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The winds of change

14 Feb 2020 / Technology Print

The winds of change

The procurement of power has entered a brand new era, due to the introduction of the new Renewable Electricity Support Scheme (RESS). What does it mean for the Irish renewable energy sector?

On 2 December 2019, the Minister for Communications, Climate Action and Environment Richard Bruton announced details of the legal process for the first Renewable Electricity Support Scheme (RESS) auction, which is a critical step in the renewable project delivery process and brings greater certainty for a ‘bankable’ route to market for the sector.

The RESS brings Ireland into line with other countries by moving away from a fixed subsidy (as was the case under the previous REFIT scheme) for renewable energy generators to a competitive auction approach.

The RESS scheme is ultimately underpinned by agreement between the EU Commission, EU Parliament and EU Council by the revised (RED II) clean energy package (Renewable Energy Directive 2018/2001/EU), which came into force in December 2018) to set a binding energy target of 32%, a target that Ireland will need to contribute to in the form of a national renewable share of circa 24-26% by 2030.

Climate action plan

The scheme is critical to achieving the (70x30) goal of 70% of Irish electricity from renewables (RES-E) by 2030 (currently at circa 35%), a key element of the Government’s climate action plan.

In order to hit our 2030 targets, it is estimated that a 2030 RES-E generation (total) range of between 5,660MW to 12,140MW is required (currently circa 4,300MW), depending on a number of demand/output assumptions.

The first RESS auction is set to open in June, subject to State-aid approval, and will deliver up to a 3,000GWh increase in renewable electricity generation by the end of 2022.

EirGrid has been tasked with implementing and operating the majority of auction processes for RESS-1, which will involve working with the Department of Communications, Climate Action and Environment (DCCAE) and the Commission for Regulation of Utilities (CRU) on the detailed design, and terms and conditions for the scheme.

The launch of RESS also ties in with the announcement on 11 December 2019 of the EU’s Green Deal, a legally binding commitment to achieve net carbon emissions in Europe by 2050. The deal includes a 50-55% emissions reduction target for 2030, a very demanding target for Ireland.

RESS auctions frequency

The frequency of future RESS auctions is dependent on the renewable electricity project supply pipeline, which has not yet been baselined. It is envisaged that a minimum of four auctions will occur between 2020 and 2027 to deliver on the 2030 targets.

This will provide pathways for renewable developers, including offshore wind projects, as it sets out the indicative timelines and volumes for auctions over the coming decade, and provides clarity for developers in relation to when they need to have their projects ‘auction ready’. It will also allow Ireland to take advantage of new technologies as they emerge and adapt future RESS auctions to reflect the experience and lessons from RESS-1.

Consumer benefits

Poyry, a consulting and advisory services firm, in a report released in October 2019, concluded that building a significant amount of CfD supported renewables in the ISEM could bring significant value to consumers.

If the RESS CfD strike price comes in at 60/MWh  over the 15-year period from 2025-2040 (and if sufficient capacity were built to take in renewables penetration to 70% across the electricity market), consumers in both Northern Ireland and the Republic of Ireland could benefit by around €2.5 billion.

This is on the basis that the reduced wholesale price of electricity (due to higher levels of near-zero marginal cost renewables on the grid) – the ‘wholesale price saving’ – would offset the cost of providing stability to CFD-supported generators – the ‘stabilisation cost’.

Emerging market

The corollary of the wholesale price saving is that it might cannibalise the economics of the emerging market for corporate PPAs, as the lower, fixed prices sought by corporates for these electricity ‘hedging’ contracts may not be viable for generators to support.

This may be a headwind for the Corporate Purchase Power Agreement (CPPA) market, making the Government target of 15% renewables from CPPAs (roughly 2,500 MWs) more difficult to achieve without some form of policy incentives, such as: (a) tax credits, (b) an offtaker of last resort (Norwegian-style) guarantee scheme, or (c) obligations on demand customers to purchase electricity contracted under CPPAs.

Corporates are creating a large saving on the wholesale market when they sign a CPPA without getting all of the savings, and there is a strong argument for some new policies to share these savings with the CPPA market.

The rise of corporate PPAs

In the last five years, Europe has seen significant growth in the use of corporate PPAs for renewable energy, with 5.3GW contracted directly. This is largely due to the decreasing costs of renewable-energy generation, phasing out of feed-in tariffs, as well as growing corporate demand for traceable green energy (or ‘guarantees of origin’ [‘GoO’]).

A CPPA is essentially a long-term contract, under which a large energy user (such as a data centre) agrees to purchase electricity directly from an energy generator. This differs from the traditional approach of generators simply selling electricity into the wholesale market (I-SEM) through a licensed electricity supplier (such as SSE, Energia, ESB, etc).

Balancing risk

The generator shares wholesale market values with the supplier, who also crucially takes on the balancing risk (for a fee) if the forecasted power is not delivered. CPPAs offer organisations a hedge against future volatile power prices by securing a fixed-energy cost for a fixed period, and the related green rights.

CPPAs create a different risk allocation profile for participants (usually tri-party) compared with the traditional PPAs, which include the energy volume delivery profile (baseload, fixed annual or quarterly, or ‘as produced’), pricing (fixed €/MWh  or under a cap and floor arrangement) and tenor (usually ten-15 years).

Typically, the CPPAs with stricter delivery obligations tend to be balanced with more attractive remuneration for the generator. The key risk for the generator (and their funders) tends to be the credit risk of the offtaker; hence why most CPPs are currently only bankable with the large US tech giants, such as Microsoft (37MW Tullahennal wind farm in Co Kerry in 2017), and Amazon (91MW wind farm at Meenbog, Co Donegal, and 23MW wind farm at Esk, North Cork, in 2019).

Types of PPA structures

There are three typical contract structures for the corporate PPA: ‘physical PPAs’, ‘synthetic PPAs’, and ‘private wire PPAs’.

Pursuant to a physical (or sleeved) PPA, the corporate off-taker will enter into a long term PPA (with a renewable energy generator to take some or all of the energy generated by its plant), with a defined amount of power sold at a fixed price per MWh.

The generator can then appoint a utility and enter into PPAs on mirror image commercial terms to buy the power from the generator, and physically transfer it to the corporate off-taker. Typically, the corporate off-taker will pay a margin or a ‘sleeving fee’ to the utility for transacting the power through the pool and the corporate off-taker will also secure the GoOs.

In a synthetic (or virtual) PPA structure, no power is physically traded. The generator and the consumer enter into a direct financial hedging contract, such as a CFD (rather than a PPA). Each party will then enter into separate agreements with their electricity supplier/utility to sell/acquire (as applicable) electricity at the spot price.

Private wire PPAs are concerned with the sale of electricity from a generator to an offtaker. However, unlike the physical PPA, power will normally be sold directly from the generator’s facility (located close by) to the offtaker (such as an industrial factory) rather than being notionally passed through a national power grid.

In the pipeline

The two main requirements for a vibrant corporate PPA market are an appetite for green energy from locally based corporates, and a pipeline of fully consented renewables projects. In relation to the former, Ireland is home to more than 60% of the RE100 signatories, a climate group initiative under which the world’s most influential companies commit to achieving 100% renewable power by a target date.

These companies are under pressure from their shareholders and employees to demonstrate ‘additionality’ (a measure that can be said to have directly led to the construction of new, renewable generation) in procuring green power, and have the expertise in implementing these deals in other more mature markets.

There is now also a secondary tier of large domestic businesses that are starting to see both the commercial and environmental benefits of a PPA. The Neo Network, a community aimed at accelerating renewable-energy procurement, notes a significant increase in membership from companies in the manufacturing sector seeking to satisfy environmental, sustainable and governance (ESG) targets.

On the latter requirement, while there has historically been grid and planning obstacles for renewables projects, these barriers are (slowly) starting to lift, resulting in the emergence of a strong pipeline of consented projects, including wind and solar, all looking for an effective route to market.

Simplifying the risk allocation and streamlining the approach to CPPA deals may by the key obstacle to overcome if greater traction in this market is to be seen over the coming years.

Grid-connection clarity

A further positive development delivered by the CRU on 29 November 2019 was the release of the ECP-2 proposed decision, which is hugely significant in determining which renewables projects will be built in Ireland between 2022 and 2030. The key takeaways from this decision are:

  • There will be 50 projects (50 per year 2020-22),
  • 25 based on the largest renewable projects (GWhrs),
  • 25 based on the earliest planning permission date (renewable and non-renewable),
  • Planning permission needs to be in place to apply for ECP 2, and
  • Community-led projects get prioritised.

EirGrid has recently demonstrated that powering the grid with 70% renewable energy is technically possible, having achieved these record levels on the grid on 8 December 2019 during Storm Atiyah.

The approval of the RESS (together with the publication in June 2019 of the Climate Action plan) is welcome news for the Irish renewables sector, coming some 16 months after the Government first approved the high-level design of this new support scheme.

However, there is likely to be a gap of 18 months between the completion of the last wind farms under the old REFIT support scheme, and the connection of new projects under the RESS, which obviously highlights the lost opportunity for developers, funders and stakeholders in Ireland in deploying additional renewable capacity over that period. Such additional capacity would have greatly assisted our chances of achieving our 2020 RES-E targets, which are now likely to be missed.

While the RESS is an essential part of the policy framework needed to hit our 2030 targets, it is only part of the picture. The planning process in Ireland needs to be streamlined to process applications more quickly and fast-track critical infrastructural projects.

Key challenges

One of the key challenges facing developers is the lack of consistency and transparency around the current timelines for planning decisions (on average, appeals between 2017-19 were under consideration for 66 weeks) which greatly diminishes the ability of developers to provide certainty to stakeholders and funders on delivery target dates for projects.

Additional industry concerns also remain in relation to important issues, such as the new wind-energy development guidelines (due to be published in December 2019), contestable cabling landownership, curtailment, and uncertainty on local authority rates.

It will prove to be a very challenging task to expand the emergent CPPA market in Ireland, unless the same level of certainty available in other jurisdictions can be provided to large corporates on when these new data centres can expect to receive their power from a project.

Data centres are set to make up 31% of the annual demand for electricity by 2027 if Eirgrid’s median demand scenario plays out. Reputation is a fundamental consideration for the big tech giants, and they would rather build their data centres elsewhere in Europe rather than get mired in years of vexatious planning appeals and uncertain delivery dates, notwithstanding all the other obvious benefits of locating in Ireland. This would be a massive lost opportunity for Ireland Inc.

Annual fines

The publication of the scheme’s details also begs the question: why such a long delay in finalising the RESS design? The Government has been acutely aware of the impact of missing our 2020 targets, and yet it appears to be sleepwalking into the (very soon to be real) imposition of hundreds of millions of euros of annual fines for its failure to deliver on our legally binding RES commitments.

There does not appear to be any meaningful evidence in the scheme details that supports the argument that such a long period of delay (since July 2018) was necessary for finalising the design.

Once again, it is clear that, if Ireland is to achieve its 2030 RES targets, further joined-up thinking is needed between the policy makers, the regulator, the planning authority and the local authorities in order to provide a more coherent environment, where strategic renewable infrastructural investments can be delivered in a timely and transparent manner, so that all stakeholders in a project are provided with certainty around deliverability.

The deadline for final submissions for the consultation process closed on Friday 17 January 2020. The final terms and conditions of the scheme are due to published in February, and then submitted to the EU Commission for State-aid approval.

 

Ronan O'Grady
Ronan O’Grady is head of legal at Solar 21, Rathcoole, Co Dublin