In this legal update we have summarised and commented on a number of recent legal developments and open issues that will be of interest to generators of renewable energy, their funders and offtakers in the SEM. This legal update is neither a complete nor a definitive statement of law or of regulation. Specific legal advice should be obtained before taking any action.
BALANCING RISK IN I-SEM AND THE NEED FOR CLARITY ON REFIT
An important feature of the I-SEM will be the ability of market participants to trade in different time frames: ahead of, during and after the Trading Day. There are significant advantages in ex ante price disclosure in any market and having a highly liquid, actively traded day-ahead market will be an important indicator of the success of the I-SEM. However, trading in a day-ahead market creates particular challenges for generators who have a more limited ability to predict their output for the following day.
In particular, if there is a mismatch between what the generator sells into a day-ahead market and what it actually generates on the day, it will need to either sell any additional excess generation into the within day or balancing market or, if it is short generation, will need to purchase power in the within day or balancing markets to cover its contract position. Important questions remain as to how this "balancing risk" is to be allocated in the I-SEM, and in particular whether it will be compensated through the REFIT reimbursement methodology.
At present, pursuant to Decision Paper CER/08/236, REFIT reimbursement for offtakers is calculated as the amount, if any, by which the applicable REFIT payments in respect of a generator under the PPA exceeds the total revenues received from the market. This figure is calculated as the total of all revenues from the market over the entire PSO year, taking into account energy payments, constraint payments and capacity payments for every individual trading period in the year. If this principle is applied in the I-SEM, as we believe it should be, offtakers will be kept whole for the amount, if any, by which the applicable REFIT payments in respect of a generator under the PPA exceeds the total revenues received from the market (irrespective of the time periods within which they trade and whether they are forced to purchase electricity to cover a short generation position). This is consistent with the current operation of REFIT, the applicable State Aid notifications and the expectations of market participants.
It has been suggested, however, that REFIT may only compensate offtakers in respect of differences between...