In an eagerly-awaited paper released earlier this month, the Commission for Energy Regulation (Ireland) and the Utility Regulator (Northern Ireland), who together regulate the Single Electricity Market (SEM) (the wholesale market for electricity generated and consumed on the island of Ireland), took a step closer to settling a key regulatory issue that is affecting the development of wind generation on the island.
This issue concerns how to dispatch and remunerate renewable generators in situations where more renewable energy is available than is required to meet total system demand for electricity.
Curtailment or constraint?
"Curtailment" is the label that has been adopted by the Irish regulators to describe the output reduction direction which will need to be given by the system operators in such a situation. An overlapping concept, known as "constraint", already forms part of the SEM trading rules, but applies to the distinct situation in which a generator (including a renewable generator) is directed to reduce its output because of the local limitations of the transmission network.
Curtailment is not currently recognised separately under the SEM trading rules, but a renewable generator that participates in the SEM, has firm (or partially firm) grid access and is subject to curtailment will effectively be compensated for this curtailment through the constraint payments mechanism under the SEM.
Policy context: the rush to wind
The management of curtailment has received increasing industry attention over recent years due to a number of competing pressures:
- On the one hand, the governments of both Ireland and Northern Ireland have set aggressive targets for the consumption of energy generated from renewable sources (both Ireland and Northern Ireland are targeting 40% by 2020). Renewable support schemes on both sides of the border have contributed to a rush of connection applications by renewable generators. Approximately 1,200MW of wind generation was connected to the all-island system at the time of SEM "go-live" in 2007, approximately 2,100MW is currently connected, and it is estimated that 5,100MW will need to be connected in order to meet the 40% targets.
- On the other hand, the electricity transmission and distribution systems of both jurisdictions must carry out costly and protracted reinforcement works in order to accommodate the queue of renewable projects that are currently awaiting connection. The regulators are sensitive to the need to control the cost, to electricity consumers, of grid development programmes, as well as the continuing cost of the renewable support schemes themselves.
The proposed decision
In their latest paper, entitled "Treatment of Curtailment in Tie-Break situations – Proposed decision paper (SEM-12-090)", the regulators have proposed that:
- curtailment will be implemented physically by directing all controllable renewable generators to reduce their output on a pro rata basis;
- the SEM market systems will initially continue to compensate participating renewable generators, with firm (or partially firm) grid access, for curtailment through the constraint payments mechanism; but
- crucially, the annual "pot" of funds that is available to compensate curtailed renewable generators will be capped at the amount paid during the earlier of (i) the 2016 calendar year; and (ii) the calendar year following that in which all-island renewable energy penetration of 30% (ie. 75% of the ultimate 40% target) is first reached. The annual pot will then be reduced, on a straight-line basis, over the subsequent four-year period, so that compensation for curtailment through the SEM will end by 2020
Many renewable generators on the island of Ireland do not participate directly in the SEM, and instead derive their revenues from privately-negotiated power purchase agreements under which remuneration is closely linked to physical generation. For this reason, the Irish renewable industry's response to the consultation process has focused upon the physical manner in which it is to be implemented.
In this context, the decision of the regulators to adopt a pro rata approach to physical curtailment can be seen as more favourable to generators awaiting connection than the regulators' previous proposal, under which renewable generators lacking firm grid access would have been curtailed in priority to established generators with firm, or partially firm, access.
The implementation of the proposed decision – in whatever form it is ultimately made – will be a complex task. Among other things, it will require the electricity system operators, in both jurisdictions, to distinguish between constraint and curtailment events in real time and in a transparent manner. It will also be necessary to devise a robust methodology for the application of the sinking cap on annual curtailment compensation, and to introduce the necessary modifications to the SEM settlement systems.
Meanwhile, sponsors, investors and lenders associated with Irish renewable energy projects will need to forecast and model the anticipated levels of physical curtailment, and (if relevant) its financial consequences, that arise from the decision. The use of the pro rata approach to physical curtailment, across all controllable renewable generators, means that this recommendation applies not just to projects awaiting financing, construction and connection, but also to projects that have already been built.
In line with standard regulatory consultation practice in relation to SEM issues, the consultation process remains open in relation to the proposed decision, and responses may be made to the Commission for Energy Regulation (on behalf of the joint regulators) up until the close of business on 2 November 2012.
The proposed curtailment decision, and the extensive consultation process of which it forms the penultimate stage, serves as a compelling illustration of the tensions (consumers vs generators, established generators vs new entrant generators) within an electricity system that is confronted with an unprecedented level of new, geographically dispersed, "intermittent" generation which also happens to be supported by environmentally-motivated subsidies and targets. The manner in which the all-island system accommodates this new generation will be closely watched by many.
Treatment of Curtailment in Tie-Break situations –
Proposed decision paper (SEM-12-090) may be downloaded from www.allislandproject.org.
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