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August 16, 2012
Davy Research Research Report: Sector update
Caren Crowley Ireland's Electricity Future [email protected] / +353 1 6148997 Barry Dixon [email protected] / +353 1 6148997 Policy and players shaping David McNamara [email protected] / +353 1 6148997 investment
2020 EU climate change commitments to drive growth Table of contents
• Despite overcapacity in conventional power generation, the Republic of Executive summary 2 Ireland and Northern Ireland are committed to generating 40% of electricity requirements from renewable resources by 2020 to meet The Single Electricity Market (SEM) – an binding EU climate change targets. all-island wholesale electricity market 4
Some €5bn of capital investment will be required to construct an •
additional 3–3.5GW of onshore wind by 2020. SEM generation capacity and fuel mix 8
• Government schemes to support this investment have been implemented in both jurisdictions. Growth in generation capacity 10
Larger industry players to deliver renewable investment Renewable energy incentives 13
• Certain technical challenges and the constrained financing environment Challenges in delivering SEM 2020 renewable mean that scarce capital is more likely to be channelled into projects via energy targets 16 the utilities and larger, more experienced project developers.
• The four integrated energy utilities that currently dominate the all- A changing SEM 18 island electricity market – ESB, Bord Gáis Energy, SSE Ireland and
Viridian – are best placed to support continued delivery of onshore Retail electricity markets supported by the wind capacity. SEM 21
• Larger project developers such as Bord na Móna, Coillte, Mainstream and Element Power will also feature. Appendix I: REFIT payments in the Republic of Ireland 35
Changing competitive landscape
• The presence of the Irish state in the all-island electricity market is set Appendix II: other renewable energy players 36
to lessen with plans for the disposal of Bord Gáis Energy and certain Appendix III: Viridian Wind 38 ESB generation capacity. Further structural changes are possible
depending on the outcome of the certification of ESB’s transmission Appendix IV: Bord Gáis Energy assets: assets later in 2012. investments in wind power generating • Regional market integration, backed by further interconnection and capacity 39
compatible UK trading arrangements under the EU Target Model, will Appendix V: EU ETS Phase III – implications bring greater market participation from the UK 'Big 6' utilities. for power generation sector 40 • Either Bord Gáis Energy or Viridian would provide a strategic foothold
in the all-island Single Electricity Market (SEM) for an international Important disclosures 42 utility or both could join forces to consolidate the SEM’s competitive landscape and internationalise as the regional market comes to fruition. Please refer to important disclosures at the end of this report. J&E Davy, trading as Davy is regulated by the Central Bank of Ireland. Davy is a member of the Irish Stock Exchange, the London Stock Exchange and Euronext. For branches in the UK, Davy is authorised by the Central Bank of Ireland and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request. All prices are as of close of previous trading day unless otherwise indicated. All authors are Research Analysts unless otherwise stated. For the attention of US clients of Davy Securities, this third-party research report has been produced by our affiliate, J & E Davy. Research Report: Ireland's Electricity Future August 16, 2012
Executive summary As a result of the economic downturn in Ireland, total annual electricity generated in the Single Electricity Market (SEM) peaked in 2008. This €3bn wholesale electricity market is supplied by more than 9GW of conventional generation capacity. With the dispatchable margin or surplus conventional generation capacity running above 2GW and with a further 2GW of installed onshore wind adding to the surplus capacity, we might not be so interested in the investment landscape.
• Authorities in both the ROI and NI However, authorities in both the Republic of Ireland (ROI) and have made substantial binding Northern Ireland (NI) have made substantial binding commitments to commitments to meet EU climate change targets by 2020. meet EU climate change targets by 2020. These include generating 40% • These include generating 40% of of electricity requirements from renewable resources in each jurisdiction. electricity requirements from With renewable electricity running at 17% in ROI and 14% in NI on renewable resources in each an annual basis, a substantial investment in renewable generation is jurisdiction. required to reach 40%. The principal focus in both jurisdictions is onshore wind. Current estimates of required additional onshore wind capacity are 3-3.5GW. This level of project construction will require up to €5bn of capital investment. Support mechanisms have been implemented in both jurisdictions – a Renewable Energy Feed-In-Tariff (REFIT) in ROI and a Renewable Obligation Certificate (ROC) system in NI – to underpin the investment. Political risk is minimised as the cost of these supports is spread across electricity customers in each jurisdiction.
Certain technical challenges for system operation with increasing amounts of intermittent wind capacity and the constrained financing environment are impacting project economics. Accordingly, scarce capital is more likely to be channelled into projects via the utilities and larger, more experienced project developers. The SEM’s four integrated energy utilities – ESB, Bord Gáis Energy, SSE Ireland and Viridian – are • The SEM’s four integrated energy utilities – ESB, Bord Gáis Energy, best placed to support the large-scale roll-out hedged by their supply SSE Ireland and Viridian – are best businesses. A balanced portfolio of conventional and renewable placed to support the large-scale generation will become increasingly important to their competitive roll-out hedged by their supply positions as we approach 2020. Larger project developers already present businesses. in the sector such as Bord na Móna, Coillte, Mainstream and Element Power will also feature as financeable counterparties.
• The ROI government’s plans for the The ROI government’s plans for the disposal of Bord Gáis Energy and disposal of Bord Gáis Energy and certain elements of ESB’s generation capacity will impact the SEM’s certain elements of ESB’s competitive landscape. Both companies have substantial wind generation capacity will impact the development pipelines and large investment requirements. The potential SEM’s competitive landscape. for further changes to the structure of the state’s continued presence in the ROI electricity market depends largely on the outcome of the 9(9) certification process on ESB’s transmission assets later in 2012. The International Energy Agency’s (IEA) 2012 policy analysis recommends a reassessment of ESB’s vertically integrated structure contrary to current government policy.
Regional market integration will alter the competitive landscape. Backed • Regional market integration will by physical interconnection in the form of EWIC, EirGrid’s new alter the competitive landscape. 500MW interconnector (being commissioned in Q3 2012), competition will increase from the UK 'Big 6' utilities. Negotiation for compatible
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trading arrangements under the EU Target Model between SEM and the UK (British Electricity Trading and Transmission Arrangements or BETTA) must be completed by the end of 2016.
Of the four SEM integrated energy utilities, ESB and SSE are best • Of the four SEM integrated energy placed to compete in the regional market due to their scale of operations utilities, ESB and SSE are best and their existing UK trading capabilities. Either Bord Gáis Energy or placed to compete in the regional Viridian would provide a strategic foothold in the SEM for an market due to their scale of international utility or both could join forces to consolidate the SEM’s operations and their existing UK trading capabilities. competitive landscape and internationalise as the France-UK-Ireland (FUI) regional market and EU Target Model come to fruition. The ability to finance continued development of onshore wind pipelines in the SEM will drive their medium-term growth and success.
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The Single Electricity Market (SEM) – an all-island wholesale electricity market Background to the SEM The SEM is the single wholesale market for electricity in the ROI and NI. Substantially all electricity generated across the island of Ireland is bought and sold through a single pool, the aim of which is increased • The SEM was the first cross-border competition, efficiency and security of supply. market for electricity in Europe. • It is the wholesale market for electricity in the ROI and NI, SEM was the first cross-border market for electricity in Europe when it supporting the transmission of went live on November 1st 2007 and is jointly regulated by the electricity to 3m customers throughout the island of Ireland. Commission for Energy Regulation (CER) in the ROI and the Utility • In 2011, electricity generation in Regulator (UR) in Northern Ireland. the SEM totalled close to 35TWh. In 2011, electricity generation in the SEM totalled close to 35TWh. The market encompasses some 3m electricity customer connections (2.2m in ROI and 0.8m in NI).
How the SEM operates SEM is described as a gross mandatory pool and it operates with dual currencies (euro and sterling).
More than 40 registered generation units with a capacity over 10MW on the island of Ireland are obliged to sell the electricity they produce into one large pool. Smaller generators have the discretion to opt-in. The market operator, SEMO, sets transparent wholesale electricity prices every half hour, 365 days a year. Licensed electricity suppliers have equal access to the pool to purchase electricity every half hour throughout the • SEM electricity prices reflect the day to satisfy demand from their customers. short-run cost of electricity production. Long-run (development) costs are covered by Electricity generators have until 10am each day to offer a price for a capacity payment mechanism. committed electricity production for each half hour of the following day. • Thus a generator receives both a Generators are obliged to price based on their short-term cost of payment for the electricity they sell and a capacity payment for producing that electricity, principally fuel-related operating costs. generation plant availability. SEMO determines the 'merit order' for each period based on bids • The market is specifically designed received, instructing the more efficient generators to run to meet to set the cheapest possible price projected demand according to its 'Market Schedule'. On this basis, for electricity at all times by every generator is given a daily dispatch schedule detailing power to be selecting the most efficient exported to the grid. The wholesale electricity price paid by SEMO to all electricity generators available to meet demand and to ensure that generators, known as the system marginal price (SMP), is set by the no company has an undue most expensive generator required to meet projected demand for each influence on electricity prices. half hour trading period, i.e. the last generator into the 'merit order' for that half hour trading period.
Licensed generators also receive a capacity payment designed to remunerate its fixed costs. The SEM Committee sets the capacity payment pot for a trading year in advance. The capacity payment mechanism is designed to incentivise and remunerate adequate generation capacity to meet projected system demand. Capacity payments are paid to generators based on availability to generate
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regardless of whether SEMO includes them on the Market Schedule or not.
Annual SEM turnover, currently close to €3bn, principally comprises • Annual turnover in the SEM is payments for electricity (SMP x TWh) and capacity payments. A third c.€3bn. payment, constraint payments, is becoming an increasingly larger feature of the market due mainly to the incremental addition of variable generation capacity to the SEM, i.e. intermittent wind. Constraint payments represent those payments made to generators to compensate for any difference between the Market Schedule (expected run time based on qualifying for the merit order) and actual dispatch by the transmission system operator (TSO), assuming generator availability. Constraints occur when system stability and integrity require changes to be imposed on the Market Schedule.
Figure 1: Annual SEM turnover (€000s)
€3,500
€3,000
€2,500
€2,000
€1,500
€1,000
€500
€0 2008/09 2009/10 2010/11 Energy Capacity Constraint payment
Source: CER
Note: the SEM financial year runs from October 1st to September 30th.
SEM – physical infrastructure and system operation The SEM is operated on an all-island basis by SEMO, which is part of the EirGrid group. The physical network supporting the market consists of the transmission and distribution systems. The transmission system is the backbone of the electricity system. It is a meshed network of high voltage overhead lines, underground cables and transmission stations which delivers electricity to numerous bulk transfer points all over Ireland. Electricity is distributed onwards on lower voltage lines to individual customers via the distribution system.
State-owned EirGrid is the TSO in ROI. EirGrid subsidiary System Operator Northern Ireland (SONI) is the TSO in NI. EirGrid, as TSO
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in each jurisdiction, is responsible for efficiently managing electricity supply and demand second-by-second and controlling flows of power on the island's grid. As a legacy of electricity market deregulation, ESB Group companies, ESB Networks and Northern Ireland Electricity (NIE), actually own the transmission network that EirGrid operates in both jurisdictions. Detailed relationship agreements set out the division of responsibilities. Under current arrangements, ESB is responsible for the development and maintenance of the transmission system in accordance with EirGrid’s requirements. The arrangement between ESB Networks and EirGrid concerning the ROI transmission assets requires approval under EU law. The result of an ongoing Article 9.(9) certification process under the Electricity Directive will be known later in 2012.
The distribution systems in ROI and NI are separately managed to the transmission systems. The distribution systems in the ROI and NI are owned and operated by ESB Group companies, ESB Networks and NIE respectively.
• Although the SEM operates as a Although the SEM operates as a single all island market from a pricing single all island market, actual and operations perspective, actual power flows between NI and the ROI power flows between NI and the are limited in physical terms due to a lack of cross border transmission or ROI are limited in physical terms. distribution capacity currently.
North-South tie line The operation of the SEM requires physical connections between the NI and ROI grids. Only one high voltage transmission link between ROI and NI, the Louth-Tandragee 275 kV Interconnector, is in operation. It was commissioned in 1970.
The lack of transmission capacity between NI and ROI creates a physical constraint on flows within the SEM’s two jurisdictions. The existing transmission link has a North to South capacity of 430MW and South to North capacity of 380MW, although capacity reliance by the TSOs is 200MW and 100MW respectively. Flows for Q2 2012, illustrated in the chart below, demonstrate the current system's limitations.
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Figure 2: Tie-line flows at peak in Q2 2012 (+ve values indicate North to South flows)
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MW 0
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02/04/12 09/04/12 16/04/12 23/04/12 30/04/12 07/05/12 14/05/12 21/05/12 28/05/12 04/06/12 11/06/12 18/06/12 25/06/12
Week starting Source: CER
A second North-South tie-line, a 400 kV electricity transmission link connecting Tyrone (NI) and Meath (ROI) is being developed by • A second North-South tie-line is expected to be in operation from EirGrid and NIE. The 140km overhead line, regarded as strategic to 2017. system security and the flexible operation of the SEM, has been the • It will substantially improve the subject of opposition from minority interest groups. This opposition, in physical operation of the SEM. addition to an error in the planning application, has substantially delayed the project. The TSOs are projecting that the tie-line will be operational from 2017, at which time it is planned that SEM can operate physically as a single market.
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SEM generation capacity and fuel mix All of the major generating plants export electricity to the transmission system or national grid and the power is transmitted nationwide.
• Gas and coal are the principal fuel Electricity is generated by power plants throughout the country, utilising sources for dispatchable plant. a variety of fuel or energy sources – including gas, distillate oil, coal, peat, hydro, wind, biomass and landfill gas. Gas and coal are the principal fuel sources for dispatchable plant, i.e. generating units which can be fully monitored and controlled by the TSO from their control centres.
Conventional generation facilities in the SEM include those operated by commercial semi-state bodies ESB, Bord Gáis and Bord na Móna (BNM) and by private sector competitors Viridian, SSE, AES Corporation, Tynagh Energy and Rusal Aughinish. In total, conventional power plants account for more than 9GW of fully dispatchable generation capacity in the SEM.
Wind farms are not defined as dispatchable, but those with capacity of 5MW or more are obliged to be 'controllable' by the TSO and are therefore defined as partially dispatchable. Current installed wind capacity of c.2GW in the SEM means wind as an energy source is starting to make a substantial power supply contribution even though it is not regarded as fully dispatchable.
Interconnection
• Included in the list of sources of Included in the list of sources of dispatchable power in the SEM are two dispatchable power in the SEM are interconnectors, one linking NI with the UK and a second which, when two interconnectors, one linking NI completed, will connect the ROI with the UK. with the UK and a second which, when completed, will connect the Moyle Interconnector (Moyle) ROI with the UK. Moyle is a 63km undersea HVDC link which entered commercial operation in 2002. It connects the transmission systems of NI and Scotland and has a nameplate bidirectional capacity of 500MW. Mutual Energy Ltd, a mutual company with no shareholders, owns and operates Moyle between Islandmagee, County Antrim, and Ayrshire, Scotland.
System limits currently restrict trading capacity:
Import 450MW (Nov-Mar) 410MW (Apr-Oct) Export 295MW (Sep-Apr) 287MW (May-Aug)1
All capacity is auctioned by SONI on behalf of Mutual Energy with any financial surpluses for the benefit of energy consumers. Moyle had been the subject of major technical faults and associated outages in recent times. Moyle, which is funded by long-term bond finance, was recently
1 Moyle Interconnector Limited, Interconnector Capacity Calculation, September 2011
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downgraded by Moody’s to an underlying rating of A3 with a negative outlook, principally reflecting the cost of repairing recent faults and unavailability in addition to the changing competitive landscape with the EWIC due to be commissioned later in 2012.
East-West Interconnector (EWIC) EirGrid is on schedule to complete construction of a new 500MW HVDC transmission link between ROI and Wales, known as EWIC, in Q3 2012. EWIC will run between Deeside in North Wales and Woodland in County Meath at a length of c.250km (186km subsea). Although its nameplate bidirectional capacity is 500MW, EirGrid estimates 440MW available capacity in either direction at any given time for the purposes of system operation.
EirGrid will own and operate the €600m EWIC and has already started auctioning capacity. Finance for the project comes from a number of sources and includes €110m in grant funding from the EU Commission under the European Energy Programme for Recovery, €160m of commercial debt and a loan from the EIB of up to €300m. • Further interconnection between Further interconnection between SEM and the UK and between SEM SEM and the UK and between SEM and France is being studied by EirGrid. and France is being studied by EirGrid. SEM supply and demand Total annual electricity generated in the SEM peaked in 2008 at over 38GWh. In 2011, this figure was less than 35TWh. For 2012, the TSOs are forecasting a total electricity requirement of c.27,500GWh in ROI and between 9,000 and 10,000GWh in NI for 20122.
With total current installed dispatchable generation capacity in the SEM of 9,356MW (6,585MW in ROI and 2,771MW in NI), supply is substantially outstripping demand.
• In Q2 2012, the availability of dispatchable power generation This is illustrated for the ROI in the table below. CER data for Q2 2012 capacity in the ROI was illustrate the high level of dispatchable plant available compared to peak substantially greater than peak demand (i.e. the dispatchable margin) and the potentially substantial demand. contribution from wind generation when the wind blows.
Table 1: Calculation of dispatchable margin at time of peak demand in each week in Q2 2012
Week starting 02 Apr 09 Apr 16 Apr 23 Apr 30 Apr 07 May 14 May 21 May 28 May 04 Jun 11 Jun 18 Jun 25 Jun Peak demand 3,607 3,556 3,623 3,757 3,697 3,628 3,516 3,492 3,432 3,605 3,547 3,479 3,493 Availability of dispatchable Plant 6,150 6,136 6,218 5,765 5,566 5,797 5,885 6,005 5,207 5,367 5,777 5,839 5,822 Wind 1,173 396 864 1,251 776 380 28 392 187 853 1,093 395 179 North-south tie line -41 107 -71 171 218 -16 54 -222 207 85 -49 -35 16 Dispatchable margin 3,675 3,083 3,388 3,430 2,863 2,533 2,451 2,683 2,169 2,700 3,274 2,720 2,524 Source: CER
The figure for availability of dispatchable plant in ROI can be further contextualised by noting that the all-time system peak demand for ROI was 5,090MW, recorded on December 21st 2010.
2 All Island Generation Capacity Statement 2012-2021, EirGrid; SONI
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Growth in generation capacity No new conventional thermal generation was connected to the SEM in 2011. Based on the supply-demand dynamic, few conventional generation plants are expected to be constructed in the near term.
We expect SSE to construct a new Combined Cycle Gas Turbine (CCGT) power station at its recently acquired Great Island site in Wexford. We also expect some open cycle reserve or peaking plant to be added incrementally. The scale will depend on future policy decisions concerning the remuneration of fast response, flexible capacity. With the decommissioning of older oil-fired units, we expect to see limited, if any, net new conventional generation capacity through 2020 in ROI. • ROI and NI have set a 40% target for generating electricity from No additional conventional generation capacity is currently anticipated renewable resources by 2020. • This target is directing investment in NI through 2020. With the decommissioning of heavy fuel oil units in new renewable generating at Ballylumford, in addition to UK policy changes likely to affect coal capacity through 2020, principally fired generation at Kilroot, conventional capacity in NI could fall onshore wind. materially. • In 2011, renewable energy accounted for about 17% of total customer demand across the island However, substantial growth in generation capacity in both ROI and NI of Ireland. will occur to meet stretching but binding EU climate change targets.
Under EU Directive 2009/28/EC, both the ROI and NI have legally binding targets to ensure that 16% and 15% respectively of all energy consumed (across electricity, heat and transport sectors) is from renewable sources by 2020. As part of these obligations, the governments in ROI and NI have each set a 40% target for generating electricity from renewable resources by 2020. This target will require more than a doubling of renewable electricity generation capacity, principally onshore wind, over the next eight years. In 2011, the share of electricity generated from renewable sources accounted for about 17% of total customer demand in Ireland.
Renewable energy capacity in the SEM There is now more than 2,200MW of renewable energy capacity connected to the power system in ROI and NI. The primary renewable energy generation sources which export electricity to the all-island power • Wind quality or wind speeds are system are wind and hydro. captured or reflected in the capacity factor. • The term capacity factor is used to Ireland’s climate ensures that both onshore and offshore wind farms describe the production profile of a benefit from high wind speeds and consequently capacity factors. In the power project and is one of the ten years prior to 2010, the wind capacity factor for wind power in largest determinants of the Ireland was 29-31%. economics of wind power. • Ireland’s climate ensures that both onshore and offshore wind farms Ireland’s first wind farm was opened by BNM at Bellacorrick, County benefit from high wind speeds and Mayo, in 1992; since then, more than 170 wind farms have been consequently capacity factors. constructed in 27 counties on the island of Ireland. In December 2011, the maximum export capacity of wind generation installed on the island was 1,955MW.
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Figure 3: All island wind capacity 2011 (MW)
2,000
1,950
1,900
1,850
1,800
1,750
1,700
1,650 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: EirGrid 2011 Annual Report
A record maximum wind generation output of 1,839MW occurred on November 30th 2011. Levels of wind on the grid at any given time are reaching 50% of total demand, according to EirGrid. However, the chart below demonstrates the variability in wind power availability.
Figure 4: Wind power availability (MW) in Q2 2012
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0 02/04/12 09/04/12 16/04/12 23/04/12 30/04/12 07/05/12 14/05/12 21/05/12 28/05/12 04/06/12 11/06/12 18/06/12 25/06/12 Maximum wind Average wind Wind at peak
Source: CER
Of the c.2,000 MW of installed wind capacity in the SEM, 767MW and 860MW of wind farm capacity are connected to the ROI transmission and distribution systems respectively. 370MW of wind power capacity is connected to the distribution system in NI and only 27MW connected to the NI transmission system.
EirGrid estimates a ROI requirement of between 3.5GW and 4GW total installed wind capacity to achieve 2020 renewable energy consumption targets. This will require the construction of an additional 2-2.5GW of wind power capacity.
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CER’s grid capacity allocation process, known as Gate 3, has administered 3,990MW of grid connection offers for wind generation (both on-shore and off-shore) in ROI. 'Gate 3' schedules firm grid access over the period 2012-2022 in accordance with the projected capacity of the transmission and distribution system in line with EirGrid’s grid development strategy.
SONI estimates that NI requires 1,448MW of renewable generation in 2020 to meet the 40% target. SONI forecasts that 978MW of onshore wind and 300MW of offshore wind, together with modest amounts of tidal and large-scale biomass, will achieve the 2020 target. This will require the construction of an additional c.600MW of onshore wind capacity or c.75MW per annum.
The principal focus in both jurisdictions for additional renewable energy capacity is onshore wind. With current estimates of required additional onshore wind capacity running between 3 and 3.5GW, project construction will require in the region of €5bn in capital investment. This estimate is based on indicative industry capex costs of €1.5m per MW installed. The €5bn estimate excludes any capacity constructed specifically for direct export to the UK.
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Renewable energy incentives The legally binding EU renewable energy targets are underpinned by national support schemes. The current scheme in operation in ROI for onshore wind is a Renewable Energy Feed-In-Tariff called REFIT II. The support scheme in NI is a system of redeemable Renewable Obligation Certificates or ROCs.
Ireland's Renewable Energy Feed-In-Tariff (REFIT) A REFIT is the primary means by which electricity from renewable sources is supported in Ireland. The support scheme is on offer for electricity exported to the Irish grid in the onshore wind, hydro and • A REFIT is the primary means by biomass landfill gas technology categories. The REFIT support scheme is which electricity from renewable funded by a Public Service Obligation (PSO) levy. sources is supported in ROI. • The current REFIT support scheme, REFIT 2, provides a guaranteed The current REFIT support scheme, REFIT II, provides a guaranteed reference price for renewable reference price for renewable energy for the suppliers with an additional energy for the suppliers with an payment of 15% of the reference price. REFIT 2 is designed to additional payment of 15% of the incentivise the addition of 4,000MW of new renewable electricity reference price. capacity to the Irish grid.
REFIT II was introduced in March 2012 following state aid clearance from the European Commission. Eligible projects include only those with a maximum capacity of less than 125MW which commence construction after January 1st 2010 and which are operational by the end of 2015. The support for any particular renewable power project can not exceed 15 years and may not extend beyond end-2030.
REFIT payments are made to licensed electricity suppliers with which the REFIT applicant (i.e. renewable energy generator) has entered into a Power Purchase Agreement (PPA). The licensed supplier pays the generator for power in accordance with the commercially agreed contractual terms of a PPA with the price being at least equal to a REFIT II reference price for that technology category.
Reference prices per MWh for each technology are set out in the legislation as follows:
Table 2: REFIT reference prices for each category of renewable energy technology
Category REFIT reference price MWh Onshore wind (above 5MW) €66.35 Onshore wind (equal to or less than 5MW) €68.68 Hydro (equal to or less than 5MW) €83.81 Biomass landfill gas €81.49 Note: Prices set at January 1st 2010 to be indexed annually from January 1st 2010 with Irish CPI. DCENR will publish adjusted reference prices on its website annually. Source: Department of Communications, Energy and Natural Resources (DCENR)
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REFIT serves to eliminate market risk for renewable generators and acts as a floor price with electricity suppliers receiving payments where the market price for electricity is lower than the REFIT formula. For further explanation and examples of amount payables under different market scenarios, please refer to Appendix I.
The PSO levy charged to all electricity consumers funds REFIT. The • The PSO levy charged to all PSO levy is designed to recoup the additional costs incurred by licensed electricity consumers funds REFIT. suppliers in sourcing a proportion of their electricity from renewable energy sources and also a proportion from certain generators in support of other national policy objectives such as the use of indigenous fuels, i.e. peat.
CER is responsible for calculating the costs associated with the PSO and sets the PSO levy for the 12-month trading period running from October 1st to end-September in the following calendar year. Suppliers notify CER of contractual arrangements with renewable generators for REFIT PPAs by end-April in a PSO period. Unless a project is listed in an annual statutory instrument of REFIT eligible projects for the forthcoming PSO year and the CER has accounted for the project in its PSO levy decision, payments cannot be made under REFIT.
CER has determined a PSO levy of €131m for the period from October 1st 2012 to September 30th 2013 (2011/2012: €92m). The proposed increase in the PSO levy primarily reflects lower forecast SEM market prices in 2012/2013 as well as an increase in the quantity of generation subject to PSO support. There is 1,379MW of REFIT renewable generation capacity included in the current PSO decision, which is an increase of 137MW compared with the 2011-2012 PSO.
NI renewable energy policy supports and UK electricity market reform • NIRO was introduced in April 2005 The Northern Ireland Renewable Obligation (NIRO) is currently the and is credited with the increase in main support mechanism for encouraging increased renewable electricity renewable electricity generation in NI from a baseline of 3% in 2005 to generation in NI. NIRO was introduced in April 2005 and is credited 14% in the year ending March with the increase in renewable electricity generation in NI from a 2012. baseline of 3% in 2005 to 14% in the year ending March 2012.
NIRO operates in tandem with the renewable obligation schemes in Scotland, England and Wales in a UK-wide market for ROCs which is administered by Ofgem. Ofgem issues ROCs to electricity generators based on the amount of eligible renewable electricity generated. For example, each MWh of electricity generated from onshore wind earns 1 ROC.
NIRO obliges licensed electricity suppliers to produce a certain number of ROCs for each MWh of electricity supplied to customers in NI or pay a buy-out fee that is proportionate to any shortfall in the number of ROCs surrendered. The buy-out price in NI for 2011/2012 was set at £38.69 per ROC (linked to RPI) for each MWh of the obligation not met by a ROC. Eligible generators in NI receive ROC support for a period of 20 years.
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Each year the obligation is set for electricity suppliers six months in advance. For the 2012/2013 obligation year, licensed suppliers in NI are obliged to surrender 0.081 ROCs per MWh of electricity supplied. The annual obligation is set based on a complex methodology following input from market participants and forecasts of variables across the entire UK electricity market.
NI Energy Minister Arlene Foster recently announced changes to NIRO for the period 2013-2017 following a UK-wide banding review. New banding levels are being introduced from April 1st 2013 to reduce the impact on the consumer who bears the cost of NIRO. Most significantly, a 10% reduction is being applied to large-scale onshore wind (5MW+) from 1 to 0.9 ROCs. Importantly, an extension of NIRO was confirmed from 2033 to 2037.
As part of a wide-ranging initiative for electricity market reform (EMR) in the UK, led by the Department of Energy and Climate Change (DECC), Arlene Foster announced in May 2012 measures that will be implemented in NI.
DECC's draft Energy Bill, subject to a Legislative Consent Motion in the NI Assembly, will extend to NI as follows: • NIRO will be closed to new generation and additional capacity after March 31st 2017; • a Feed in Tariff (FIT) with Contracts for Difference (FIT CfD) for large-scale renewable electricity generation (greater than 5MW) will apply from March 31st 2017; • administration of the FIT CfD on a UK-wide basis; • a UK-wide Fixed Renewable Obligation Scheme from 2027 to minimise the risk of a hiatus in investment in new renewable generating stations and to maintain confidence in the stability of conditions for investment in renewable energy; and • the introduction of a UK-wide emissions performance standard for new coal-fired power stations to limit the amount of carbon that they can emit. A decision on the introduction of an Emissions Performance Standard (EPS), set at 450g CO2 /kWh, in NI to reinforce the requirement that no new coal-fired power stations are built without Carbon Capture and Storage (CCS) technology will be taken during 2012.
The commitment to extend NIRO for new generation capacity until March 2017 is an important market signal, albeit at a slightly reduced level. Notwithstanding some dissatisfaction among renewable developers, it is not expected to have a material impact on the planned delivery of onshore wind capacity in NI.
Discussions are ongoing in relation to other elements of the UK electricity market reform package as they impact NI, covering such issues as the implications for SEM arising from the introduction of a Carbon Price Floor in NI.
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Challenges in delivering SEM 2020 renewable energy targets
Managing an increasing amount of intermittent wind on the grid Notwithstanding the more than adequate generation capacity within the • Policy drivers are targeting SEM, policy drivers in both SEM jurisdictions – being driven by the substantial growth in renewable Irish government and the Northern Ireland Executive – are targeting generation capacity through 2020 substantial growth in renewable generation capacity through 2020. but technical challenges remain. Policy supports outlined will ensure that incentives continue to bring new projects through development even though certain technical challenges remain. Technical challenges relate principally to the impact of further variable and instantaneous generation, i.e. non-dispatchable or intermittent power, on the transmission system.
A significant penetration in renewable power generation has implications for the real time operation of the power system. The output of power plants that use renewable energy sources, especially wind farms, can change significantly over time. Furthermore, the ability to control the power output of those plants is reduced. This can compromise the dynamic stability of the power system, particularly at high, instantaneous penetrations of wind.
Strategies are being developed to manage the power system in a secure, reliable and consistent manner in the years ahead. In particular, procedures around curtailment and constraint need further work. Curtailment of power generation occurs when excess generation exists to meet system demand. Constraints occur when the network has insufficient capacity to export certain generation units.
• Technical challenges relate principally to the impact of further The regulators continue to consult on the detail of “Scheduling and variable and instantaneous power Dispatch” issues, specifically how to treat curtailment issues in tie-break generation, i.e. non-dispatchable situations. Conclusions expected during 2012 could impact new wind renewable energy, on the system. developments preserving the rights of existing wind capacity already on • This creates issues around the the grid. Although wind generation units are not “dispatchable” and fall scheduling and dispatch of power outside the merit order, they rely heavily on the current policy of in the SEM. • Resolution of these issues will priority dispatch, i.e. wind farms export power to the grid when the impact the economics of new wind is blowing. Limiting the dispatch of wind farms due to constraint power generation projects. and curtailment issues will, accordingly, lower their capacity factors and impact project economics.
Decisions relating to how these technical challenges are addressed will impact on the economics of new wind projects. From a financing perspective, just as banks reverting to higher probability wind data trimmed the comfort levels in project finance models, allowing for the impact of decisions relating to constraints and curtailment will affect project economics.
Financing environment favours utilities and larger, experienced • Renewable energy projects are project developers capital-intensive and therefore very sensitive to the availability and cost Financing for large-scale roll-out of renewables is problematic. In of financing. addition to the technical challenges, many wind development projects are not economic at lower gearing levels and shorter payback periods or based on higher probability wind data.
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The financing landscape favours larger and more experienced industry players over the short to medium term. Larger companies represent bankable counterparties from the perspective of project financing, while experienced developers can bring in-house procurement and/or framework agreements to bear on improving project economics.
Project developers active in ROI and NI include the four integrated • Because power plants are capital- utilities: ESB (Hibernian Wind Power); SSE (SSE Renewables); Viridian intensive, reductions in capex can (Energia Renewables); and BGE (BG Energy). The development have a meaningful impact on economics for such parties are more compelling as they seek to match project returns. • The financing landscape favours large customer bases with a balanced portfolio of generation assets. Their larger or more experienced customer bases serve as effective hedges on the generation capacity they industry players who can secure develop. As detailed elsewhere in this report, the four utilities' strategies better commercial arrangements include developing and constructing further wind capacity. with technology vendors. Other larger or experienced project developers who might play key roles in delivering the additional wind generation capacity include commercial semi-state bodies BNM and Coillte in addition to privately financed international renewable energy developers such as Mainstream and Element Power. For more information on these project developers, please refer to Appendix II.
Other challenges Notwithstanding the technical challenges of managing the electricity network, one of the implications of 40% of electricity being generated from renewable sources will be an increased reliance on natural gas. Gas- fired power plants must be available to provide standby, rapid response capacity when wind power is unavailable.
Given Ireland’s heavy dependence on imported natural gas for power generation, this will add to energy security concerns. Although Corrib is expected to provide an alternative indigenous natural gas supply with first gas to flow by early 2015 and Hess may yet proceed to construct its planned regasification terminal at Shannon, the incentivisation and remuneration of standby generating capacity has the potential to further increase the electricity cost base.
As gas fired peaking plants are not constructed to run for long periods but instead provide fast response standby or reserve capacity, they rely principally on capacity payments to remunerate their development and operating costs. The structure and quantum of the capacity payment mechanism and pot will need to incentivise peaking plant project developers to construct planned projects as installed wind capacity reaches new records. BG Energy holds a strategic position in this market segment through its Greener Ideas joint venture. Up to 400MW of new open cycle gas turbines (OCGTs) are planned and three sites at Westmeath, Kilkenny and Tipperary have received planning permission for 300MW of peaking capacity. It is unlikely we will see construction commencing until the incentive regime assures sufficient remuneration.
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A changing SEM
Preparing for regional market integration The European Council Heads of State have mandated delivery of a • The European Council Heads of single EU energy market by 2014. State have mandated delivery of a single EU energy market by 2014. A common EU model, known as the Target Model, for compatible cross-border electricity trading is expected to be in place, together with detailed rules giving it binding legal effect on all EU internal borders, by 2014.
France, UK and Ireland have been grouped together as the “FUI Market” in North-Western Europe. Integrating the SEM into the internal European electricity market is likely to require substantial changes to the current SEM operating model.
SEM will benefit from a two-year transitional period for “island systems with central dispatch”. The derogation means that transitional arrangements will apply within SEM until December 31st 2016 following implementation of the new EU-wide model.
The various arms of EirGrid are working with the two regulators in the SEM Committee to determine how to implement the Target Model in ROI and NI in a manner that is consistent with national and EU policy objectives. A public consultation on market integration commenced in January 2012. It remains to be seen what impact the Target Model will have on the Irish electricity market. Given the derogation, SEM is likely to be the last to join the new integrated European market.
The Irish state is already committed to harmonisation of electricity markets in ROI and UK. New interconnection in the form of EWIC will come on line in Q3 2012 and boost technical capacity between the two countries to 1,000MW. This is materially ahead of the EU interconnection capacity target of 10%.
• Regional market integration, Regional market integration, backed by physical interconnection backed by physical interconnection capacity, will increase competition and market participation in the SEM capacity, will increase competition 3 and market participation in the from the 'Big 6' UK utilities . Utilities in the SEM must account for this SEM from the 'Big 6' UK utilities. new competitive dimension. • Utilities in the SEM must account for this new competitive dimension. SSE is best placed as the only one of the 'Big 6' competing in Ireland with a substantial integrated business in the UK and a strong trading capability. In addition to the recent acquisition of Endesa Ireland, SSE is examining options to construct new generation capacity in Wales.
Due to its large legacy market share in Ireland, ESB has focused recent new generation investment activities, both renewable and conventional,
3 SSE, EDF, Scottish Power (Iberdrola), RWE, E.ON and Centrica
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in the UK. Existing investments in generation capacity, which include an 840MW CCGT joint venture with SSE commissioned in December 2009 in Southampton and a 350MW CCGT at Corby near Northampton, have allowed ESB to develop its trading capabilities. ESB is also developing an 870MW CCGT at Carrington near Manchester and recently announced a planned 1,500MW CCGT development in Leeds. It has also prioritised the construction of a 40MW wind farm at Myndd y Betwys in Wales during 2012, having commissioned the 66MW Fullabrook wind farm in Devon in 2011.
BG Energy and Viridian, as successful and competitive utilities in the context of the SEM, will need to give careful consideration to the impact of regional market integration on utilities of their scale and market focus. Either would provide a strategic foothold in the SEM for an international utility or both could join forces to consolidate the competitive landscape in the SEM and internationalise as the FUI market and Target Model come to fruition.
Export and offshore opportunity In May 2012, the Irish state confirmed its determination to explore the export potential of Ireland’s indigenous renewable energy resources. Ireland's Department of Communications, Energy and Natural Resources (DCENR) published a strategy document for renewable energy4, outlining a goal to export renewable electricity from both onshore and offshore wind farms to the UK and North-West Europe provided it is economically beneficial to the state.
Politically, this prospect is being advanced through the British Irish Council. In June 2012, ROI Energy Minister Pat Rabbitte and UK Energy Minister Charles Hendry agreed on a process to develop a formal memorandum of understanding on renewable energy trading between the ROI and UK by the end of 2012. Any such agreement on renewable energy trading between the two countries will underpin ambitious plans by Mainstream and Element Power to deliver up to 8GW of wind capacity for export to the UK in their Energy Bridge5 and Greenwire6 projects respectively. See Appendix II for more information.
Offshore wind – varying degrees of support in the SEM Ireland has a substantial and attractive offshore wind resource. A large number of projects are in various stages of development off the Eastern seaboard in the Irish Sea. However, unlike in the UK where a range of large utility and industry investors are committing billions to offshore wind development, Ireland has not yet put in place the economic policies to underpin current development economics. Ireland has only one operational offshore wind farm, Arklow Bank (owned by GE), which was commissioned in June 2004. Co-developed by Airtricity and GE, it lies 10km off the east coast and comprises 7 x 3.6MW GE turbines.
4 DCENR, Strategy for Renewable Energy 2012-2020, May 2012 5 http://www.mainstreamrp.com/energy-bridge/ 6 http://www.greenwire.ie/
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ROI’s 2010 National Renewable Energy Action Plan (NREAP)7 sets a target contribution of 555MW from installed offshore wind towards a total installed renewable energy target of c.4,700MW (4,094MW onshore wind) in the 2020 base scenario. NREAP also set out a REFIT level for offshore wind of €140/MWh. No state aids application has • No ROI state aids application has been advanced for this support as yet. Statements in the DCENR's yet been advanced for support of recently published "Strategy for Renewable Energy 2012-2020" suggest offshore wind capacity generation. that an offshore REFIT is no longer policy.
Aside from a support scheme, activities to legislate for integrated foreshore consenting and onshore planning are ongoing. Industry also awaits publication by DCENR of an Offshore Renewable Energy Development Plan (OREDP) during 2012 which is intended to provide for improved strategic decision making and greater policy cohesion in marine renewables.
Despite the uncertainty, EirGrid is working with its counterparts in Scotland in relation to assessing the feasibility for an offshore interconnected transmission network and subsea electricity grid based on renewable energy sources off the coast of western Scotland and in the Irish Sea/North Channel area. The so-called ISLES project is a collaborative project between the Scottish government, the Northern Ireland Executive and the government of Ireland. The project recognises that existing grid limitations have hampered the ability to exploit offshore renewable resources.
Ireland is also participating in the North Seas Offshore Grid Initiative with nine other EU member states, the EU Commission, EU Regulators and TSO associations aimed at maximising the potential of the renewable energy resources of the Northern Seas (North Sea, English Channel, Irish Sea and Atlantic area).
In NI, an offshore licencing round was launched in December 2011 to attract developers for 800MW of marine energy development. The leasing round is being run by the Crown Estate and sought expressions of interest for up to 600MW of offshore wind off the south east coast of NI. The Crown Estate expects to award development rights to a single developer during 2012 with physical development not expected until 2015/2016 onwards.
• The support scheme in NI offers NI’s support framework, NIRO, offers two ROCs per MWh of offshore two redeemable ROCs per MWh of wind constructed and operational in 2013/2014 and 2014/2015 falling electricity generated from off-shore wind. to 1.9 in 2015/2016 and 1.8 in 2016/2017 as the cost of the technology comes down during the decade. The ROCs support is for 20 years. NIRO expires in 2037.
7 http://www.dcenr.gov.ie/NR/rdonlyres/C71495BB-DB3C-4FE9-A725- 0C094FE19BCA/0/2010NREAP.pdf
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Retail electricity markets supported by the SEM SEM united the ROI and NI wholesale electricity markets. However, • Although the SEM united the ROI the electricity supply businesses in each jurisdiction continue to operate and NI wholesale markets, the independently. retail electricity markets in each jurisdiction continue to operate independently. The level of competition in the retail electricity markets in ROI and NI differs, and consequently the degree of regulation (including price controls) also varies across jurisdictions. The CER is the independent body responsible for overseeing the regulation of Ireland's retail electricity (and gas) markets. The UR is an independent non-ministerial government department that is overseeing the liberalisation of NI's energy markets (the CER and the UR jointly regulate the SEM).
ROI energy regulator CER completed deregulation of all segments of the ROI electricity supply market in April 2011 with deregulation of ESB’s supply business in the domestic market segment. In NI, the UR continues to regulate former incumbent, Power NI. Although the market opened fully to competition in November 2007, UR continues to set its retail tariffs for Power NI due to its continued substantial market share in the domestic market segment.
ROI – a competitive retail electricity market In 2011, the ROI generated 27,000 GWhs of electricity. There are 2.24m electricity connections in ROI, of which 2.02m are to the domestic segment.
• There were seven active suppliers There were seven active suppliers in the ROI in 2011, including ESB in the ROI in 2011. supply subsidiary Electric Ireland, Bord Gáis Energy, SSE subsidiary • The electricity market in ROI was fully deregulated in April 2011 Airtricity and Viridian subsidiary Energia. The electricity market in ROI when price controls were removed was fully deregulated in April 2011 when price controls were removed from the domestic segment. from the domestic segment.
Although Electric Ireland's share (by MWhs consumed) of the domestic electricity market in Q1 2012 rose slightly from Q4 2011 levels to 57.65%, it remains below the deregulation threshold of 60%. Since Q1 2009, Airtricity increased both customer numbers and MWhs delivered into the domestic market, while Bord Gáis Energy decreased customer numbers and MWhs levels from a peak in Q2 2011.
The business market was fully deregulated in October 2010. Energia, which does not compete for residential customers, is the largest supplier in Small and Medium Enterprise (SME) electricity markets, although its share (in terms of MWhs) of the 'Large Energy Users' (LEU) segment has declined in the last five quarters. Electric Ireland is the largest in the LEU market.
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Table 3: ROI's retail electricity market by customer numbers (% share of market segment or overall market) in Q1 2012
Suppliers Domestic market Small business market Medium business market Large energy users Grand total Electric Ireland 1,286,452 (64%) 89,555 (47%) 13,863 (57%) 766 (46%) 1,390,636 (62%) Airtricity 363,238 (18%) 36,654 (19%) 3,410 (14%) 356 (22%) 403,658 (18%) Bord Gáis Energy 365,249 (18%) 20,208 (11%) 1,544 (6%) 170 (10%) 387,171 (17%) Energia 44,196 (23%) 5,444 (22%) 260 (16%) 49,900 (2%) Others 8,349 (0%) 96 (0%) 96 (0%) 96 (6%) 8,637 (0%) Total 2,023,288 (90%) 190,709 (9%) 24,357 (1%) 1,648 (0%) 2,240,002 (100%) Source: CER; Davy
Table 4: ROI's retail electricity market by consumption in MWhs (% share of mkt segment or overall market) in Q1 2012
Suppliers Domestic Small business market Medium business market Large energy users Grand total Electric Ireland 1,408,463 (58%) 323,546 (32%) 278,423 (26%) 893,376 (47%) 2,903,808 (45%) Airtricity 501,089 (21%) 207,846 (20%) 254,761 (24%) 293,475 (16%) 1,257,171 (20%) Bord Gáis Energy 521,488 (21%) 130,108 (13%) 115,936 (11%) 173,371 (9%) 940,903 (15%) Energia 362,383 (35%) 402,098 (38%) 370,078 (20%) 1,134,559 (18%) Others 12,118 (0%) 1,442 (0%) 12,139 (1%) 151,192 (8%) 176,891 (3%) Total 2,443,157 (38%) 1,025,325 (16%) 1,063,357 (17%) 1,881,492 (29%) 6,413,331 (100%) Source: CER; Davy
NI – price control remains in certain segments of the retail market NI consumes close to 9,000 GWhs of electricity annually. There are c.829,000 electricity customers in NI, 93% of which are domestic customers.
In 1999, industrial electricity consumers first became eligible to change supplier. In 2005, the small and medium business segment opened to competition. In 2007, the domestic market opened to competition; however, the effective start of competition is this market segment began in June 2010 with the entrance of Airtricity.
Figure 5: Structure of the electricity sector in Northern Ireland
Source: UR
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• Due to the lack of competition in Due to the lack of competition in the domestic market, a supply price the domestic market in NI, a supply control is in place for the dominant electricity supply company, price control is in place for the Viridian-owned Power NI (formerly called NIE Energy Supply or dominant electricity supply NIEES). In Q1 2012, Power NI supplied 84% of domestic demand for company, Viridian-owned Power NI electricity. Airtricity, Energia and Electric Ireland have made in-roads in (formerly called NIE Energy Supply or NIEES). the non-domestic market segment, with Airtricity starting to build a • In Q1 2012, Power NI supplied 84% meaningful presence in the domestic segment. of domestic demand for electricity.
Table 5: NI's retail electricity market by customer numbers (% share of market segment or over allmarket) in Q1 2012
Suppliers Domestic SME<70k VA SME>70k VA Large Energy Users> Grand total 1MW Power NI 673,797 (87%) 28,806 (53%) 1,093 (23%) 9 (5%) 703,705 (85%) Airtricity 85,770 (11%) 14,344 (26%) 1,300 (27%) 42 (24%) 101,456 (12%) Energia 0 (0%) 6,483 (12%) 1,081 (23%) 59 (34%) 7,623 (1%) Electric Ireland 387 (0%) 4,823 (9%) 1,249 (26%) 60 (35%) 6,519 (1%) Firmus 251 (0%) 25 (0%) 31 (1%) 3 (2%) 310 (0%) Quinn Energy 0 (0%) 2 (0%) 3 (0%) 0 5 (0%) Budget Energy 10,154 (1%) 34 (0%) 1 (0%) 0 10,189 (1%) Vayu 0 0 3 (0%) 0 3 (0%) Total market 770,359 (93%) 54,517 (7%) 4,761 (1%) 173 (0%) 829,810 (100%) Source: UR (Utility Regulator); Retail Market Monitoring; Quarterly transparency report, May 2012; Davy
Table 6: NI's retail electricity market by consumption in MWhs (% share of mkt segment or over all market) in Q1 2012
Suppliers Domestic SME<70k VA SME>70k VA LEU> 1MW Grand total Power NI 740.74 (84%) 115.67 (32%) 66.28 (13%) 18.08 (5%) 940.76 (44%) Airtricity 122.81 (14%) 138.91 (39%) 134.23 (26%) 99.75 (26%) 495.71 (23%) Energia 0.00 58.72 (16%) 153.76 (29%) 92.31 (24%) 304.79 (14%) Electric Ireland 0.35 (0%) 42.83 (12%) 166.21 (32%) 146.10 (38%) 355.49 (17%) firmus 3.15 (0%) 0.44 (0%) 3.51 (1%) 23.33 (6%) 30.43 (1%) Quinn Energy 0.00 0.03 (0%) 0.13 (0%) 0.00 0.16 (0%) Budget Energy 11.58 (1%) 0.20 (0%) 0.03 (0%) 0.00 11.80 (1%) Vayu 0.00 0.00 0.53 (0%) 0.00 0.53 (0%) Consumption (GWh) 878.63 (41%) 356.80 (17%) 524.68 (25%) 379.57 (18%) 2139.67 (100%) Source: UR; Retail Market Monitoring; Quarterly transparency report, May 2012; Davy
ROI and NI gas supply market As the retail electricity markets in both the ROI and NI undergo liberalisation, suppliers are using a variety of new products and • Utilities are also leveraging their innovations to compete and to retain customers. These include energy existing customer relationships to consulting and services, prepayment meters and various sponsorship compete in new markets. initiatives. Utilities are also leveraging their existing customer • Dual fuel (electricity and gas) relationships to compete in new markets. Dual fuel (electricity and gas) offerings are now a prominent feature of the energy markets in offerings are now a prominent feature of the energy markets in ROI and ROI and NI. NI.
With the importance of customer bases and the benefits for suppliers of having dual fuel strategies and broader relationships with customers, it is important to understand the dynamics in the gas supply market in ROI and NI. Work is ongoing to unite the ROI and NI gas markets under
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Common Arrangements for Gas (CAG), although for now the two markets operate independently with some 650,000 consumers in ROI and 150,000 in NI.
More than 75TWh of gas is consumed annually across ROI and NI. Power generation accounts for close to 40TWh in ROI and 10TWh in NI. The majority of gas consumed in ROI and all gas consumed in NI is imported from the UK. However, the Corrib gas field off the west coast of Ireland will be able to contribute a majority of gas volumes used in • Having no gas exploration, ROI and NI for a number of years when it comes on-stream. Corrib is development or production expected to commence commercial production in 2015. activities, Irish utilities use their trading arms to procure gas for their customers on international Having no gas exploration, development or production activities, Irish commodity markets. utilities use their trading arms to procure gas for their customers on international commodity markets.
ROI All gas market segments are open to competition in ROI and incumbent Bord Gáis Energy remains the largest supplier. The domestic gas market is the only remaining retail market segment that is still subject to tariff regulation. CER regulates Bord Gáis Energy's tariffs to domestic customers.
Bord Gáis Energy's domestic market share was 71% for both customer numbers and consumption at the end of Q1 2012, down 2% on Q4 • The domestic gas market is the only 2011 but still above the required threshold of 60% (defined in terms of remaining retail market segment that is still subject to tariff customer numbers in CER's gas market roadmap). Another criterion for regulation in ROI. deregulation of the domestic market sector is that the annual switching rate is greater than 10%. This criterion has been met as the switching rate for the gas domestic sector over the 12 months to end-2011 was approximately 17%.
Bord Gáis Energy is the largest supplier in the non-domestic market, although it is less dominant than in the residential market.
Table 7: ROI's retail gas market by customer numbers (% share of market segment or overall market) in Q1 2012
Suppliers Domestic IC market FVT market RTF users Grand total Electric Ireland 37,315 (6%) 318 (1%) 3 (0%) 13 (5%) 37,649 (6%) Airtricity 118,468 (19%) 1,217 (5%) 33 (2%) 19 (8%) 119,737 (18%) Bord Gáis Energy 446,737 (71%) 11,429 (50%) 647 (37%) 57 (23%) 458,870 (70%) Energia 4,338 (19%) 263 (15%) 50 (20%) 4,651 (1%) Flogas 25,660 (4%) 4,981 (22%) 336 (19%) 30,977 (5%) Gazprom 14 (6%) 14 (0%) Phoenix 3 (0%) 2 (0%) 26 (11%) 31 (0%) Vayu 569 (2%) 451 (26%) 65 (27%) 1,085 (0%) Total 628,180 (96%) 22,855 (3%) 1,735 (0%) 244 (0%) 653,014 (100%) Source: CER; Davy
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Table 8: ROI's retail gas market by consumption in GWhs (% share of market segment or overall market) in Q1 2012
Suppliers Domestic IC market FVT market RTF users Grand total Electric Ireland 154 (5%) 4 (1%) 0 (0%) 64 (4%) 222 (4%) Airtricity 572 (20%) 18 (3%) 27 (4%) 92 (6%) 709 (13%) Bord Gáis Energy 2,015 (71%) 237 (42%) 259 (37%) 297 (20%) 2,808 (50%) Energia 130 (23%) 95 (14%) 277 (19%) 502 (9%) Flogas 110 (4%) 157 (28%) 144 (21%) 411 (7%) Gazprom 298 (20%) 298 (5%) Phoenix 0 (0%) 1 (0%) 133 (9%) 134 (2%) Vayu 22 (4%) 174 (25%) 318 (22%) 514 (9%) Total 2,852 (51%) 568 (10%) 700 (13%) 1,479 (26%) 5,599 (100%) Source: CER; Davy
Note: In Tables 7 and 8, IC, FVT and RTF refer to Industrial and Commercial, Fuel Variation Tariff and Regulated Tariff Formula customers respectively. These categories relate to various segments of the non- domestic market and are classed according to their connection capacity and annual consumption, with the RTF category representing the largest gas consumers. While there are no longer regulated business tariffs, the reporting structure has been maintained by the CER for consistency and comparison. All of these market segments have been deregulated since at least October 2011.
NI Approximately 16,000GWh of annual gas demand exists in NI. Only 4,500GWh represents demand for distribution to final business and domestic customers. The remainder is from the power generation sector, principally AES’s Ballylumford and ESB’s Coolkeeragh power stations.
Two substantial players provide gas infrastructure in NI. Original incumbent Phoenix Natural Gas is owned by leading European private equity firm Terra Firma. Phoenix established the natural gas industry in NI in 1996. The other player, firmus energy, is part of the Bord Gáis Eireann (BGE) group.
The NI gas distribution system comprises two networks: • The Phoenix Natural Gas network, covering the Greater Belfast and Larne area, has around 136,000 customers (128,000 domestic). • The firmus energy network covers ten towns8 along BGE’s two NI transmission pipelines, the South-North Pipeline and North-West Pipeline, and has about 11,300 customers (9,800 domestic).
Consequently, NI is divided into two gas supply markets in each of the distribution licence areas. The gas supply market in Phoenix’s • The gas market in the Greater distribution licence area in Greater Belfast and Larne has been open to Belfast and Larne area has been competition since 2007 for all customers. In this licence area there are open to competition since 2007 for currently four active gas suppliers in the non-domestic sector: Phoenix all customers. Supply Limited (PSL, recently acquired by SSE), firmus energy (BGE- • For the ten towns connected to the owned), Energia (Viridian-owned) and independent supplier Vayu. gas network outside of the Greater Competition in the domestic sector in this licence area started in Belfast and Larne area, firmus energy retains the exclusive rights November 2010 with the entry of firmus. to supply gas to all customers.
8 Antrim, Armagh, Ballymena, Ballymoney, Banbridge, Coleraine, Craigavon, Londonderry, Limavady and Newry.
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In Q1 2012, Phoenix's share of the gas supply market (by volume) in the Greater Belfast and Larne area was 78.2% with firmus at 21.2%; more recent market entrants Energia and Vayu had less than 0.5% each.
For the ten towns connected to the gas network outside of the Greater Belfast and Larne area, firmus energy retains the exclusive rights to supply gas to all customers. Firmus’s exclusive supply licence opens to competition in the large non-domestic user segment in October 2012 and for the remainder of users, including domestics, in April 2015.
ROI and NI energy supply markets dominated by four players Retail market shares mean that only four competitors have the scale and competitive offerings to support future infrastructure investment on the island of Ireland. The four competitors are Viridian, SSE Ireland, Bord Gáis Energy and ESB. • Retail market shares mean that only four competitors have the scale and competitive offerings to The limited number of competitors is partly a function of the continued support future infrastructure presence of legacy incumbents with strong franchises in both markets – investment on the island of Ireland. ESB, via Electric Ireland, and Viridian, via Power NI and Energia. • The four competitors are Viridian, SSE Ireland, Bord Gáis Energy and ESB. It is also a function of the scale of the market. With the presence of strong legacy incumbents and two to three further competitors, the potential for scale for new entrants in the context of the integrated utility business model looks challenging.
Furthermore, the structure of the SEM as a gross mandatory pool or spot market with limited possibilities for forward trading and other hedging activities ensures that only current market participants with both generation and supply businesses can efficiently hedge their exposures. The International Energy Agency (IEA)9 recently remarked that this lack of a forward or futures market in the SEM may constitute a barrier to entry as electricity suppliers may be unable to sufficiently mitigate risks.
The next section looks at Viridian, SSE Ireland, Bord Gáis Energy and ESB in more detail.
9 IEA, Energy Policies of IEA Countries, Ireland 2012 Review (Ireland Energy Review 2012)
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Key competitors, corporate activity and policy determinations in the ROI and NI electricity markets The four key players in the ROI and NI electricity markets are Viridian, SSE Ireland, Bord Gáis Energy and ESB. All four players compete effectively in the SEM, having sufficient scale in the downstream or retail energy markets in addition to a presence in the wholesale market through ownership of generation capacity. Both ESB and Bord Gáis Eireann are present in the mid-stream with operating licences for energy transmission and/or distribution systems.
Table 9: Main companies in the energy sector in ROI and NI
Company Viridian SSE Ireland Bord Gáis ESB Owners Arcapita Private investors (SSE is listed Irish government and staff Irish government and staff on the London Stock (3.27% ESOT) (5% ESOT) Exchange) Assets: Wholesale market Energia: CCGT power stations Airtricity: wind farms; Endesa BG Energy: CCGT power ESB Energy International: and minority stake in Eco Ireland: conventional power station and wind farm conventional and renewable Wind Power and Viridian plants capacity power generation capacity Resources; Power NI PPB Assets: Networks Bord Gais Networks: gas ESB Networks and NIE: infrastructure in ROI; firmus electricity tranmission and energy: gas distribution distribution assets and network in NI operator licences in ROI and NI Assets: Retail market Energia: targets non-domestic Airtricity: electricity and gas BG Energy: gas and electricity Electric Ireland: electricity and gas and electricity consumers supplier in ROI and NI; supplier in ROI; firmus energy: gas supplier in ROI, electricity in ROI and NI; Power NI: Phoenix Supply: natural gas gas and electricity supplier in supplier in NI domestic and business supplier in NI; Phoenix Energy: NI electricity consumers in NI supplies gas to commercial customers in ROI Source: Davy
• The Irish state is the single largest The ownership of the four largest players in the ROI and NI electricity stakeholder in the all-island sector is a mixture of the Irish state, private equity and private investors. electricity sector, predominantly through its ownership of ESB and The Irish state is the single largest stakeholder in the sector, Bord Gáis Eireann. predominantly through its ownership of ESB and Bord Gáis Eireann. • Corporate activity expected in 2013 will reduce the Irish government interest in the sector and should A number of transactions have occurred at a corporate level which in promote competition. certain instances have consolidated market share. More corporate activity is expected in the coming months.
Impending or possible corporate activity is reportedly aimed principally at providing funds for the Irish state. However, it is also being encouraged to reduce the state’s presence and accordingly increase competition in the Irish electricity market. In particular, the IEA’s recent review recommended that the Irish government should “reassess the competitive landscape of the electricity sector, with a focus on the appropriateness of the depth of state activity in the sector and the unbundling of incumbents' vertically integrated assets, in line with EU legislation. In addition to selling Bord Gais Energy, the government should pursue its plans for disposal of some of ESB's non-strategic power generating plants”.
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Viridian Group Investments Limited (Viridian) Viridian is an independent power generation and energy supply business operating across the Irish market through two divisions: Energia Group (Energia) and Power NI Energy (Power NI). Viridian generated sales of £1.73bn and EBITDA of £111m in the year to March 2012.
Viridian is owned by Bahrain-based private equity firm Arcapita, which acquired the utility in a £2.1bn leveraged buyout in December 2006.
Energia Energia operates in the retail and wholesale markets of the energy sector.
In the retail market, Energia supplies electricity and gas to over 65,000 business customers in competitive markets across ROI and NI. Energia EBITDA and sales to March 2012 were £85.9m and £1bn respectively.
In its wholesale business, Energia is a supplier of electricity from conventional and renewable energy sources.
Energia owns and operates two Combined Cycle Gas Turbine (CCGT) stations in North County Dublin – Huntstown I (343MW), commissioned in November 2002, and Hunstown II (404MW), commissioned in October 2007. Energia also has a substantial PPA business. The PPA business manages long-term contractual arrangements with third-party renewable electricity generators (446MW operating at March 2012) to resell generation capacity to Energia’s customers. Energia also owns minority interests in 104MW of wind farm projects in ROI and NI. Please refer to Appendix III for more information.
Power NI Power NI (formerly NIE Energy Supply) is Viridian’s regulated electricity supply and power procurement (PPB) business operating in NI. In the 12 months to end-March 2012, Power NI's EBITDA and sales were £25m and £725m respectively.
Power NI supplies electricity to homes and businesses in NI. It was the incumbent supplier before the liberalisation of the electricity market in NI. In Q1 2012, Power NI supplied 941GWh or 44% of the total NI electricity market (674,000 domestic customers and 30,000 commercial customers).
Power NI PPB currently administers contracted capacity from three power stations in the NI market on a regulated basis. From November 2012, PPB will retain 600MW of generation capacity under contract with one generator, AES, as other contractual arrangements expire during 2012. The PPB business is a legacy of deregulation of the NI electricity market as a whole.
In December 2010, Viridian sold its regulated electricity transmission and distribution business in NI to ESB for a reported £1.2bn (£1.03bn plus the assumption of obligations under a £175m Eurobond).
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Recent refinancing activities at Viridian In March 2012, Viridian completed a refinancing of the group. The refinancing included the issuance of five-year senior secured notes (€313m and US$250m, due 2017), amending and extending Viridian's junior credit facility, selling a majority shareholding in operational and in-construction wind assets and entering a senior revolving credit facility. Post refinancing, net debt was calculated by Viridian at just over £700m at March 31st 2012, with net senior secured debt amounting to £403m. The net debt figure includes arrangements with unsecured junior lenders.
On June 15th 2012, as part of the refinancing arrangements with junior lenders, Viridian completed the sale of a majority interest in its operational and in-construction wind assets in NI and ROI.
The AMP Capital-managed Irish Infrastructure Fund acquired a controlling stake in the 104MW portfolio with the acquisition of 75% of Eco Wind Power Limited (EWP) and 80% of Viridian Resources Ltd (VRL). Viridian will retain the minority shareholding in both entities • On June 15th 2012, as part of the and its subsidiary, Energia, will continue to manage the assets of EWP refinancing arrangements with junior lenders, Viridian completed and VRL and will offtake substantially all of the generated capacity. the sale of a majority interest in its operational and in-construction The consideration was not disclosed, although we estimate an enterprise wind assets in NI and ROI. • The transaction for a controlling value (for 100%) of close to €200m (including non-recourse project stake in the 104MW wind power finance facilities of £57m in NI and c.€40m in ROI). portfolio is the first investment completed by the Irish Infrastructure Fund in which the The transaction for a controlling stake in the 104MW wind power National Pensions Reserve Fund portfolio is the first investment completed by the Irish Infrastructure (NPRF) is a cornerstone €250m Fund in which the National Pensions Reserve Fund (NPRF) is a investor. cornerstone €250m investor.
SSE Ireland Scottish and Southern Energy (SSE), which is listed on the FTSE and has its headquarters in Scotland, has incrementally developed a substantial presence in the Irish energy marketplace since the acquisition of Airtricity in 2008. SSE operates principally in the UK and Ireland, supplying more than 10m domestic and business customers across the two markets.
SSE reports consolidated segmental revenue for Ireland which includes limited operations in Continental Europe. We believe most of the segment's revenue of £654m for the year ended March 2012 can be attributed to SSE Ireland.
SSE in the retail market SSE Ireland operates on an all-island basis, supplying over 750,000 domestic and commercial energy customers (500,000 electricity customers and 250,000 gas customers). Airtricity is the primary retail brand for SSE Ireland.
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The Airtricity supply business has grown rapidly since SSE acquired it in 2008. In 2008, Airtricity supplied electricity to 9,000 businesses in NI and over 33,000 domestic and business customers in ROI. Today, Airtricity has some 621,000 electricity and gas customer accounts in ROI and NI (91% household and 9% business).
SSE has further strengthened its presence in the retail energy markets in ROI and NI with the recent acquisition of Phoenix Supply Ltd. and Phoenix Energy Ltd. from Terra Firma for an enterprise value of £19.1m. Phoenix Supply is the regulated supplier of natural gas in the Greater Belfast area in NI with 130,000 gas customers. Phoenix Energy is a supplier of gas to commercial customers in the competitive ROI market and has only a small number of customers.
SSE in the wholesale market SSE controls c.1,568MW of power generation capacity in the SEM. This capacity was built primarily through acquisitions, including Airtricity in 2008 and Endesa Ireland this year. SSE also provides PPAs to independent power generators.
As part of the acquisition of Airtricity in 2008, SSE acquired 400MW of • SSE Ireland is the largest wind operating or consented onshore wind farm capacity in Ireland. Today, energy generator in the SEM. SSE Ireland is the largest wind energy generator in the SEM, operating 25 onshore wind farms with a capacity of more than 500MW.
SSE Renewables has stated that it has a development pipeline of 1,400MW of onshore and offshore wind farm capacity in construction or with development consent in Ireland. Plans include the construction of more than 100MW over the next two years.
• Following the completion of the Balancing its investment in wind power and securing supply for its Endesa Ireland acquisition, and growing customer base, SSE announced in June 2012 that it had agreed including its existing 500MW of wind farm capacity in operation, to acquire Endesa Ireland for a cash consideration of €320m (£256m). SSE forecasts that it will become the third-largest electricity Endesa Ireland's assets are conventional power plants in ROI with generation capacity owner on the island of Ireland with 1,568MW. operating capacity of 1,068MW at four sites. The Endesa portfolio also includes a 460MW CCGT power station currently commencing construction at Great Island, County Wexford. The Great Island power station is expected to be commissioned in 2014, at which time an existing 240MW fuel oil unit at the same site is to be decommissioned. As part of the agreement to acquire Endesa Ireland, SSE will invest €125m over three financial years to complete the construction of the new CCGT. The Great Island power station has consents for gas and grid connections.
The Endesa Ireland acquisition also provides SSE Ireland with three further options for the future development of electricity generation plants in Ireland.
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Bord Gáis Eireann (BGE) Bord Gáis Éireann is owned by the Irish state and is involved in nearly every aspect of the ROI and NI energy sector. At the retail level, it supplies close to 900,000 gas and electricity customers; in the wholesale markets, it operates a gas-fired power station and is developing a portfolio of wind farms. It also manages the gas transmission and distribution networks in ROI and a gas distribution network in select towns in NI.
BG Energy BG Energy consists of BGE's dual-fuel, retail supply business in NI and ROI as well as power generating assets. Subject to restructuring initiatives as a result of the forthcoming sale of BG Energy, it remains to be seen whether all or part of the NI gas transmission and distribution business will be assigned to BGE Networks or sold with BGE’s NI operating division, firmus energy.
In ROI, BG Energy competes in the gas and electricity markets under the Bord Gáis Energy brand. In Q1 2012, Bord Gáis Energy was the ROI's largest gas supplier with 50% share of the market by volume and its fourth-largest supplier of electricity, meeting 15% of demand during the period.
In NI, BG Energy operates in the gas and electricity markets through its subsidiary, firmus energy.
firmus energy competes in all segments of the gas market in the Greater Belfast Area and its total share of this market is now 21.2% (volume terms). firmus energy also operates an exclusive gas supply licence for ten towns along BGE’s two transmission pipelines in NI. firmus’s exclusive supply licence opens to competition in the large non-domestic user segment in October 2012 and for the remainder of users, including domestics, in April 2015. firmus energy's share of the NI retail electricity market is negligible, representing 1% of the total demand.
In 2011, according to BGE, firmus generated a small negative EBIT. Management anticipates that firmus will be profitable by the end of 2012.
In the wholesale market, BG Energy invests in power generation assets to service its customers’ electricity requirements. BG Energy formed an assets division in 2010, BG Energy Assets, which has responsibility for operating and maintaining existing power generating capacity, developing new assets and investigating emerging energy technologies.
BG Energy’s operational assets include the 445MW Whitegate CCGT power station and close to 240MW of wind generation capacity in the SEM.
The Whitegate CCGT cost €400m to develop and commenced operations in November 2010. It is managed under contract by GE, the supplier of the plant's technology.
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BG Energy’s c.240MW of wind farm capacity comprises 14 wind farms in eight counties. Most of the installed wind capacity was acquired as part of the €500m acquisition of SWS Natural Resources in late 2009 and in a few smaller transactions. BG Energy has announced a €400m 260MW development and construction programme over the next four years, and financing arrangements with the EIB and potentially Export Credit Agency support will ensure that the pipeline is delivered. For more on BG Energy's wind generating capacity, please refer to Appendix IV.
Government decision to dispose of BG Energy In February 2012, the Irish government announced its intention to • In February 2012, the Irish dispose of state assets with a value of up to €3bn as part of negotiations government announced its with the country's lenders. The disposal programme includes BG considered intention to dispose of state assets with a value of up to Energy. BGE will continue to own and operate the regulated gas €3bn. transmission and distribution network and manage its newly assigned • The disposal programme will water utility responsibilities as a state-owned commercial enterprise. include BG Energy. The newly mandated state shareholder executive, NewERA, and related government departments are progressing plans for the disposal of BG Energy. Identified policy, regulatory, legislative and financial issues are to be addressed to facilitate a transaction in 2013. Both NewERA and BGE have commenced processes to appoint financial advisers to progress the sale.
Political pronouncements have repeatedly stated that a disposal can only occur when market conditions are favourable and at an acceptable price. Other political commentary indicates that a primary reason for undertaking the transaction is to promote competition in the Irish energy market.
ESB ESB is the former incumbent monopoly provider of electricity in ROI. It was established in 1927 and was responsible for the electrification of ROI.
ESB is a vertically integrated energy utility with activities ranging from electricity transmission and distribution; energy storage (hydro); conventional and renewable generation; engineering and consultancy services; and the supply of gas, electricity and services to customers in ROI, NI and internationally. For the financial year ending December 2011, ESB reported turnover of €2.99bn and EBITDA of €1.12bn.
The ESB is divided into four principal divisions: • ESB Networks; • NIE; • ESB Energy International; and • Electric Ireland.
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ESB Networks and NIE The ESB owns ESB Networks and NIE, giving the group ownership of the entire electricity transmission and distribution network on the island of Ireland. Both businesses are run independently subject to regulatory supervision by CER in ROI and UR in NI.
The ownership of the ROI transmission system is subject to the ongoing Article 9.(9) certification process.
ESB Energy International ESB Energy International (ESBEI) principally comprises the generation and engineering operations of ESB. ESBEI controls power generation capacity of close to 4.4GW in the SEM (3.8GW ROI and 0.5GW NI) using a range of energy sources – coal, peat, gas, wind, hydro. ESBEI operates some 250MW of wind power capacity, with the majority of the capacity in ROI.
Electric Ireland ESB’s retail business trades independently within the ESB Group as Electric Ireland. Electric Ireland supplies electricity to customers in ROI and NI and gas to customers in ROI.
In Q1 2012, Electric Ireland supplied 62% or 1.4m customers in the retail electricity market in the ROI. Electric Ireland also competes in the NI retail electricity sector where it supplies over 6,500 customers or 17% of electricity demand. It currently has c.6% of the retail gas market in ROI.
Government decision to retain ESB as a vertically integrated utility • In February 2012, as part of policy In February 2012, as part of policy determinations relating to the €3bn determinations relating to the €3bn state asset disposal programme, state asset disposal programme, the Irish government announced that it the Irish government announced would not proceed with a sale of a minority shareholding in ESB, as that it would not proceed with a previously signalled, and that it intended to retain the ESB as a vertically sale of a minority shareholding in integrated energy company in state ownership. ESB, as previously signalled, and that it intended to retain the ESB as a vertically integrated energy Government policy is for a continued strong state presence in the company in state ownership. generation and supply of electricity in addition to ownership of electricity and gas networks. The ESB is to be supported as a strong strategic player in the all-island energy market and in due course in the integrated European market.
In the context of the asset disposal programme, the government has committed to exploring the sale of some of ESB’s non-strategic power generation capacity. Facilitating market efficiency and competition are some of the reasons cited for this policy.
The IEA’s fresh recommendation that the Irish government should “reassess the competitive landscape of the electricity sector, with a focus on the appropriateness of the depth of state activity in the sector and the unbundling of incumbents' vertically integrated assets, in line with EU legislation” may serve as a complicating factor, particularly as the IEA’s 2012 review of Irish energy policy was intended by the Irish government to satisfy the requirements for an independent assessment of the
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electricity market as part of the terms and conditions of the state’s bailout package.
Government policy in relation to ESB is, in any case, dependent on the Article 9.(9) certification process by CER and the European Commission in relation to the retention of the electricity transmission assets in ESB ownership. This is expected to be concluded during H2 2012.
The impact of a finding against ESB, on government policy and on company strategy, could be quite far-reaching for the sector as the ESB may face a decision as to whether it wishes to be a focused networks business or to continue as an integrated energy utility less its ROI transmission presence.
Commenting on government policy to retain ESB as a vertically integrated utility, the IEA further remarked that “the divestiture of some further non-core generation assets – and in particular price setting assets – would help address the inherent structural issue of ESB’s market dominance in the Irish electricity market, which is still viewed by many market participants and potential entrants as a barrier to entry and impediment to sustainable long term competition". Government policy concerning any disposals of ESB assets is the subject of a detailed review and will not be known until later in 2012.
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Appendix I: REFIT payments in the Republic of Ireland In the Republic of Ireland, REFIT payments are made to licensed electricity suppliers with whom the REFIT applicant (i.e. renewable energy generator) has entered into a PPA. The licensed supplier pays the generator for power in accordance with the commercially agreed contractual terms of a PPA with the price being at least equal to a REFIT 2 reference price for that technology category.
Reference prices per MWh for each renewable energy technology are set out in the legislation as follows:
Table A1: REFIT reference prices for each category of renewable energy technology
Category REFIT reference price MWh Onshore wind (above 5MW) €66.35 Onshore wind (equal to or less than 5MW) €68.68 Hydro (equal to or less than 5MW) €83.81 Biomass landfill gas €81.49 Note: Prices set at January 1st 2010 to be indexed annually from January 1st 2010 with Irish CPI. DCENR will publish adjusted reference prices on its website annually. Source: Department of Communications, Energy and Natural Resources (DCENR)
The amount of REFIT payable to the electricity supplier depends on the market payment. A balancing payment of up to a maximum of €9.90MWh (not subject to indexation) may also be payable to the supplier in respect of eligible electricity exported to the grid.
The amount payable to the electricity supplier for different market payments is illustrated in the table below for the example of electricity generated from an onshore wind power project and can be explained as follows: 1. When the market payment is equal to or greater than the sum of the REFIT 2 reference price plus balancing payment, there is no REFIT and no balancing payment payable to the supplier. 2. Where the REFIT reference price plus balancing payment exceed the market payment, payment to the supplier under the REFIT support scheme is the difference between the two. 3. Where the market payment exceeds the reference price but is less than the total of the reference price plus the maximum balancing payment (i.e. €9.90), the balancing payment shall be €9.90 less the amount by which the market payment exceeds the REFIT 2 reference price.
Table A2: REFIT and balancing payments payable for different market payments
Technology type REFIT 2 Market Balancing Any other Market Balancing Any other Market Balancing Any other reference payment payment REFIT payment payment REFIT payment payment REFIT price MWh example 1 per MWh payment per MWh per MWh payment per MWh per MWh payment example 1 example 2 example 2 example 3 example 3 Onshore wind (Large) €66.35 €90 €0.00 €0.00 €50 €9.90 16.35 €70 €6.25 €0.00 MWh Source: Department of Communications, Energy and Natural Resources (DCENR)
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Appendix II: other renewable energy players
Bord na Móna (BNM) BNM has diversified from its core responsibilities under the Turf Acts in recent years under its New Contract with Nature business strategy. BNM is developing a portfolio of power generation assets with a target of generating up to 800MW of capacity by 2020. BNM owns and operates the Edenderry power station (120MW). Originally peat-fired, Edenderry now co-fires with 15% biomass with a 30% target for co- firing of peat and biomass by 2016. BNM also commissioned the 116MW Cushaling peaking plant at Edenderry, County Offaly, in 2010.
BNM owns Ireland’s first commercial wind farm built in 1992 at Bellacorick and has substantial further wind capacity under development in three large projects. The 80MW Mount Lucas wind farm in County Offaly is expected to commence construction this year and commercial operation in 2014. The 40MW Bruckana development at the Templetuohy Bog on the borders of County Laois, County Tipperary and County Kilkenny is also at a build-ready stage with commercial operation targeted for 2015.
Oweninny, located adjacent to the existing Bellacorick wind farm in County Mayo, is the largest of BNM’s wind developments. BNM is planning a first phase of 172MW as a joint venture with ESB with up to 370MW development potential. Commercial operation of the 172MW Phase I is planned for late-2015. The pace of delivery will be dependent on upgrading the electricity network. BNM is also exploring large-scale wind developments at cutaway peatlands as part of the export opportunity.
Coillte Coillte, with its substantial land bank, diversified in recent years from its forestry and related activities into developing wind farms. It had already provided a number of sites to third-party developers for their own wind projects.
Coillte has a wind development pipeline of more than 400MW or 11 projects in nine counties following grid access in either Gate 2 or Gate 3 which it has plans to develop or co-develop. Co-development partners include utilities Viridian, ESB and SSE. Coillte also has a larger development pipeline of earlier stage projects.
Mainstream Mainstream describes itself as the world’s leading independent offshore developer. The Eddie O’Connor wind and solar development vehicle also has substantial onshore wind developments in North America, South Africa, Chile and Ireland.
Mainstream is currently constructing its first Irish wind project of 9MW in Caherciveen, County Kerry, and expects to commence construction of its second Irish project (8MW in County Leitrim) in the second half
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of 2012. Mainstream is also actively seeking to acquire further projects as well as developing its own greenfield sites in Ireland.
In June 2012, Mainstream Renewable Power opened an office in Edenderry, County Offaly, and formally announced plans for its “Energy Bridge” to transform the Irish midlands into Europe’s Renewable Energy Hub to supply the UK with up to €2.5bn or 5,000MW of wind energy by 2020. Mainstream’s plans involve the investment of €14bn by 2020 in new onshore and offshore wind farms which will export electricity directly to the UK. Phase 1 will involve developing a 1,200MW onshore wind farm in the Irish midlands which will be commissioned in 2017.
Mainstream is planning its own underground transmission and has reportedly invested over €500,000 to secure a grid connection to the UK and has identified 900 eligible landowners in the midlands to site the wind turbines.
Element Power Ireland Element Power Ireland is run by Tim Cowhig, Kevin O’Donovan and Peter Harte from SWS Natural Resources (SWS), which was acquired from management and private investors by BGE for a reported enterprise value of over €500m in December 2009. At that time, SWS owned 179MW of operating wind farms and over 450MW of development projects. Element Power Ireland has an expanding wind development portfolio of 134MW in Ireland.
Element Power Ireland is part of Element Power, a global solar and wind developer with a presence in 12 countries, 141MW in operation and 9,500MW of projects in development. Element Power is backed by sustainable private equity firm Hudson Clean Energy Partners in its debut US$1bn fund. Element Power is Hudson’s flagship subsidiary.
Element Power Ireland announced its Greenwire project this summer. Greenwire is a planned 3GW wind development project comprising clusters of onshore wind farms in the Irish Midlands connecting to a regional collector node and exporting electricity via underground onshore cables and 2 150mm 2,500MW subsea HVDC cables to the UK, independent of the Irish national grid. The project, which is budgeted to cost €8bn, has already secured two grid connections in Wales – 1GW at Pentir in 2017 and 2GW at Pembroke in 2018. Element Power Ireland is currently in the process of signing land option agreements with landowners.
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Appendix III: Viridian Wind Viridian first invested in wind when it acquired Eco Wind Power (comprising five wind farms in ROI) from Treasury Holdings in April 2008.
Viridian's subsidiary, Energia Renewables, is focussed on expanding the group's presence in renewables by using its expertise and reputation to contract new PPAs with third-party renewable generators and leverage its in-house development expertise, technical know-how and market knowledge to complete further development projects in its project portfolio.
Operational Following the June 2012 transaction with Irish Infrastructure Fund, Viridian owns a minority stake in a 104MW wind farm portfolio: • It owns 25% of Eco Wind Power Ltd with 54MW of capacity in eight operational ROI wind farms. • It owns 20% of Viridian Resources Ltd, which expects to complete construction of two wind farms with a capacity of 50MW in NI this year.
Energia will continue to manage the 104MW portfolio and sell most of the electricity generated through its Renewable PPA business. With 446MW under contract, Energia supplies nearly a quarter of the operational wind capacity to the SEM.
Development Viridian completed its first wind farm construction project at Drumlough Hill, County Donegal (10MW), in 2011, its second at Corkermore, County Donegal (10MW) and its third at Caherdowney, County Cork (9.2MW) – both in 2012. Completion of the 50MW currently in construction in NI will leave Viridian as one of the most experienced developers active in ROI and NI.
Energia has budgeted for a direct investment in an 80MW pipeline of wind farms (12MW in NI; 68MW in ROI) scheduled for construction over the next three years. Management anticipates a €10m equity investment in each of the financial years ending March 2013 and 2014 together with project financing to support the build programme. Energia also has a pipeline of earlier stage wind projects across Ireland (currently in various stages of the planning process) which it intends to advance in due course.
Management is focused on driving growth through continued expansion in renewables as one of five strategic objectives underpinning the group's strategy.
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Appendix IV: Bord Gáis Energy assets: investments in wind power generating capacity In December 2009, BGE acquired the wind power generation assets of SWS Natural Resources (179MW of operating wind farms and over 450MW of development projects) for a reported enterprise value of over €500m. BGE acquired a further 106MW of wind farm development projects in 2009 from other developers.
Investing in wind generating capacity is the cornerstone of BG Energy's sustainable growth strategy.
Operational capacity BG Energy operates c.240MW of wind farm capacity in the SEM, comprising 14 wind farms in eight counties.
ROI – 32 and 6.9MW Sorne I & II, 9.2MW Flughland in Donegal; 6MW Ballymartin in Kilkenny; 19.5MW Booltiagh in Clare; 36MW Lisheen, 0.85MW Mienvee in Tipperary; 22.5MW Knockawarriga in Limerick; 9.35MW Gneeves in Cork; 45MW & 38.4MW & 8.5MW Kilgarvan I & II (Inchincoosh) & Sillahertane in Cork/Kerry.
NI – 5.5MW & 5.1MW Owenreagh I and II in Tyrone.
Development In April 2012, BG Energy commissioned its first own developed wind farm – the 6MW Ballymartin Wind Farm in Kilkenny. Its second own developed wind farm, the 42MW Garracummer Wind Farm in Tipperary, is to become operational in late 2012.
BG Energy has announced a €400m 260MW development and construction programme over the next four years. Management could expand this to 565MW over five years based on opportunities in its development pipeline.
BG Energy was recently approved for EIB financing of €155m to part finance the development of six wind farms between 2011 and 2013 (15- year project financing) with an expected total capacity of 131MW at a total cost of €311m. A further application for funding of €45m for two additional projects is being advanced. Discussions are also ongoing in relation to Export Credit Agency financing of up to €180m to fund the remaining element of the 2012/2013 wind programme.
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Appendix V: EU ETS Phase III – implications for power generation sector Background The power generation sector currently accounts for approximately 60% of the traded carbon volumes in the EU; in Ireland, it accounts for 63.2% of emissions in the ETS sector. This is important in the context of Phase III of the ETS, in which 100% of the Powergen sector allocation will be auctioned from 2013 rather than freely allocated as was the case during the initial trading periods.
During Phase II of the ETS in Ireland, the allocations and emissions broke down as follows:
Table A3: Carbon emissions and allocation breakdown, 2008-2010 (m tonnes CO2)
Name of installation Operator Allocated Emissions Over/under allocation 2008 -2011 Whitegate Independent Power Plant Bord Gáis Eireann 1,193,139 1,186,421 -6,718 Cushaling Power Limited Cushaling Power Limited 10,580 9,384 -1,196 Edenderry Power Plant Edenderry Power Plant 2,529,276 3,175,544 646,268 Tawnaghmore Generating Station Endesa Ireland Limited 19,300 15,459 -3,841 Rhode Generating Station Endesa Ireland Limited 80,076 9,504 -70,572 Great Island Generating Station Endesa Ireland Limited 1,420,116 212,951 -1,207,165 Tarbet Generating Station Endesa Ireland Limited 4,038,320 1,706,405 -2,331,915 ESB Lough Ree Power Station ESB 2,064,760 2,926,986 862,226 ESB Marina Generating Statation ESB 1,056,976 594,899 -462,077 ESB North Wall Generating Station ESB 1,311,460 609,838 -701,622 ESB Aghada Thermal ESB 2,121,272 1,933,048 -188,224 ESB West Offaly Power ESB 2,838,640 3,983,697 1,145,057 ESB Aghada CCGT ESB 1,609,812 1,059,288 -550,524 ESB Poolbeg Generating Station (CCGT) ESB 3,605,784 4,061,844 456,060 ESB Moneypoint Generating Station ESB 15,076,716 14,184,199 -892,517 Huntstown Power Station Huntstown Power Company Limited 2,908,496 3,043,828 135,332 Dublin Bay Power Plant Synergen 3,098,940 4,338,980 1,240,040 Tynagh 400MW CCPP Tynagh Energy Limited 2,984,376 3,093,581 109,205 Huntstown Power Station Phase 2 HPC2 Viridian Power Limited 3,252,340 4,068,247 815,907 Percentage over Over-allocation of 1.96% Total over/under allocation 1,006,276 Source: EPA
Breaking emissions down in the Powergen sector shows an over- allocation of ETS permits of 1.96% during Phase II. This over- allocation can be attributed to the fixed annual allocation of permits agreed before the onset of the current economic slowdown. This provided a generous buffer during the recent downturn as demand contracted. However, the initial allocation to the Irish Powergen sector was in line with the EU's reduction targets, with the carbon output of the sector 14.74% higher than allocated in 2008. However, this fell dramatically to a 1.2% deficit in 2009. Since 2009, actual emissions have been 3.8% and 17.6% under allocation in 2010 and 2011 respectively as electricity demand contracted sharply.
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Figure A1: Annual emissions versus allocation profile in the Irish power generation sector %
20
15
10
5
0
-5
-10
-15
-20 2008 2009 2010 2011
% over/under ETS allocation
Source: EPA; Davy calculations
While Phase II allocations have proved generous in the context of lower economic activity in the economic downturn, the potential costs of auctioned permits could be much higher when Phase III begins. The 10 average grid emissions rate in Ireland is 538g of CO2 per kWh produced, from which an approximate cost of carbon can be determined. The 2012 average spot price of €7.22 would result in a cost of carbon of €3.88 per MWh of electricity produced. This equates to 2- 3%11 of the retail cost of electricity. As carbon is treated as a “pass- through” cost, electricity consumers will ultimately pay this price. The table below details the sensitivity of grid prices to CO2 price movements.
Table A4: CO2 price sensitivity
Cost of carbon ( € per MWh)
CO2 price (€) 5 €2.69 (2012 average) 7.2 €3.90 10 €5.38 15 €8.07 20 €10.76 25 €13.45 Source: EPA; Davy calculations
Evidently, the potential costs of generation are high for fossil fuel powered stations, depending on the demand for electricity and the
prevailing CO2 price at auction. While the CO2 price plummeted during Phase II of the ETS, owing to the downturn and the resulting over- allocation of permits, demand for carbon will inevitably pick up as the economy recovers. Many entities may have banked Phase II permits in anticipation of any recovery, which will be converted to Phase III credits. This may provide an initial buffer to costs when Phase III begins in 2013.
10 See http://cmt.epa.ie/global/cmt/emission_factor_sources.pdf 11 Based on Electric Ireland Standard Electricity Price Plan
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