Blog: RESS Mixed Investment Signals

18 Mar 2020

The recent publication of the final terms and conditions for the first Renewable Electricity Support Scheme (RESS) auction has given a long-awaited green light to the renewables industry that we will likely see the first auction take place in 2020, writes David O'Sullivan, Commercial & Regulation Manager, Brookfield Renewables

The initial RESS High-Level Design outlined four to five auctions running from 2019 to 2025 to deliver up to 13.5TWh of new renewables. In that publication the Department set out a strong preference for technology neutral auctions. While the recent Climate Action Plan 2019 contains details for RESS1 in 2020 it also sets out many targets for offshore wind including an explicit target of “at least 3.5GW of offshore wind”. Given that 3.5 GW of offshore wind alone would deliver all the 13.5 TWh target in the RESS High Level Design, investors are perhaps understandably unsure about whether post RESS-1 auctions will be technology neutral or whether they will be exclusively for offshore.

A look at the bigger picture does provide a little more clarity for investors. A review of the overall target of 70% renewables in the context of the EirGrid Median Demand Scenario suggests we will require all 13.5 TWh of the proposed RESS volumes plus the full 15% target for Corporate PPAs set out in the Climate Action plan to come close to achieving the target. So, while industry may not have a clear policy environment or investment signals, it can at least have some degree of comfort that there will be a market for new renewables over the coming decade.

 

RESS 1

 

RESS 1 Timelines 

The Climate Action Plan sets a clear pathway for delivering 2030 objectives and evidence of buy-in to this programme is clear in the recent milestones delivered for the RESS1 auction.

While the auction itself was delayed from 2019 to 2020, since September of 2019 we have seen a marked acceleration in progress including several stakeholder workshops, obtaining Government approval for the draft RESS1 terms and conditions and a quick turnaround time between the end of the consultation period for the terms and conditions and their final publication date.

This has increased confidence levels within the industry that we will see an auction take place this June.
The only outstanding question mark which now remains is when State Aid approval for RESS1 will be granted and what impact that might have on the auction.

RESS 2

 

Terms and Conditions 

While the draft Terms and Conditions were reasonably well received by industry, the final terms and conditions are generally considered more of a mixed bag. There is some disappointment that there were minimal changes to the auction design elements of the RESS1 Terms and Conditions following the December and January consultation.

In January 2019 IWEA published a position paper on the RESS detailed design which focused on five points to deliver consumer value. These were:
1. Longer contracts;
2. Revenue stacking;
3. Realistic construction timelines;
4. Stable price;
5. Manageable risks.

While it can be argued that the final Terms and Conditions adopt points 1-3 above, it seems that the DCCAE differed with industry views in relation to points 4) and 5):

4. Stable price - Exposure to inflation risk and all negative pricing risk mean we will likely see higher bid prices in RESS1 than we otherwise would have. Perhaps more importantly, the absence of indexation means that strike prices will need to be considerably higher to provide enough revenues in early years to offset lower revenues in later years. If IWEA calculations of a 10%-12% increase in bid prices bear true at auction, we could see negative publicity making decarbonisation of electricity even more challenging for both the DCCAE and industry.

5. Manageable risks - the continued inclusion of a December 2023 “cliff-edge” will increase risks for many projects, particularly as grid delivery remains unclassified as a force majeure event. This could well mean lower participation rates at auction and resulting upward pressure on clearing prices.

Outside of those core points, it was positive to see a change in the final terms and conditions in removing ‘constraint payments’ from how ‘market revenues’ are defined. This will make it easier for compensation for redispatch, which is mandated through the Clean Energy Package, to be realised once the SEM Committee has made a decision.

Other issues, such as a very high bar being set for older projects to be considered for repowering, will likely have longer term impacts on the volume of renewables in future auctions.

Critical Path for 2030 

Overall, while things are progressing well, it is vital that RESS 1 is delivered by June 2020 to reduce the gap to our 2030 target which will begin to widen steadily from this year as the number of new projects falls as REFIT comes to a close. The next few months will be pivotal in setting the starting point for Ireland’s renewable journey towards 2030.