Wind Subsidies
With the levy on consumers for wind-generated electricity set to soar, John Kinsella examines whether a new subsidy design will ease the burden
With the PSO levy on consumers for wind-generated electricity set to soar, will a new subsidy design ease the burden?
Stand by for higher electricity bills in the autumn. From October, the Commission for Regulation of Utilities is set to increase the Public Service Obligation levy by 170%. And future increases in the PSO burden may become clearer when white smoke emerges from the longawaited first RESS auction.
RESS stands for Renewable Energy Support Scheme, and it will be taking over from the Renewable Energy Feed-In Tariff scheme (REFIT) which has been in place since 2009.
The PSO and REFIT/RESS are connected. The RESS is a subsidy scheme that will rebate wind power generators the difference between a guaranteed price and the wholesale price of electricity in future years. In the REFIT guise, Ireland’s wind energy sector has enjoyed huge expansion, at a cost of billions of euros to electricity consumers.
The PSO levy is paid by every commercial and domestic electricity consumer. It funds the outgoing REFIT scheme and will fund the incoming RESS scheme. Until now, the PSO has provided huge subsidies for peat power generation in the midlands, for ‘security of supply’. Now that peat bogs are being closed to fight climate change, the levy will solely support renewables, mainly wind.
The PSO levy is calculated by the CRU every 12 months, and it’s set to soar for 2020/21 because the wholesale price of electricity has been falling. For 2019/20, the PSO tapped electricity consumers for €176m. For the coming year the amount raised by the levy will nearly triple to €480m.
Effective 1 October 2020, the CRU is proposing average increases of €5.20 per month for domestic customers and €14.50 per month for SME customers. For industrial electricity consumers, the increase is much larger. According to the regulator, the key driver for the increase is the expected lower wholesale market prices for the 2020/21 period.
PSO levy payments are calculated on the basis of the estimated wholesale electricity market prices for the year ahead. These payments are then
adjusted, through the ‘R-factor mechanism’, to take account of the actual generation and wholesale electricity prices.
Under REFIT, each year there has been an amount of renewable electricity on the grid that has an inflation-linked guaranteed price. When the wholesale electricity price is under the REFIT rate, the PSO fund bridges the gap. In theory the offset for the increased levy should be lower unit prices for electricity. However, despite all the extra wind generation in the past two decades, electricity prices in Ireland are among the highest in the European Union.
With REFIT, producers are guaranteed an inflation-linked price for 15 years, currently c.€80 per megawatt hour, for the power they sell to the national grid. The scheme launched in 2009 and the last REFITfunded wind farms have connected to the grid this year.
After much delay, policy makers in the Department of Communications, Climate Action and the Environment have adopted a new approach to subsidising wind power generation. A new subsidy model was required due to the EU outlawing REFIT-type subsidies.
The Renewable Energy Support Scheme centres on an auction system. Winning bidders will still have their price guaranteed, though there will be no more inflationlinking. According to the department, generators must compete in auctions for subsidy support by bidding in a price for their renewable generated electricity. This price might vary from project to project and also from auction to auction.
DCCAE expects that generators’ bid levels will reduce as the scheme matures with each additional auction, due to technology cost reductions.
“This in turn will put downward pressure on the prices that consumers pay to support renewables through the PSO,” DCCAE claims. In the short term, however, the PSO burden on electricity consumers will continue to be sizeable.
RESS is devilishly complicated. DCCAE, now led by Green Party minister Eamon Ryan, oversaw the shambles that was the bidding process for the National Broadband Plan, and in an auction process lawyers for losing bidders will be watching like hawks. The ‘Terms and Conditions’ document for RESS runs to 113 pages of dense legalese, and on this occasion Ryan will be hoping that his mandarins have their ducks in a row. RESS supports from the PSO to wind energy generators and their
‘Despite the extra wind generation, electricity prices in Ireland are among the highest in the EU’
power customers will be provided through a two-way arrangement relating to a ‘Floating Feed in Premium’. When costs (the bid price the generator has made initially to win at auction) exceed market revenues, payments will flow from the PSO to the supplier. In the event that market revenues exceed costs, the supplier will have to pay that surplus back to the PSO fund.
“There’s more of a balancing risk being shared by the renewable electricity supplier,” explains Ronan O’Grady, head of legal at Solar 21, a specialist in renewable energy infrastructure. Bids will have to be low enough to be competitive at auction but high enough for some inflation cushioning. “You almost have to bid up your price a little bit, just in case you get stung for inflationary costs,” O’Grady adds.
The big unknown with RESS and the risk to electricity consumers, is at what price bidders will be successful. The PSO will stump up €480m to renewable producers in 2020/21 on the basis of a REFIT wind energy reference price of €71 to €73 per
MWh. That’s because the market price offered by electricity wholesalers per MWh is way under the REFIT €71/€73 price point.
It’s somewhat alarming to note that Eamon Ryan’s department expects winning bids could be way above the current REFIT reference price, so much so that for the first RESS auction a maximum bid level of €120/MWh has been stipulated. If, for any reason, wholesale electricity prices stayed at the current level through the next decade, RESS suppliers who have bids accepted at €119/MWh would reap an enormous bounty from the PSO — paid for by electricity consumers.
The allied risk for electricity consumers is that the wind energy sector is much more concentrated now than it was when REFIT was devised. Scores of small players have been consolidated into a few large suppliers, many of whom paid steep prices for their assets.
Such fears may be misplaced. David Connolly, CEO of the Irish Wind Energy Association, says that RESStype subsidy schemes in other EU countries have driven down the price of electricity. “The technology is so efficient and the industry is so mature that we should absolutely be able to do this cheaper than natural gas, oil or coal,” says Connolly.
“However, the policy and regulatory landscape in Ireland is not nearly efficient enough for us to deliver the low-price wind energy we think we can deliver. If things stay the way they were for the last decade, like the time it takes for a wind farm to secure planning permission and then connect to the grid, we may hit an obstacle in the new wave of renewables.”
The view from Ibec, the business lobby group, is that the transition to a low-carbon economy has to be financed in a way that ensures energy affordability and business competitiveness. According to Conor Minogue, Ibec’s senior executive on energy policy: “Renewable supports must be designed with cost effectiveness in mind. To keep the PSO as low as possible, the new government should consider additional financing through the Exchequer. Given the scale of the transformation planned between 2021 and 2030, we believe the long-term sustainability and equity of the model needs to be assessed.”