RESS – will it deliver for solar and offshore wind?
October 2018 | SPECIAL REPORT: ENERGY & NATURAL RESOURCES
Financier Worldwide Magazine
October 2018 Issue
The high level design for the Renewable Electricity Support Scheme (RESS), which was recently released by the government, will bring Ireland into line with other countries by moving away from a fixed subsidy for renewable energy generators, under the existing Renewable Energy Feed-in Tariff (REFIT) scheme, to a competitive auction approach. Given that offshore wind and solar will be supported for the first time, it is a big departure from REFIT which was dominated by onshore wind.
RESS will help Ireland deliver its 2030 renewable electricity EU targets. It aims to diversify Ireland’s mix of renewable technologies receiving support, reduce the level of subsidy, promote community participation in renewable energy projects and ensure value for money for consumers.
What is the impact of RESS on the renewable energy industry?
The introduction of RESS will bring up a lot of questions for the Irish energy industry. Stakeholders may ask whether technology specific auctions would have been preferable to technology neutral auctions. Despite the well-publicised drop in the cost of both solar PV and offshore wind, they may not be ready to be price competitive in technology neutral auctions with onshore wind, which has benefitted from subsidies since the 1990s.
There is also the question of whether the auctions’ aim of pushing down subsidy levels favours institutional investors with large portfolios over smaller developers?
Finally, if the effective level of the subsidy is decreasing, how will this affect the value of existing wind farm projects, some of which will receive the fixed REFIT support until the end of 2032?
Technology neutral v. technology specific auctions
Offshore wind and solar PV industry representatives were strongly supporting technology specific auctions and several European countries have taken this approach. There is an argument that even if used for a limited period of time, it would better facilitate solar, offshore wind and bio-energy in becoming more established in Ireland.
Germany has technology specific auctions for certain tender volumes and the UK has offshore wind in a different category to solar and onshore wind. Each of those countries has shown flexibility toward using technology specific and neutral auctions. It would be welcome if this was considered in the detailed design of the initial RESS auctions.
The government’s reasons for technology neutral auctions include minimising costs to consumers and helping to meet Ireland’s EU RES-E obligations. To promote technology diversity, the government will use interventionist levers, some of which include: (i) targeted delivery dates, and penalties for default, such as forfeit of bid bond and exclusion from subsequent auctions; (ii) placing a cap on single technologies at each auction, which is planned for the 2020 auction, RESS-2; (iii) increasing the capacity supply in an auction if prices submitted are lower than expected; (iv) variation in length of support per technology; (v) setting budgetary caps per auction, which is set once capacity volume is agreed; (vi) setting administrative strike price per technology before the auction; and (vii) allocation of 5-15 percent for community-led projects at each auction.
The argument against technology specific auctions is that capital costs for onshore wind and solar PV have fallen significantly over the past five years and this trend is expected to continue for the next decade. The high level design paper takes the view that RES-E technology costs will continue to fall and converge throughout the duration of the scheme, meaning technology diversity will increase naturally as the scheme matures.
Reduced support levels
The experience in other countries has seen auctions become increasingly competitive, which has driven down the subsidy to generators over successive auctions. The direction of travel clearly points to a subsidy-free future for renewable energy and developers and their funders will need to adapt to this new reality if they are to survive. For example, the UK, in its ‘2017 Clean Growth Strategy’, gave no indication that solar technology would be included, as it has started seeing investment into solar without subsidy backing. This is not too surprising as solar accounted for 57 percent of global renewables investment in 2017. Zero-subsidy bids have also recently been recorded for European offshore wind projects. This could become a feature in Ireland in the coming years that the industry will need to adapt to.
RESS adopts a similar approach, whereby all renewable technologies will be subject to a three year viability gap look back analysis, based on levelised cost of energy (LCOE), which is the international standard for comparing renewable technology costs. This analysis is designed to assess cost competitiveness and technologies which are no longer eligible for a subsidy and which will be excluded, while emerging technologies may be allowed to participate at an auction if they become economically viable.
The conclusion we can draw from our European neighbours is that technology specific auctions can be useful for a period of time to facilitate technologies that are developing or competing for the first time against an established industry. Given that technology costs are falling, technology specific auctions are unlikely to be necessary over the long- or medium-term. The detailed design of the initial RESS auctions, the market’s response and the auctions’ ability to diversify the technology mix will be the real test of how successful the chosen approach has been.
More institutional investors and M&A deals
With subsidies likely to decrease in future years, this may indirectly give a competitive advantage to institutional investors over other developers. With increased risks and tighter margins on individual projects, institutional investors may benefit from economies of scale across a larger portfolio.
The secondary market for existing projects with legacy feed-in tariffs schemes could also gain from the uncertainties caused by the new auction scheme. This could result in more M&A activity and interest in existing REFIT projects, particularly until the first RESS projects are commissioned.
Given the imminent changes with RESS and the Integrated Single Electricity Market (I-SEM), together with reducing technology costs helping to drive the growth of renewables, it promises to be an interesting time ahead. The recent announcements of several significant battery storage projects, which will be the first to operate on a commercial basis in Ireland, are also a positive development. In the longer term, storage, demand-side management and increased interconnection will all be essential to accommodate greater levels of renewable electricity on the grid. One thing is for certain: the Irish energy market is undergoing a period of unprecedented change. As with all major industry changes, there will be both winners and losers.
Ainsley Heffernan and David Gunn are partners at Beauchamps. Mr Heffernan can be contacted on +353 (0)1 418 0672 or by email: email@example.com. Mr Gunn can be contacted on +353 (0)1 418 0932 or by email: firstname.lastname@example.org.
© Financier Worldwide
Ainsley Heffernan and David Gunn