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Calculation of the R-factor in determining the Public Service Obligation Levy

DOCUMENT TYPE:

Decision Paper

REFERENCE:

CER/08/236

DATE PUBLISHED:

20th November 2008

CONTACT: James Mc Sherry [email protected]

The Commission for Energy Regulation, The Exchange, Belgard Square North, Tallaght, Dublin 24. www.cer.ie

CER – Information Page Abstract: The calculation of the PSO levy in a given PSO period requires an ex-ante estimate of the monies recoverable in that PSO period by relevant parties, plus the calculation of the monies that should have been recovered by relevant parties two PSO periods ago. This decision paper addresses the ex-post calculation of the correction factor (‘R-factor’) to apply in determining such monies owed to/from the PSO fund. This paper also addresses responses to the proposed decision paper in relation to the calculation of the R-factor (CER/08/170) and any issues that were raised by respondents in relation to that paper regarding the PSO.

Target Audience: Electricity generators and suppliers (including those participating in the REFIT scheme), and electricity customers Related Documents:

• Electricity Regulation Act 1999

• Notification of Public Service Obligations 2000

• S.I. No. 217 of 2002 - Electricity Regulation Act 1999 (Public Service Obligations) Order 2002 as amended by S.I No. 284 of 2008.

• PSO Invoicing and Collection Procedures, CER 03/013, 27th January 2003: http://www.cer.ie/en/renewables-decision-documents.aspx?article=ce87d5b2-be1b-48da-be3c-a209dd82cd22

• REFIT Terms and Conditions/Clarifications: www.dcenr.gov.ie/NR/rdonlyres/E260E316-B65A-4FDC-92F0-9F623BA18B55/0/REFITtermsandconditions.doc

• Proposed Approach to Setting the PSO benchmark Price in SEM AIP-SEM-07-240 PSO Consultation Paper: Published June 1st 2007

• PSO Benchmark Price Setting Methodology AIP-SEM-07-431 PSO Decision Paper : Published July 31st 2007 http://www.allislandproject.org/GetAttachment.aspx?id=d5e5c834-8551-4551-81df-f0cf94326045

• Consultation on the Arrangements for the Public Service Obligation Levy,

CER/08/093: http://www.cer.ie/en/renewables-current-consultations.aspx?article=39ce537a-1620-486d-b93e-bc70ab5934ca

• Decision on Arrangements for the Public Service Obligation Levy, CER/08/153: http://www.cer.ie/en/renewables-current-consultations.aspx?article=39ce537a-1620-486d-b93e-bc70ab5934ca&mode=author

• Proposed Decision in relation to the Ex-Post Correction Factor to apply in the Calculation of the PSO Levy CER/08/170: http://www.cer.ie/en/renewables-current-consultations.aspx?article=39ce537a-1620-486d-b93e-bc70ab5934ca

• PSO Levy 2008/2009 Decision CER 08/129: http://www.cer.ie/en/renewables-decision-documents.aspx?article=d96d9b61-b24f-414e-b93e-abe0f4ce561e

Executive Summary Section 39 of the Electricity Regulation Act 1999 sets out the legal basis for the Public Service Obligation (PSO) levy in Ireland. Statutory Instrument No. 217 of 2002 made under Section 39 requires that the Commission for Energy Regulation (‘the Commission’) review the costs associated with the PSO and set the associated levy for the required period. In June of 2007, the Commission and the Northern Ireland Authority for Utiltity Regulation (NIAUR) consulted on and determined the methodology for setting the ex-ante benchmark price for the PSO in the Single Electricity Market (SEM). This decision paper decides upon the methodology for the calculation of the ex-post correction factor - the ‘R-factor’ – for all relevant parties in the context of PSO. This paper deals with the approach to be used in the calculation of the R-factor for both the Renewable Energy Feed in Tariff (REFIT) and other mechanisms supported by the PSO. The R-factor is calculated as the difference between a supplier’s ex-ante estimate of entitlements under the relevant PSO scheme and the actual entitlements determined two PSO periods later through the submission of audited, verifiable figures. The ex-post figures for review will be obtained through independently audited submissions from suppliers to the Commission. Over the course of the consultation on the R-factor, there have been numerous requests for clarification on issues surrounding the R-factor itself and other issues in relation to the PSO, in particular with regard to the REFIT scheme. This decision paper addresses those requests, along with any previous clarifications outlined in the Commission’s proposed decision paper on the R-factor (CER/08/170).

Table of Contents 1.0 Introduction ................................................................................................. 1

1.1 The Commission for Energy Regulation ............................................................. 1 1.2 Purpose of this paper .......................................................................................... 1 1.3 Structure of this paper ........................................................................................ 1

2.0 Overview ..................................................................................................... 3 2.1 Background ......................................................................................................... 3 2.2 R-Factor .............................................................................................................. 5

3.0 Response to Comments Received to CER/08/170 ..................................... 7 3.1 Distributed Nature of REFIT Information ............................................................ 7 3.2 Application of CPI and EURIBOR ....................................................................... 8 3.3 Pre-2008 REFIT Payments ............................................................................... 10 3.4 Requirements Regarding Supplier Submissions .............................................. 11 3.5 Ex-ante Payments to the PSO Fund & Legislative Changes ............................ 12 3.6 Capacity Payments ........................................................................................... 13 3.7 Compensation Payments based on existing MSQ Contracts ........................... 14 3.8 Use of MSQs for Opportunity Payment Calculations ........................................ 14

4.0 Summary of Decisions .............................................................................. 16 4.1 Non-REFIT PSO Revenues and Costs ............................................................. 16 4.2 Definitions of MG and MGLF ............................................................................ 16 4.3 CPI & EURIBOR ............................................................................................... 16 4.4 Pre-2008 REFIT Payments ............................................................................... 17 4.5 Supplier Submissions ....................................................................................... 17 4.6 Treatment of REFIT PPAs ................................................................................ 17 4.7 REFIT Balancing and Technology Difference Payments .................................. 18 4.8 In-Market REFIT Opportunity Cost Payment .................................................... 18 4.9 Out-of-Market REFIT Opportunity Cost Payment ............................................. 19 4.10 R-factor ............................................................................................................. 19

5.0 Conclusions & Next Steps ......................................................................... 21 Appendix A – Glossary of Terms .......................................................................... 1 Appendix B – REFIT R-Factor Calculation ........................................................ 3

PSO Ex-Post Correction Factor CER/08/236

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1.0 Introduction

1.1 The Commission for Energy Regulation The Commission for Energy Regulation (‘the Commission’) is the independent body responsible for overseeing the regulation of Ireland's electricity and gas sectors. The Commission was initially established and granted regulatory powers over the electricity market under the Electricity Regulation Act, 1999. The enactment of the Gas (Interim) (Regulation) Act, 2002 expanded the Commission’s jurisdiction to include regulation of the natural gas market, while the Energy (Miscellaneous Provisions) Act 2006 granted the Commission additional powers in relation to gas and electricity safety. The Electricity Regulation Amendment (SEM) Act 2007 outlined the Commission’s functions in relation to the Single Electricity Market (SEM) for the island of Ireland. This market is regulated by the Commission and the Northern Ireland Authority for Utility Regulation (NIAUR). The Commission is working to ensure that consumers benefit from regulation and the introduction of competition in the energy sector.

1.2 Purpose of this paper The purpose of this paper is to set out the Commission’s decision with regard to the methodology to be applied to the ex-post calculation of the R-factors to apply in calculating the monies owed to/from suppliers in complying with their obligations in relation to the PSO and, in the case of REFIT1, monies (if any) owed in accordance with the provisions in clause 5.4. This paper also addresses any further clarifications requested by respondents pertaining or related to the R-factor or PSO.

1.3 Structure of this paper This paper is structured in the following manner:

• Section 2.0 details the background to this decision paper, including other consultations and decisions in relation to the PSO. An overview of the R-factor is also given.

1 http://www.dcenr.gov.ie/NR/rdonlyres/E260E316-B65A-4FDC-92F0-9F623BA18B55/0/REFITtermsandconditions.doc


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• Section 3.0 outlines the Commission’s responses to submissions from stakeholders in relation to the proposed decision paper CER/08/170.

• Section 4.0 summarises the decisions and clarifications made with regard to the initial consultation CER/08/093, the proposed decision CER/08/170 and this decision paper in concerning the ex-post calculation of the R-factor and any issues raised by respondents in relation to this.

• Section 5.0 outlines the conclusions and next steps the Commission will be taking after this decision paper.


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2.0 Overview In this section, the background to this decision paper is given, followed by an outline of the R-factor and how it is calculated.

2.1 Background Under Section 39 of the Electricity Regulation Act 19992 the Commission is responsible for the imposition of PSO on the Board, licence holders and holders of permits under Section 37 of the Principal Act. S.I. No. 217 of 20023 was made by the then Minister for Public Enterprise under Section 39 which sets out more detail in relation to the above matters. S.I. No. 217 of 2002 (as amended by S.I. No. 284 of 2008) provides, inter alia, for the calculation of the PSO to allow for the recovery of costs by relevant parties in accordance with the notifications to the EU Commission regarding the various mechanisms supported by the PSO. Under S.I. No. 217 of 2002, the Commission is obliged to approve ESB’s estimated additional costs to be incurred in complying with the PSO. These include additional costs related to the contracting of ESB with generating stations which use peat as their primary energy fuel and generating stations that use renewable, sustainable or alternative forms of energy as their primary fuel source. The original November 2000 Notification (‘the Notification’) set out the broad areas that may be covered by the PSO (as listed in Section 39), namely security of supply, use of indigenous fuel sources and environmental protection. It referred specifically to the schemes envisaged to be covered by the PSO at that juncture, i.e. the imposition on the ESB of a requirement to have available to it the output of electricity generating stations using peat and stations using renewable, sustainable or alternative forms of energy. Subsequent to the Notification, new schemes have been notified to the EU in accordance with Article 88(3) of the Treaty and Directive 2003/54/EC and have received state aid clearance. Most recently, the REFIT scheme has been notified to the EU and received state aid clearance. The REFIT was introduced by the Government on the 1st of May 2006 as a support mechanism for certain types of renewable generation. The REFIT replaces the Alternative Energy Requirement (AER) mechanism and its stated purpose is the achievement of Ireland’s 2010 renewables target. The REFIT

2 http://acts.oireachtas.ie/en.act.1999.0023.7.html#partvi-sec39 3 http://www.irishstatutebook.ie/2002/en/si/0217.html


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Terms and Conditions are published on the DCENR’s website4. The Government applied to the EU for state aid clearance in August 2006 in accordance with Article 88(3) of the Treaty and this was received in September 2007 (N571/2006 and C (2007) 4317 final respectively)5. The REFIT differs from the AER scheme in that it is open to all suppliers, not just ESB CS. Under the REFIT, the supplier agrees to purchase all of the output from the generator under contract for 15 years through a Power Purchase Agreement (PPA). Under the REFIT there are three streams of compensation, accruing to the supplier:

I. a 15% balancing payment intended to cover balancing costs associated with contracting with undispatchable generators;

II. a technology difference payment to promote diversity in renewable generation; and

III. an opportunity cost payment to reflect any extra cost of contracting with REFIT generators relative to what the energy could have been bought/sold from/to the pool.

The DCENR has recently made amendments to S.I. No. 217 of 2002 (via S.I. No. 284 of 2008). This provides a statutory basis for the inclusion of the REFIT costs in the PSO levy and to provide that suppliers other than ESB may draw support from PSO schemes. On the 16th of June 2008, the Commission published a consultation paper on its website entitled Arrangements for the Public Service Obligation Levy – A Consultation Document (CER/08/093). In this paper, three issues relating to the PSO were consulted upon:

• the methodology to be applied to the ex-post calculation of correction factors to apply in determining the actual monies owed by/to suppliers through the PSO;

• the ex-ante benchmark price for the REFIT in the context of the PSO; and

• the collection and distribution procedures to apply for the PSO levy. On the 20th of August 2008, the Commission published a decision paper on its website entitled Arrangements for the Public Service Obligation Levy – A Decision by the Commission for Energy Regulation (CER/08/153). In this decision paper, the latter two bullet points above were addressed and the Commission outlined relevant decisions regarding these.

4http://www.dcmnr.gov.ie/Energy/Sustainable+and+Renewable+Energy+Division/Sustainable+and+Renewable+Energy+Division.htm 5 http://ec.europa.eu/community_law/state_aids/comp-2006/n571-06.pdf


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For the REFIT ex-ante benchmark price, a time-weighted average SMP was chosen. Historically the Best New Entrant6 (BNE) price was used for the ex-ante benchmark price. This was chosen because it is consistent with the Notification to the EU regarding REFIT, is consistent with the Commission/NIAUR PSO benchmark price setting methodology7, is transparent, does not impose unnecessary administrative burdens and provides for parity of treatment between those receiving support under the REFIT and those receiving support under other PSO supported mechanisms. With regard to collection and distribution procedures, the PSO levy will be divided among suppliers monthly on a pro-rata basis. The Commission concluded that the PSO invoicing and collection procedures, as originally outlined in CER/03/0138, require updating in light of commencement of the REFIT and the fact that suppliers other than ESB CS are now entitled to recover monies under the PSO. The Commission also acknowledged that any changes to the collection and distribution of PSO monies must be robust enough to deal with a net positive, zero or net negative (money owed) PSO levy. The Commission intends to publish a paper to reflect the updated PSO invoicing and collection procedures with the necessary revisions to CER/03/013. On the 17th of September 2008, the Commission published a proposed decision paper entitled Ex-post Correction Factor to apply in the Calculation of the Public Service Obligation Levy (CER/08/170). This addressed the remaining issue of the ex-post calculation of correction factors (‘R-factors’) from the initial consultation (CER/08/093) above. This is the follow-up to that proposed decision paper and sets out the Commission’s decisions in relation to the issues contained therein.

2.2 R-Factor The calculation of the PSO levy requires an ex-ante estimate of the monies recoverable in a given PSO period by relevant parties plus the calculation of the monies that should have been recovered by such parties two PSO periods ago.

6 The BNE price comprised “the all-in cost per MWh of a BNE Combined Gas Turbine (CCGT) operating at baseload, and at efficiencies, availabilities and cost parameters determined by the CER”. 7 PSO Benchmark Price Setting Methodology AIP-SEM-07-431 PSO Decision Paper : Published July 31st 2007 http://www.allislandproject.org/GetAttachment.aspx?id=d5e5c834-8551-4551-81df-f0cf94326045 8 PSO Invoicing and Collection Procedures, CER 03/013, 27th January 2003 http://www.cer.ie/en/renewables-decision-documents.aspx?article=ce87d5b2-be1b-48da-be3c-a209dd82cd22


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The Commission has published its decision regarding the PSO monies9 to be recovered by suppliers under the PSO for this levy period (1st October 2008 – 30th September 2009). Following this period, parties will be required to submit audited reports regarding the actual monies that should have been recovered by them for that PSO period. The difference between the estimated and actual monies that should have been recovered will then be included in the PSO period 1st October 2010 to 30th September 2011 levy as the ‘R-factor’, with interest applied as per the Notification of 200010. Prior to the introduction of the SEM, the Best New Entrant (BNE) price was used to set the benchmark price against which the PSO monies were recovered/paid to ESB. This price represented the cost of a BNE generator in the Irish market and there was no ex-post revision of this because no market price existed in the pre-SEM bilateral trading arrangements. Therefore, the ex-ante estimate only was used for the recovery of PSO monies. The R-factor was, however, necessary to account for the differences between factors such as estimated versus actual plant output. The introduction of the SEM resulted in actual ex-post values being available for the market price; therefore differences in ex-ante SMP estimates and ex-post SMP values can now be taken account of and included in the R-factor. The Commission and the NIAUR published a decision paper on the 31st July 200711 regarding the methodology for the calculation of the PSO Benchmark Price to apply in each jurisdiction. This is to be based on a series of forecasted modelled pool prices, using the same model that is adopted in determining directed contract prices. This did not explicitly address the methodology for the calculation of the ex-post R-factor. This paper outlines the Commission’s decision in relation to the calculation of the ex-post R-factor for PSO supported mechanisms, including the REFIT scheme. This paper is the follow-up to the proposed decision paper CER/08/170.

9 CER 08/129 Public Service Obligation (PSO) Levy 2008/2009 Charges http://www.cer.ie/en/renewables-decision-documents.aspx?article=d96d9b61-b24f-414e-b93e-abe0f4ce561e 10 Paragraphs 5.35 and 5.36 of the Notification of Public Service Obligations 2000 11 PSO Benchmark Price Setting Methodology AIP-SEM-07-431 PSO Decision Paper : Published July 31st 2007 http://www.allislandproject.org/GetAttachment.aspx?id=d5e5c834-8551-4551-81df-f0cf94326045


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3.0 Response to Comments Received to CER/08/170 In this section, submissions received regarding the 17th of September 2008 Ex-post Correction Factor to apply in the calculation of the Public Service Obligation Levy (CER/08/170) proposed decision paper are outlined. The Commission’s responses (italicised) to these submissions are then given. Three responses to CER/08/170 were received from the following:

• Airtricity Ltd • Saorgus Energy • SWS Group

3.1 Distributed Nature of REFIT Information One respondent was concerned that there would be difficulties for future market entrants to gain an understanding of the REFIT scheme, due to the distributed nature of information relating to the REFIT. They recommended that the Commission and DCENR publish a guide to REFIT to assist market participants. The same respondent noted the need for an updated paper to reflect the changes that have occurred since CER/03/013 PSO Collection and Invoicing Procedures was published. The Commission acknowledges that information with regard to REFIT is distributed across a number of sources and consider that this paper and the documents contained in the ‘Related Documents” section at the start of this paper provide sufficient information to enable understanding of the REFIT scheme. In addition, the Commission notes that the REFIT is a matter for the DCENR. The Commission has forwarded this request for consolidated information to the DCENR for consideration. The Commission intends to publish a document detailing revised PSO collection and invoicing procedures to replace CER/03/013 in due course. The Commission acknowledges that the collection and distribution procedures outlined in this document need to be updated in line with the extra requirements for payment to/from the PSO fund as a result of the REFIT.


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3.2 Application of CPI and EURIBOR One respondent requested that “a uniform estimate of CPI and REFIT prices should be adopted”. It was also requested that timelines and the official rates of EURIBOR (Euro Interbank Offered Rate) and CPI be clarified. CPI The ex-ante CPI estimates used by the Commission are based on global assumption submissions received from ESB for tariff purposes, as approved by the Commission. The submissions are based on and checked against CSO figures and the ESRI’s latest available (relative to when the decision on CPI estimates must be made) quarterly reports that provide forecasts and known actuals of CPI and other financial indexes. It is important to note that CPI values for given year are considered in effect from January 1st of the following year. The actual CPI applied for the calendar year of 2006 would therefore be the known 2005 value as calculated, applied from 01/0106. CPI values (ex-ante and ex-post) used are based on the calendar year and not the PSO year. The CPI figures applied to the reference price for the estimates of the October 2008 - September 2009 PSO were the actual CPI figure for 2007 (effective 01/01/2008 and compounded as appropriate from when the REFIT Terms and Conditions applied) and the estimated CPI for 2008 (effective 01/01/2009), as contained in the ESRI’s Spring “Quarterly Economic Commentary”. This forecast was based on figures available by end-February 2008. For the 2008/09 PSO levy period, the relevant CPIs were applied to the reference price for the relevant forecasted volumes, estimated to occur in 2008 or 2009. For example, for October – December 2008, the known CPI for 2007 was used, for the January – September 2009 period the estimated CPI for 2008 was used. Actual CPI figures and actual output per month will be reconciled with the ex-ante estimates and included in the relevant R-factor calculations. Example: Application of CPI for 2008/2009 Levy The 2008/2009 Levy was set to cover the period 1st October 2008 – 30th September 2009. From a CPI perspective, there are two periods involved here as the levy period is spread between 2 calendar years. Effectively this means there will be two reference prices within the period:


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CPI Period 1

October 2008 – December 2008 € Original Ref (CPI’d up to 31/12/07) x 2007 CPI (applied from 01/01/08) = € Ref 1

The above CPI (REF 1) is applied to the reference price for the volumes relating to

October 2008 – December 2008

CPI period 2

January 2009 – September 2009 € Ref 1 (calculated for CPI period 1) x 2008 CPI (applied from 01/01/2009 &

obtained from ESB’s global assumptions, approved by Commission) = € REF 2

The above CPI (REF 2) is applied to the reference price for the volumes relating to January 2009 – September 2009

CPI is applied on an annual basis and is not pro-rated for the number of months the reference price is applied for. Therefore, the CPI figure applied for any given month in a given year is the same. EURIBOR The EURIBOR rate will apply to the PSO period, not the calendar year. The EURIBOR rate is to apply ex-post to R-factor payment values owed to/by suppliers to/from the PSO fund and is the rate used as submitted by ESB in their global assumptions, as approved by the Commission. It is intended to reflect the fact that monies accruing under the R-factor are paid two PSO periods after the period to which the payment refers. For example, in July 2010, the interest rate for the October 2008 – September 2009 period and October 2009 – September 2010 period will both be used, compounded. As a result of the calculation of the R-factor for the October 2008 – September 2009 levy period being carried out in Q2 of 2010, the most recent EURIBOR rate included in ESB’s global assumptions for the 2010 levy shall be used as the rate to apply to the 2010 period (i.e. 1st January 2010 – 1st October 2010). Example: October 2008 – September 2009 Levy R-factor payment at EURIBOR Payment due in October 2010, calculations being done May 2010. ESB’s global assumptions submissions have been received, containing the EURIBOR estimate for the 2010 calendar year. R-factor = €10,000.


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EURIBOR PERIOD (calendar year)12 4% 2008 (actual) 4.5% 2009 (actual) 3.5% 2010 (based on ESB’s submitted global

assumptions, as approved by Commission)

PSO Period 1 October 2008 – September 2009 October 2008 – December 2008 = 4% x (1/4 year) = 1% January 2009 – September 2009 = 4.5% x (3/4 year) = 3.375% Total = 1% + 3.375% = 4.375% PSO Period 2 October 2009 – September 2010 October 2009 – December 2009 = 4.5% x (1/4 year) = 1.125% January 2009 – September 2009 = 3.5% x (3/4 year) = 2.625% Total = 1.125% + 2.625% = 3.75% R-factor amount payable (compounded EURIBOR) for whole period October 2008 – September 2010 = (€10,000 x 4.375%) x 3.75% = €10828.90 A correction will be made ex-post for the application of estimated EURIBOR values.

3.3 Pre-2008 REFIT Payments It was requested that clarification be provided in relation to the interest to be applied to PSO payments of REFIT entitlements before the start of the 2008/2009 PSO Period. There are two time periods involved here:

• From the 1st May 2005 to 31st December 2007 • From 1st January 2008 to 30th September 2008

The Commission is not in a position to authorise payment to suppliers of EURIBOR interest on monies paid out to them in this year’s PSO in relation to pre-2008 REFIT generation. In section 5.36 of the Notification it clearly states that the EURIBOR rate is only to be applied to R-factor amounts owed to

12 These are only indicative figures used for illustrative purposes in this example.


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suppliers. Payments for estimated output in the 2008 levy13 (from last actuals known, up until the 30th September 2008) will be paid at the EURIBOR when they are included in the relevant R-factor.

3.4 Requirements Regarding Supplier Submissions One respondent requested that the Commission elaborate on “how the ex-post submissions by suppliers are to be audited and what specific requirements (if any) are there for the third party verification of claims”. As regards ex-ante estimates, it was queried whether parameters for the estimation of output should be adopted or whether there was any requirements for independent oversight and auditing of the process. Ex-ante, the onus is on the supplier to provide their best estimates regarding output for generation. Therefore P50, P75, or P90 figures from renewable generators can be used. To this end, the Commission requests that suppliers make their best estimates of output to ensure that the difference between ex-ante estimates and ex-post known values are minimised to keep the R-factor (positive or negative) to a minimum. Once generators have historical data and more accurate parameters upon which future estimates may be based, it would be expected that estimates of output would become more accurate. As detailed in Article 19 of S.I. No. 217 of 2002 (as amended by S.I. No. 284 of 2008), parties (other than final customers & including suppliers) who have any duties imposed on them by S.I. No. 217 of 2008 are required to specify the procedures according to which “it will estimate each constituent element of the PSO Levy, as appropriate, specified in Article 8 (1) of this Order...”. The onus is on suppliers to provide their best estimates for output, not the Commission. The Commission may, however, look for a statement from suppliers that details their MG (or MGLF) output and supporting data, including information with regard to estimates of output. It is noted that in the case where ex-ante figures are over estimated, monies are given back to the PSO in the relative R-factor. As per Article 10 of S.I. No. 217 of 2002 (as amended by S.I. 284 of 2008), “each supplier shall provide the Commission details of the actual additional costs incurred by that supplier in complying with the obligation imposed on it by that Article.........together in each case with a separate auditors’ certificate, detailing

13 The 2008 levy was calculated in July 2008. This levy consisted of actual PSO payments due before 1st October 2008 and estimates for the period 1st October 2008 – 30th September 2009. In determining the pre-October 2008 payments, however, estimated quantities had to be used in 2008 for those months up to October where actual values were not known. As such, these values will be included in an ex-post reconciliation and R-factor amounts due/owed by suppliers relating to these months will be subject to interest at the EURIBOR rate in accordance with the Notification of 2000.


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the actual amounts of the costs and expenses referred to in subparagraphs (a) and (b)......”. Ex-post audited submissions from suppliers must be in compliance with the necessary legislation and the decisions set out in this paper. The Commission is of the opinion that independent auditing is the most appropriate way to ensure valid ex-post figures are used and to enable calculation of the R-factor. This decision is in-line with S.I. No. 217 of 2002. The Commission intends to monitor the ex-ante and ex-post submissions of suppliers on an ongoing basis. The Commission may request information and/or evidence regarding amounts invoiced, received, accounted for and paid by persons pursuant to Article 20 of S.I. No. 217 of 2002. Auditors will be required to state clearly that submissions are in accordance with this decision. In this regard, the Commission may request that estimates are submitted on the basis of specific parameters (P90, P75, P50).

3.5 Ex-ante Payments to the PSO Fund & Legislative Changes One respondent raised a concern with regard to a potential situation that the amounts allocated to be received (ex-ante estimates + R-factor) by suppliers in the PSO levy may not actually be recovered by such suppliers over the 12 month period in question. The respondent was concerned that the calculations outlined in Appendix C of CER/08/170 do not capture the possibility of this occurring. It was suggested that this could be accounted for in the calculations outlined in Appendix B of this paper. The Commission envisages a number of scenarios where this may occur:

1. A negative PSO (money owed to the PSO fund and not paid). 2. Forecasted demands: If forecasted demands prove materially incorrect,

enough money may not be recovered from final customers to ensure the PSO fund is sufficiently full. Note this would only occur in the event of a positive PSO Levy.

3. Supplier default: If a supplier defaults and hence does not make its payments to the PSO fund, this may result in a shortfall in the monies being paid back into the fund. Note this would only occur in the event of a positive PSO.

With regard to the first point, in the event of a negative PSO, it is considered that ESB CS would, at present, be the only supplier owing net money to the PSO fund. The Commission acknowledges that the current legislation does not specifically provide for payment to the PSO fund in such a case. The


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Commission is engaging with the DCENR to examine the legislative requirements in this regard. With regard to supplier default, the Commission notes that the responsibility to recover monies for the PSO fund from suppliers currently lies with the DSO and the TSO, as outlined in Articles 14 and 15 of S.I. No. 217 of 2002. The issue of forecasted demand will not affect this years PSO, as the levy to final customers was set to zero. Under S.I. No. 217 of 2002 the responsibility to collect levy monies from final customers lies with the suppliers, the DSO and the TSO. The Commission acknowledges that more work is required in this area to ensure payment to the PSO fund is achieved in the event of supplier default or forecast errors. The Commission is reviewing the situation with the relevant parties in respect of all three of these issues in order to provide greater certainty to industry in the event of such occurrences. There will be no change, however, to the R-factor calculation outlined in Appendix B of this paper (same as Appendix C of CER/08/170).

3.6 Capacity Payments One respondent disagreed with the Commission’s position in CER/08/170 regarding capacity payments to suppliers. In that paper, the Commission considered that the PPA price between a generator and supplier was effectively an ‘all-in’ price, covering both energy and capacity payments. The respondent outlined that in some PPAs the contracted payment is defined in terms of “net electrical output” and that such PPAs do not include arrangements for the transfer of capacity payments from the generator to the supplier. On that basis they felt “it is incorrect to assume the PPA price is an ‘all-in’ price that includes the capacity payment in such cases”. It was requested that the Commission consider the PPA price to be the energy price (excluding capacity) in such cases. The RAs’ decision14 on the setting of the ex-ante PSO benchmark price in the SEM decided that a capacity adder will be included in this price. Capacity is therefore factored into the calculation of the ex-ante PSO benchmark price. In arriving at this decision, it was noted that participants “in general supported the addition of a capacity adder to the benchmark price”. The Commission deems it appropriate that capacity is included in the ex-ante benchmark price because suppliers receive payment for that capacity from the pool.

14 PSO Benchmark Price Setting Methodology AIP-SEM-07-431 PSO Decision Paper : Published July 31st 2007 http://www.allislandproject.org/GetAttachment.aspx?id=d5e5c834-8551-4551-81df-f0cf94326045


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The ex-post reconciliation also takes account of capacity in relation to what the supplier should have received based on energy sold to the pool. If capacity were excluded from what the Commission considers the “PPA price”, it could lead to an increase in the PSO levy for final customers. The Commission considers the PPA price to be an ‘all in’ price, as outlined in the proposed decision CER/08/170. Whether capacity payments go to a generator or supplier is considered a matter for commercial negotiation.

3.7 Compensation Payments based on existing MSQ Contracts It was stated by one respondent that where “existing PPAs are based on MSQ, it would be unjust not to pay the REFIT revenue streams on the basis of the MSQ”. As stated in section 2.2.1 (2C) of CER/08/170, the Commission considers it appropriate that the 15% balancing payment and technology difference payment will be based on the metered generation (MG or MGLF) of the REFIT supported generating plant. The opportunity cost compensation is also to be based on MG, where the generator is not constrained down. The treatment of the opportunity cost compensation stream is detailed further in section 3.8. As stated in the Terms and Conditions of the REFIT: “eligible domestic electricity’ means electricity produced from renewable energy by new electricity generating plant in the State …..”

“Power Purchase Agreement’…..means….a contractual agreement between an electricity generator and a licensed supplier obliging the latter to purchase the output from a new renewable energy powered electricity generation plant ….”

The Commission considers that PPAs should be based on metered generation because this is in line with what is envisaged in the REFIT Terms and Conditions. In CER/08/170 it is stated that in the absence of a pro-forma REFIT PPA contract, the Commission considers that PPAs may be based on MSQ or MG. From a REFIT perspective, however, suppliers will only be compensated for metered generation.

3.8 Use of MSQs for Opportunity Payment Calculations One respondent requested that the revenue stream of the REFIT opportunity cost payment should not be based on MSQ as currently outlined (Table 1 in CER/08/170). It was argued that the revenue side of the equation should instead be based on MG. The respondent was concerned that suppliers would not be compensated for the difference between their costs and revenues based on metered generation.


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Another respondent requested that the basis for all three compensation streams be MSQ, where existing contracts are based on MSQ (i.e. revenues and costs of opportunity cost compensation be based on MSQ) The Commission is of the view that MSQ should remain on the revenues side of the Table 1. Under current market arrangements, suppliers are compensated for constrained generation, when acting as Intermediaries for generators. Suppliers, under a metered generation contract, only pay for the metered generation. If the generator in question is not constrained down, the MG=MSQ and, as such, the supplier’s MG revenues from the pool will be compared with their MG costs at the REFIT reference price and any compensation due will be paid. In the event that the generator is constrained, the Commission considers that the supplier, acting as Intermediary, is adequately compensated from the market for such constrained generation. The basis for this stream of compensation will still be MG, unless the generator is constrained, in which case the supplier is compensated by the market. If MG was used on the revenues side, as opposed to MSQ, the PSO levy for final customers could potentially be increased. If MSQs were used on the revenue and cost sides of the above table, the REFIT supplier would be compensated based on MSQs, not MG. In line with section 3.7 above, the Commission considers that this would potentially increase the PSO levy on final customers and is not in line with the aims of the REFIT Terms and Conditions, where ‘metered generation’ and ‘electricity produced’ are referred to. The Commission, in reaching this decision, wishes to ensure that any potential PSO levy on final customers is minimised in the context of the governing legal framework and purpose of the PSO schemes.


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4.0 Summary of Decisions This section provides a review of the decisions reached on the ex-post calculation of the R-factor and issues relating to this calculation regarding the REFIT. In reaching the decisions outlined below, the Commission is seeking to ensure that all parties, including suppliers, generators, and final customers are treated in accordance with their obligations under the legal framework governing the PSO.

4.1 Non-REFIT PSO Revenues and Costs In section 2.2 of CER/08/093 the Commission consulted on the treatment of costs and revenues associated with contracts and plants supported under the PSO, other than the REFIT scheme. The Commission’s decision is to proceed with the approach outlined in CER/08/093. The calculation of the R-factor shall be as outlined in paragraph 5.36 of the Notification.

4.2 Definitions of MG and MGLF Metered Generation (MG): Active Power15 produced at the Export Point (being the nominal commercial point of entry to the Transmission or Distribution System of the Active Power generated at a Transmission connected or Distribution connected site) Metered Generation Loss Factored (MGLF): Metered Generation adjusted to reflect transmission losses and (where applicable) distribution losses (DLAFs and TLAFs) at the Trading Boundary.

4.3 CPI & EURIBOR CPI In the ex-ante estimates, CPI figures used will be estimates based on the ESRIs most recent (in relation to when calculations for the levy are being done) “Quarterly Economic Commentary”. Forecasts are done on a calendar year basis and the relevant CPI applied to the relevant REFIT reference price for the relevant period. Ex-post, the actual values for CPI will be known and, as such, 15 Refer to Trading and Settlement Code for definition – http://www.allislandmarket.com/MarketRules/ .


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will be reconciled against the ex-ante estimates and included in the relevant R-factor calculations. The application of this is outlined in section 3.2 of this paper. EURIBOR The interest rate to be applied to both over and under recoveries of REFIT monies under the PSO will be that as set out in section 5.36 of the PSO Notification of 2000: “the actual annual interest rate at Euribor compounded over an average period outstanding of 2 years”. This will be the EURIBOR applied over the PSO period in question, not a calendar year. The application of this is outlined in section 3.2 of this paper.

4.4 Pre-2008 REFIT Payments The Commission is not in a position to authorise payment to suppliers of EURIBOR interest on monies paid out to them in this year’s PSO (October 2008-September 2009) in relation to the output of REFIT supported generation before the commencement of the above levy period. This decision is in line with paragraph 5.36 of the Notification.

4.5 Supplier Submissions Ex-ante: The onus is on suppliers to provide their best estimates of output to ensure that the difference between ex-ante estimates and ex-post known values are kept to a minimum. P90, P75 or P50 figures may be used, but this may be subject to review at a later date. The Commission may request submissions on a specific basis regarding details of MG output and supporting data. Ex-post: The Commission will request that independently audited submissions are provided by suppliers for their PSO contracts in line with this decision, CER/08/170, the Electricity Regulation Act 1999 and S.I No. 217 of 2002 (as amended by S.I. No. 284 of 2008), the REFIT Terms & Conditions and the Notification of 2000.

4.6 Treatment of REFIT PPAs Calculation of the monies recoverable under the PSO in relation to REFIT PPAs will be carried out on an individual PPA basis. S.I. No. 284 of 2008 and the


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REFIT Terms and Conditions clearly envisage that REFIT calculations are made on a per PPA basis between an individual generator and supplier, and not on an individual supplier basis. Such calculations will be made with regard to the determination of ex-ante estimates and the ex-post R-factor. Payments to/from the levy are made on a supplier basis.

4.7 REFIT Balancing and Technology Difference Payments The basis for these two streams of compensation will be metered generation (MG or MGLF), for both in-market and out-of-market generation. Market Scheduled Quantities (MSQs) will not be used in the calculation of these two forms of compensation. The 15% balancing and technology difference payments are ring-fenced from each another and the third compensation stream, the opportunity cost payment. Therefore, the Commission confirms that the balancing and technology difference payment are not included as revenues in the determination of opportunity cost payment. The REFIT Balancing and Technology Difference Payments will be given in ex-ante estimates and reconciled ex-post with known values through the R-factor.

4.8 In-Market REFIT Opportunity Cost Payment For in-market REFIT, the opportunity cost payment is calculated as the difference between the total revenues received from the market versus the total cost of purchasing metered energy from the generator, based on the REFIT reference price for the relevant PSO period. The opportunity cost payment due suppliers is outlined in Table A. Where Costs > Revenues, the supplier will be entitled to compensation. Where Costs <= Revenues, there will be no payment to the supplier under the opportunity cost mechanism. This calculation will be estimated ex-ante and reconciled ex-post with known values for inclusion in the R-factor. These costs and revenues outlined in Table 1 are all that will be considered for calculating the opportunity cost payment


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Table 1. In-market opportunity cost payment REVENUES COSTS

Energy (and where relevant) Constraints: SMP x MSQLF16x TPD17

REFIT Reference Price x (MG or MGLF as applicable per contract) x TPD

Capacity Payments

4.9 Out-of-Market REFIT Opportunity Cost Payment For the purposes of the out-of-market opportunity cost payment, the difference between the cost to suppliers at the REFIT reference price and what it would have cost them to buy the equivalent volumes from the market is used to determine if any payment due. If the Market Cost >= Contract Cost there will be no payment to the supplier. If Market Cost < Contract Cost, the supplier will be entitled to compensation under the opportunity cost payment support. The figures outlined in Table 2 are all that will be considered for the purposes of calculating the opportunity cost payment. Table 2. Out-of-market opportunity cost payment

Market Cost Contract Cost

Pool Purchase Price (SMP + Capacity Charge + Imperfections Charge + Market Operator Charge) x (MG or

MGLF) x TPD

REFIT Reference Price x (MG or MGLF) x TPD

4.10 R-factor

16 Note that under the Trading and Settlement Code (section 5) the MSQ of a Variable Price Taker is set to its Actual Output (Metered Generation = Actual Output x TPD), when it’s dispatch is in accordance with its MSQ. When such a generator is constrained down in dispatch, its MSQ is set to the greater of its Actual Output and the time weighted average of its outturn availability. Thus, for the purposes of the revenue calculation, the formula MSQLF x TPD ensures that the correct market revenue (MG unless constrained down) accruing to the Supplier is calculated. 17 TPD is the Trading Period Duration in the TSC and is 0.5 and defines the ½ hour Trading Period in the SEM. The energy payment is thus calculated in MWh.


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The R-factor (for the REFIT and other PSO mechanisms) shall be calculated as the difference between the ex-post amounts actually due to suppliers under the relevant PSO scheme (based on submitted, audited statements that are consistent with governing legislation and this decision paper) and the ex-ante estimates detailed to be paid to them under the relevant PSO levy. The detailed calculation of the R-factor for the REFIT is outlined in Appendix B.


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5.0 Conclusions & Next Steps

The Commission is satisfied that the method by which the R-factor is calculated for monies owed to/by suppliers under the REFIT and other PSO mechanisms is outlined in sufficient clarity in this paper, providing a transparent and fair mechanism by which suppliers are compensated. In coming to this decision, the Commission has adhered to the principals and policies outlined in the relevant PSO and REFIT governing legislation, the PSO Notifications to the EU, the relevant State Aid decisions and the REFIT Terms and Conditions. The Commission has also attempted to secure that all stakeholders, including suppliers, generators and final customers are treated equally and fairly with regard to their obligations under the PSO. In reaching this decision, the Commission has also attempted to ensure that PSO monies levied on final customers are kept to a minimum, in the context of the governing legislation. Next Steps The Commission is aware that further work needs to be undertaken with the DCENR and the TSO/DSO in relation to the provision of payments to the PSO fund and the possibility of a supplier defaulting. In addition, changes to legislation that may be required to accommodate this. The Commission is of the opinion that all payments due to suppliers from the PSO fund for the 2008/2009 levy will be paid as outlined in CER/08/129.18 The Commission will be liaising with the DCENR on these issues in due course. The Commission is also aware that the distribution and collection procedures as outlined in CER/03/013 and revised in CER/08/153 will need to be updated to reflect the changes to the PSO collection and distribution procedures and the surrounding issues that have emerged since the introduction of the REFIT.

18 2008/09 PSO Levy paper, CER 08/129 http://www.cer.ie/en/renewables-decision-documents.aspx?article=d96d9b61-b24f-414e-b93e-abe0f4ce561e

Appendices

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Appendix A – Glossary of Terms AER Alternative Energy Requirement

Commission Commission for Energy Regulation

CPI Consumer Price Index

DCENR Department for Communications, Energy and Natural Resources

DLAF Distribution Loss Adjustment Factor

DUoS Distribution Use of System

DSO Distribution System Operator

Large Wind Wind based generators above installed capacity of 5 Megawatts

MG Metered Generation

MGLF Metered Generation adjusted to reflect transmission losses and (where applicable) distribution losses (DLAF’s and TLAF’s) at the Trading Boundary.

MSQ Market Scheduled Quantity

MSQLF Market Scheduled Quantity Loss Factored

NIAUR Northern Ireland Authority for Utility Regulation

PPA Power Purchase Agreement

PSO Public Service Obligation

RAs Regulatory Authorities; the Commission for Energy Regulation and the Northern Ireland Authority for Utility Regulation

REFIT Renewable Energy Feed in Tariff

SEM Single Electricity Market

SI Statutory Instrument

SMP System Marginal Price

TPD The ½ hour Trading Period in the SEM

TSO Transmission System Operator

TLAF Transmission Loss Adjustment Factor

Appendices

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TUoS Transmission Use of System

Appendices

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Appendix B – REFIT R-Factor Calculation

Table 3: Algebraic formulae for ex-ante, ex-post and R-Factor calculations in PSO

Estimate Actual Variable

RFp R-Factor relating to the REFIT Project

RFs Net R-Factor relating to Supplier

PPA PPA price

EBP Ex-ante Benchmark Price as defined by the Commission

TRP Technology Reference Price as defined in the Terms and Conditions of the REFIT19

RRP REFIT Reference Price as defined in the Terms and Conditions of the REFIT20

ETRP TRP x estimated CPI

ERRP RRP x estimated CPI

ATRP TRP x actual CPI

ARRP RRP x actual CPI

AMC Actual Market Costs to supplier

AMR Actual Market Revenues to supplier

EOG AOG Estimated (or Actual) Output Generated (MG or MGLF as applicable)

ETPt (1 or 2) ATPt (1 or 2) Estimated (or Actual) REFIT Technology Payment

EFEDp AFEDp Estimated (or Actual) 15% Balancing Payment due to Supplier

ESTp ASTp Estimated (or Actual) Technology Difference Payment due to Supplier

19 http://www.dcenr.gov.ie/Energy/Sustainable+and+Renewable+Energy+Division/Sustainable+and+Renewable+Energy+Division.htm 20 ibid

Appendices

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EOCp AOCp Estimated (or Actual) Opportunity cost Payment due to supplier

ERDp ARDp Estimated (or Actual) REFIT payment due to Supplier

(i) Ex-ante process

Before the PSO period commences suppliers estimate REFIT payment due for each REFIT supported project: ERDp = EFEDp + ESTp (where applicable) + EOCp Where: EFEDp → ERRP x EOG × 0.15 ESTp → ETPt (1 or 2) x EOG ETPt (1) → If PPA > ETRP = (ETRP- ERRP) ETPt (2) → If PPA < ETRP = (PPA – ERRP), provided PPA > ERRP EOCp → Diff [(EBP, ERRP) if EBP < ERRP] x EOG

(ii) Ex-post process

Ex-post, the actual PSO payment the REFIT Supplier should have received for that project is calculated. This is a similar calculation as before, but using actual values: ARDp = AFEDp + ASTp (where applicable) + AOCp [If (AMC > AMR)] Where: AFEDp → ARRP x AOG × 0.15 ASTp → ATPt (1 or 2) x AOG ATPt (1) → If PPA > ATRP = (ATRP- ARRP) ATPt (2) → If PPA < ATRP = (PPA – ARRP), provided PPA > ARRP AMR → See table 1 above AMC → See table 1 above

Appendices

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(iii) Reconciliation process

Payments made to each Supplier (based on ex-ante estimates of output and values) are compared with actual output and values (ex-post): Table 4: R-Factor calculations for 3 REFIT compensation streams

Ex-Ante payment based on ex-ante output estimate in

€’s

Ex-Post payment based on actual (MG or MGLF)

output in €’s

R-Factor for particular REFIT

supported project in €’s

EFEDp AFEDp = AFEDp - EFEDp (1)

ESTp ASTp = ASTp - ESTp (2)

EOCp AOCp = AOCp - EOCp (3)

Net=(EFEDp+ESTp+EOCp) Net=(AFEDp+ASTp+AOCp) * Net = ∑[(1),(2),(3)]

* Please note that the R-Factor for the Balancing payment, Technology Payment and Opportunity costs may be separately positive or negative. The total R-Factor for a particular REFIT supported project may also be zero, positive or negative.

RFp = ARDp – ERDp Each supplier’s net position, for all its REFIT contracted projects, is calculated as follows:

RFs = ∑RFp As discussed in Section 2.2., that the resulting R-Factor for a supplier can be positive or negative and that suppliers may be obliged to repay money to the PSO levy, as well as receive additional PSO payments for individual REFIT supported project(s). Please also note that the R-Factor amount will be added to the allowed ex-ante estimate for the supplier in question in the relevant PSO period.

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