Getting The Deal Through – Electricity Regulation 2014

Author:Mr Alex McLean, Patrick McGovern and Claire Madden
Profession:Arthur Cox
 
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1 Policy and law

What is the government policy and legislative framework for the electricity sector?

Overall policy responsibility for the sector lies with the minister for communications, energy and natural resources and his Department (DCENR). In this capacity, the minister is advised by a range of other statutory bodies including the Commission for Energy Regulation (CER) and Sustainable Energy Authority of Ireland (SEAI).

The principal legislation governing the electricity industry in the Republic of Ireland is the Electricity Regulation Act 1999, as amended (1999 Act), which provides for the establishment of a regulatory framework for the introduction of competition in the generation and supply of electricity in the Republic of Ireland and established the CER as the national regulatory authority responsible for overseeing the liberalisation of Ireland's energy sector including granting licences for the generation, transmission, distribution and supply of electricity.

Government policy in the Irish electricity sector is driven principally by the relevant EU directives. The European Communities (Internal Market in Electricity) Regulations 2000 (the 2000 Regulations) completed the transposition of Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity (Directive 96/92/EC). The European Communities (Internal Market in Electricity) Regulations 2005 (the 2005 Regulations) were promulgated to transpose the requirements of Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC (Directive 2003/54/EC).

The European Communities (Internal Market in Electricity) Regulations 2010 (the 2010 Regulations) represent the first step taken in Ireland towards the transposition of Directive 2009/72/ EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity. The 2010 Regulations provide, inter alia, for the strengthening of independent regulation, better levels of consumer protection, the licensing of a public electricity supplier, the designation of a supplier of last resort and the enhancement of security of supply provisions. The European Communities (Renewable Energy) Regulations 2011 (as supplemented by the Sustainable Energy Act 2002 (section 8(2)) (Conferral of Additional Functions - Renewable Energy) Order 2011) have transposed Directive 2009/28/EC on the promotion of use of energy from renewable sources.

The Irish electricity sector underwent fundamental reform with the establishment on 1 November 2007 of a single electricity market (SEM) encompassing the Republic of Ireland and Northern Ireland. Key characteristics of the SEM include a gross mandatory pool with central commitment, a single system marginal price, transmission-constraint payments and the introduction of capacity payments.

The Energy (Miscellaneous Provisions) Act 2006 and the Electricity Regulation (Amendment) (Single Electricity Market) Act 2007 provide the legal basis for the SEM in Ireland, including establishment of a SEM Committee of the CER.

A March 2007 government White Paper, 'Delivering a Sustainable Energy Future for Ireland', set out the government vision for the future development of the energy sector for 2007 to 2020 around the central pillars of increasing security, sustainability and competitiveness of energy supply.

2 Organisation of the market

What is the organisational structure for the generation, transmission, distribution and sale of power?

Ireland has been increasingly liberalising its energy sector for more than a decade and significant steps have been taken at a regulatory level to facilitate competition in generation and supply. In practice, however, the number of new market entrants has been relatively low, reflecting the relatively small size of the Irish market. The current state of the market is described below.

Generation

The generation market is fully liberalised and there has been increased competition in recent years The most significant growth in generation investment has been seen in renewables. It is intended that 40 per cent of electricity consumed in Ireland in 2020 will be produced from renewable sources, and the development of renewables has been heavily promoted by successive price-support regimes for wholesale purchases of renewable energy (the REFIT schemes). Although ownership of renewable assets has traditionally been diverse, recent years have seen some consolidation in ownership by larger traditional utilities such as Bord Gais Eireann, Viridian and Scottish and Southern Energy (SSE) owned Airtricity. While representing a significant proportion of Ireland's generation portfolio, renewables are generally traded outside the market with prices set by reference to government support schemes.

With respect to price-setting generation, the government White Paper of 2007 included the aim of reducing the ESB's market share to 40 per cent of generation in an all-island (Republic of Ireland and Northern Ireland) context by 2010. To this end January 2009 saw the finalisation of a deal under the ESB-CER Asset Strategy Programme in which Spanish utility Endesa SA purchased from the ESB the 216MW Great Island and 589MW Tarbert plants, four 50MW peaking plants and two brownfield sites. Endesa's participation in the Irish market was to be short lived however, and it sold the former ESB plant to SSE in 2012 in a deal worth €230 million. The only other large-scale independent power plants not contracted to the ESB and supported by public service obligation levies are the Viridian-owned 343MW CCGT Huntstown Power Plant and the 401MW CCGT Huntstown Phase II Power Plant (commissioned in 2002 and 2007 respectively).

Bord Gais Eireann also constructed a 445MW CCGT generation station at Whitegate, County Cork, which was commissioned in 2011. At least a further 6,000MW of conventional projects are at present in a queue for connection to the electricity network.

Transmission

The transmission system is owned by the ESB. On 1 July 2006, a newly established independent state-owned company, EirGrid, took over the role of transmission system operator (TSO). Pursuant to section 14(2A) of the 1999 Act, only EirGrid may be granted a licence to act as TSO, and pursuant to section 14(2B) of the 1999 Act, only the ESB may be granted a licence to act as transmission asset owner. In July 2011, having undertaken an extensive independent analysis of the issue, the Irish Government decided that the ownership of the electricity transmission network assets would remain with the ESB while the operation and development of the transmission system would continue to be the responsibility of EirGrid. In a decision published on 21 May 2013, the European Commission determined that the effective implementation of the transmission system arrangements in place in Ireland met the requirements of the EU Third Energy Package (Directive 2009/72/EC). Accordingly, EirGrid would be certified as the transmission system operator (TSO) for Ireland. The ESB will remain as owner of the transmission assets in Ireland and is responsible for the funding of, and carrying out construction and maintenance on, the transmission network.

Market operation

Since the establishment of the SEM on 1 November 2007, the role of market operator for the island of Ireland has been discharged by a contractual joint venture between EirGrid and its Northern Ireland counterpart, System Operator Northern Ireland (SONI), known as the single electricity market operator (SEMO). EirGrid holds a SEMO licence under section 14(j) of the 1999 Act and is exempted from the need to hold a licence in Northern Ireland. SONI holds a corresponding licence in Northern Ireland and an exemption under section 14(2F) of the 1999 Act. SONI was acquired by EirGrid in March 2009.

Distribution

The distribution system is owned and operated by the ESB. Pursuant to section 14(2C) of the 1999 Act, only the ESB or a subsidiary of the ESB may be granted a licence as distribution system operator (DSO). The European Communities (Internal Market In Electricity) (Electricity Supply Board) Regulations 2008 provide for the establishment of a subsidiary company of the ESB to operate the distribution system. Pursuant to these regulations, the subsidiary company and the ESB must enter into agreements in respect of how the subsidiary company will fulfil its duties as DSO. ESB Networks Limited, a new ring-fenced subsidiary within the ESB group charged with the operation and management of the electricity distribution system, was established in December 2008.

Supply

Full retail contestability was introduced on 19 February 2005, but the electricity market was not fully deregulated until 4 April 2011. Newly rebranded Electric Ireland (formerly the ESB), Energia (a Viridian Group subsidiary), Airtricity and state-owned incumbent gas supplier Bord Gais Eireann are now active in the retail market. Bord Gais Eireann successfully entered the domestic electricity supply market in February 2009 and recorded unprecedented levels of customer switching. Airtricity (which was acquired by SSE in 2008) has also re-entered the domestic market, launching a significant switching campaign in July 2009. Following earlier losses of market share before full liberalisation, Electric Ireland has recently been permitted to compete for customers. At the end of Q4 2012, Electric Ireland had a 59.6 per cent share of the domestic market (MWh), up from 56.87 per cent at the end of Q4 2011.

REGULATION OF ELECTRICITY UTILITIES - POWER GENERATION

3 Authorisation to construct and operate generation facilities

What authorisations are required to construct and operate generation facilities?

The key administrative authorisation required to construct a generation facility is an...

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