Why do some plants receive money while not producing electricity?

As we have seen with capacity payments, electricity generators receive payments for being available to produce electricity.  Following a competition contracts were put in place to provide much-needed generation capacity at a time (circa 2005) when electricity blackouts were a real prospect. The contracts were tailored to reward the availability of the plants to generate electricity.  Under certain circumstances these plants could, up to 31^st March 2016, receive payments while not actually producing electricity.

In 2005 when the Irish economy was booming, there were fears that there would not be enough electricity generating plants to meet the rising demand of the Celtic Tiger ¹. A decision was made by the Commission for Energy Regulation (CER) to run a competition to build generating plant to avoid the risk of electricity shortages in the booming economy ².  Tynagh Energy and Aughinish Alumina were the two plants selected in this competition.

Press reports have described Tynagh as a plant that was more profitable shut down than operating ³ but this was because several factors such as the falling demand for electricity during the recession, the growing penetration of wind, and the East-West interconnector meant that the requirement for Tynagh to operate and produce electricity after 2008 was much less than expected (Figure 2). However, if the plant is not operating, it cannot earn revenue on the electricity market. To get the plant built in the first place the contract under which it was procured in 2005 guaranteed that if it were not used, it would still be compensated for its fixed costs as provided for in the contract.

Tynagh Energy and Aughinish Alumina each entered a ten-year contract with the ESB to sell electricity at a predetermined price (close to the cost of fuel and CO₂) in return for a fixed annual payment. The cost to ESB of these contracts for difference compared with their market value, was underwritten by Irish consumers through the PSO.

This was done because nobody was showing a willingness to build new capacity in Ireland without a guaranteed income [revenues]. The fixed payments to Tynagh were related to its ability to run if needed, not its actual running level, effectively in the form of capacity payments ⁴. In some years the PSO cost was negative (i.e. the total contract cost for Tynagh and Aughinish was below the market revenue for capacity and energy) so that the contracts led to the return of money to the PSO fund, to the benefit of the electricity customer. The agreements expired in March 2016 so such payments, amounting to €47 million for the 2015/16 PSO period ⁵, will not continue. The plant may still be subject to reconciliation payments for a further two years.