The Irish Department of Communications, Climate Change and Environment recently released its long-awaited consultation on the design options of a proposed new Renewable Electricity Support Scheme. The aim is to incentivise the introduction of sufficient renewable generation to meet national and European renewable energy targets, ensuring that 16% of Ireland’s energy requirements are met through renewables by 2020.
The ambition is for the future scheme to allow the government to control the costs and the level of renewable penetration, while responding to market change and capturing the benefits of emerging technologies.
Any proposed new subsidy scheme must be compliant with EU State Aid guidelines. This means the scheme must be based on a competitive bidding process, include a premium in addition to the market price and should expose renewable generators to market prices whilst maintaining standard balancing responsibilities. This limits the options for the design to come straight out of the legacy and centrally administered Renewable Energy Feed in Tariff (REFIT) box, which has historically been the subsidy scheme of choice in Ireland, but does not comply with the EU rules.
Unsurprisingly, the favourite option appears to be the Floating Feed in Price (FIP) and the consultation makes that clear. The FIP is a varying €/MWh premium, calculated as the difference between the strike price and the reference market price, which is not static. A floating FIP scheme would be reflective of a wider European trend with FIP schemes currently being used by countries like Denmark, Finland, Germany, Italy, the Netherlands, Spain and Great Britain under different guises.
The consultation is adamant that a pay as clear auction (uniform price) should the preferred option based on economic theory and will be consistent with I-SEM day ahead auctions process and future XBID project allowing cross-border intraday continuous trading. The consultation also explores technology neutral versus technology specific auction question. The complexity this would bring is acknowledged, but it seems that the Department support the idea of a technology neutral auction due to better efficiency. Technologies that may be too expensive could be excluded, although it then states they may create a separate pot for nascent/emerging technologies. Based on the analysis provided, this would suggest domestic/commercial rooftop solar could be excluded initially given its high price in the levelised cost of energy analysis.
While there is nothing wrong with the aspirations of the scheme and specifically meeting the primary objective of cost-effective deployment, the GB Contracts for Difference shows that this ambition can quickly get lost in the fog of the politics, with onshore wind and solar, despite being lowest cost form of renewable generation, being excluded from auctions. Many onshore wind developments in Ireland already face planning battles. One hopes, in the case of Ireland, evidence and analysis will underpin selection of the appropriate auction design and eligibility and not ideology.
One of the most interesting aspects of the new subsidy scheme is the promotion of community ownership as small-scale generation is more flexible under EU state aid rules. The focus seems to be on between 10-20% of the total capacity in the auction being set aside for community led projects. The difficulty with setting such a target is defining what a community energy project is in the first place, with the proposals being 50% or more of equity owned by community groups. It is unclear if that the benefits of this category outweigh the removal of the de-minimis benefits that are taking place for assets under 10MW.
The future renewable auction and roll out of I-SEM will mean that Power Purchase Agreements will become increasingly important for renewable developers and investors in the market. The need to maximise the revenue and be aligned to the subsidy scheme criteria, while managing exposure to the punitive imbalance prices.
Remaining grid connections will be at a premium in Ireland. Many people have been planning in advance for a renewable subsidy scheme, particularly for solar and/or DS3 participation, taking an option on the connection and land. We doubt the levelised cost of energy figures presented in the analysis are truly reflective of what the auction will deliver. European prices indicate Irish auctions will clear lower. But this should ensure that the new scheme outperforms the expectations on consequential consumer costs through what is ultimately collected under the Public Service Obligation levy.
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