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New Irish Renewable Electricity Support Scheme – European Insights 12 Sep 2017

In today’s Insight, we examine the Renewable Electricity Support Scheme consultation paper released last week and look for insights from similar schemes in operation around Europe.

On Monday of last week (4th September), the Department of Communications, Climate Action and Environment released the much-anticipated consultation paper on the development of the new Renewable Electricity Support Scheme (RESS) for Ireland which will eventually be the successor to the current REFIT 2 & 3 schemes. 

Community Front and Centre

As expected, there is considerable focus given to community involvement, ultimately to increase acceptance of new renewable projects. A measure to include a mandatory community investment offer for specific projects has been mooted, along with a series of grants, soft loans and potential priority grid access. How these complex mechanisms will be implemented in practice remain unclear.

Support Payment Mechanisms

The proposed support scheme itself is similar in structure to a number of RESS across Europe, such as those in GB, France and the Netherlands. 

The recommended approach is a technology neutral auction resulting in the awarding of a uniform-price Floating Feed-in-Premium (FFiP). All generators successful in the auction then receive the same uniform clearing price, or strike price. It is expected that there will be a number of auctions, however the frequency of these has not been specified. The length of the awarded FFiP contract will most likely be 15 years. 

As highlighted in the diagram below, the FFiP ensures that the supported generator earns the strike price for all power generated. Where the Reference Market Price is less than the strike price, a top-up FFiP payment is made. If RMP is greater than the strike price, the generator pays the difference back.

 

Consistent with other FFiP schemes around Europe, the Irish FFiP will not cover balancing costs for supported projects, instead leaving this risk with them to be managed. 

It has also been recommended that no premium be awarded when negative wholesale market prices occur, which could lead to an incentive for RE generators to self-curtail during such events. 

Solar vs Wind?

One interesting question is how solar, offshore and other more nascent technologies will compete with the more well-established onshore wind projects in a technology neutral auction. One would expect there to be no competition. If this is the case, the consultation paper has recommended that a technology-specific auction could then be introduced.

This is an approach which the Dutch have taken with their renewable support scheme, called the SDE+, which is very similar to the proposed Irish RESS. It too awards a uniform-price FFiP referenced against a strike price, but is technology specific as opposed to the proposed technology neutral Irish RESS. In 2016 there were two rounds of auctions, the first was held in Spring and had a budget of €4 billion and the second in the Autumn and had a budget of €5 billion. These auctions resulted in 3,183 projects being awarded the SDE+ subsidy, totalling 3.9 GW of RE capacity and at a cost of €9 billion. 

Interestingly, more solar projects were granted subsidies than wind projects under the SDE+. This was driven by the fact that wind projects must go through much more stringent planning procedures compared to solar in the Netherlands and ultimately a project cannot bid for an SDE+ subsidy without planning permission. As a result, the solar business model is becoming increasingly more competitive in the Netherlands.

It is not impossible to envisage a similar scenario playing out in Ireland under the new RESS scheme given the planning challenges facing wind development projects, so this Netherlands experience should give prospective wind and solar developers food for thought.

Auctions Mean Cheaper Projects

A look at the below table of recently awarded RE prices under similar schemes in Europe could give an indication as to the future RE prices in Ireland under the proposed RESS. The trend of falling auction clearing prices continues as renewables continue to become increasingly competitive when compared with conventional energy sources. 

 

It was announced yesterday morning that three offshore wind farms were awarded subsidies through the Contracts for Difference (CfD) allocation in GB. The clearing prices of £74.75/MWh and £57.50/MWh for delivery years 2021/22 and 2022/23 respectively are considerably less than the £92.50 price guaranteed to the Hinkley Point C nuclear plant in the UK recently, further reaffirming renewables’ increasing competitiveness.

Looking at the significant downward pressure auctions place on technology costs and the ever-present political desire to minimise the cost of the PSO, it is clear to see why auctions will be the way of the future for Irish renewable energy support.

ElectroRoute is active in markets across Europe from both an electricity trading and RESS project power offtake perspective and as such will be leveraging this experience to help our clients structure optimal routes to market under the new Irish RESS support scheme in the future.

For those wishing to respond to the RESS consultation, which closes on 3rd November, the consultation documents can be found here: http://www.dccae.gov.ie/en-ie/energy/consultations/Pages/Renewable-Elect...  

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