Irish Energy: A Sector in Transition
03 December 2019
Ireland’s Climate Action Plan
Accompanied by an extensive promotional campaign, the Irish Government published its Climate Action Plan in June 2019. As it aims to enable Ireland to meet its targets to reduce its carbon emissions by 30 per cent between 2021 and 2030 and lay the foundations for achieving net zero carbon emissions by 2050, the Plan is necessarily ambitious. It lays out 180 actions required, which span all areas of the Irish economy. It includes, among other things:
New climate legislation – in the form of a Climate Action (Amendment) Bill – to give statutory underpinning to the carbon budgets that will guide the implementation of government policy
A plan to increase the percentage of Ireland’s electricity that is produced from renewable resources, from 30% to 70% by 2030 predominantly through the implementation of the Renewable Electricity Support Scheme (discussed further below)
A ban on the use of oil-fired boilers from 2021 and gas boilers from 2025, and ambitious targets for the installation of domestic heat pumps and the upgrading of the energy efficiency of homes
A reduction in the use of landfill to 10% of all waste and the recycling of 70% of all waste by 2030 along with a ban on single-use plastic by 2030
Implementation of public transport initiatives that are described as “sustainable-mobility projects” namely the expansion of the DART rail service, the building of Metro Link and the implementation of the BusConnects Programme
A commitment to the introduction of electric buses and a goal of having 950,000 electric cars in Ireland by 2030, and
A commitment to the reduction of carbon emissions in the Agricultural sector
We published a summary and discussion of the Plan shortly after it was released.
Not surprisingly, given its scope and the importance attributed to it by the Irish Government, the Climate Action Plan is frequently cited by policymakers as the basis for Ireland’s energy policy. However, it appears that the Government will implement the Plan through more detailed energy policy development in certain areas. In November 2019, it was announced that in light of the Plan’s intended move to 70% renewable electricity, Minister John Bruton is initiating “a major review into Ireland’s energy security and sustainability”, with a particular focus on the roles of natural gas and other technologies in this transition. Watch this space.
Renewable Electricity Support Scheme (RESS)
Ireland’s installation of approximately 4GW of onshore wind generation – the vast majority of it since 2005 – has been the “engine room” of Ireland’s achievement of over 30% electricity from renewable sources. Most of these assets receive, or have received, assistance through one or other of the AER or REFIT government-backed support schemes, both of which are now closed to new applicants.
The Climate Action Plan contemplates that by 2030, 70% of Ireland’s electricity will be produced from renewable sources. It is widely acknowledged – including by the Irish government – that in the context of the Irish electricity system, the cost base associated with renewable electricity generation is not yet low enough that sufficient new assets can be expected to be developed, and to operate profitably, without at least some form of external support and/or pricing certainty.
To bridge this financial gap, the Department of Communications, Climate Action and Environment (DCCAE) is currently at an advanced stage in its development of a further support scheme known as RESS – the Renewable Energy Support Scheme. The DCCAE has been holding frequent industry briefings on the development of the scheme (most recently, on 22 November 2019) and intends to run a public consultation, between December 2019 and January 2020 on the Terms and Conditions of RESS.
Financial support under RESS will be allocated through a highly structured auction process, and will be quantified under a contract-for-difference based on the price “bid” into the auction by each successful project.
The first RESS auction is currently scheduled to occur in June 2020, following the completion of a qualification process (the terms of which are also still being finalised). Participants in the auction will be required to post a bid bond (expected to be required in an amount of €2k/MW) as a condition of auction participation, and if they are successful in the auction, they will be required to post a performance bond (expected to be required in an amount of €25k/MW) in order to enter the “implementation agreement” under which their RESS support will be disbursed. Subject to state aid approval, a tranche amounting to “approximately 10%” of the first RESS auction will be reserved for solar energy.
Following the first RESS auction – and, in all likelihood, influenced by its results – a series of further RESS auctions will be held over the coming years, with differing characteristics as to size and targeted generation technology.
It is a reasonable expectation that the providers of project finance – particularly those that already have a level of familiarity with the Irish energy sector and the REFIT scheme – will look favourably upon RESS as a “bankable” route-to-market for renewable electricity projects. However, the RESS process differs significantly from the well-established REFIT process, and developers and funders will need to structure the timing and method of their engagement accordingly – particularly if the bidding and performance security are to be provided by the funder.
DS3 – new frontiers
The operators of the Irish and Northern Irish electricity transmission systems, EirGrid and SONI, have since 2011 operated the “Delivering a Secure, Sustainable Electricity System” (DS3) programme by which technical electricity system services are procured. The DS3 programme has been formulated in order to meet the challenges of increasing Ireland’s renewable generation share while maintaining a safe and secure electricity grid, and has enabled EirGrid and SONI to increase the maximum levels of renewable generation that may be accommodated on the Irish grid from 50% to 65%, with the ultimate target being 75%.
The programme is now divided into two separate procurement streams – Volume Capped and Volume Uncapped Contracts – and has recently entered a new intensive phase of implementation, with significant procurement exercises completed in relation to both contract types during the course of 2019.
Under the Volume Capped auction process – which EirGrid and SONI describe as “one of the first of its kind globally” – three bidders (representing assets providing 110MW of solid-state battery services) were successful, securing fixed term contracts for a maximum of six years.
Meanwhile, under the Volume Uncapped process (under which prices are set by the energy regulator, rather than by auction), a wide range of ancillary services were procured from over 80 generator and demand side units. The next “gate” in the procurement of Volume Uncapped services has already opened.
The review of DS3 contracts has become a standard feature of commercial life for onshore Irish wind farms, as asset owners and operators seek to extract additional project revenues, while seeking comfort in relation to the commercial and legal risks that may be involved. While the current DS3 programme is calibrated to assist in the achievement of Ireland’s 40% renewable electricity target for 2020, the industry awaits an indication of what steps will be deployed by the system operators in order to reach the far more challenging 70% target for 2030, as announced in the Climate Action Plan.
Natural gas – still relevant
Observers of Irish energy policy during 2019 could be forgiven for thinking that natural gas is taking a subordinate role in the transition to a decarbonised energy sector. However, a number of initiatives and transactions throughout 2019 have demonstrated that natural gas will play a critical role in transforming Ireland’s energy landscape.
Gas Networks Ireland (GNI), the owner and operator of the Irish natural gas transmission and distribution networks, has commenced injecting “renewable gas”, in the form of biomethane, into the national grid at a facility in Co. Kildare. It is also developing further injection infrastructure that will accommodate biomethane production through on-farm anaerobic digestion. GNI has a strategic plan to achieve 20% renewable gas on the Irish network by 2030.
GNI commissioned the first of 70 planned fast-fill Compressed Natural Gas (CNG) refuelling stations that will be accessible by heavy goods road vehicles. These will be co-located with “conventional” service stations and will facilitate the use of renewable gas in road transport. This project is co-financed by GNI and the European Union’s Connecting Europe Facility as part of GNI’s Causeway Project.
Ervia, the semi-state parent of GNI, signed a memorandum of understanding with Norwegian energy company, Equinor to guide the assessment of the potential for Ireland to participate on the Norwegian government’s “Northern Lights” carbon capture and storage (CCS) project. This would involve the capture of carbon emitted by Ireland’s large electricity generators and industrial facilities, and its storage in depleted Norwegian gas fields. The goal of the exercise would be “net zero” carbon emissions from the gas-fired Irish power generation projects which provide essential back-up and flexibility for the electricity grid.
2019 was a year in which the Irish Government set out its stall on climate change, in dramatic fashion, through the publication of the Climate Action Plan. This is antipated to have far-reaching consequences for the Irish energy sector.
Looking ahead to 2020, the implementation and out-turn of the first RESS auction will command considerable industry scrutiny over the summer, as it will set the scene for the next decade of Irish renewable energy development. It is also hoped that the momentum built up by the DS3 programme during 2019 can be continued.
It would be prudent to assume that at least one “Brexit-related” event will occur over the course of 2020 – as it is becoming clearer that Brexit will be a prolonged process - whether orderly or disorderly. But whatever form this event takes, we do not expect it to cause undue disruption to the operation of the Irish energy sector, beyond possibly some relatively arcane wholesale pricing effects.
The Climate Action Plan has indicated that the Irish energy sector will continue its “direction of travel” towards greater reliance on renewable sources. In the immediate term, the RESS and DS3 programmes will determine just how fast this journey can proceed.
If you would like to discuss any of these topics and their potential impact on your organisation in 2020, contact a member of our Energy & Utilities team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.