As part of the development of a sustainable energy strategy, the Irish government has recently enacted a number of measures that represent significant extensions to the Renewable Energy Feed In Tariff (“RE-FIT”) scheme of financial support for the generation of electricity from renewable sources. This article summarises the original positions, these changes, and hints at issues that should be considered by parties seeking to make use of the support that is available.
Readers will by now be familiar with the general structure of the RE-FIT scheme. The scheme was introduced as a means of delivering Ireland’s renewable energy targets set out in Directive 2001/77/EC on the promotion of electricity produced from renewable energy sources in the internal electricity market. The national legal basis for the scheme is the Electricity Regulation Act 1999.
In the form in which it was introduced on 1 May 2006 (“RE-FIT 2006”), the scheme began as a support mechanism for certain types of renewable generation, specifically: large scale wind energy (having installed nameplate capacity rating in excess of 5 MW)
- small scale wind energy
- hydrobiomass (landfill gas)
- other biomass
The RE-FIT scheme is open to participation by all licensed electricity suppliers. It requires the supplier to enter into a power purchase agreement (“PPA”) with a generator for the purchase of renewable energy. The PPA is commercially negotiated between the parties. The supplier purchases the output from the proposed generator under the PPA and, subject to certain economic conditions being satisfied, it receives a stream of payments under RE-FIT.
RE-FIT is designed to make renewable-based PPAs more attractive to suppliers at the negotiation stage, by providing an additional stream of revenue to a supplier that enters into such a PPA. The supplier receives, for 15 years, a guaranteed administration payment, and may also qualify for “opportunity cost” and “technology” payments. The scheme provides a hedge against the risk faced by the supplier/purchaser that the agreed PPA price exceeds market-based wholesale prices, and that the supplier is therefore supporting, through the PPA, a technology that proves to be more expensive than other sources of electricity.
The availability of RE-FIT makes a qualifying PPA more commercially attractive to suppliers, and this in turn benefits renewables developers who are looking to remunerate their projects through bankable long-term PPAs.
There are two elements of RE-FIT payments, namely, opportunity cost payments and technooogy cash payments, as described below.
A key element of RE-FIT is the set of reference prices that are listed for each of the technologies to which the scheme applies. Under RE-FIT 2006, these range from 5.7 euro cent per kWh for “Large Scale Wind” (defined above) up to 7.2 euro cent per kWh for electricity projects that use hydroelectric or certain types of biomass technologies. The prices are adjusted upwards by the annual increase, if any, in the Irish consumer price index.
The “Large Scale Wind” reference price is used to calculate the “opportunity cost” payments that are to be made under RE-FIT to a supplier where the supplier’s cost of purchasing the electricity under the relevant PPA exceeds the cost that the supplier would face if it had to purchase the same electricity from the single electricity market (SEM). The latter cost is proxied by way of an SEM-based “benchmark price”, which is calculated by the CER and is based on a weighted average of market prices. For the 2009-2010 period, the Commission for Energy Regulation has forecasted that the price is €52.00 per MWh or 5 eurocent per KWh .
In addition to the opportunity cost payment, a “technology difference payment” is available under RE-FIT, to compensate suppliers for the higher underlying costs thought to be associated with the use of renewable technologies that are more expensive than large scale wind. The payment is available if the PPA price exceeds the reference price for the relevant technology, in which case the payment is assessed on the difference between such technology-specific price and the “Large Scale Wind” reference price of 5.7 euro cent per kWh.
Transfers and Duration
The Rules issued by the Government in relation to RE-FIT, and as approved by the European Commission, set out a number of conditions applicable to the PPA. One such rule relates to transfers. If a PPA is terminated, the relevant RE-FIT letter of offer (which each applicant declared successful in REFIT receives) may, with prior ministerial consent be transferred if a new supplier enters into a compliant PPA for the remainder of the 15-year term. The Department of Energy, Communications and Natural Resources (“the “Department”) has clarified that any agreement to transfer a PPA will not be unreasonably withheld and can be processed on a “time is of the essence” basis. It stressed that the duration of RE-FIT cannot exceed fifteen years and this fact must be accepted by the new supplier. For example, if the initial PPA operated for ten years, the remaining compensation cannot exceed five years, thereby delivering support for a period not exceeding fifteen years in total. Although helpful, the requirement to obtain this consent is a delaying factor which will be noted by potential project entrants.
Changes to RE-FIT: (1) Extension of RE-FIT 2006
RE-FIT is supported by funds levied from Irish electricity consumers through the Public Service Obligation (“PSO”) mechanism. The mechanism requires that each project qualifying for support be published in a statutory instrument.
The latest statutory instrument published in respect of RE-FIT 2006 was the Electricity Regulation Act 1999 (Public Service Obligations) (Amendment) Order 2009 [the “2009 Order”)]. In addition to supplementing the list of projects, the 2009 Order also allows the Minister to extend the commercial operation deadline (which is currently 31 December 2010) for particular projects.
As Ireland’s PSO mechanism constitutes a form of State aid, the Irish Government was required to obtain EU approval in relation to the establishment of RE-FIT 2006, and this was duly obtained. However, such approval was granted only in relation to generating capacity of 1,450MW.
As is clear from the 2009 Order, the total capacity of projects approved for RE-FIT 2009 (discussed in further detail below) now amounts to in excess of 1,661MW. We understand that an extension to EU State Aid approval is currently being sought in respect of the additional capacity.
Changes to RE-FIT: (2) Establishment of RE-FIT 2009
The Department recently announced details of a number of additional categories of technologies that are to be eligible for support under a further tranche of the RE-FIT scheme (“RE-FIT 2009”). RE-FIT 2009 will provide support for the following categories of electricity:-
- Anaerobic Digestion which is electricity generated from the product of the breakdown of organic waste by bacteria in an oxygen-free environment.
- High Efficiency Combined Heat and Power (HE-CHP) which is electricity generated from biomass as a result of the simultaneous production in one process of thermal energy and electrical energy. In the case of HE-CHP, the applicant must demonstrate that the proposed project satisfies certain efficiency requirements.
- Ocean (wave and tidal); and
- Offshore wind.
The following points are also worthy of mention:-
- RE-FIT 2006 had a specific target of securing 400MW of newly constructed renewable energy-based electricity plants by 2010. RE-FIT 2009 has a new target of 16 per cent share of energy from renewable sources by 2020 addressed to Ireland in Directive 2009/28/EC on the promotion of the use of energy from renewable sources;
- While both RE-FIT 2006 and RE-FIT 2009 provide support mechanisms for renewable energy generated from biomass fuels, each scheme has been designed to deal with separate and distinct categories of biomass technologies (for example, biomass landfill gas in RE-FIT 2006 and HE-CHP in RE-FIT 2009);
- RE-FIT 2009 includes substantially higher references prices than those provided by RE-FIT 2006. Under RE-FIT 2006, the reference prices are as follows -
- Large Scale Wind – 5.7 eurocents per kWh;
- Small Scale Wind – 5.9 eurocents per kWh;
- Hydro – 7.2 eurocents per kWh;
- Biomass Landfill Gas - 7 eurocents per kWh; and
- Other Biomass – 7.2 eurocents per kWh;
Whereas, under RE-FIT 2009, the reference prices for the new categories included were as follows -
- Anaerobic Digestion - 12 eurocents per kWh;
- Ocean Energy – 22 eurocents per kWh;
- Offshore Wind – 14 eurocents per kWh and
- HE-CHP - 12 eurocents per kWh.
- The reference prices set out under RE-FIT 2006 are adjusted by way of indexation annually by the annual increase, if any, in the Consumer Price Index (“CPI”) of Ireland (based on such index as at 1 January 2007). By contrast, the rules of RE-FIT 2009 do not provide for the indexation of the reference prices; and
- RE-FIT 2009 provides the Minister at the Department (the “Minister”) with new powers to limit support provided under the scheme. Under RE-FIT 2009, the Minister may at his discretion and by notice published on the Department’s website impose a quantitative limit in any category or an overall limit across all categories of electricity.
One final point of note is that EU state aid approval is currently being sought in respect of RE-FIT 2009. In advance of state aid clearance from the European Commission, the Minister reserves the right to alter or amend the rules of RE-FIT 2009 as a consequence of any directions received from the European Commission.
The following general points, common to both RE-FIT 2006 and RE-FIT 2009, should also be noted:
- A generator that participates in the SEM is not generally permitted to enter into a PPA, as generating licence conditions require that its entire output be sold into the SEM pool (rather than through a PPA). However, a generator wishing (or obliged) to participate in the SEM may retain a PPA, so long as the CER has approved an “intermediary” arrangement, whereby the PPA purchaser then bids the power into the SEM. Under such an arrangement the PPA purchaser would receive both SEM and RE-FIT revenues. The extent to which these will be shared between the PPA purchaser and the generator will be a matter for commercial negotiation.
- The RE-FIT rules do not prevent payments being made to an electricity supplier that is part of the same corporate group as the generating company. When taken together with the previous point, this may give rise to an opportunity for both SEM and RE-FIT revenues to be captured by members of the same corporate group – although the establishment and operation of a supply undertaking for this purpose carries with it a significant regulatory and administrative burden.
- Specific issues that should be addressed in a RE-FIT–backed PPA include provision for the consequences of the loss of the RE-FIT ‘letter of offer’, and of market change.
- Each PPA will require careful consideration of any counterparty risk, i.e. what credit support is required from the supplier?
- the terms and conditions of the RE-FIT schemes are contained in the State aid decision, the respective sets of Rules and clarifications published by the Department , and the relevant enabling PSO legislation. It would be a lot simpler, and conducive of more legal and regulatory certainty, if these instruments were consolidated into a user friendly document with a unified legal status and a transparent change control process.
The current economic conditions have not prevented Ireland from providing a real financial incentive to developers interested in realising the growth potential of renewable energy. It is to be hoped that a significant portion of the projects that have been and will be approved for RE-FIT 2006 and RE-FIT 2009 will be built out, and that this activity will provide a platform for a sustainable and dynamic Irish renewable energy industry.