Exporting renewable energy

William Fry Solicitors hosted a round table discussion on the export of renewable energy from Ireland to Great Britain.

What is the potential for exporting renewable energy from Ireland?

Fergus Devine

No matter what sector you are in, before you start exporting you have got to figure out: “Is there a market? Is there demand in that market and is there a route to that market?” EU regulations have created the market for renewable energy in the UK – and it’s not clear to me that the UK has admitted yet that they require Irish renewable power to help meet that market demand.

William Webster

If you look at the extent of the renewable targets for the UK, then 15 per cent of all energy has to come from renewables. This equates to 35 per cent of electricity demand, which means there is a market of 120TWh to go after and only one third of that has already been filled. There are other projects being developed onshore and offshore in the UK but the political framework for onshore projects has deteriorated. As we get closer to the 2020 deadline, member states will look at what scope there will be in using the flexibility mechanism to reach their target and will start to look at countries like Ireland which will probably be in a surplus.

Peter O’Shea

Fergus put his finger on it when he said that it is a market created by regulation. So it is not a natural market in some respects. That is probably its greatest strength but also its greatest weakness, in that what man has put in place, man can take away. It is about giving some degree of certainty in the UK, with a set of rules put in place that will endure for the period of what is a significant long-term investment. There is clearly an opportunity until 2020 but after 2020 the situation is extremely unclear and there are some critical policy issues to be addressed for the period after 2020.

John Reilly

Nothing will happen without the market framework being in place. As regards the opportunity, we have 2GW installed on the island today and probably a further 2GW likely to be developed by 2020. That should satisfy Ireland’s National Renewable Energy Action Plan targets for compliance by 2020. Our view in Bord na Móna is that there is probably another 4GW of potential onshore, that is plus or minus 1GW depending on planning outcomes in particular and the ability to manage incremental increases in the quantities of wind energy on the power system.

Our own land holdings within Bord na Móna could easily accommodate 2-3GW and it is likely to be more challenging to develop onshore wind farms on private land, as opposed to the wide open, sparse populated cut-away peat lands emerging in our landholding. So in total we think there is possibly the potential for 6GW to 8GW to be developed onshore by 2030 and there is possibly another 6GW potential offshore in that timeframe. The key issue is that we cannot use all this domestically and so export opportunities will need to arise if this potential is to be fulfilled.

Michael Walsh

There is an opportunity if you look at the resource available. There is a surplus of resource on this island relative to the native demand. There is more demand on the neighbouring island than there will be resource. By delivering a degree of connectedness between the two islands, in an organised fashion, that enables greater trade – the general feature throughout history has been that greater trade has been good for both parties. If infrastructure projects are delivered to bring greater trade, with the two markets on the islands coming together, I think that there is a very significant opportunity that will benefit both economies in the longer term.

Denis Cagney

The basic business model underlying this is fairly well recognised and well established, with the perception that Ireland has a very good wind resource. If that is to be realised, that has to be exported as there are clear limits that we can accept on our own system. Therefore it is very much a function of how the UK is committed to 2020 targets and what is going to replace 2020. After that, will we still have member state renewable targets or more aggregated emissions reduction targets? Focusing on the more immediate 2020 targets and being involved in the UK-Ireland steering group, the focus is very much about what should be in this inter-governmental agreement.

What is the UK willing to commit to in terms of the first instalment, at least, in terms of capacity? We know they have their 2020 targets. How much are they going to offer to onshore Ireland? Hopefully this will emerge in the coming months. Another factor will be what will be acceptable from a planning perspective in Ireland? There is no point in having a very ambitious regime between member states if it does not have any chance of getting planning acceptability. The last element is what can be financed?

Paul Dowling

Intrinsically, the Westminster Government needs trade. A characteristic of the English economy is that they believe the ability to trade is critical. So that is the big positive. On the renewable energy policy side, they have a more sophisticated policy framework than we have in Ireland with many more variables.

They also review that policy on quite a regular basis. An example of this is the road map they published in 2010, and they will tweak the policy within that framework. In Ireland, we have a tendency to set a policy for a period of five to 10 years. In the UK, it is more fluid and it would be quite acceptable in UK policy terms to say: “Offshore wind is going to do twice what it was targeted to do two years ago.”

The more fundamental issue here is that in Ireland we have a tendency to think more long term and sometimes we miss the here and now. Last year, the UK put in 1,900MW of wind, onshore and offshore. We did 125MW here in Ireland. We will have problems hitting our own targets unless we get our own house in order.

Denis Cagney

I think there is an air of unreality about some of the figures and some of the plans one sees progressing. That said, we have moved on in the last year (2011) to 20 per cent of our consumption from wind which is considerable progress from where we were. Implicit in what Paul is saying is that somehow or other meeting our own targets and meeting an export goal are sort of competing with one another. If the export market and these export projects do not run out, they will simply fold; the two issues are largely separate. We met with the European Commission and they said: “If a member state fails to meet its own renewable targets, it cannot invoke something from exports.” And that is perfectly sensible. The export projects can go ahead if they make business sense.

Peter O’Shea

By looking at Gate 3, we will get a better understanding about what is going to proceed by the year end. By then we should have a much better baseline to say with confidence that Ireland is going to meet its renewable targets. I personally think we will, given the scale of Gate 3, and REFIT 2 is sufficient to make sure we will get the 4,000MW in Ireland, north and south, which will meet our 40 per cent target and then look beyond that to see if there is an export market.

Michael Walsh

Paul made an interesting point that we were down as low as 57MW one year but in the last couple of years there has been a lot of good work done between the department, the regulators and ourselves in getting a lot of the policy instruments in place such as REFIT, clarity on SEM rules and Gate 3. We are now seeing a real upturn in interest from developers and I think we are going to start building at a much higher rate than previously seen. With the Irish targets, a couple of large players developing a few big wind farms gets you a long way towards the targets very quickly.

Do the economics of onshore Irish wind stack up for the GB market?

Peter O’Shea

Our analysis would indicate the cost of putting onshore wind in place and putting a cable in place can compete against the latest offshore wind round in the UK. There is a gap but the key question is: “Who gets that gap?” It has got to be shared between British consumers, Irish consumers, Irish local communities and perhaps even royalties to the Irish Government.

William Webster

Another factor is the so called levy control framework regime, which has been set by the UK Treasury until 2020 (when it will be £7.1 billion) and whatever DECC does has to be within that framework. If they can get more ‘bang for their buck’ from cheaper projects in Ireland, then they will get more MWs towards their targets.

Fergus Devine

Critical to the inter-governmental discussions is that the UK Government are willing to benchmark our onshore wind against UK offshore wind although at a discount to UK offshore wind. The UK’s new Energy Bill is going to roll out renewable supports in the form of contracts for difference, which is their new version of ROCs. These will be rolled out in Northern Ireland as well. If Irish onshore projects are to receive those supports in line with UK offshore projects but Northern Ireland onshore projects are treated as equivalent to English onshore projects, there will be a disparity between North and South which will need sorting out.

Paul Dowling

I’m not so sure you will get a discount on offshore wind. The UK Government is taking someone’s pie and going to give it to someone else outside the jurisdiction. There is not much political capital in that. There might be some trading element which appeals to the Conservative mind-set. There has to be a very strong economic case for the UK Government to do this. Also, the offshore wind pitch is about building an industry for the 21st century in the UK and it has a strong political lobby. We need to be careful in how we frame our language. We constantly talk about the export potential. We need to talk more about the trading between the two islands.

John Reilly

The other dynamic here is the European electricity market regionalisation. We should not be looking at this solely in terms of imports and exports between two neighbouring jurisdictions. I think in the next decade or so we will see the development of a regional electricity market – albeit at a slow and piecemeal pace. It is more about: “As a group of islands on the fringes of Western Europe, what does our total electricity system look like? And what components make up that system?” In terms of our reliance on gas, we are almost wholly reliant on GB, riding on the back of their gas infrastructure. If you were to look at this in terms of energy security for a regionalised Ireland/GB market, why shouldn’t we assist the UK in meeting their stretching RES targets with the development of renewable resources on the western fringes of their marketplace in return for the gas security benefits their system provides us?

Paul Dowling

If there is tight pricing, there will be no option but to go for a fully functioning interconnector because the project will not be able to bear the costs of the infrastructure. It comes back to pricing. If there are big margins in the pricing, you can build up the radial model but if there are not, you are going to have to get economic rent out of that piece of infrastructure. It is like building a motorway that can only go one way.

How will the subsidy element for renewables work across the two islands?

Fergus Devine

The inter-governmental agreement will have to extend the new UK regime to RoI projects. Under the new regime in the UK, including Northern Ireland, the CfD support prices will initially be priced equivalent to current ROC prices and will be offered as 15-year contracts which makes them bankable. After a five-year period, allocation will be by competitive auction and new projects will therefore have to compete for them.

John Reilly

Essentially we have a similar regime in Ireland in that we started with AER contracts and have moved through REFIT 1 and 2 and the general trend is that as we move forward, each subsequent support tariff will likely be less attractive than the previous one. That is exactly as it should be, as we should be thinking in terms of 2030 and if we are still subsidising onshore wind in Europe, developed in the right locations, then there is something seriously wrong. At that stage onshore wind in particular should be an integrated element of a wider regional power system and market, where it should be competitive in terms of making a major contribution to the wider decarbonisation agenda. I’m sure Irish onshore wind can be delivered at a competitive price into the UK, certainly when compared to Round 3 offshore and therefore a support system can be devised that makes a project like this bankable in that context.

How will interconnection be funded in order to facilitate the export of renewable energy?

Fergus Devine

Any solution for interconnection funding must ensure that the cost of Irish onshore wind energy is still competitive when delivered to the GB market.

Peter O’Shea

If the interconnector is part of an integrated set of systems, then these projects will not just be seen as exporting to GB but will be seen as a wider provision of an energy system over the two islands. The interconnector aspect is pivotal to the projects. The two options are, one, some form of direct connection that is built into the project and the second is some form of regulated interconnector that is standalone from the project. I would tend towards the latter of the two as it gives the message that this is about joining two systems and is a system-wide approach to delivering energy to consumers in both GB and Ireland.

Michael Walsh

If you look at it from the viewpoint of developing strategic infrastructure that connects the two islands and enables greater trade, that has huge benefits. We did a study with our colleagues in the National Grid TSO and it identified that if you use this infrastructure to release, for example, 700MW of trading capacity between the two islands, it would cost an incremental investment of around

€100 million and it would release benefits of about €75 million extra each year from trade. So it is as good an investment as you will find in any sector.

If you look at the other model of direct connection, you could imagine a situation in 2020 where you have a very cold winter’s day with no wind blowing and a capacity shortage in GB and we have 4GW of thermal units doing nothing and 3GW of lines doing nothing. That would be a huge policy failure.

Denis Cagney

The issues of interconnection and the regulatory treatment of networks are at the core of this. It is still unresolved but it has to be resolved before the projects go ahead. I think it is a question of how we balance short-term versus long-term considerations. In the short term, the political dynamic is to have an inter-governmental agreement that will begin to deliver something by 2020.

The first model is the radial export to GB. Effectively, the projects would be part of the GB system off Wales which just happens to be in the midlands of Ireland. From a regulatory perspective, it is fairly convenient with few issues to resolve. On the GB side, my understanding is that they will be drawn to that in the early stages as there is no need for primary legislation. That is the tension in this project: to get something up and running and at the same time we want to future-proof it. We do not want something so short-term that we forgo an opportunity.

The issues of integration are very complex but they are doable. In the long term, there is going to be market integration. That is the tension I see on the regulatory side and it spills over into the planning and public acceptability side of the project. It is also not just the acceptability of this to the public but also to An Bord Pleanála, who are keen to know what the definitive, concrete Irish policy framework is for any project that comes to them for approval.

Is there one issue to focus on for the next 12 months to make the export of renewable energy a reality?

Fergus Devine

The Minister is trying to balance the planning concerns by highlighting the jobs benefit. We are trying to sell ourselves as the Saudi Arabia of wind and he has used the phrase “we won’t just make the sandwiches,” meaning that we want a greater role in the supply chain. However, if we try to deliver too much, including factories to make the turbines, we are really going to get lost. Instead, we need to focus on bite-sized projects that we can deliver.

On the funding side, a PPP model is often used whereby the Government provides the land, the planning and the relevant authorisations. There is a model where you could offer those bite-sized projects on a PPP basis and payments or fees the Government receives could be used to pay for the interconnector.

Paul Dowling

I would focus on the ‘here and now’ and learn how to actually export wind with the current infrastructure and get on and do it. There is an opportunity with the current infrastructure. Let’s start moving some power now to deal with the curtailment issue.

Peter O’Shea

Michael mentioned the benefit of having short papers outlining the issues of comparing direct connection versus interconnection of both grids. I would suggest a third piece around using the existing infrastructure around virtual trading. I think understanding these three options will address the connectivity issue, which is the difficult piece.

John Reilly

Two things. Understanding clearly the UK commitment. This doesn’t work without the guy who signs the cheque. All the signs are that the UK will put the cash on the table if it is perceived to be of economic value to the UK.

The second issue is the whole issue of planning and public acceptability of large-scale wind farms in Ireland, whether they are for exporting to the UK or meeting our 2030 targets. The planning authorities will want to know clearly when we submit a planning application for generation assets what need are they fulfilling under Irish energy policy.

Michael Walsh

Both governments need to agree that this is something worth pursuing. If they come to the conclusion that this is something real, and if they can create a sense of urgency and demonstrate a level of political commitment, then I think the rest of the details are eminently solvable.

William Webster

The benefit of renewables, and wind in particular, is that it is bite-sized compared to other low carbon technologies. It is incremental so you can start with a certain size and if it works, you can add to it. There is also an aspect of ‘just get on and try it’. You can sign up to the GB balancing and settlement code and solve those practical details of selling into the GB market. Someone could start now on a small project and join the day-ahead market and start selling renewables into the market, and they will soon find the obstacles.

Peter O’Shea

Going back to Fergus’s earlier comment, “we are not just in it for the sandwiches,” I would like to see a real assessment of what really is in it for Ireland Inc. As a nation, we are not neutral to the outcome of this and we need to understand what is in this for Irish taxpayers, communities and consumers, over the medium and long term, and it has got to be about more than just developers making profits.