RESS 2 Terms and Conditions: What are the Key Changes Compared to RESS 1?

Following much anticipation within the renewable energy industry, the Department of Energy, Climate and Communications (DECC) recently published the initial draft RESS 2 terms and conditions (RESS 2 T&Cs) and launched the public consultation process. This was accompanied by the initial RESS 2 auction timetable. The good news is that interested stakeholders have until 5:30pm on 20 August 2021 to prepare and submit their submissions on the RESS 2 T&Cs to the Department.

The bad news is that the initial RESS 2 auction timetable provides for a longer than anticipated wait for renewable energy developers - The projected RESS 2 application for qualification window is 29 March 2022 to 29 April 2022, with an intention to run the RESS 2 auction on 29 July 2022. See full timetable here.

We have set out the issues based on the qualification phase, auction phase and implementation phase.

Qualification Phase

Eligible technologies

Offshore wind projects are not eligible to participate in RESS 2. However, eligibility has been expanded to include hybrid projects.

New Project Criteria

The “New Project” requirements remain largely consistent with RESS 1, except for the minimum investment requirement. The investment in the RESS 2 Project, by or on behalf of the Generator for that RESS 2 Project, must equal or exceed €300 per kW of capacity. However, the investment is only counted after the date of execution of the Implementation Agreement and the RESS 2 T&Cs provide that: “the investment in the RESS 2 Project made after the execution of the Implementation Agreement by or on behalf of the Generator for that RESS 2 Project must equal or exceed €300 per kW of capacity”.

In the Department’s consultation document, reference is made to projects that may utilise existing renewable sites. These projects may not provide Ireland with a significant increase beyond existing renewable capacity levels therefore are potentially exploiting RESS. An arbitrary “line in the sand” after which investment costs are calculated to meet this requirement may not be the most efficient solution to address the Department’s concern on this.

However, developers will need to be aware of this, particularly the smaller solar projects with lower investment levels.

Grid connection

The grid connection qualification criteria are largely consistent with those included in RESS 1. However, the RESS 2 T&Cs have been updated to incorporate certain Q&A responses EirGrid provided prior to the RESS 1 auction.

Where a RESS 2 Project’s grid connection agreement or offer is subject to a modification, the modification must

• remain compliant with the RESS 2 T&Cs, and

• maintain the capacity at least equal to the Offer Quantity and the Minimum Installed Renewable Capacity (i.e. 90% of the Installed Renewable Capacity being the capacity of the RESS 2 Project excluding the capacity of any energy storage facilities within the project)

RESS 2 Storage Hybrid Projects

The RESS 2 T&Cs provide welcome flexibility to developers of hybrid generation / storage renewable electricity projects. A RESS 2 Hybrid Storage Project is defined as a solar / storage or wind / storage renewable electricity generating station and for the purposes of the RESS 2 scheme, it may be incorporated within a RESS 2 Project or separately metered as a separate project. The consultation document notes that the final RESS 2 T&Cs are not likely to provide for any additional options other than those described below. This is the case unless a compelling case is made and a robust methodology put forward.

Option 1

The RESS 2 T&Cs provide for a co-located, separately metered storage project so only the generation component of the facility is designated as the RESS 2 Project. It is permissible for this co-located storage project to sit behind the “Top Meter”. This is a meter for all output of the site. This includes output from generation or storage facilities on the site that are not part of the RESS 2 Project.

This is so long as the sub-meter of the RESS 2 Project “is of revenue quality and compliant with the requirements of the SEM Metering Code”; and (the configuration is permissible in accordance with the relevant DSO/TSO connection arrangement for the RESS 2 Project, SEM Trading and Settlement Code, SEMOpx Rules, and with any other applicable rules and regulations

Option 2

If the storage project is incorporated within the RESS 2 Project, a RESS 2 Hybrid Storage Project must only store energy generated by the RESS 2 Project and not electricity imported from any other source. This must be to the TSO’s satisfaction in the Application for Qualification and verified by a director declaration. This remains an ongoing requirement to be eligible for RESS 2 Support. The storage facility must be electrically connected behind the meter of the RESS 2 Project so that charging of the storage facility will be reflected as decreased exports across that meter and discharging of the storage facility will be reflected as increased exports across that meter. A RESS 2 Hybrid Storage Project will cease to be eligible for support if it at any time uses electricity imported from the grid to charge the storage facility.

Option 2 is likely to be an attractive option for developers, as it may act as a method of protection against negative pricing periods by charging the storage assets instead of exporting to the market.

Qualification Declaration:

• An Applicant with a RESS 2 Hybrid Storage Project must confirm by way of a director’s declaration (the form of which will be provided in the Qualification Information Pack) that the project complies with the technology requirements;

• that that the RESS 2 Project complies with Section 5.5, and

• that the project is not designed to be operated so that energy used to charge the storage facility will have any source external to the RESS 2 Hybrid Storage Project

The Minister is entitled to audit the RESS 2 Hybrid Storage Project’s compliance with the RESS 2 T&Cs in this context.

Interaction with RESS 1 Project

An Applicant must provide a director declaration that: (a) the planning consent or grid connection offer/agreement is not one which a RESS 1 Project has relied upon, as detailed in that RESS 1 Project’s application for qualification under RESS 1, and is not any subsequently modified or reissued version of the planning consent or grid connection arrangements that such a RESS 1 Project has relied upon or will rely upon; or (b) the Application for Qualification is being made for separately metered extension to a RESS 1 Project where this extension is on an adjacent land area and planning consent allows for both projects to be constructed and to the extent that both projects will utilise common grid connection offers or agreements that the grid connection offers or agreements will allow for both projects to be constructed and that the MEC of the connection will allow both projects to export at full capacity.

It is unclear whether an Applicant must provide this declaration regardless of whether the RESS 2 Project interacts with a RESS 1 project or not. However, considering all non-community led project were required to provide a blank community-led project declaration as part of their RESS 1 application for qualification, EirGrid may require a similar approach with this declaration. A RESS 2 Project, which is a separately metered extension of a RESS 1 Project in accordance with Section 6.4.10(b), will only be eligible for support under RESS 2 once the associated RESS 1 Project has achieved Commercial Operation in accordance with the RESS 1 Implementation Agreement for that RESS 1 Project.

Community Led-Projects

Community Led-Projects must now be 100% owned by a Renewable Energy Community (a REC). In RESS 1, this ownership percentage was significantly lower at 51%. All projects, rather than 51%, must now be returned to the relevant REC.

Auction Phase

Technology Neutral

RESS 2 will pit all technology types against each other in the same preference category, with the RESS 1 solar preference category removed. This may be as a result of the offer prices achieved in RESS 1 with solar achieving a cheaper average price of €72.92 per MWh compared to the “All Projects” category of €74.08 per MWh. However, this is despite the potential scope within the RESS state aid approval to continue with a focused support for the development of solar in Ireland.

Inflation

The Department has maintained the approach of not indexing the RESS strike price. In the consultation document, the Department have cited concerns over public opinion turning against the support when indexation is applied over time and opposition to transferring the inflation related costs and benefits to consumers. This requires participants to build in an assumed inflation cost into their RESS offer price. This essentially “fixes” the inflationary cost over the lifetime of the support scheme rather than the inflation being linked to CPI or some other metric linked to actual increases in project operational costs. We understand this was a material concern for developers, particularly those constructing their project by way of institutional finance. The Department is consulting on developers’ perceived difficulty in procuring finance due to this inflationary issue. It is likely that this will benefit corporate PPA off-takers who are likely more amenable to inflation risk being shared by the parties or assumed by the off-taker.

Offer Quantity

The “Installed Capacity” requirements are largely consistent with the RESS 2 terms and conditions, in that as a condition to Commercial Operation Generators, must demonstrate that the Installed Capacity is at least 90% of the Offer Quantity but no more than 120% of the Offer Quantity. With the introduction of hybrid projects, the requirements have been amended to ensure these requirements only capture the “renewable” elements of the project. In order to satisfy these requirements, the “Installed Renewable Capacity” must fall within this 90% to 120% range. The installed renewable capacity is the total MW^AC nameplate capacity of all of the Installed Plant, as that term is defined in the Grid Code, of the RESS 2 Project excluding the capacity of any energy storage facilities.

Financial Questionnaire

A Qualified Applicant must submit the Financial Questionnaire and the information contained therein must be true and accurate. This is in line with the EU State Aid Decision and the evaluation of the RESS scheme. If the information is found to be untrue or inaccurate, the RESS 2 Project will be disqualified from RESS 2 or their support may be revoked. This depends on the time the issue is discovered. The Qualified Applicant will be prohibited from participating in any future RESS competitions for a period of five years. The Financial Questionnaire will require the Qualified Applicant to submit information as the following

• The importance of RESS to the project

• The likelihood of the applicant being able to deliver the project with RESS or other support, other potential non-RESS opportunities for delivering the project

• The project internal rate of return

• The project’s capital costs, and

• Annual operating costs

Evaluation Correction Factors (ECF)

ECFs are intended to be used in the RESS auctions to factor in additional benefits a certain technology type may have over another in selecting successful projects beyond a simple comparison of Offer Prices. However, RESS 1 provided for an ECFs of 1 for all technologies. This means the ECFs had no impact on winner selection as it gave rise to a straight comparison between Offer Prices irrespective of the technology type or the additional value a particular technology may offer to the grid.

The Department appears keen to use technology specific ECFs in RESS 2, but the ranges of ECF will be limited. The proposed ECF for wind will be set between 0.9 and 1.15. Solar will be set between 0.85 and 1.05, and non-variable technologies will be set between 0.95 and 1.0. This may lead to additional benefits beyond selecting projects which have the lowest cost impact on the PSO.

Standstill Period

Like RESS 1, each Applicant must provide a Declaration of Bidding Independence. The Applicant must also state who it has disclosed Pricing Information to as well as any agreements or arrangements that are contingent upon the result of the RESS 2 Auction.

In keeping with RESS 1, the RESS 2 T&Cs requires this declaration to be forward looking. It must also remain true from application submissions and bid submissions for 3 months. This is known as the “Standstill Period”.

Certain exceptions apply, including

• any information for which a change of status or change of the information itself was approved and accepted in writing by the TSO, or
• changes to an Applicant’s company information details or an authorised individual (ie the “point” person for an Applicant’s application).

The RESS 2 T&Cs include a new express provision (9.2.6). This provision restricts an Applicant from sharing Pricing Information to anyone not included in the Declaration of Bidding Independence. This excludes finance provider or advisers. It also prevents an applicant from engaging in commercial discussions with third parties, that were not disclosed, regarding potential changes in Principal Owners or arrangements/agreements contingent upon the result of RESS 2. This does not include any technical input.

Given that the consequences of breaking these obligations may give rise to restriction of the Applicant from future RESS auctions, these additional “for the avoidance of doubt” provisions underscore the importance of complying with the Standstill Period restrictions.

Post Auction

RESS 2 Support Deadlines

The earliest a RESS 2 Project is eligible to receive support is 1 April 2023. The interim Commercial Operation Date is 30 September 2024 with a final longstop date of 30 September 2025. The RESS Support End Date is 30 September 2039. This excludes any Force Majeure extensions which may push this out to 30 September 2040. Unfortunately, the definition of Force Majeure remains unchanged and so quite limited in the circumstances to which an extension might arise.

Market Reference Price

The calculation of the MRP remains unamended. However, the Department appears open to changing the calculation for non-variable technologies. Particularly in the context of co-located or hybrid projects) as non-variable technologies use a MRP of the annual average DAM price, while variable technologies use the hourly DAM price. For all projects, the feed in premium is settled by comparing the Strike Price to the applicable MRP and applying the difference to the project’s actual hourly generation.

Performance Security

Bid and Performance Security will be applied on a €/MWh basis in RESS 2, as opposed to the €/MW basis that applied in RESS 1. The proposed level of the Bid Bond is €7/MWh of Deemed Energy Quantity for one year and the proposed level of the Performance Security is €24/MWh of Deemed Energy Quantity. This is in keeping with the Department’s consultation document.

Based on the capacity factor of solar projects, 11% for solar compared against, 35% for Onshore Wind), they will be required to provide lower value performance security than other projects. The Department has also specified that one single bond or performance security must be provided. The Implementation Agreement now provides for a helpful mechanism to replace the Performance Security. This gives some clarity in circumstances where a RESS 2 Project is sold prior to Commercial Operation or expiry of the Performance Security.

The form of bond now contains an express longstop date (30 April 2025), which is helpful, and they have amended the forms to provide for more internationally accepted terms.

Successful Applicant Restriction

In RESS 1, if a Successful Applicant posted its performance bond and executed its implementation agreement, and received a Letter of Offer, that RESS 1 Project will not be eligible to participate in the next RESS competition. This restriction has been replaced with a more severe consequence for RESS 2 Projects. If withdrawal is made following execution of the Implementation Agreement, the withdrawn Project would be ineligible to receive support in any future RESS competition. There is no express consequence for the Applicant or any Principal Owner.

Extension Projects

The Department has seen fit to address “extension” projects with some specificity in the RESS 2 T&Cs. “Extension” projects located at the same site or an adjacent land area will only be eligible to participate in future RESS auctions if they have the requisite planning permission to construct both projects on the same, or adjacent site.

Where both the extension project and the RESS 2 Project use the same grid connection, the relevant grid offer or agreement must have sufficient MEC to allow both project export at full capacity and both projects must be separately metered. The extension project will only be eligible to receive support once the RESS 2 Project achieves Commercial Operation. RESS 2 Projects involving Biomass HECHP, Biogas HECHP and Waste to Energy HECHP, must achieve Milestone 8 under the Implementation Agreement.

Citizens Investment Scheme

The Department is continuing to work on the development of citizen investment options. Once sufficiently developed, the details will be published, and a standalone consultation opened to enable stakeholders to have their say on the scheme. It is disappointing that this investment scheme remains uncertain after its initial announcement in January 2020 as it is unlikely to be straightforward for generators to comply with. It remains to be seen whether the administrative burden, or cost of such a scheme will have to be fully assumed by generators.

Community Benefit Fund

The Community Benefit Fund provisions appear to be largely consistent with RESS 1. However, the Department has clarified how the distance to a household to an onshore wind farm is measured. The distance specified is measured from the base of the nearest turbine of the RESS 2 Project to the nearest part of the structure of the household, the location of which is identified in the postal geo-directory. This should give some much need clarity for wind farm owners in assessing what households fall within this requirement.

Conclusion

While the RESS 2 T&Cs remain consistent with much of the RESS 1 terms and conditions, there are some welcome enhancements and the accommodation of hybrid projects is a significant positive development.

It is disappointing that the timeline for the auction is delayed until July 2022 which will be two years since the RESS 1 auction, however, this does provide generators with the opportunity to further develop and refine their projects so they have fully locked in and committed price inputs prior to bidding.

It remains to be seen whether the Citizens Investment Scheme will be a workable and efficient scheme which does not unduly increase costs for generators (which costs will ultimately be borne by electricity consumers). Early clarity on these proposals is important.

We would encourage all industry stakeholders to engage with the consultation process and provide a submission to the Department in advance of the deadline of 5:30pm on 20 August 2021.

For more information, contact a member of our Energy team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.