Irish energy: wind in its sails?

On the back of a recent expansion of wind power in the Irish Republic, the government has announced an increased renewables target of 15% of total generated output by 2010. The increase is supported by the recently-announced renewable energy feed-in tariff (REFIT) program, but this method of financial support raises more questions than answers over the economics of Irish green power.

The REFIT program has replaced the alternative energy requirement (AER) as the main mechanism for funding renewable capacity in the Irish Republic.

Under the previous AER program, project developers bid prices at which they were willing to sell electricity from renewable energy projects to ESB for 15 years. The lowest priced bids up to capacity limits received contracts with the ESB, and the contracts obliged the ESB to purchase the electricity produced for up to 15 years at these prices.

This guaranteed revenue stream was sufficient to allow developers to secure bank debt to finance the necessary capital investment. The ESB was compensated for the net additional costs it incurred from a public service obligation (PSO) levy funded by electricity consumers. The PSO levy, which cost domestic customers E26 in 2005 and is clearly marked on customer bills, has been falling in recent years; the 2007 PSO levy will be zero.

The clear change under the REFIT program is the ability of project developers to freely negotiate with any electricity suppliers in the liberalized electricity market. Rather than a bidding process, the purchase price is negotiated directly between the generator and supplier, the consumer is protected by imposing price caps beyond which compensation to suppliers will not be paid. The current cap for large scale wind projects is E57MWh. Under the program contracting suppliers will still be compensated for the net additional costs incurred from the PSO levy funded by electricity consumers.

Interestingly for 2007 the PSO levy will be zero, this logically implies that the ability to compensate the net additional costs of suppliers of renewable energy will be seriously impaired, and if this is the case, are the additional costs of the renewable energy expansion to be funded from elsewhere? Or does this imply that the renewable market is sufficiently mature in Ireland that there are no additional costs associated with renewable energy?