SEM Chart of the Week
Financial opportunities in RESS-1
The proposed new Renewable Energy Support Scheme (RESS) will provide support to renewable electricity projects in Ireland. The scheme will be a competitive auction based funding mechanism with a primary focus on cost effectiveness. The RESS-1 auctions are actively targeting between 1TWh – 3TWh of renewable energy that can be delivered ahead of 2022.
In this chart of the week, we look at the interesting incentive built into the new auction design.
The Department of Communications, Climate Action and Environment (DCCAE) are targeting shovel ready projects with the expected deadline for the RESS-1 project to be at or before December 2022. Support for these successful projects will last up to 15 years.
There is additional value on offer to those who can deliver quicker. If a project can be operational in time for July 2021 they can earn 1.5 years of additional support from the RESS process as can be seen in Figure 1.
Impact on bidding?
A rule of thumb for wind project is that financing will take 12 months and a further 18 months for construction. This makes December 2022 a sensible deadline if the auction is to take place in June 2020.
If a project developer is confident that they can deliver in time for July 2021 it is possible that this may impact their bidding strategy. If the project could be delivered ahead of schedule, it would receive an additional 18 months of support if the bid was accepted. This could give rise to the potential incentive to bid in lower prices.
Delivery of a renewable energy project takes time and there are several pitfalls, such as the on-time delivery of a grid connection.
There could be potential danger for any projects bidding in a low price on the assumption of an extra 1.5 years of support, only to then be unable to deliver their project prior to the deadline due to circumstances beyond their control.
Ultimately there could be a negative impact on other projects being ‘out bid’ (undercut) by some faster build projects such as solar that are betting that they can deliver the project early.
What does this mean?
It’s too soon to tell if there will be an incentive to bid low in order to try and guarantee an accepted offer. Developers would be minded to remember failure to deliver on time by ESBN is not considered a force majeure, but early delivery would have financial benefits.