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REFIT in I-SEM Decision Update
The Department of Communications, Climate Action and Environment (the “Department”) has published its final decision on the interaction between existing renewable energy support schemes (ie, the AER and REFIT schemes) and the upcoming revised wholesale electricity market, I-SEM. Click here to view the decision.
The Renewable Energy Feed-in Tariff (“REFIT”) schemes have helped to drive significant renewable generation development in Ireland.
REFIT (through a power purchase agreement (“PPA”) with an offtaker) provides renewable energy generators with price certainty in the form of a floor price tariff, which is key to underpinning financing for the generators. This tariff is calculated using a ‘reference price’. For example, in 2017, the reference price was €69.72/MWh for wind developments above 5MW.
Where a generator’s total market revenue is less than the revenue under the REFIT PPA, the difference is funded by the Public Service Obligation (PSO) levy (the PSO ‘pot’ is funded by electricity consumers through a levy on their electricity bills).
The Irish electricity market will soon undergo a major structural change in the transition from the current Single Electricity Market (“SEM”) to I-SEM, currently expected to ‘go-live’ on 1 October 2018.
I-SEM will change how energy is traded and generation capacity is remunerated in Ireland. Under I-SEM, total energy payments to wind farms will be made up of a combination of revenues across a number of market windows (instead of a single market window as is the case currently under SEM).
One key feature of I-SEM is that generators are required to be ‘balance responsible’ (ie, that they bear financial responsibility for their imbalances in the new Balancing Market in I-SEM). The Department’s decision looks to reconcile balance responsibility with the price certainty originally afforded by REFIT.
REFIT in I-SEM
The Department’s final decision is largely in line with the Department’s Proposed Decision (published in November 2017).
The key parts of the decision can summarised as follows:
- Wind Generation (above 5MW): The market revenue calculation under REFIT will be based on the lower of (i) a blend of 80% of the Day Ahead Market Price and 20% of the Balancing Market Price and (ii) the Day Ahead Market Price.
- Wind Generation (below 5MW): The market revenue calculation under REFIT will be based on the lower of (i) a blend of 70% of the Day Ahead Market Price and 30% of the Balancing Market Price and (ii) the Day Ahead Market Price.
- Other Generation (peat, hydro, biomass): The market revenue calculation for peat, hydro and biomass generators supported by the PSO levy will be based on the Day Ahead Market Price.
- The above market revenue calculations will only take into account capacity market revenues and not capacity market costs.
Power Purchase Agreements
The Department’s decision also notes the following in relation to PPAs:
- Changes in how the PSO levy is calculated may lead to changes in PPAs between REFIT generators and suppliers. Any changes to REFIT PPAs must be notified to the CRU. The deadline for doing so is 17 August 2018.
- While supplier changes in the current PSO year are currently not possible, the Department will facilitate supplier changes which come into effect in the new PSO levy year (ie, 1 October 2018 / 30 September 2019) and the following PSO year if it can be shown that such a change is necessary for the continuation of the project.
- Suppliers cannot transfer money between themselves across multiple PSO years. However, the Department has indicated that it has ‘no objection’ to such amounts being exchanges bilaterally between suppliers as part of a change of PPA supplier.
The Department will notify the above changes to the European Commission. Once clearance has been received from the Commission, the PSO Order will be amended and the Irish energy regulator – the CRU – will provide a more detailed regulatory decision (this may be by amending the existing R-Factor paper or issuing a new paper). The changes will not come into effect until I-SEM go-live (currently scheduled for 1 October 2018).
Analysis / Comment
REFIT-supported projects were project financed on the basis that REFIT would provide price certainty. The Department’s decision to impose balancing responsibility on these projects (as the price achieved in the Balancing Market will now form part of the reference price) introduces new risk to these projects which has, understandably, been strongly resisted by industry.
It remains to be seen how this new uncertainty will be handled by these projects. However, negotiations on amendments to PPAs in the market to deal with I-SEM are on-going and the PPAs will now also need to be amended to take account of this decision. It is likely that the finance documents for many project financed REFIT projects will also need to be updated in light of this decision (as well as the introduction of I-SEM).
Nonetheless, industry has been aware for some time now that the Department was considering imposing some balance responsibility on REFIT projects. This decision means that PPA amendments can largely be finalised (although it would be strongly preferable if the CRU’s detailed regulatory decision paper addressing the changes to REFIT in light of this decision was also now available to generators and suppliers). In addition to the publication of the CRU’s decision paper, the next key milestone for renewable projects is the requirement to notify the CRU of changes to their PPAs by 17 August 2018 (extended from April 2018 by this decision of the CRU).
As expected by industry, the Department’s decision confirms that revenues from the DS3 Programme will not be included in the determination of total market revenue for the purposes of determining PSO payments. As such, the share of these revenues under PPAs will also need to be agreed between generators and suppliers.
If you have any questions on how this decision might affect your project, please reach out to your usual Matheson contact in the Energy team.
This article was authored by Garret Farrelly and Owen Collins in the Matheson Energy team.