Ireland’s renewables market braced for the impact of EU intervention on energy prices
David Neary of Deloitte Ireland discusses the council regulation on an emergency intervention to address high energy prices and its impact on the renewable energy market in Ireland.
Council Regulation (EU) 2022/1854 on an emergency intervention to address high energy prices was formally adopted under the written procedure on October 6, published in the EU’s official journal on October 7, and entered into force on 8 October 2022 (with direct effect in Ireland). The scope of the regulation is fourfold:
To reduce electricity consumption;
To introduce a cap on market revenues that certain producers receive from the generation of electricity and redistribute them to final customers in a targeted manner;
Price setting for the supply of electricity for households and small and medium-sized enterprises; and
To introduce a temporary solidarity contribution from EU companies and permanent establishments with activities predominantly in the crude petroleum, natural gas, coal, and refinery sectors to contribute to the affordability of energy for households and companies.
This article will discuss the introduction of a cap on market revenues as this may be of most interest to sustainability and renewable energy markets.
Cap on market revenues
By way of a snapshot, the regulation outlines a cap on market revenues of €180 ($180) per MWh for producers and intermediaries generating electricity from wind, solar, geothermal, hydropower, biomass fuel, waste, nuclear energy, lignite, crude petroleum products, and peat.
EU member states are to ensure that all surplus revenues resulting from the application of the cap on market revenues are used to finance measures in support of final electricity customers that mitigate the impact of high electricity prices on those customers, in a targeted manner.
Why is it needed?
In Ireland, the Single Electricity Market comprises two ex ante energy markets, a Balancing Market, two markets for financial instruments, and a market for capacity remuneration. These markets operate independently and on different timelines. For short-term electricity demand, energy is traded in the day-ahead and intraday markets from one day ahead of the trading day up to shortly before real time.
The introductory comments to the regulation note that the Day-Ahead Market is impacted by the fact that the price received by all market participants is set by the last plant needed to cover the demand, which is the plant with the highest marginal costs, when the market clears. Given the unprecedented rise in costs for gas and coal-fired power generation facilities, it is generally these plants that set the price and this has led to exceptionally high prices in the Day-Ahead Market across the Union. Therefore, renewable energy producers have experienced significant increases in their revenues.
An EU-wide solution was seen as the best manner of addressing these unprecedented revenues, as to do otherwise may lead to significant distortions between generators in the Union, as generators compete Union-wide on a coupled electricity market. A commitment to a joint Union-wide cap on market revenues from inframarginal generators should enable the avoidance of such distortions.
Why €180 per MWh?
The regulation recognises that renewable energy producers have made investment decisions based on a certain level of revenue; however, it also recognises that while occasional and short-term peaks in prices can be considered a normal feature in an electricity market, the extreme and lasting price increase observed since February 2022 is markedly different from a normal market situation of occasional peak prices. As such, the €180 per MWh cap seeks to adjust for the temporary extreme price increase to a more normalised average peak price (which should match with the upper limit of investment decision projections).
In summary, the cap is at a level above what renewable energy producers thought they might achieve given the history of peak prices but below the price being achieved at present, something they could likely only have dreamt about and surely never modelled.
Will the measure impact renewable energy investment in Ireland?
As the €180 per MWh cap aims to allow renewable energy producers to recover their investment and operating costs, the EU’s view is that it should not jeopardise future investments in the capacity needed for a decarbonised and reliable electricity system, and this is welcome.
However, while the capping measures relate to inframarginal generators (i.e., low-cost producers of energy) and not those producers that were unlikely to be undertaking large capital expenditure projects any time soon (i.e., fossil fuel generators), one must consider the cost of deployment for these inframarginal generators.
It is common knowledge that renewable energy producers now have to spend more to build their projects for the first time in years because of the cost inflation and supply-chain problems, so this will put a squeeze on the margins expected. This may cause an unexpected delay in deploying renewable energy infrastructure in Ireland and an impact on Ireland’s ultimate climate goals, but this remains to be seen.
It strikes this author that aside from the obvious impact the war in Ukraine is having on the electricity market, any delay in deploying renewable energy infrastructure may lead to another price increase. This is evidenced in the regulation’s comments with respect to the impact this summer’s exceptional drought and high temperatures has had on electricity demand and consequently the peak price.