The Department of Communications Climate Action and Energy (“DCCAE”) have recently released it’s consultation into the next phase of its renewable energy (electricity production) support mechanism dubbed the Renewable Electricity Support Scheme (“RESS”). It is a follow on from the original AER and REFiT schemes which are all fully closed to new applicants.
Whilst there is still a lot of detail to be fleshed out one thing is clear – the Department is very much in favour of communities owning local renewable energy assets.
The consultation does include stipulations around community investment in developer-led projects but for the purpose of this post I will focus on the incentives and concessions being discussed for community-led projects and why this approach could provide a real boon to rural Ireland.
First off what is a community-led project? The paper defines this as a renewable energy project, where community investors have over 50% equity stake in the project and includes projects that are 100% owned by the community. On this definition there have been a significant number of community-led projects developed in Ireland to date but it is likely that the new scheme will place a cap on the total equity stake of any one community member.
That being said these are some of the incentives being discussed:-
Firstly the DCAAE are minded to ring-fence a certain portion of the available support for community-led projects. This is a significant win as it means they would not be subjected to a competitive process where they would be pitted against larger and more sophisticated developers. The support would likely be time based so early applicants with viable projects that meet all the pre-conditions are almost guaranteed to receive support.
It appears that the Department favours a Floating Feed in Premium (“FiP”) for both developer and community-led projects. A FiP although similar to the traditional Feed in Tarriff (“FiT”) differs in that the project owner is subject to market trading risk and could potentially lose out on income if the power generated is not traded in the most efficient way. The key difference here is that community-led projects would have a pre-determined FiP on which to model the project and taking market de-minimum rules into account this should represent a situation closer to the status quo of previous REFiT schemes.
Conversely for developer-led projects the idea behind the REES is to conduct an auction whereby the strike price represents the highest value bidder still required to meet the available capacity. The auction will inevitably put downward pressure on the FiP paid to developer-led projects, such that large scale utilities like the ESB will find themselves in dominant position for capacity and any smaller developer-led projects that do receive support, may have to reduce expectations with regard to returns if they are to successfully secure capacity in the auction.
The consultation looks at the below possible financial incentives to encourage community-led projects.
-Up to €20k grant for feasibility studies and start-up costs;
-Soft loans to help cover a portion of the cost of the project through to Financial Close (i.e. the point whereby the main senior debt facility is available for drawdown); and
-Soft loans to help cover a portion of the construction costs.
By soft loans I would assume what it is meant is unsecured loans meaning the eventual senior debt funder will have access to all the normal project finance security and would take priority of payment over the soft loans. These financial incentives, although not hugely material in the greater capital expenditure profile, do provide some cushion particularly at the risky planning stage of the project.
Perhaps the biggest consultation point is the mention that the DCCAE would favour a redesign of the current gate process for renewable energy projects to allow community-led projects access to what is an extremely valuable commodity. There are currently over 13GW of renewable energy applications in a queue waiting to be connected (put into context the All-Island system demand at peak times is only c. 5GW) so the possibility of jumping this queue would be attractive even on its own merits.
Community led projects represent an interesting and novel approach to renewable energy development. However, even with the financial supports and concessions being discussed, the community will face all the same risks and pitfalls that traditional developers face including planning & grid complications, financing difficulties, project cost over-runs and local community opposition to name but a few, any of which could potentially derail the project resulting in large financial losses which will ultimately be borne by the community developers themselves. The key to success will be a well structured investment platform overseen by knowledgeable elected community decision makers coupled with a skilled professional team who can guide the project through to commercial operation.
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