Offshore RESS - An Overview

The Renewable Energy Support Scheme (the RESS) is Ireland’s scheme to promote generation of electricity from renewable sources. After two auction rounds, the deadline for commercial operation of RESS 1 projects is now approaching and RESS 2 projects, which were successful at auction, are proceeding to their delivery phase.

Following these two rounds of the RESS scheme, which were dominated by onshore wind and solar, the first offshore wind RESS (O-RESS 1) auction is now firmly on the horizon in 2023.

In October 2021, the Department of the Environment, Climate and Communications (DECC) published draft terms and conditions for O-RESS 1 and a consultation paper inviting industry submissions on those terms and conditions. DECC’s response to submissions to the consultation was published in May 2022 (the Response).

Simultaneously with the development of the terms and conditions for O-RESS 1 by DECC, two other notable policy frameworks are being developed:

• the Commission for Regulation of Utilities (the CRU) is developing a connection offer policy for offshore wind projects; and
• the first round of applications for consents to occupy the Irish seabed for offshore wind projects under the Marine Area Planning Act 2021 (the MAP Act) is under consideration.

At DLA Piper, our full-service Projects, Energy and Infrastructure team in Dublin, together with our international offshore wind sector group, is monitoring the development of Irish offshore wind policy including the developing government policy in relation to grid connections, route to market, access to seabed rights and planning permission.

Projects have been progressed by various parties in anticipation of the planned 2023 O-RESS 1 auction and subsequent auction rounds. Whilst early-stage developers will have been living and breathing the developing regulatory environment, new investors are now looking towards Ireland, O-RESS 1 and subsequent auction rounds. We therefore expect new investment in Irish offshore wind projects to pick up pace.

In this first part of our New Horizons Irish Energy Series, we set out an overview of certain key features of the O-RESS 1, for those investors who are looking at O-RESS 1 and the developing Irish offshore wind sector for the first time.

Structure of Support

Like the earlier RESS schemes, O-RESS 1 will be a two-way floating feed-in premium, which will look very similar to a contract for differences.

O-RESS 1 support will be allocated by way of a pay-as-bid auction, with the price bid by a generator becoming its O-RESS 1 strike price (the Strike Price).

That generator will then enter into a Power Purchase Agreement with an offtaker, which must be a licensed electricity supplier. The offtaker will sell the power into the Single Electricity Market (SEM).

Where the price in the SEM Day Ahead Market:

• exceeds the project’s Strike Price, the offtaker will be required to make a difference payment equal to the amount of that excess;
• is less than the project’s Strike Price, the offtaker will receive a support payment from the Public Service Obligation (PSO) Levy fund equal to the difference between the SEM Day Ahead Market price and the project’s Strike Price; and
• is less than zero (i.e. at times of negative market prices), no support payment will be made.

Qualification Requirements for O-RESS 1

According to the Response, the primary eligibility criteria for projects to participate in O-RESS 1 will be:

• a Maritime Area Consent (MAC) granted pursuant to the MAP Act, to allow the project to operate the relevant maritime area; and
• a Grid Connection Assessment (a GCA) containing certain key details of the grid connection for the project, in accordance with the process developed by the CRU.

The Minister for the Environment, Climate and Communications (the Minister) is currently assessing applications for MACs from developers for the first phase of offshore wind projects (Phase 1 Projects), under transitional provisions of the MAP Act. This function will pass to the Marine Area Regulatory Authority (MARA), which is expected to be established in 2023.

A GCA is not a connection offer. However, according to the CRU’s decision on “Offshore Grid Connection Assessment Phase 1 Projects” which was published on 18 February 2022, the GCA will detail the connection method and the cost of connecting the Phase 1 Project to the transmission system at its onshore connection point. EirGrid (as the Irish Transmission System Operator) is currently working to complete and issue GCAs for Phase 1 Projects. Phase 1 Project applicants that have a GCA will be eligible for a full grid connection offer following receipt of an O-RESS 1 Notice of Award, being confirmation that the relevant project has been successful in the O-RESS 1 auction.

The Response states that, for Phase 1 Projects, securing final grants of planning permission for the onshore and offshore project components is intended to be a post O-RESS 1 auction deliverable. This presents potential risks in the context of the new planning regime introduced by the MAP Act. The significance of this and how it is proposed to be managed will be the subject of a separate article in this New Horizons Irish Energy Series.

O-RESS 1 Auction Timing

EirGrid and DECC published a provisional timetable for O-RESS 1 on 21 June 2022. The following table sets out certain significant events in that provisional timetable:

Bid Bonds / Performance Security

As with RESS 1 and RESS 2, O-RESS 1 auction participants must submit a bid bond and, if successful in the auction, performance security. According to the Response, the amount of the bid bond for an O-RESS 1 project will be EUR6/MWh and the performance security for projects that are successful will be EUR20/MWh, in each case multiplied by an estimate of the energy expected to be produced by the project in the first year of its operation.

Period of O-RESS 1 Support

Start date for O-RESS 1 support

Support under O-RESS 1 does not have a fixed start date but, instead commences from the Commercial Operation Date (COD) for the relevant project for a fixed period, subject to an additional requirement that O-RESS 1 support will only commence from the date that is 42 months after the date on which planning permission for the relevant project was awarded.

Support under O-RESS 1 will be lost entirely if COD has not been achieved by the date which falls 96 months after the date on which planning permission for the relevant project is awarded (although this 96 month period may be extended, subject to certain longstop dates which have yet to be determined, if an O-RESS 1 project’s planning permission is subject to judicial review).

Duration of O-RESS 1 support

Although there remain a number of open points in relation to timing, the Response states that O-RESS 1 support will last for between 12 years and 16.5 years depending on when planning permission is received. More details on the interaction between the award of planning permission to an O-RESS 1 project and the commencement of O-RESS 1 support will be the subject of a separate article in this New Horizons Irish Energy Series.

Indexation

Although it was a topic of discussion at the time the schemes were developed, RESS 1 and RESS 2 do not provide for any indexation of the strike price. For O-RESS 1, DECC has revisited the question of indexation and has suggested that it is considering implementing some form of partial indexation for O-RESS 1 projects. Its reasons for considering indexation when it refused to do so in the context of RESS 1 and RESS 2 are that some offshore wind project costs may be more exposed to inflation than project costs for onshore projects (due to longer, more expensive construction periods) and that operational costs are likely to be higher for offshore wind projects than for onshore projects. DECC has also suggested that general inflation indicators such as the consumer price index may not be appropriate for use in O-RESS 1 and that an industry specific indicator may be used instead.

The Response notes that options for indexation, including partial indexation, remain under consideration by DECC.

Curtailment

In the Response, DECC states that treatment of curtailment remains under consideration by DECC and key stakeholders. DECC stated in the Response that clarity on this issue is planned to be provided in the final O-RESS 1 terms and conditions, when published. Given the anticipated significant increase in non-synchronous generation over the coming years, project developers will be concerned to see the manner in which curtailment is addressed by the O-RESS 1 terms and conditions, as any uncertainty associated with it may have an impact on their financial models.

Milestones

Like RESS 1 and RESS 2, the development of O-RESS 1 projects will be subject to a series of development milestones, which will be contained in an Implementation Agreement entered into between the developer and the Minister. For each such milestone, there will be a “Final Milestone Date” by which the relevant milestone must be satisfied failing which, in most cases, the project will cease to be entitled to participate in O-RESS 1 and the Minister may draw any remainder of the performance security posted by the developer of the project under the O-RESS 1 terms and conditions.

In addition, for certain milestones, there will also be an “Interim Milestone Date”. Where the relevant milestone is not satisfied by that Interim Milestone Date, the Minister may draw a set percentage of the performance security per month (up to a fixed maximum percentage in total) until the relevant milestone has been achieved.

Pursuant to the Response, the Final Milestone Dates and Interim Milestone Dates for an O-RESS 1 project will be a fixed period of time from the date on which that O-RESS 1 project is awarded planning permission. Some further flexibility is provided if planning permission is subjected to judicial review, subject to the overall longstop dates, as described above.

Community Benefit

Participants in RESS 1 and RESS 2 are required to contribute EUR2.00/MWh to a community benefit fund established for that project and operated and administered in accordance with DECC’s Good Practice Principles Handbook.

For O-RESS 1 projects, the Response abandoned initial plans, contained in the draft terms and conditions published for consultation, for a single centralised fund. Instead, generators will be required to procure a professional fund administrator in an open competition to establish and manage a fund on behalf of that individual project. The fund administrator will undertake the day-to-day operation of the community benefit fund in accordance both with the O-RESS 1 terms and conditions and the O-RESS 1 Community Benefit Fund Rules and Guidance which were published in draft form by DECC on 26 July 2022.

O-RESS 1 provides for early contributions to the community benefit fund prior to the project commencing generation and achieving COD. The obligation to contribute to the O-RESS 1 community benefit fund will commence one year from the date on which the developer issues a notice to proceed (or equivalent) under its main construction contract for its project. The annual amount of early contributions is EUR2,000/GWh multiplied by an estimate of the power expected to be produced by the project in the first year of its operation. These early contributions can be offset against later obligations to contribute to the fund, on and from the third anniversary of COD.

Irish Operation and Maintenance

The draft O-RESS 1 terms and conditions contained a requirement for operation and maintenance facilities for O-RESS 1 projects to be located in Ireland or Northern Ireland. The Response states that no objections were received to this requirement and this will remain in the final O-RESS 1 terms and conditions.