The imminent all-Ireland electricity market changes and ambitious green policy plans promise huge decarbonisation gains, but Brexit and clean energy target uncertainty could yet undermine investment
In May, in the face of on-going Brexit-related uncertainty, a new all-Ireland electricity market goes live with the aim of better aligning the whole island with European markets and enabling the free flow of energy across borders.
By encouraging the free trade of energy across borders, the Integrated Single Electricity Market (I-SEM) for the island of Ireland is very much at the foundation of what could effectively constitute a single market for electricity across Europe.
Add to this fact the impact the policy overhaul is likely to have on electricity generation, consumer bills and decarbonisation across Ireland, and you have a "very radical and swift transition" in energy policy, according to Mateusz Wronski, head of product development at Aurora Energy Research and lead author of a new report on the impact of imminent Irish energy reforms.
"A similar process in Britain, by comparison, has taken around 12 years," Wronski tells BusinessGreen. "So in many ways this is a more radical shift than pretty much anywhere in Europe."
Aurora's new report delivers encouraging news for the green economy - and indeed those advocates of maintaining free trade in energy and a close relationship with the EU single market post-Brexit.
Launched today, it argues the new system will help push a shift towards a greener, more flexible energy system, with the reforms intended to encourage competition across the sector while enabling security of supply and ensuring the highest possible level of renewable electricity on the grid, all while having very little impact on consumer bills.
Bolstered by the removal of subsidies for peat generation, the establishment of a competitive capacity market and the swift implementation of a new renewables support scheme, it all puts the island of Ireland well on track to meeting its renewable electricity target of 40 per cent by 2020, according to Aurora.
Indeed, even before the new market goes live the reforms are already having an impact. Earlier this year, Northern Ireland's only remaining coal-fired power station, the 513MW Kilroot facility, failed to secure any contracts in a recent capacity auction, raising the prospect of the plant closing even before the I-SEM goes live in May.
The auction result served to demonstrate how the reforms are forcing the worst-polluting and most expensive plants to compete with increasingly cheap renewables providers. Good news, certainly, for clean energy and decarbonisation, but such radical change will come at a major cost to fossil fuel plants and their staff if the shift is not effectively managed.
"The Irish market was previously, let's say 'generous', to generators, and one might argue perhaps excessively so," says Wronski. "And now the introduction of the competition might provide the clearance of the market, if you will, bringing it to an efficient level. There is the possibility of plant closure, and obviously when you introduce competition in any case there will be losers by definition. Obviously that has drawbacks and can be a painful process."
On the other hand, the reformed market offers up significant opportunities for both Ireland and Northern Ireland. Aurora's analysis points to the emerging battery storage market, which is being supported by EirGrid - the government of Ireland-owned grid management firm - through its DS3 programme to shift to a system reliant on increasing levels of renewables.
The DS3 programme will see an auction next month for balancing services on Ireland's grid, which is expected to see battery developers successful in the tender earn a combined €318m over the next five years. The tender is therefore expected to be heavily over-subscribed, Wronski says.
"What opens up is an opportunity for batteries, as suddenly Ireland becomes a big focal point for many of the big battery funds," he explains. "Even though it is not a massive market, because it is an isolated system and needs help dealing with that level of intermittency, that help now comes from battery storage. So when a 500MW opportunity opens up in Ireland, it is enough to attract some pretty big investors."
The energy market reforms all form part of a wider decarbonisation drive from the government of Ireland, as it seeks to reverse a worrying trend that saw greenhouse gas emission increase 3.5 per cent last year. A new National Development Plan was announced last month including a raft of ambitious new climate policies centred on a €22bn state investment plan to support the transition to a low carbon and climate resilient society.
The funding will see the creation of a new climate action fund with a promised initial investment of €100m that aims to deliver €50mof income. Moreover, the Plan aims to phase out coal and peat energy generation and end sales of petrol and diesel vehicles by 2030. An accompanying energy effiiency drive aims to make approximately 30,000-45,000 homes more energy efficient each year.
Yet all these radical low carbon programmes and the opening up of competition in the electricity market across Ireland are reliant on private, green investment in renewables and batteries - a flow of funding that pervading policy uncertainty currently threatens to undermine.
Firstly, of course, there is the potential impact of Brexit on cross border trade to contend with. The UK government - struggling to keep both soft and hard Brexit ministers happy - is still yet to thrash out a clear plan for precisely how it wants a future trade relationship with the EU to work. Consequently, prospective investors are denied the kind of policy certainty they would like to see and are likely to face higher costs of capital as a result.
"The whole integrated common electricity market is obviously undermined if there is a hard border across Ireland and there are tariffs, because then you would effectively have to think about decoupling the Irish and Northern Irish energy markets," warns Wronski. "That could be a very damaging scenario from a purely economic efficiency perspective. I don't think it is a high probability scenario, but nonetheless if you are an investor in this area you will be taking this into account."
Nevertheless, he says, given the clear gains from investing in the clean energy in Ireland once the I-SEM swings into action, the Brexit issue is unlikely on its own to deter investors. More pressing, Wronski argues, are the uncertainties surrounding energy policy within the island of Ireland itself.
Most notably, there is still no timeline for setting a further renewable energy target beyond 2020 across the island of Ireland. After all, without a clear policy steer in this area it is difficult to know how much intermittency there is likely to be from renewables, and therefore whether new energy storage or back up gas plants are worth ploughing money into.
"I don't think Brexit as an uncertainty dwarves some of the more fundamental policy uncertainty here, because we have to decarbonise the power sector regardless of what happens with Brexit, and ultimately that is the key guidance to investment," Wronski says. "But the lack of such a timetable or clarity as to even when people will know what the 2030 renewable energy target will be is certainly creating a lot of investment uncertainty."
Overall though, it seems the impending market changes coupled with the Irish government's revamped climate strategy are already helping to drive much needed investment in Ireland and Northern Ireland's electricity sector, with significant further economic benefits on offer from batteries and renewables as well. The question is whether policymakers can capitalise on these opportunities by providing the targets and clear direction needed to mobilise a real green infrastructure boom - a scenario that would establish the island of Ireland as a true test bed, not just for a unified EU energy market, but for a modern, competitive, fully decarbonised economy.
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