Reverse RESS Auctions
Kim Scullion, January 2021
Overview
Ireland has decided that the most efficient and least expensive way to achieve our Renewable Energy targets is to hold a number of auctions now known as the RESS auction. Within this process the least expensive renewable projects will be successful whilst the most expensive will fall away or look for alternative merchant structures.
| Q: Should RESS auctions therefore not be for the full volume required to meet Ireland’s renewable energy target as they are designed to be the most efficient and cost-effective way of meeting these targets? |
Or put another way:
| Q: Is the RESS auction not the most efficient way for both corporates and generators to also meet the 15% renewable target expected to be met by Corporate PPAs? (“CPPA”) |
Corporates want to source their power from renewable sources, but it needs to be made easier for them to do this. They need to be incentivised and encouraged to participate in Ireland’s existing mechanisms that we are using to build out the renewable energy we require.
Reverse auction for corporates
Any projects which are ready to be built will bid into the RESS auction and the most expensive projects will not be successful.
| Q: Does this then not imply that the 15% that corporates are expected to contract with will be more expensive projects than the RESS projects? |
| Q: Are corporates likely to sign a PPA for renewable generation that is more expensive than PSO generation? |
| Q: Could corporates be encouraged to enter the auctions (in an opposite direction to the generators) by allowing them to take the cheapest new renewable generation to meet their demand? |
Corporates could bid their strike price offer into the auction (they would then essentially take up the least expensive volume first). Their contract could then be with the PSO so there is no counterparty risk for the generator or the corporate. If successful their Reverse RESS CFD would hedge some of the PSO exposure to the strike prices and thus reduce the volume of Feed in Premium (FIP) covered by the RESS contracts (so if there was 15% demand from corporates and they took 15% of the auction, RESS would only be supporting the remaining 85% as is expected, if corporates take up more it reduces the support required from the PSO).
RESS support paid directly to the generator
Reverse auctions would be another reason that a generator should not be required to enter into a PPA with a licenced supplier for RESS. Support should go directly to the generator. The generator could then have a CFD with RESS (PSO) for the RESS Strike Price and the corporate could have a (corresponding) Reverse RESS CFD with the PSO.
There is no reason in the SEM market why a RESS generator should have to enter into a PPA with a licenced supplier to obtain RESS support. A generator can register directly in the SEM (it does not need a supplier to access the market). If it has a RESS CFD then it will obtain the RESS Strike Price less the DAM Price. To get the DAM Price it could enter into a balancing contract with a trader like Erova.
A corporate would then be free to choose its supplier in the market and maintain the ability to change suppliers in the future (for its onsite demand) as it is free to do so now. If a generator receives the PSO support directly, you then will not have two different suppliers, i.e., one holding a PPA with the RESS generator and a different supplier supplying the corporate’s (corporate who has the Reverse RESS CFD) onsite demand.
The SEM is designed that all generation must sell into the market and all demand has to buy from the market. So even under the current design where a RESS 1 generator has to enter into a PPA with a licensed supplier, the supplier has to “sell” this generation into the market and then buy it back if it needs these MWhs to meet its demand i.e., the RESS generator’s MWhs are not netted from the supplier’s (supplier who holds the RESS PPA) physical demand.
There is no reason why a RESS generator should have to enter into a PPA with a licensed supplier in order to get RESS support.
Paying for renewable generation through a PSO Levy
If corporates want to base themselves in Ireland and do not contract directly with renewable generation or through a Reverse RESS CFD scheme they will be subject to the PSO levy like all customers in Ireland.
If corporates want to say they are 100% powered by new renewable generation, they could contract for this through a Reverse RESS CFD. Potentially, they could then be given an exemption from paying the PSO levy for the volume they have a Reverse RESS CFD in place for.
This saving could then be weighed up when choosing to bid into the Reverse RESS CFD auction (i.e., forecast of the cost of the PSO levy on their demand for the next 15 years vs fixing a Reverse RESS CFD which exempts them from this cost, as well as hedges the variable cost of their electricity supply bill).
| A: Corporates that have a Reverse RESS CFD for some of their demand volume could get an exemption from paying the PSO levy on this volume. |
Reverse auction for anyone
Technically anyone could be allowed to bid in on the reverse side of the RESS auction (subject to certain collateral or qualification requirements). If you would like to buy additional renewable generation by entering into a Reverse RESS CFD you could.
This could create demand from corporates or even a secondary RESS market. So, for example, a trader or supplier could buy a Reverse RESS CFD and sell on to a corporate.
Demand would still have to come from a corporate as they may only want this type of contract if they knew they would have to pay a higher PSO levy to cover 100% of their generation or a higher levy if they do not secure renewable generation themselves through a Reverse RESS CFD.
Reverse auctions could be run at the same time as the RESS auction and bids to buy could be matched with offers to sell or they could be run separately to RESS auctions, after the event.
Reverse RESS CFDs could also be for different terms. Just because the RESS contract is for 15 years does not mean the Reverse RESS CFD would have to be for the same length of time.
Potential barriers that may delay uptake of CPPAs
Some of the barriers for the delay in uptake of CPPAs include price, term, size, and traceability.
Price
In Ireland, a CPPA with a renewable generator is likely to cost in the range of €55/MWh and €70/MWh depending on the technology and competitive nature of the project. This compares to wholesale prices for “brown power” currently in the €40’s/MWh.
| A: A RESS auction for Ireland’s full renewable target (i.e., including the expected 15% from corporate demand) would ensure the corporates pay the cheapest price for new renewable generation. |
Term
A new renewable generator will need a fixed price for a long term, so probably 8, 10 or even 15 years in order to satisfy their lender’s requirements for the project debt. Most small or medium sized corporates will not have board approval to sign any type of contract past 5 years.
Also, many corporates will not want to fix a price for a long term if they think their competitors are not fixing a price too. This is because, should prices subsequently fall and their competitors who did not fix were then paying less for their power than themselves this would then allow their competitors to decrease the price they were charging their customers (corporates pass through their costs of power to their customers). A year or two of this could put the corporate that had fixed a higher power price out of business. (Although this could be offset by the fact that any corporates picking up cheaper wholesale power could be paying a higher PSO levy if they have not secured a long term Reverse RESS CFD).
Although some large corporates will be in a position to enter into long term deals to enable a renewable project to be financed this will be limited to a small number of very large players.
| A: Reverse auctions can be for any term with any volume contracted to a corporate contributing to reducing the exposure to Feed in Premium (FIP) on the other side of the RESS auctions (i.e., reducing the PSO). |
Size
Renewable energy projects vary in size, but most commercial projects are above 5MW. A project this size produces a lot of electricity over the year, the number of individual corporates of this size are limited. Aggregation of corporates would be great but the ease and speed at which this could happen to get a project over the line is not to be underestimated.
| A: Reverse auctions could be for any volume. RESS generators will have their RESS contract for their full volume for 15 years but corporates could secure a Reverse RESS CFD for any volume for any term. The Reverse CFDs could be with the PSO and not the counterparty. |
Traceability
As the SEM is not a physical market any corporate who now signs a CPPA with a generator is still not “physically” getting the generation from this project. All generation must be sold into the SEM and all demand must be purchased form it. Therefore, there is no reason why a corporate signing a Reverse RESS CFD with the PSO would prove anything less in terms of their demand being met with new renewable generation than a CPPA does now in SEM.
Conclusion
It is widely publicized that data centres will increase Irelands demand for power over the next few years. This increase in power demand increases our RESS target and increases the risk that we will miss our targets for meeting a percentage of this higher demand figure with renewable energy.
Large energy users need to be encouraged to source their power from renewable power. Or at least some of the barriers for not entering into a CPPA on both sides (generator and corporate) need to be addressed by the government if they are relying on a portion of their RESS target being met by CPPAs.
If CPPAs do not deliver as expected, Ireland will not meet their targets and will be subject to EU fines. Corporates will not pay for these fines, Ireland will.
A government backed and run Reverse RESS auction could help reduce the barriers to entry for all size corporates, reduce the country’s PSO burden and make sure Ireland meets its RESS targets.
To discuss further please contact trading@erovaenergy.ie