Energy Update: REFIT in I-SEM – Department Issues Options Paper
24 May 2017
The Irish Department for Communications, Climate Action and Environment (“DCCAE”) has, on Tuesday 23 May 2017, published an options paper discussing various methods by which Ireland’s Renewable Energy Feed-in Tariff (“REFIT”) support schemes might operate, when trading commences in the new wholesale electricity market – the Integrated Single Electricity Market (“I-SEM”). A paper of this type has been awaited since the high level design of the I-SEM was settled in late 2014.
REFIT in I-SEM
The REFIT schemes currently serve as Ireland’s primary incentive to attract the investment in renewable energy generation that will be necessary in order for Ireland to meet its EU renewable energy targets. Having been largely successful in this role, these schemes are estimated to currently support approximately 2,600MW of installed or in-construction renewable energy generation capacity, the majority being onshore wind generation projects.
The Irish energy regulators are currently developing I-SEM in order to meet the requirements of the European “target model” for electricity market integration. The REFIT schemes operate successfully in the existing all-island wholesale electricity market. However, due to the added complexity of I-SEM and, in particular, the introduction of Day-Ahead, Intraday and Balancing markets, a deliberate design decision needs to be taken before these schemes can operate in I-SEM.
Re-pricing the REFIT
At the heart of the design decision is the selection of a market price, in I-SEM, against which the REFIT schemes will then operate.
The REFIT schemes act by “topping up” the revenues received under power purchase agreements, where the revenues available under these agreements exceed the revenues available from the market. The determination of these market revenues is relatively straightforward in the current wholesale electricity market, because a single half-hourly spot energy price exists that can readily be used for this purpose.
However, under I-SEM a number of distinct markets will exist, including Day-Ahead, Intraday and Balancing markets. From these markets a price – or pricing formula – needs to be selected for the purpose of calculating the market revenues upon which the REFIT schemes will operate.
It has been almost three years since the high level design of the I-SEM was settled. It is therefore surprising that the ambition of the Department’s paper is limited to contemplating a small number of available options for the treatment of REFIT in I-SEM. Of these options, an “emerging approach” (as the Department refers to it) is identified and described. It seems likely that this approach will ultimately be adopted by the Department.
The emerging approach involves, for REFIT calculation purposes:
- using the clearing price in the new Day-Ahead market; and
- ignoring any costs for electricity that a project is required to “purchase back” in order to satisfy the balancing obligation that it will face in I-SEM.
A key feature of this approach is that it exposes REFIT-supported projects to “balancing risk”. In other words, the total remuneration available to these projects, i.e. the sum of REFIT payments and market revenues, will vary according to the success of their trading activities in the Day-Ahead market. This exposure is something that REFIT-supported projects and their stakeholders have not faced prior to I-SEM.
The Department’s paper is explicitly stated not to include any decisions, and not to stand as a consultation paper. The Department, however, does indicate a willingness to meet with “industry representative groups” for the purpose of discussing it.
One hopes that a decision on REFIT in I-SEM will follow swiftly, particularly if it is to involve the imposition of balancing risk. REFIT-supported projects will need time, prior to I-SEM going live, to devise and implement strategies to mitigate this risk. The Department’s paper was issued exactly one year before the scheduled I-SEM go-live date, and the clock is most definitely ticking.
While the usual public consultation channels are not open, affected parties need to ensure that their views are communicated to the Department through the appropriate industry representative bodies.
For more information, please contact a member of our Energy, Utilities & Projects team.
The options paper is available here.
The content of this article is provided for information purposes only and does not constitute legal or other advice.