Why do we guarantee prices for some generators and not for others?

Another way of looking at the guarantees that the PSO funds is to see them in terms of a price risk that has been taken away from the investor to be carried by the consumer so that the system gets the electricity it needs but at a lower price to the consumer.

For example, with the assurance of the guarantee, investors in a wind farm know how much they will get for their electricity leaving them free to assess and carry the other site-specific risks themselves – such as that the chosen site may not be as wind rich as previously thought, or that the wind resource may be very low in some years depending on weather conditions. If the risk is lower, the cost of capital will be lower and the guaranteed price that is needed to incentivise the investment in wind can be lower as well. This is the logic of the guarantee.

Irish energy policy has successfully stimulated investment in onshore wind, landfill gas and to a lesser extent in biomass. The strength of the stimulus required was lowest for wind, next lowest for landfill gas and then followed by biomass combustion. The highest level of price guarantee was for high efficiency biomass fired CHP. The guaranteed prices for electricity from these qualifying sources are set out in the table below.

The REFIT capacity cap is 4,000MW. REFIT 3 has an overall limit of 310MW, differentiated by technology: Anaerobic Digestion (including CHP) 50MW; Biomass CHP 100MW; Biomass co-combustion (including co-firing with peat) 160MW. ¹

The same logic of reducing investor risk governed the procurement of additional electricity generating capacity when it appeared to be needed in Ireland. For example, in 2002, in the absence of a market response, the Commission for Energy Regulation (CER) saw the need to run a competition for two additional power stations to guarantee the reliability of electricity supply during the economic boom. A contract with Tynagh Energy and Aughinish for the required capacity was the result. It ensured the required supply capacity would be put in place to meet the envisaged demand. In practice, demand has turned out to be lower than expected at the time (Figure 6), and the costs have turned out to be higher; but in other circumstances these costs would have been lower.

The price of this insurance was a take or pay contract; the extra costs of which were added to all bills as part of the public service obligation or PSO. These contracts expire in 2016 so those payments will disappear from our bills.²

We, as an island system with most of our electricity generated from imported fossil fuels (64% in 2013), needed to ensure that we had a secure supply of electricity at all times. One way the government decided to do this was by guaranteeing three peat-fired stations a fixed price for their electricity for a period of 15 years from 2000 (Edenderrry Power) and 2004 (Lough Ree and West Offaly). These plants run on an Irish indigenous fuel (peat), so we have the assurance they will always have access to fuel to generate our electricity. Guaranteeing them a fixed price means that if the wholesale price of electricity falls below a certain price, the PSO pays the difference.

The logic behind it is that peat offers a guaranteed Irish source of power even if it produces high emissions of greenhouse gases. These arrangements for a guaranteed price ended in 2015 for the Bord na Mona (BnM) peat-fired station and will end in 2019 for the two ESB peat-fired stations. The peat-fired stations were also awarded priority dispatch, after renewable energy and that means that they can run longer and recover their costs over a shorter period of time.

The EU takes a deep interest in all state aid, and so the PSO had to be approved by the EU before being put on customer’s bills ³.