1. Introduction

It is an exciting time in the Irish renewable space at the moment with the first Renewable Energy Support Scheme[1] (RESS) auctions due to commence soon with a closing date for submissions of 28 July 2020.

We have been working with various wind and solar developers as they develop trading and balancing solutions for their RESS assets and one common question we are asked is “What Route to Market Structure is best for me?”.  The purpose of this Insight is to help answer this question.

Under RESS, in a manner similar to REFIT, the RESS generator is required to enter into a Power Purchase Agreement (PPA) with a licenced supply entity (Supplier).  The subsidy payment is made via the Public Service Obligation Levy (PSO) to the Supplier.

The two most common routes to market for Irish renewables over the last five years has been:

• Traditional Power Purchase Agreement
• Supplier Lite Structure

In this article we describe both structures and highlight the advantages and disadvantages of each.

2. Power Purchase Agreement

A traditional PPA is a standard agreement whereby the RESS Generator contracts with a licenced supplier (such as ElectroRoute Energy Supply Limited) under which the Supplier purchases every MWh of power produced by the Generator and in return pays the Generator a pre agreed price as shown in Figure 1.  For RESS 1, this price is likely to be the Generator’s Strike Price less an agreed Fee.

Figure 1 – Typical Power Purchase Agreement Structure

The PPA is the most straightforward, and least administratively intensive route to market for a Generator – typically the supplier will manage all market interfaces, trading, balancing, collateral, working capital and PSO cashflows and in return earns the Fee.

They key advantages and disadvantages of a Power Purchase Agreement are as follows:

3. Supplier Lite Structure

ElectroRoute estimates that approximately 40% of REFIT 2 onshore windfarm generators (over 900MW) adopted a Supplier Lite route to market. The structure became popular from 2015 onwards for a few reasons, predominantly:

• At that time the only entities offering long term PPAs were the incumbent utilities who were not providing competitive or flexible offerings,
• Generators were aware that the introduction of I-SEM would result in market change and did not want to enter into inflexible long term contracts with the utilities, and
• the emergence of ElectroRoute who pioneered the provision of services to enable bankable Supplier Lite structures.

The Supplier Lite structure is very similar to the PPA structure, with one key difference. Instead of entering into a PPA with a third party offtaker (such as ElectroRoute or a Utility), the Generator sets up its own licenced supply vehicle with which it contracts. See Figure 2 for an illustration of this.

Figure 2- Typical Standalone Supplier Lite Structure

Having its own supply vehicle (SupplyCo) allows the Generator to control its PPA and Route to Market, however, in most scenarios, a Generator will not have:

• the ability to manage the compliance requirements of owning a licenced supply entity
• the market access and trading capability to (eg SEMOpx access, clearing bank structures etc)
• 24*7 trading and forecasting capability to manage balancing risks.

Therefore usually the SupplyCo will contract with a third party trader, such as ElectroRoute, who assumes responsibility for market interfaces, forecasting, trading and balancing and pays the Day Ahead reference price to SupplyCo less a pre agreed Fee for each MWh.

PSO management and R Factor related working capital remains the responsibility of the Asset Owner.   Figure 3 provides an overview of how such a structure works.

Figure 3- Supplier Lite (sleeved through ElectroRoute)

4. ElectroRoute RESS Services

Whether an Asset Owner decides to follow the PPA or Supplier Lite structure, ElectroRoute can provide competitive, bankable solutions underpinned by credit support.

Through its solutions, ElectroRoute will, for a fixed fee per MWh,

• Take all balancing risk exposure
• Provide access to the ex-ante I-SEM markets (SEMOpx & clearing bank access)
• Manage all trading and market interface requirements
• Take responsibility for all wind/solar and price forecasting costs
• Cover all trading fees and all collateral movements with the market.

If you wish to discuss route to market options for your future RESS project, please reach out to our team at clientservices@electroroute.com.

ElectroRoute’s 24*7 trading desk

Reference

[1] https://www.dccae.gov.ie/en-ie/energy/topics/Renewable-Energy/electricity/renewable-electricity-supports/ress/Pages/default.aspx

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The last few months have seen momentum building in Ireland behind offshore wind. The Climate Action Plan has set a target of reaching 3.5GW of offshore wind in Ireland by 2030.  Kristen Read and John Dallas from A & L Goodbody have prepared this Insight to provide an overview of recent developments which have been introduced to set Ireland on course for achieving this target.

Relevant Projects

The recent announcement from the Department of Housing, Planning & Local Government (DHPLG) that seven Irish offshore wind projects have been designated as ‘Relevant Projects’ in the context of the forthcoming Marine Planning and Development Management legislation (MPDM) is a welcome step forward to give greater certainty and confidence to developers of offshore wind projects in Ireland.
In the past, there has been significant uncertainty for developers of offshore wind projects in Ireland, particularly in relation to the offshore and onshore consenting process for their projects. The Climate Action Plan (CAP) published in July 2019 (which underpins the Government’s policy for incentivising offshore wind projects) committed to address the question of how ‘legacy projects’ would be treated under any new legislative regime for offshore renewable energy projects. The designation of Relevant Projects is the latest step by Government to clarify the position of these projects.
The seven Relevant Projects, together with SSE’s 520MW Arklow Banks project, have the potential to deliver 4.4GW of capacity as part of Ireland’s strategy to support very significant deployment of offshore wind projects between now and 2030.

For the Relevant Projects it means that they will be granted a ‘Planning Interest’ under the new MPDM (when enacted) and will therefore have priority over earlier stage projects in accessing the new offshore consenting regime.

Timing for Consents

Given ongoing delays in the formation of a new Government, it is unclear when the MPDM will be enacted and therefore uncertain when the Relevant Projects will be able to commence the planning process under the new regime. However, it is encouraging to see that MPDM will be priority legislation for the likely future Government and that significant progress is also being made in relation to other pillars of the offshore consenting regime, in particular on the development of our National Marine Planning Framework (NMPF).

Whilst the single consent principle will remove unnecessary duplication in the offshore consents process, the MPDM general scheme does not include a clear statutory timetable for An Bord Pleanála to carry out its examination and issue its decision. If we look to our nearest neighbours in the UK and the Development Consent Order process, having a clear and statutory timetable to obtain consent has certainly facilitated the timely delivery of offshore wind projects in the UK. If the ambition for offshore wind energy, as set out in the CAP, is to be realised by 2030, then the timely delivery of planning consents will be key. A statutory time period for decisions would be very helpful in this regard, as well as an appropriate resourcing strategy in An Bord Pleanála to deal with the likely volume and complexity of applications for offshore development consents under MPDM.

Grid Connection

Only one offshore wind project currently holds a grid connection agreement (namely Oriel). Clearly, securing a grid connection offer is a priority for most offshore wind developers. On foot of a direction issued by the Commission for Regulation of Utilities in January 2020, EirGrid is required to commence processing grid applications from projects that are designated as a ‘Relevant Project’ under the Transitional Protocol. It is expected that the formal designation of Relevant Projects by DHPLG will facilitate engagement between EirGrid and these projects.
On 10 June, the Department of Communications, Climate Action and Environment published a formal consultation to inform the grid development policy for offshore wind in Ireland. The consultation document and accompanying report by Navigant sets out a number of approaches from ‘Developer-Led’ (decentralised) to ‘Plan-Led’ (centralised) and includes helpful comparisons across a number of European jurisdictions. It is expected that this consultation will guide Government policy on grid delivery for offshore wind projects and will address important questions such as responsibility for consenting, construction and operation of offshore grid assets. It is possible that a different or ‘transitional approach’ may be taken in respect of Relevant Projects to avoid potential delays to these projects in making the regulatory and legal changes required to implement an enduring offshore grid connection policy.
We anticipate that the approach to ownership and operation of offshore transmission infrastructure will come into sharper focus as part of this policy design process.

Route to Market

The CAP targets a first offshore wind RESS auction in Q2 2021. On the assumption that only ‘consented’ projects (i.e. projects with a development consent / a Marine Area Consent (MAC) under MPDM or an appropriate foreshore lease) will be eligible to participate in that auction, it is difficult (for that and other reasons) to see sufficient offshore wind projects being in a position to participate in an auction within those timeframes.
The timing of the first RESS auction allowing offshore wind to compete as a ring-fenced technology category requires deliberate coordination with other key workstreams including (i) enactment of MPDM and finalisation of NMPF, (ii) delivery of development consents under MPDM, (iii) finalisation of the charging regime for MACs, and (iv) issuing of grid connection offers. Each of these are important to confirm overall project design and costs in the context of competitive auctions.
The MPDM also suggests that only projects that have been granted support through a competitive process established under Section 39 of the Electricity Regulation Act (i.e. RESS) will be eligible to receive a MAC. We would suggest that this is a relatively inflexible approach in that it pre-supposes that the only viable route to market for offshore wind projects (now or in the future) is through a RESS supported power purchase agreement. We would suggest that the industry should be allowed greater flexibility to innovate in relation to alternative routes to market for offshore wind (as is being seen in the US and Europe) whilst recognising that Government will require sufficient comfort on the viability of any alternative route to market when granting exclusive rights over the Irish marine area.

Supply chain challenges and opportunities

The recent report, Harnessing our Potential, commissioned by IWEA and prepared by the Carbon Trust, outlines that significant investment is needed in the Irish supply chain to ensure that the wider economic benefits of offshore wind development can be captured domestically. The report highlights a number of issues including:-

• At present, Irish firms only stand to capture approximately 20% of the likely investment that will be generated through development of offshore wind in Ireland unless steps are taken urgently to grow the local supply chain;
• Currently, Ireland does not have a port capable of supporting the construction and operation and maintenance of offshore wind farms, meaning developers will have to depend on ports in the UK; and
• SSE has recently announced its selection of Arklow harbour as the preferred operations and maintenance base for the Arklow Bank windfarm. This is a welcome development and one which is hoped to be a sign that Ireland can capture as much of the offshore wind value chain as possible.

Recession and the Economic Impact of Covid – 19

Whilst Covid-19 has wreaked havoc on the Irish economy, and the full economic impact of the pandemic is still unknown, the European Commission’s proposal for a major recovery plan places the Green Deal at its core. As part of the European Green Deal and to help drive the energy transition and to ensure that it’s a just transition, the European Commission has tabled a Sustainable Europe Investment Plan worth €1 trillion. Specific measures for offshore wind are included in the Green Deal. This means that there is an opportunity for offshore wind to not only be instrumental in Ireland achieving its 2030 targets but to also be a part of Ireland’s economic recovery story. This should only serve to drive further momentum in the burgeoning Irish offshore wind sector.

For more information please contact Kristen Read, associate on A & L Goodbody’s Environmental & Planning team or John Dallas, partner on A & L Goodbody’s Energy, Infrastructure & Natural Resources team.

Authors

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Last Friday 13^th December, the Department of Communications, Climate Action and the Environment unveiled the Draft Terms and Conditions (T&Cs) for the Forthcoming Renewable Electricity Support Scheme (RESS) 1 auction, expected to take place in June 2020.

In our latest ElectroRoute Insights, we provide a high-level overview of some key highlights contained within the paper;

Structure

The RESS support will be administered via the renewable generator contracting directly with a Supplier, similar to that of the REFIT scheme. This structure provides RESS recipients the option of entering into a Power Purchase Agreement (PPA) with an existing supply company like ElectroRoute Energy Supply Limited, or in adopting a Supplier Lite approach.

Support Duration

RESS 1 intends to support projects up to 31/12/2037 (with a further year extension available where a Force Majeure has successfully been claimed prior to achieving Commercial Operation).

Subsidy support is available from 1 July 2021 if a project is ready (although the period from 1 July to 30 September 2021 will need to be claimed back in the RESS Reconciliation process as payments will only commence to be made from 1 October 2021.

RESS 1 Reference Price

For Variable Generation Projects: hourly Day Ahead Market (DAM) Price, and

For Non-Variable Generation Projects: time weighted average DAM price over the course of the PSO year (i.e. Baseload price)

Calculating RESS PSO Monies

The RESS contract will be a 2-way Contract for Difference (CfD) whereby;

• For hours in which, the Strike Price exceeds the Market Reference Price, the Supplier will be entitled to a support payment, calculated as the difference between the Strike Price and the greater of (a) the Market Reference Price or (b) zero euro per megawatt hour.
  • This is an important point and one we have not seen before, e. if the Market Reference Price is less than €0/MWh, the generator will not receive any support payment for any power produced in that period.

• For hours in which the Market Reference Price exceeds the Strike Price, the Supplier will be obliged to make a Difference Payment to the PSO.

Unlike the existing REFIT scheme, the T&Cs suggests that support will be calculated with reference to Loss-Adjusted Metered Quantity rather than giving generators the option of Metered Quantity.

Payments from Suppliers to the PSO

Where the ex-ante assessment of PSO amounts calculates that there is likely to be an amount due from a Supplier in respect of a forthcoming PSO year (i.e. where market revenues are expected to exceed the Strike Price) , the Supplier is expected to make payments to the TSO, as opposed to receiving them.

• We expect that this new risk (relative to REFIT which is effectively a 1 way CfD) will put pressure on the CRU to ensure that the ex-ante calculations which forecast the Benchmark Price in the market are highly detailed, specific to projects (as opposed to using a time weighted average price) and considering of technology.
• Due to the Pay as Bid methodology, this risk is greater for some projects than others given each will have differing Strike Prices

Moving Suppliers during the RESS Contract Term

The T&Cs indicate that the RESS Letter of Offer may be transferred to another Supplier in the event that the “original Supplier is unable to perform its obligations under the RESS 1 PPA or these RESS Terms & Conditions”

Leaving the RESS 1 Scheme

There will be a one-time opportunity for a Generator to leave the RESS 1 scheme throughout the term of support. The project must give 12 months’ prior written notice and evidence that the Supplier to the PPA agrees to the withdrawal. The withdrawal will take effect from the first day of the new PSO Levy period.

Curtailment Compensation

The Department have introduced a metric to compensate for curtailment where there has been in excess of 10% curtailment for two consecutive Levy Periods. This will be measured by the TSO who will deliver a report for each RESS 1 participant annually. The TSO will detail the total curtailed volume that was not compensated through another scheme (other schemes being undefined).

Whilst the detail requires further clarification, the idea seems to be to compensate generators for the portion above 10% curtailment and paragraph 5.6.2 states;

“The Curtailment Compensation Arrangements will set out the calculation … of the level of additional compensation (if any) that is consistent with a Curtailment level limited to a maximum of 10% for that RESS 1 Project in that year”

It is for clarification if this should be interpreted as paying for levels of compensation greater than 10% and limited to a further 10% of total output.

The principles however are clear, the Minister has indicated a desire to support projects which are seeing excessive levels of curtailment over a sustained period.

Preference Categories

The T&Cs outline a preference for a designated volume of renewable energy from both Community led projects and Solar projects.

For Community led[1] projects, a preference is given for up to 30GWh and for Solar[2] projects, a preference will be given for up to 300GWh.

By including a project in a Community led Preference category, the project cannot compete in the second (Solar) or third preference (All Projects[3]).

Auction Offer Process

RESS 1 is not linked to a market-clearing mechanism and is therefore a simple, sealed bid auction which awards on the basis of Pay as Bid methodology.

The contract award will not be inflation linked.

At ElectroRoute, we are currently designing innovative and bankable route to market solutions for auction participants that provide flexibility and certainty.  We look forward to engaging with the renewable industry on balancing and other products in the months to come as the June 2020 deadline for the auction comes closer.

References

[1]Limited between 1-5MW in size. Defined as a project which is 51% by a Renewable Energy Community, with minimum 150 shareholders and an allotted share capital of maximum €20,000

[2]Limited between1-125MW in size

[3]Limited between 1MW up to 600GWh in output

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  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.

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