SEMC decision on removal of benefits for sub-10MW generation

 

BACKGROUND TO CONSULTATION

On 9 November 2016, Tughans issued a briefing note in respect of a statutory consultation on a proposal by the regulatory project team for the new Integrated Single Electricity Market for Ireland (I-SEM) which is currently expected to be operational from 30 September 2017.

We noted that, if implemented, the proposals outlined in the consultation would, among other things, significantly impact payments to operators of generating stations below 10MW (De Minimis Generators), known as De Minimis Benefits.

Further information on the background to the consultation, and a link to the consultation itself, is available in that briefing note, which can be accessed here: https://www.tughans.com/latest-news/sem-proposal-remove-benefits-sub-10mw-generation/

Broadly, however, the consultation related to the most appropriate basis for levying Supplier Charges under I-SEM. Supplier Charges are levied on electricity suppliers in order to recover certain market costs such as capacity costs.

In the consultation paper, the Single Electricity Market Committee (SEMC), the joint North/South regulatory body responsible for making decisions impacting the current single electricity marketing (SEM), and I-SEM, considered two key approaches to the recovery of these fixed, shared costs:

1. Net Demand Approach (the current approach), in which total supplier charges are based upon a supplier’s net position, and suppliers who have contracted with De Minimis Generators are actually paid “negative charges” rather than being charged as they are for industrial scale generation; and

2. Gross Demand Approach (the proposed approach), which levies supplier charges based on a supplier’s total demand, separate to their net energy position, with no De Minimis Benefits paid to suppliers for contracting with De Minimis Generators.

The Net Demand approach reflects that De Minimis Generators bring certain value add to the market, due to the small scale benefits they bring to communities, and their lessened pressure on the grid network versus industrial-scale generators.

By contracting with a portfolio of De Minimis Generators, suppliers are able to significantly reduce their Supplier Charges (by netting them off), and these savings are often shared with generators either through power purchase agreement (PPA) payments, or an increased price per unit, versus the price offered to industrial-scale generators.

 

DECISION OF SEMC

On 16 February, the SEMC published its initial decision paper (Decision Paper) in respect of the mechanism for Supplier Charges, which can be accessed in full here:

https://www.semcommittee.com/sites/semcommittee.com/files/media-files/SEM-17-010%20ETA%20Supplier%20charges%20charging%20basis%20-%20Decision%20Paper%20Final.pdf

In short, notwithstanding the significant opposition to moving to a Gross Demand approach received from a majority of consultees, the SEMC noted that it “is minded to transition to a Gross Demand approach as the enduring approach to the levying of Supplier Charges”.

It also noted that it will determine the enduring approach to the basis for Supplier Charges at a later date (but did not specify when that was likely to be), and set out the conditions under which a transition to a gross demand approach, which would occur no earlier than January 2020, could take place.

Whilst the SEMC made certain commitments in the Decision Paper to, among other things, review costs for De Minimis Generators, no concrete proposals appear to be have been put forward as regards mitigating the likely impact on De Minimis Generators resulting from the withdrawal of De Minimis Benefits.

 

LIKELY FINANCIAL IMPACT

In the Decision Paper the SEMC put forward some estimates regarding the likely impact of the move on De Minimis Generators.

In the Republic of Ireland, the SEMC considered that as long as suppliers with PPAs with REFIT-supported De Minimis Generators continue to be made whole to the REFIT reference price, the revenue of REFIT-supported De Minimis Generators should not be impacted by a move to the Gross Demand approach, although there might be an impact on cash flow due to delays in REFIT payments.

In Northern Ireland, by contrast, the SEMC noted that the ROC support scheme is independent of revenue from the market and so it would provide no extra compensation to ROC supported projects for any reduction in “market” revenues. The withdrawal of De Minimis Benefits is likely to impact between 3% and 16.5% of annual revenue for ROC-supported De Minimis Generators, according to the responses to the consultation.

 

For De Minimis Generators without any market support scheme, North or South of the border, responses to the consultation estimated that a revenue reduction in the region of 30% annually might be expected. The SEMC’s own estimate of this figure was that it might fall somewhere between 0% and 9% (after the PPA was renegotiated), subject to a commercial negotiation process, varying between suppliers.

 

If you are interested in discussing how this decision might impact your business, or would like someone to review your PPAs to determine what the likely impact of removal of De Minimis Benefits will be, and whether there is any way to mitigate this, please contact Andrew Kirke.

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While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.