improvement
in competitiveness, GNP growth is expected
to resume, averaging 5.5 per cent in
the period 2010-2015 (i.e. the average
growth experienced in each of the ve

years 2011-15).
The high degree of responsiveness
of the Irish economy to changes in world
activity could give rise to a strong recovery
from 2011 onwards, assuming the economy
regains competitiveness. However this
recovery would imply a restoration of only
some of the losses sustained over the period
2008-2010. As a result of the recession, by
2015 output would be around 15 per cent
below where it would have been without
the global economic crisis.
On public nances, the lower level
of economic activity is likely to reduce
government revenue from a range of
taxes while at the same time government
expenditure is expected to rise due to
increased welfare and national debt
interest payments. As a result the general
government balance as a percentage of
GDP is expected to remain very high at
12 per cent in 2010, taking into account
the scal measures for 2009 and Budget
2010 announced to date. The resumption
of economic growth after 2011 would
bring about an improvement in the general
government balance which on the basis of
this benchmark scenario is forecast to fall to
3.9 per cent of GDP in 2015.
The deterioration in the economy

is expected to lead to a dramatic rise in
unemployment and the unemployment
Table 2: World Recovery Scenario Major Aggregates
     

Annual % Growth Rate Average Annual Growth Rate
GDP -7.8 -2.3 5.2 3.3 2.6
GNP -9.0 -1.9 5.5 3.3 2.7
Total Employment (PES basis) -9.2 -5.8 2.8 1.5 1.0
Output, industry -9.2 -3.9 8.3 4.0 2.2
Output, market services -4.6 -1.2 5.2 3.0 3.0
Consumer Prices
(Personal Consumption Deator) -1.0 -0.2 2.5 2.7 2.2
Non-agricultural Wage Rates -3.2 -1.8 3.1 4.6 3.2
Personal Savings Ratio 9.9 10.4 7.9 6.4 5.4
General Government Balance, % GDP -12.3 -11.6 -3.9 -1.2 -1.0
General Government Debt, % GDP 61.0 74.8 81.2 67.8 58.0
Balance of Payments, % GNP -2.2 1.0 5.2 6.7 4.5
Unemployment Rate (ILO basis) 12.7 16.5 6.6 4.9 4.0
Net Emigration (thousands) 30.0 40.0 -8.3 -24.7 -18.2
Baseline Scenario 2025
rate. As a result of lower levels of output
in the building, manufacturing and market
services sectors total employment is
expected to fall by 9.2 per cent in 2009
and a further 5.8 per cent in 2010. The
unemployment rate is expected to peak
at 16.5 per cent in 2010. In line with the
anticipated recovery in economic activity
from 2011 onwards, employment growth

is expected to resume and average 2.8 per
cent over the period 2010-2015. This is
expected to result in some moderation in
the unemployment rate which is projected
to fall to 6.6 per cent by 2015.
Emigration is assumed to peak at 50,000
in 2012. The cumulative net emigration
of 152,000 over the period 2009 to 2015
represents a signicant reduction in the
labour force as a result of the recession. Of
course the likely response of migration to
the current recession is highly uncertain.
If migration were not to resume to the
extent assumed here this would lead to a
larger rise in the unemployment rate and a
slower recovery in the labour market than
described.
The combination of the bursting of the
housing bubble and the world nancial
crisis has had a substantial impact on the
endowment of labour and capital in Ireland.
This has served to permanently reduce the
potential output of the economy. While the
Medium-Term Review 2008-2015 published
in Spring 2008 suggested that the potential
output growth rate for the Irish economy
over the period 2005-2020 was around
3.6 per cent a year, today we feel that it
is closer to 3.0 per cent a year. Over the
longer-term we anticipate average GNP

growth of 3.3 per cent over the period
2015 to 2020 and more moderate growth
averaging 2.7 per cent over the period
2020-2025.
Specic scenario assumptions
Fuel price assumptions in the Baseline
Scenario are as follows:
• Gas prices fall from
€25.8 per MWh
in 2008 to €17.7/MWh in 2010, then
climb steadily to €31.5/MWh in 2025.
• Similarly, oil falls from
€56.4/MWh in
2008 to €44.9/MWh in 2010 before
increasing to almost €58.2/MWh by
2025.
• Coal prices increase from
€8.1/MWh in
2008 to €14.0/MWh in 2025.
• We assume no growth in real peat prices
over the period.
• Carbon taxes increase from
€13.8/tonne
08 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future
en implemented according to the
timetables announced by the relevant system
operators.
12

Note on alternative scenarios

It is noted that the Baseline Scenario
is the less ambitious of the two main
energy scenarios developed in Ireland
at the end of 2009. The more ambitious
scenario is the ‘White Paper plus’ scenario
which incorporates assumptions such as
greater penetration of renewables, higher
proportions of electric vehicles and meeting
all of the targets established within the
National Energy Efciency Action Plan
(NEEAP)
13
.
We believe that the targets of the
“White Paper plus” scenario and other
similarly ambitious scenarios will require
concerted national action and investment
over the next 15 years and there are
many challenges yet with respect to
infrastructure, investment and technology
that must be considered. It is in the context
of this challenge that this report hopes
to support further debate on the risks we
face, the options available and the means
of progression. It is for this reason that
the Baseline Scenario is adopted as our
reference case.
14

     


Baseline 65.5 212.2 401.2 637.4
Table 3: Electricity savings in MWh
250
300
200
150
100
50
0
2008
2010
2009
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2024
2023
2025
$/bl
Figure 6: Baseline oil price scenario

CO
2
in 2009 to over €40/tCO
2
by 2025.
Figure 6 illustrates the specic oil price for
the Baseline Scenario. The price path dips
from 2008-2010 in response to the current
global recession before assuming a steady
linear growth path out to 2025, reaching a
nominal price of $185 dollars per barrel in
2025 or just under $100 in $2008 prices.
The Baseline oil price scenario therefore
assumes a steady and moderate increase
in oil price with no price shocks anticipated
over the next 15 years.
Electricity demand in the Baseline
Scenario has been adjusted to take account
of recently implemented measures which
have not yet had a substantial impact
(further details in DCENR’s National Energy
Efciency Action Plan, 2009-2020)
11
but
will lead to savings over the period to 2025.
Energy demand is reduced by the amounts
shown in Table 3, and changes linearly
between the reference years.
With respect to energy infrastructure,
plant commissioning and decommissioning in

the modelling exercise has be
Economic and Social Impacts of three Oil and Gas Price Scenarios
Chapter 3.
Economic and Social Impacts of three
Oil and Gas Price Scenarios
R
elative to the Baseline oil price
presented in the last chapter, we have
modelled three alternative oil price
scenarios known as – “Accelerated growth”,
“Root” and “Camel”
15
along with an impact
assessment for each of the scenarios. In
each impact assessment we interpret the
results to explain the outcomes and their
linkage with the oil price variable
16
.
    

The accelerated growth scenario (Figure
7) presents a steady but rapid increase in
global oil prices from the recovery year of
2011. The most rapid growth occurs in
the eight years subsequent to the 2011
recovery, with a slowed rate of growth
then from 2019 to 2025, where real prices
actually fall and level off. The scenario is
illustrative of an aggressive price path where

global demand, supply and associated
political constraints combine over the
next ten years to drive available resource
prices signicantly higher before ultimately
moderating somewhat as markets adjust.
Internationally, the impact of a rise in oil
prices on output and ination varies across
countries and depends on the response of
monetary authorities. An oil price shock of
this size would have a substantial effect on
ination. Figure 8 shows the percentage
change in the price level compared to the
Baseline Scenario for the US, the UK and
the Euro Area. In this simulation monetary
authorities react by increasing interest rates
to negate some of the upward pressure on
the price level. The results suggest that
by 2015 interest rates in the US would be
around 1
3
/4 percentage points above the
Baseline Scenario and that interest rates
in the Euro Area and UK would be around
1
1
/5 to 1
1
/4 basis points above the Baseline
Scenario.
This higher level of interest rates

would increase the cost of capital in these
countries and have a negative effect
on output. In addition, the Euro would
appreciate by around 3 per cent against
both the Dollar and Sterling in the long
term, having a negative effect on Euro Area
competitiveness. The effect of the oil price
shock on the levels of GDP for the US, UK
and Euro Area are shown in Figure 9. The
Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 09
250
300
200
150
100
50
0
2008
2010
2009
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

2021
2022
2025
2023
2025
Nominal $/bl
Accelerated Growth
Baseline
Figure 7: Accelerated Growth scenario
5
9
4
3
8
7
6
2
1
0
% change relative to Baseline
2010 2012 2014 2016 2018 2020 2022 2024
US
Euro Area
UK
Figure 8: Accelerated Growth Scenario - Impact on Price Level in International
Economies
Economic and Social Impacts of three Oil and Gas Price Scenarios
results show that by 2019 output in the US
would be around 4.5 per cent below the
Baseline Scenario and that output in the

Euro Area and UK would be 3.75 and 3.3
per cent, respectively, below the Baseline
Scenario. Over the medium to long term,
the impact on output is strongest in the
US as they have a higher oil intensity of
production. After that, the decline in output
continues but not at the same pace as this
scenario assumes that the increase in the
oil price post-2019 is more modest than in
earlier years. Overall the adverse effects are
less marked in the UK economy as it has
domestic oil reserves.
This type of shock would affect Ireland
through three main channels. Firstly, the
appreciation of the Euro reduces Irish
competitiveness by leading to an adverse
movement in our terms of trade and this
results in a loss in income. Secondly, the
increase in interest rates would have
a negative effect on investment and
therefore output. Finally, the slowdown
in the international economy reduces the
demand for Irish exports. The effects of this
shock on the Irish economy are stronger
than on the international economy. This
arises not necessarily because the Irish
economy is more sensitive to oil prices but
rather because of its greater sensitivity
to a slowdown in international output,
changes in interest rates and changes in its

competitive position.
Figure 10 shows that there would be a
sharp reduction in the level of Irish GDP as
a result of this oil price scenario. Our model
indicates that the level of output in 2025
would be around 7.5 per cent below the
Baseline Scenario. In terms of the effect
on GDP growth rates, this oil price scenario
would knock around 1.4 percentage points
off the average growth rate between 2010
and 2015. The average growth rate between
2015 and 2020 would be around 0.6
percentage points lower and the average
growth rate between 2020 and 2025 would
be around 0.2 percentage points lower. The
shock to world output would substantially
reduce the demand for Irish exports and
consequently reduce output in the industrial
and market services sector. By 2019, output
in both the industrial and market services
sector would be around 6 per cent below
that in the Baseline Scenario.
The impact on the price level in Ireland
is more muted than on the international
economy. The effect on the consumption
deator is shown in Figure 11. The more
negative impact on output puts downwards
10 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 11
0
-0.5

-1
-1.5
-2
-2.5
-3
-3.5
-4.5
-4
-5
% change relative to Baseline
2012 2014 2016 2018 2020 2022 2024
US
Euro Area
UK
2010
Figure 9: Accelerated Growth Scenario - Impact on Output (GDP) in International Economies
0
-1
-2
-3
-4
-5
-6
-7
-8
% change relative to Baseline
2012 2014 2016 2018 2020 2022 2024
GDP
2010
Figure 10: Accelerated Growth Scenario - Impact on Irish GDP

4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
% change relative to Baseline
2010 2012 2014 2016 2018 2020 2022 2024
Consumption Deflator
Figure 11: Accelerated Growth scenario: Impact on Irish Price Level
pressure on the price level which negates
some of the upward pressure caused
by higher oil prices. The impact of
higher consumer prices would lead to a
substantial fall in real personal disposable
income. This has a marked negative effect
on consumption and, in turn, has a
negative impact on sectoral output that
is driven by domestic demand (e.g.
distribution). The rise in interest rates would
have a negative effect on investment in
Ireland with total investment being around
5.5 per cent below the Baseline Scenario in
the long run.
Given the impact on consumer prices,
we would anticipate knock-on effects of

higher ination on wage rates as employees
bargain to protect their real after-tax wage.
However, the simulation results indicate
that wage rates could actually be below
that of the Baseline over the long term. This
arises because the effect on the demand
for Irish exports (due to the slowdown in
the international economy) is so severe
that the only way rms can negate
some of this impact and try to regain
some lost competitiveness is to reduce
wage growth. The results show that
employment could fall by 2 per cent below
the Baseline in the long-run and that the
unemployment rate would be on average
around 0.5 percentage points above the
Baseline Scenario. These effects are likely to
be stronger if wage rates do not fall below
those in the Baseline Scenario.

In the Root Scenario (Figure 12), the oil
price is low for an extended period of time
before jumping to above $150 per barrel.
The price then reaches a bumpy plateau
with no sustained return to sub-$150
prices. In real terms, the price by 2025 is
only marginally higher than that of the
Baseline Scenario. The scenario is illustrative
of a major short-term price shock where
revisions to global supply and accessibility

force a rapid increase in oil price to a new
plateau. This plateau is sustained and the
price mitigates over the years in real terms
as markets adjust and new supply sources
are exploited at the higher costs.
In this Scenario, the impact on the price
level in the international economy is very
strong over the medium term but the effect
begins to diminish in the longer term (see
Figure 13). Over the medium term monetary
authorities respond to the strong increase in
the price level by raising interest rates which
has a further negative effect on output.
250
300
200
150
100
50
0
2008
2010
2009
2011
2012
2013
2014
2015
2016
2017

2018
2019
2020
2021
2022
2024
2023
2025
Nominal $/bl
Root
Baseline
Figure 12: Root scenario
5
4
3
8
7
6
2
1
0
-1
% change relative to Baseline
2010 2012 2014 2016 2018 2020 2022 2024
US
Euro Area
UK
Figure 13: Root Scenario - Impact on Price Level in International Economies
0
-1

-2
-3
-4
-5
-6
-7
-8
% change relative to Baseline
2012 2014 2016 2018 2020 2022 20242010
US
Euro Area
UK
Figure 14: Root Scenario - Impact on Output (GDP) in International Economies
10 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 11
% change relative to Baseline
2010 2012 2014 2016 2018 2020 2022 2024
4.00
5.00
3.00
2.00
1.00
0.00
-1.00
Consumption deflator
Figure 15: Root scenario - Impact on Price Level for the Irish Economy
% change relative to Baseline
2010 2012 2014 2016 2018 2020 2022 2024
-3.5
-4.00
-2.5

-3
-1.5
-2
-0.5
0
-1
GDP
Figure 16: Root Scenario - Impact on Output (GDP) for the Irish Economy
Economic and Social Impacts of three Oil and Gas Price Scenarios
Figure 14 shows the effect on output as
a result of this shock. Output falls steadily
below the Baseline Scenario in the US, the
UK and the Euro Area until the latter half
of the decade; it then falls by less as the oil
price moves back closer to where it is in the
Baseline. By 2025, output is between 1.5 to
2.5 per cent below the Baseline in the US,
UK and Euro Area.
As before, the results for the Irish
economy follow a similar pattern to those in
the international economy. The inationary
impact of the oil price increase results in
the Irish price level being around 4 per
cent above the Baseline Scenario in the
medium term (see Figure 15). This effect
weakens over the longer term and prices
actually end below the Baseline by 2025.
This seems counter intuitive but in this case
the downwards pressure on the price level
as a result of the negative effect on output,

outweighs the upwards pressure caused by
higher oil prices at the end of the period.
As a result of this shock, output in
Ireland falls sharply relative to the Baseline
out to 2016 (see Figure 16). Despite the
fact that the impact on the international
economy is slightly more moderate over
the longer term, GDP remains around 3.5
per cent below the Baseline as Ireland is
more sensitive to shocks in the international
economy. The simulation results indicate
that output in the industrial sector would
be around 3
1
/2 per cent below the Baseline
Scenario in 2025 while output in the
market services sector would be around
4
1
/2 per cent below the Baseline Scenario.
In this Scenario the effect of higher interest
rates leads to a fall in investment of around
2
1
/2 per cent in the long run relative to the
Baseline Scenario.
In terms of labour market impacts,
when the oil price increases sharply
(between 2013 and 2016) wage rates
initially increase above the Baseline

Scenario as workers demand higher wages
to compensate for their loss in purchasing
power. However, as in the Accelerated
Growth Scenario, in the long-term rms
try to regain some lost competitiveness so
wage rates fall below the Baseline leaving
workers considerably worse off. In this
Scenario, total employment is around 1 per
cent below the Baseline in the long run.

The “Camel” scenario (Figure 17) incorporates
two major and sustained price shock events
one year apart with an ultimate reversion to
a trend comparable to that of the Baseline
12 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 13
250
300
200
150
100
50
0
2008
2010
2009
2011
2012
2013
2014
2015

2016
2017
2018
2019
2020
2021
2022
2024
2023
2025
Nominal $/bl
Camel
Baseline
Figure 17: Camel Scenario
Scenario. In real terms, the second price
shock peak of the camel scenario represents
the highest oil price assessed as part of
the study – at a level of $175 in 2019. The
scenario is illustrative of a highly uncertain
future oil price market where major
sequential and persistent conicts lead to
dramatic market responses.
In this Scenario there are two transient
oil price spikes in 2014-2015 and 2018-
2019. As a result, in the simulation results
there will be stronger effects during these
two time periods. Figure 18 shows the
impact on the price level in the international
economy. In this Scenario, as oil prices and
the price level follow a more unsteady path

and so too do interest rates. Monetary
authorities respond to this type of shock by
increasing interest rates sharply during the
two price spikes but lowering them when
the price level starts to come down again.
In this scenario there is some appreciation
of the Euro against the Dollar and Sterling
but the effect is much smaller than in the
Accelerated Growth Scenario and the effects
are strongest when the price spikes occur.
The effect on the level of output in the
international economy is shown in Figure
19. As mentioned above, the impact on
output is not smooth over time because of
the nature of the shock. For each country
the impact on output is considerably smaller
than in the Accelerated Growth Scenario.
Figure 20 shows the impact on the
level of Irish GDP and Figure 21 shows
the impacts on domestic price levels. The
impacts reect the patterns shown for the
international economy. As in the previous
Scenario, the effect on Irish output is
stronger than the effect on international
output. In the long run output is around 3.5
per cent below the Baseline Scenario; more
than half the long run effect reported in
the Accelerated Growth Scenario. By 2025,
industrial output is around 3.4 per cent
below the Baseline Scenario and output

in the market services sector is around 4.5
per cent below the Baseline Scenario. As
the interest rate differential (compared to
the Baseline) is not smooth, neither is the
response of investment to such a shock.
Although the impact on investment is
negative, it is more marked during the
periods of the oil price spikes. For example,
total investment is around 4 per cent below
the Baseline Scenario during the second oil
price spike but is around 2 per cent below
the Baseline Scenario in the long run.
Similar to the Root Scenario, wage rates
initially rise above the Baseline Scenario
% change relative to Baseline
2010 2012 2014 2016 2018 2020 2022 2024
1
0
3
2
4
6
5
8
7
US
Euro Area
UK
Figure 18: Camel Scenario - Impact on Price Level in International Economies
% change relative to Baseline

2012 2014 2016 2018 2020 2022 2024
-2.5
-3
-1.5
-2
-0.5
0
-1
2010
US
Euro Area
UK
Figure 19: Camel Scenario - Impact on Output (GDP) in International Economies
% change relative to Baseline
2012 2014 2016 2018 2020 2022 2024
-3.00
-4.00
-2.50
-3.50
-1.50
-2.00
-0.50
0.00
-1.00
2010
GDP
Figure 20: Camel Scenario - Impact on Level of Irish GDP
12 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 13
Chapter 4.
Ireland

,
s dependence on Oil and Gas
% change relative to Baseline
2010 2012 2014 2016 2018 2020 2022 2024
4.00
5.00
3.00
2.00
1.00
0.00
-1.00
Consumption deflator
Figure 21: Camel Scenario - Impact on Price Level for the Irish Economy
Economic and Social Impacts of three Oil and Gas Price Scenarios
values when the spikes in the oil price occur
and then fall below the Baseline Scenario in
the long-term. As a result of the lower level of
activity in the economy, total employment is
around 1 per cent below the Baseline Scenario
in the long-run and the unemployment rate
rises by around 0.3 percentage points above
the Baseline values.
For each of the prior price scenarios
we have described the modelled economic
impacts. However, whilst these broader
economic indicators are a core component
of this report, it is important to be aware
that there are further additional impacts
with associated value that are not explicitly,
or in some cases even implicitly, captured

within such analytical systems. We identify
six such impacts in this study.
Table 4 presents a qualitative summary
of these six impact areas to be considered in
the context of what high oil and gas prices
would mean for Ireland.
14 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future


Higher energy costs will impose a greater nancial burden on the poor relative to the rich. In
this way the exposure to higher energy prices poses a greater potential cost to those least able
to afford the change. This can lead to negative welfare implications.
Related to the distributional impact, higher fuel and energy costs will push more individuals from
the margins into a position of energy and fuel poverty. This is a situation where a household
spends more than 10% of its income on trying to heat and light a home to an adequate level.
The costs of this shift include reduced welfare, poor health and excess winter mortality.
Increased fuel prices will add to travel costs and constrain travel decisions. This may lead to
reduced emissions, an outcome similar to that of a carbon tax for transport. However, unlike
a tax which would at least generate revenue for investment, exposure to rising international
oil prices would simply increase costs. Whilst the very poorest may not have access to a car,
the dominance of private transport in the Irish market would suggest the impact would be felt
widely with reduced travel for leisure and additional cost for commuting.
Energy price volatility associated with high oil and gas prices creates a situation of market
uncertainty. This makes planning difcult, can generate nancial problems for business and
individuals, hinders investment decisions and creates a poor environment for economic growth.
On a positive note however, such volatility can also serve as a strong incentive for alternative
energy sources for those who do choose to invest. The indirect taxes on nal energy demand offer
another mechanism to mitigate price volatility, although there are constraints in this regard.
Within Europe, Ireland already has comparatively high electricity costs and fuel costs. Whilst
Ireland lacks the major energy-intensive industries to have competitiveness severely impacted

by oil and gas prices, the cost of energy and fuel is a factor in relation to the operational costs
of business and associated investment decisions.
The cost nationally of importing oil and gas would be expected to rise under the higher price scenarios.
Whilst demand may drop somewhat, the lack of alternatives and strong energy requirements in
society would likely see the national energy import bill rise. Statements from Minister Ryan suggested
Ireland currently spends approximately €6 billion per annum on imported fossil fuels.
Table 4: Summary table of non-modelled impacts






Ireland‘s dependence on Oil and Gas
Chapter 4.
Ireland
,
s dependence on Oil and Gas
T
he previous chapter presents
outcomes of the HOG price analysis
with respect to the potential economic
and social impacts for Ireland. The purpose
of this exercise has been to explore possible
price scenarios, identify the potential risks
and consider national and international
exposure. In this chapter we consider
Ireland’s reliance on energy imports and
the corresponding dependence of specic
sectors and key activities on these imports.

This review incorporates both historical and
baseline scenario forecast values.


Energy security of supply and exposure
to price uctuations are topics of concern
within the European Union. The EU 27 is
a net importer of energy, importing over
half of its energy needs. Of this share,
approximately 60% are oil imports and 26%
are gas. The bulk of oil is imported from
OPEC and Russia, while Norway and Russia
provide the major share of the EU’s gas
requirements. A long term concern lies in
the availability of oil and gas reserves within
the EU 27, which are expected to be severely
depleted by 2025
17
(unless Europe’s shale
resources can be commercially exploited).
The general ambition of the European
Commission with respect to energy security
is to become more efcient and to diversify
both our energy sources (types) and energy
suppliers (origin).
For Ireland specically, dependency on
imported oil and gas for the operation of the
economy and society is particularly high.
This is shown in Figure 22, which displays
the forecast energy shares out to 2025

according to the ESRI Baseline Scenario
18
.
In this chart we see that oil and gas account
for over 80% of primary energy demand
19

in Ireland with the remaining fuels (i.e.
coal, peat and renewables) accounting for
the remainder.
The overall share of energy imports
by fuel type is presented in Figure 23
historically from 1990 to 2008 and
forecasted then out to 2025. Forecast
values are based upon the ESRI Baseline
energy scenario and information from
the Commission for Energy Regulation.
It illustrates the historical and expected
Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 15
0%
10%
100%
80%
90%
70%
60%
50%
40%
30%
20%

2008 2010 2012 2014 2016 2018 2020 2022 2024
Peat Renewables Coal Gas Oil
Figure 22: Ireland’s primary energy demand share by fuel, 2008-2025
0%
10%
100%
80%
90%
70%
60%
50%
40%
30%
20%
1990
1995
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Coal Gas Oil
Figure 23: Fuel shares in energy imports into Ireland, 1990-2025
Figure 24: Indigenous energy production shares, 1990-2008
0%
10%
100%
80%
90%
70%
60%
50%
40%
30%
20%
1990 1995 2000 2001 2002 2003 2004 2006 20082005 2007
Natural GasRenewables Peat
Figure 25: Final consumption of oil by sector, 2008-2025
0%

10%
100%
80%
90%
70%
60%
50%
40%
30%
20%
2008 2010 2012 2014 2016 2018 2020 2022 2024
Losses Agriculture Services Power Industry Household Transport
Ireland‘s dependence on Oil and Gas
16 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 17
future dominance of oil and gas in Ireland’s
imported fuel mix.
Ireland is part of a handful of EU 27
countries with greater than 80% energy
import dependency. SEI (Energy in Ireland,
2009) state that imported oil and gas
accounted for 81% of energy supply in
2008 and overall import dependency
was running at 89%. This is estimated to
rise to approximately 91% by 2025 under
the ESRI Baseline Scenario. In terms of
individual import rates, both coal and oil
are at 100%. Gas stands at 89% (in 2008)
and although this will fall as Corrib comes
online, we would expect this to rise again
to 95% by 2025 in the absence of any

further signicant nds and an increasing
shift towards gas red power generation.
In short, our indigenous energy use will
remain dominated by imported fuels in the
Baseline Scenario.
Furthermore, if we examine our
suppliers, we note that Ireland is entirely
dependent on the UK for its gas imports
and similar to many of the EU 27, is entirely
dependent on outside EU imports of oil.
With respect to gas, the Commission for
Energy Regulation suggests potential
scenarios for Irish gas supply (CER, 2009)
involving various assumptions of new
sources and storage capacity. Principally, it
is noted that the Corrib gas eld could meet
over 60% of Irish demand in the medium
term. However, the production capacity of
Corrib is expected to decline rapidly to less
than 50% of its peak after 6 years. Liqueed
natural gas (LNG) imports (e.g., from shale
gas) may offer the potential to diversify our
suppliers further over the medium term,
however, the price of such imports is likely
to be inuenced by transport, extraction
and environmental costs.
In terms of indigenous production of
energy, Figure 24 presents the growing
shares of peat and renewables and a decline
of natural gas production up to 2008. In

absolute terms, indigenous production
remains small and the relevance of high
import dependency rates become more
apparent when we refer back to the overall
consumption and dependency on oil and
gas in Ireland. Looking forward, growth in
indigenous energy production of signicant
scale is only likely to be achieved through
further development of renewable energy
sources.
The breakdown of oil and gas by sector
in the Baseline is displayed in Figures 25
and 26, respectively. For oil, the transport
sector remains, by far, the dominant sector
0%
10%
100%
80%
90%
70%
60%
50%
40%
30%
20%
2008 2010 2012 2014 2016 2018 2020 2022 2024
Losses Agriculture Services Power Industry Household Transport
Figure 26: Final consumption of gas by sector, 2008-2025
with approximately 63% of the oil use
share and little change anticipated in the

Baseline shares out to 2025. The industry
and household sectors account for much
of the balance. With regard to gas,
the power generation sector utilises
the greatest share of gas in Ireland, at 63%
in 2008 but this share is expected to drop
to 51% by 2025. In absolute terms the
level of gas used in power generation out
to 2025 changes little under the Baseline
Scenario, however an increase in demand
from households and industry reduces
its share.
This chapter has illustrated a clear
dependency within the economy on
imported oil and gas. Virtually every
sector of our economy is to some extent
dependent on oil or gas for its normal
operation - a common situation in
developed countries. Understandably this
reliance contributes to the fact that shocks
to the price of fossil fuels can therefore
have pronounced economic and social
impacts. Rather more unfortunately, the
modelling analysis within this report
suggests that Ireland is particularly sensitive
to such shocks and their outcomes, and
as a result would suffer more pronounced
economic impacts and a slower recovery as
compared with other countries. The next
topic addressed in this study is to consider

broad actions that could be taken to reduce
national dependence on oil and gas and to
discuss the drivers and motivators for action
in this regard.
16 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 17
Options and actions to reduce exposure to High Oil and Gas Prices
18 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 19
T
he previous chapter shows the clear
dependency within the economy on
imported oil and gas. As illustrated in
the earlier sections, this dependency among
Ireland and our core trading partners creates
an economic exposure to high oil and gas
prices.
But what actions can mitigate the
exposure to this risk and these impacts?
The international dimension of the impacts
would likely require concerted action
amongst Ireland and its trading partners
to reduce our collective reliance on oil
and gas if we seek to mitigate the extent
of the potential impacts (e.g. trade
slowdown). However, in this piece we focus
Chapter 5.
Options and actions to reduce
exposure to High Oil and Gas Prices
on Ireland and in this regard there remain
many options which could contribute
towards a reduced exposure toward a

number of the identied impacts in the
report.
The options for action presented
here are extracted from a position paper
entitled Ireland in the New Electricity Age
20

presented by Siemens Limited.
In this position paper, Siemens proposes
four ‘pillars’ for a sustainable energy system
in Ireland, as set out in Table 5, namely :
Pillar 1: Maximising electricity generation
from renewable sources.
Pillar 2: Grid upgrade and integration into
the European grid.
Pillar 3: Increased energy efciency and
conservation.
Pillar 4: Maximising electricity usage in
end-use applications.
In the following pages we consider
three “Focus Areas” from these pillars
and discuss the drivers and motivators
for action in each Focus Area. The Focus
Areas addressed are as follows:
Focus Area 1: Renewable energy
generation from wind.
Focus Area 2: Improvements in energy
efciency and conservation.
Focus Area 3: Electrifying the transport
sector.



Rapid implementation of the existing pipeline in onshore wind along with fast tracking of offshore
projects. Additionally, in order to maximise the efciency of wind farms, deploy storage
technologies to capture off-peak renewables energy. Explore the opportunities from ocean energy.
Develop and optimize the national grid for renewable energy, including the:
• Development of the national grid infrastructure on an all island basis.
• Extension of 400 kV and 220 kV network to facilitate transmission from key renewable locations.
• Implementation of “smart systems” to manage future load-to-generation matching.
Signicantly increase the number and capacity of interconnectors to UK and mainland Europe in
order to be able to export surplus renewable energy and benet from a European/global super grid.
Apply the technical solutions available today to improve the energy efciency of, inter alia:
• Buildings.
• Domestic appliances.
• Motors and drives in industry.
• Public lighting.
• Expanding the use of e-cars and hybrid cars .
• Improving the energy efciency of diesel public buses through hybrid electric drives and

regenerative braking power.
• Replacement of fossil fuel driven heating by ambient or geothermal heat pumps.
• Electrifying the national rail network in Ireland.




Table 5: Four pillars for a sustainable energy system in Ireland











For each of the Focus Areas presented,
we offer a qualitative examination of each
against four evaluative criteria as presented
in Figure 27, namely:
(a) Contribution to the Green Economy:
Creation of green employment, green
business opportunities and a green
market place.
(b) Impact on the Environment:
Contribution to emissions reduction and
improved international environmental
performance.
(c) Inuence on Competitiveness:
Impact upon the level of cost
competitiveness of Irish businesses
and the country’s international
attractiveness for investment.
(d) Mitigation of Energy Risk:

Reduction in energy price volatility and
energy supply risk in the Irish market.
This chapter concludes with a quantitative
case study that connects the analysis

conducted in this report with the business
case for investment in a 101 MW onshore
wind farm in Ireland. This case study
illustrates how the varied factors of
ination, interest rates and fossil fuel
prices could combine to inuence the
investment return under both the Baseline
and Accelerated Growth scenarios. The
purpose being to illustrate how a HOG price
scenario may inuence the investment
decision in one of the ‘options’ for change.
    

This rst option refers to the progressive
scaling up of Ireland’s wind energy
generation capacity from both on and
offshore large scale projects. Ambitious
plans are in place in this regard
21
in Ireland
and in this section we examine some of the
reasons to maintain a sustained effort to
reach these goals, as well as some of the
challenges that must be overcome to be
successful.
(a) Contribution to the Green Economy
While Ireland presently does not
possess an indigenous wind turbine and
component manufacturing industry, the
progressive scaling up of Ireland’s wind

energy generation capacity represents an
important employment opportunity for the
green economy. Wind energy employment
can be broken down into direct and
indirect employment. Wind turbine and
component manufacture are responsible
for the majority of direct wind energy jobs
(59%, European Wind Energy Association
[EWEA] 2009).
22
Other direct employment
includes jobs created in the initial phase of
getting a wind energy project operational;
wind farm development, wind turbine and
component installation, employment of
relevant nancial and consultant personnel
and R&D, all employment positions that
may be created within Ireland.
Other employment from wind farms
refers mostly to jobs associated with wind
turbine and wind farm operation and
maintenance once a wind energy project
has entered its full operational cycle. These
are longer term positions that would offer
further employment creation opportunities
in Ireland.
According to EWEA, the wind energy
sector employed 154,000 in the EU in 2007.
This gure is forecast to surpass 325,000
by 2020. EWEA gures show that in 2007

1,500 people were directly employed by
wind energy companies in Ireland. EWEA
highlight that 15.1 jobs are created in the
EU for every MW of installed wind capacity.
The development of this sector would
also support reductions in the national
energy import bill for fossil fuels (estimated
at approximately €6bn per annum) and
could stimulate the development of greater
marketable national expertise for export.
However, the decision to invest in
renewable energy technology deployment
will be heavily inuenced by prevailing
market conditions. Signicant start up
costs, access to capital and the expected
market return for electricity generated are
fundamental considerations for investors.
With respect to this issue it is possible for
governments to create the right conditions
to encourage investment. This can be
achieved through the introduction of
policy support mechanisms. One of the
most common policy mechanisms used
to encourage the adoption of renewable
energy sources and increase the use
of renewable energy technologies in
electricity production is the use of renewable
energy feed in tariffs (REFIT). Renewable
energy investors and developers support
the introduction of such tariffs as they

provide a form of investor certainty. Like
many other international governments,
the Irish Government has opted for this
policy support mechanism. In 2006 the
Irish government launched the REFIT
scheme which has become the main tool
for promoting RES-E and wind energy
development. The REFIT scheme provides
support in the form of a xed feed in tariff
to renewable energy projects over a 15
year period thereby providing renewable
investors with a degree of short to medium-
term market certainty. In the case study
presented later, we will illustrate how the
Accelerated Growth high oil and gas price
scenario may be expected to change the
investment case for a 101MW on shore wind
farm as fossil fuel prices add upward price
pressure to the market price of electricity.
However, whilst high oil and gas
prices and supports such as REFIT can be
important in the decision to invest, further
challenges persist in terms of access to
start-up nance, the speed of planning
procedures and the characteristics and
availability of the overall grid infrastructure.
All these challenges must be addressed if
wind energy is to achieve a greater share of
the electricity generation market and make
18 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 19

Contribution to the
Green Economy
Cleantech & Jobs
Impact on the
Environment
Targets & Legislation
Influence on
Competitiveness
Energy Price & Cost
Mitigation
Energy Risk
Supply, Stability & Price
Figure 27: Four evaluation criteria for actions
Options and actions to reduce exposure to High Oil and Gas Prices
a strong contribution to the development
of the green economy.
(b) Impact on the Environment
Wind is a clean renewable energy insofar
as there are no emissions associated with
the generation of energy from the wind
turbines. Thus wind generation can form
a key part of the solution for countries
seeking to reduce national emissions
associated with energy generation.
Government targets and legislation can
provide an added stimulus in this context
for the scaling up of national wind energy
generation. A recent renewables target
assigned to the Government under the
European Commission’s 2008 Climate and

Energy Package requires Ireland to reach
a renewable energy share of gross nal
consumption of energy of 16% by 2020.
Prior to this, in 2007 the Government
launched its Energy White Paper (Delivering
a Sustainable Energy Future for Ireland)
which included a number of ambitious
renewable targets. Targets included
renewables achieving a 15% and 33%
share of electricity generation by 2010
and 2020 respectively, with the latter
value subsequently being raised to 40% in
December 2008.
Wind energy is not without
environmental cost however and turbines
themselves require materials, manufacturing
and transport which give rise to a level
of emissions that may be considered as
part of a lifecycle analysis. Furthermore,
the mass deployment of wind farms
imposes a degree of cost on society in the
form of visual disamenity.
(c) Inuence on Competitiveness
With respect to competitiveness, two factors
are identied which may contribute to an
increased energy cost in Ireland. The rst,
as discussed in this study, is the potential
for high oil and gas prices to increase in
international markets. Changes in the
fuel input cost to oil and gas red power

generation in Ireland would be expected
to increase the market price of electricity.
Secondly the introduction of “full allowance
auctioning
23
” within the EU emissions
trading scheme from 2013 onwards to the
power sector will also raise the cost base
of fossil fuel power generation. The degree
to which carbon raises the cost base will
depend on the price fossil fuel producers
have to pay for allowances at ofcial EU
allowance auctions as well as the prevailing
price for allowances in the EU carbon
20 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 21
market. Interim technologies such as
Carbon Capture and Storage may offer an
alternative to allowances but will similarly
introduce their own costs to the mix.
Development of wind generation
capacity in Ireland would reduce the
exposure to such energy cost increases in
Ireland, as wind generation has neither
fuel input costs nor a carbon cost. Clearly
the balance of energy sources in the
power sector is an important consideration
and in the short-term, wind energy may
struggle to compete with gas and coal
red power generation on a direct basis
(i.e. particularly if there were no supporting

REFIT tariff). However, over the longer term
as technologies and the grid become more
efcient, the renewable energy component
of our energy supply should support lower
prices than would otherwise prevail where
fossil fuel and carbon prices are rising.
(d) Mitigation of Energy Risk
Energy risk as dened in this context
encompasses both the potential for a supply
interruption and/or particularly unstable
and volatile prices. The scaling up of Ireland’s
wind energy generation capacity can offset
some of the risk to supply interruption as
wind generation would be an indigenous
and nationally managed energy source
with no fuel dependencies. Furthermore,
the absence of a fuel input cost allows wind
energy to deliver energy at a reasonably
steady marginal cost of production. This
limits the potential for supply side driven
price increases or price volatility.
However, there are constraints and
in order to maximise Ireland’s wind
energy potential and improve security of
supply signicant transmission network
development and capital investment are
required. The ability of the transmission
network to absorb large amounts of
electricity produced from renewable sources
is one of the most signicant barriers to

the successful deployment of high rates
of renewable energy
24
. A strategy for the
storage of wind energy and managing
intermittency will become an important
part of the renewable penetration plan.
There are many factors to consider with
regard to storage including the additional
cost, the maturity of the technology
adopted and the feasibility of the option in a
given location. A recent and comprehensive
review of storage technologies for wind
generation concludes that there is not one
ideal individual solution. Instead efforts
to closely integrate renewables with the
electricity, heat and transport sectors is
noted as offering great potential as the rst
stage for increasing renewable energy use
and this approach can then be augmented
and made more exible with individual
storage technologies, particularly pumped-
hydro electric or ow-battery energy
storage (Leahy et al, 2010)
25
.
The potential of high levels of renewable
energy penetration was examined in the
2008 report on an all island grid by the
Department of Communications, Energy

and Natural Resources (DCENR, 2008)
26
.
This study identied a number of national
grid developments and capital investments
that need to occur in order for Ireland
to achieve a high level (30%-40%) of
renewable energy penetration. In the rst
instance DCENR note that the national grid
development that is required is extensive.
The report notes that while the cost related
to development are in “acceptable ranges
(0.8 – 1.2 €/MWh)”, the developments
will require considerable resources to be
deployed by transmission owners and
operators in addition to the work necessary
to implement the east-west and north-
south interconnectors and other extensive
transmission infrastructure development
required to accommodate non-renewable
generation and growth in demand. In order
to connect wind energy into the grid some
4,000 – 5,000km of new transmission
lines will need to be built
27
. Another factor
to be considered is the potential for an
interconnection to Europe as part of a
European super-grid.



This option refers to increased energy
efciency and conservation through
consumer and business investment in
available technologies. Specic energy
technology investments include investments
in building energy efciency, energy
efcient home appliances, lighting
efciency and smart lighting. A report
commissioned by Siemens (2009)
28

outlined a number of such technological
levers in the context of their potential to
deliver CO
2
abatement across a range of
sectors in Ireland. This earlier report offers
a useful perspective on the types of energy
efcient investment options available.
In terms of policy direction, on a national
scale, ambitious plans have been dened
as part of the National Energy Efciency
Action Plan (2009), whereby Ireland hopes
to achieve 20% energy efciency savings
to deliver a low carbon economy and help
realise the UNFCCC’s target of 450ppm
already exist
38
. However, at current low

carbon prices and without government
subsidy or other support many of them are
not yet commercially viable.
Once again, it should be noted,
Government action with regard to ‘green
procurement’ and supporting transitions
to new efcient technologies could also
provide signicant support to the more rapid
development of national energy efciency
by delivering business for suppliers and
leadership for consumers.
(c) Inuence on Competitiveness
Improved energy efciency in industry
and the services sector can contribute to a
reduced and more stable operational cost
base. The savings associated can improve
the competitiveness of an operation
and release funds for reinvestment and
development. However, clearly not all
investments will deliver a suitable return
and fuel costs would inuence the scale
of potential gains to be made in each case.
Thus caution and guidance is required to
make sound investments in appropriate
efciency and conservation options.
Indeed, the barriers to the increased
uptake of efciency related measures can
include a lack of awareness of the potential
savings and expected return on investment,
and connected to this, limited access to

capital for such investments. Continued
efforts are therefore required to inform
businesses of the sensible investments
in efciency and conservation that are
available to them.
(d) Mitigation of Energy Risk
Increased energy efciency and conservation
offers greater protection from the cost of
energy price volatility but does not offer
protection from a supply interruption. In
general however, the simple advantage of
increased efciency and conservation is
that the operation requires less energy to
achieve the same output as previously.


This option refers to supporting shifts in
the structure of the national transport eet
examining specically an increased rate of
deployment of electric vehicles. In addition,
it is noted that besides electric vehicles,
Ireland needs to invest in railbound city
infrastructure and also to electrify the
national rail network.
by 2020
29
. Here we examine some of the
motivations for these goals and some of
the barriers to progress.
(a) Contribution to the Green Economy

Whilst many energy efcient technologies
may be developed and/or manufactured
abroad, the deployment of these
technologies will create installation and
maintenance jobs in Ireland. In parallel
it could be expected that the emergence
of increased national investment levels
in energy efciency technologies would
create an attractive market place which
provides a suitable test bed and incentive
for indigenous manufacturing and
engineering sectors to engage in this area,
potentially leading to further job market
creation, innovation and exports to the
larger international markets.
Perhaps the greatest challenge with
broad nationwide energy efciency
improvements is overcoming the initial
inertia that can prevent investment. This
can be based on a lack of incentive to change
but can also simply be the result of long
payback periods for the investment which
render them less attractive. Initiatives such
as the ‘pay as you save scheme’
30
in the UK
are an example of innovative approaches
which may overcome the challenge of
securing these initial investments.
Indeed nancing models are an integral

component of the strategy to deliver
efciency changes in the market place.
The desire to change can be constrained
by the capacity to invest particularly in
times of restricted credit availability. In this
respect new nancing and business models
are needed. One example of possible
support to this market would lie in a shift
in public procurement policy. Public sector
investment in energy efcient options
could provide a signicant source of
business to the developing market as well as
leadership to households and businesses.
(b) Impact on the Environment
Efciency is generally a “win-win” situation
with respect to the environment. Increased
efciency contributes to both reduced
emissions and resource use, both of which
are core components of sustainability.
However, while improvements in
national energy efciency are encouraged
from a climate change and economic
perspective, due consideration needs to
be given to the so-called “rebound effect”
that can arise from improvements in energy
efciency. Brannlund et al. (2007)
31
and
Greening et al (2000)
32

highlight that
potential emission reductions arising
from improvements in energy efciency
may be reduced by the existence of the
rebound effect. Brannlund et al note how
the rebound effect can be described as
the direct and indirect effects, such as
substitution and income effects, induced
by a new energy-saving technology.
In this regard, the state can play a
role in terms of complementary policies
and legislation, such as incentive levies
or a carbon tax. For example, in Ireland,
whilst the Government’s scrapping of its
proposed levy on traditional incandescent
light bulbs prevented a signicant switch
in consumer behaviour towards more
energy efcient CFL or LED light bulbs, this
proposed levy was an example of how the
Government can legislate to encourage
investment in energy efcient technology.
While CFL and LED bulbs are more efcient
and economical in the long run, their initial
purchase price is higher than the traditional
incandescent light bulb. The Government’s
plan to legislate for an environmental levy
on incandescent bulbs would have reduced
their price advantage and encouraged
consumers to switch to CFL or LED bulbs.
According to the Government, the sole goal

of the levy was to alter consumer behaviour
as opposed to generating revenue (DoEHLG,
2006).
33

Similarly, a carbon price can serve to
protect some of the environmental gains
achievable through increased efciency
and energy conservation. A recent report
by the UK Environment Audit Committee
highlighted the important role that carbon
prices have to play in the deployment of
renewable technologies and energy sources.
The report emphasised how high carbon
prices are needed to deliver substantial
green investment (UK Environment Audit
Committee, 2010)
34
and how they are
necessary to curb the demand for fossil
fuels and reward the development of
renewable technology. According to the UK
Environment Committee and the Financial
Times (2009)
35
current carbon prices in
the range of €10-20 per tonne of carbon
dioxide are too low to drive investment in
green technologies and energy efciency.
Euractiv (2010) note that the carbon price

would have to be at least €100 per tonne of
carbon dioxide in order to trigger enough
investment for a shift to a truly low carbon
society
36
. Indeed, the International Energy
Agency (2009)
37
has highlighted that many
of the renewable technologies necessary
20 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 21
signicant and challenging sectors to
manage nationally with respect
to greenhouse gas emissions and
transboundary air pollution. A shift
towards electric vehicles charged by a clean
renewable energy source would contribute
signicantly to the emission reductions
from this sector. This would in turn support
national efforts to meet international
greenhouse gas emission reduction targets
and also efforts to meet national emissions
ceilings for transboundary air pollutant
emissions. There could also be noticeable
reductions in noise pollution associated
with road transport as the share of electric
vehicles in the eet grows.
With respect to related environmental
targets and ambitions, this shift would
also support national obligations to the

renewable energy for transport target
(RES-T) which calls for renewable energy
to account for 10% of transport energy by
2020, with interim targets of 2% by 2008
and 5.75%
39
by 2010. The move towards
electric vehicles would also clearly be
necessary if the Government is to full
plans outlined in November 2008 to have
10% of all vehicles in the transport eet
powered by electricity in 2020
40
.
Whilst the environmental gains of
such a change in the transport eet are
Options and actions to reduce exposure to High Oil and Gas Prices
(a) Contribution to the Green Economy
Ireland does not have an indigenous motor
manufacturing industry yet the necessary
changes for the increased penetration of
electric vehicles into the national eet will
provide an opportunity for job creation.
The successful introduction of electric
vehicles into the Irish transport sector will
be heavily dependent on the provision of
the appropriate infrastructure. This refers
primarily to the adequate and convenient
availability of battery recharging or
replacement facilities. The initial

installation and continued maintenance
of such facilities will provide a job creation
opportunity. Furthermore, although Ireland
does not have an indigenous motor
manufacturing industry, there are rst and
second tier suppliers who will also benet
from sales in electric vehicles.
A potential longer term benet from
electric car deployment with respect to
the green economy is the support that
the electric car may deliver to the wind
energy sector, by providing an additional
storage medium for renewably generated
electricity – particularly at off-peak times
i.e. overnight charging.
(b) Impact on the Environment
Transport has proven one of the most
22 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future
potentially signicant, it is important to
stress that the environmental ‘credentials’
of the shift are in part determined by the
form of power generation used to provide
the electric charging. Furthermore, the
battery components of electric vehicles
could create further environmental issues
if proper management and recycling
initiatives are not put in place.
(c) Inuence on Competitiveness
Ireland’s small size is well suited to the
reduced range currently offered by

reasonably priced electric vehicles. As a
result, one of the most frequently cited
constraints to their widespread adoption
may be less relevant in Ireland.
Furthermore, by switching to electric
vehicles, users (including business, private
and public service providers) will be able
to lower their operational costs for their
vehicle or eet. Savings will accrue in terms
of the fuelling cost of vehicles relative to
oil driven vehicles, as well as considerable
reductions in vehicle road tax. Energy
Minister Eamon Ryan notes that the cost
of driving an electric vehicle for one year
equates to one month’s petrol bill for a
regularly fuelled vehicle
41
.
However, whilst there are operational
cost savings, investment in a new vehicle
This section builds on the broader discussion
of large scale renewable wind generation to
look specically at how changes from our
Accelerated Growth (AG) oil and gas price
scenario may inuence the business case
for investment in a 101MW onshore wind
farm relative to the Baseline Scenario.
Table 6 presents the key parameters
and assumptions for the nancial analysis.
There are twin sets of parameters for certain

variables which vary under the Baseline to
AG scenario conditions. These relate to
ination, interest and revenue streams.
For simplication the average annual
values have been used and presented in
this table for ination and interest rates.
In practice these would vary year to year
and alter the cash ow development year
to year. Using the annual average value
smoothes payments over the 25 year
investment life. Another set of assumptions
for Year 1 includes the return of 50% of
expected annual income in Year 1 and no
maintenance but only operational costs in
Year 1. Operational costs for this purpose are
assumed to be 20% of the expected annual
operation and maintenance costs. A nal
assumption has been to ignore the REFIT
tariff in this assessment. The reason for this
has been that where the REFIT tariff is used,
a guaranteed market price for electricity
generation is in place that would not allow
the assessment to capture the change in the
market price stimulated by higher oil and
gas prices. As an interpretative note, the
study recognises that the REFIT tariff would
improve the returns in both scenarios, up to
the point where the REFIT tariff falls below
the market price of electricity otherwise
available to generators.

Thus in conducting this analysis,
simplifying assumptions have been
necessary and clearly projections over
a 25 year lifecycle entail uncertainty.
Nonetheless, the study illustrates the
relative difference between the two
scenarios and also the sensitivity of the
results to some key parameters – ination,
interest rates and the market price of
electricity as inuenced by rises in fuel
input costs
42
. Results are presented for the
nancial analysis in four forms, Net Present
Value (NPV), Internal Rate of Return (IRR),
Protability Index (PI) and the Simple Pay
Back (SPB) year (when cumulative net cash
ow becomes positive). A further point
to consider in examining the results is
the potential continuation of Section 486
Corporate Tax relief which offers an 18%
reduction in taxable income for eligible
projects. This has not been factored into the
nancial analysis directly, however, under
each scenario this would further improve
the after tax protability.
The overall results are presented in
Table 7. Under each criterion the AG scenario
offers the most favourable conditions
for the investment. The NPV for the AG

scenario is over €33 million as compared

Table 6: Parameters for 101MW case study
  
 
Site Location Sligo Study Assumption
Wind conditions Average annual 7.3 m/s Met Eireann
Technology Siemens AN Bonus 2.3MW Technical literature
Lifecycle of wind farm 25 years Study Assumption
Onshore capacity factor 31% International literature
MWh from 101MW farm 274,819 MWh Study calculation
Onshore capital cost per MW €1.233m per MW AIGS WS 1*
Onshore Operation and Maintenance per MW
€51,900 per MW AIGS WS 1
Onshore grid connection costs €1m Adapted study estimate
Ination average baseline to 2035 2.5% per annum Adapted study estimate
Ination average AG to 2035 2.6% per annum Adapted study estimate
Debt interest rate BL 4% per annum Adapted study estimate
Debt interest rate AG 5% per annum Adapted study estimate
Onshore feed in tariff BL Variable market price
43
Adapted study estimate
Onshore feed in tariffs AG Variable market price
44
Adapted study estimate
*All Island Grid Study
Table 7: Results of 101MW nancial case study
  
 
NPV €12,420,014 €33,850,027

IRR 5.4% 7.7%
Payback year of 25 Year 17 Year 13
Protability Index 9.9% 27.0%
Figure 28: Cumulative net cash ow of 101MW onshore wind farm over 25 years
under the Baseline and AG HOG price scenarios
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
- �150,000,000
- �50,000,000
- �100,000,000
�0
�100,000,000
�50,000,000
�200,000,000
�150,000,000
CumNCFAG
CumNCFBL
Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 23
requires funds and the relative value of
the change will be connected to the age
and performance of the vehicle or vehicles
being replaced. It is also noted, that as of
yet, electric options for heavy duty vehicles
are extremely limited (though there may
be potential to explore a hybrid diesel
eet), with most examples constrained to
very specic purposes not suitable for road
haulage.
(d) Mitigation of Energy Risk
Price changes in the transport sector
feed quickly through to the end-user

as oil prices change. This can create an
unstable price in a somewhat captive
market with consequences for individuals
and businesses. Whilst in the longer term
individuals and businesses may change their
travel patterns and modes in response, the
volatility can impact the sector noticeably in
the short run. Electric vehicles would reduce
exposure to such price uctuations as they
can potentially be fuelled at a far lower cost
through the grid. Whilst oil and gas price
changes may inuence the market cost of
electricity somewhat, the effect would be
moderated by the presence of renewable
generation sources and the far lower initial
base cost of ‘fuelling’ an electric car relative
to an oil powered vehicle.

to approximately €12 million under the
Baseline. IRR also compares favourably
at 7.7% to the Baseline 5.4%. In terms of
payback year, the investment is repaid in
Year 13 for the AG scenario and Year 17
for the Baseline. Finally, the protability
index is seventeen percentage points
higher under the AG scenario. A visual
comparison of the cumulative net cash
ows for each is presented in Figure 28.
The principal conclusion here is
that even with the higher interest and

ination rates, the AG scenario shift
in the market price of electricity for
the increase in the fuel input cost of
oil and gas creates a more favourable
investment prospect relative to the
Baseline Scenario tested. More dramatic
changes in power sector infrastructure
would themselves inuence the market
price of electricity and as such these
results represent only the micro-scale
case study.

