Earlier in the month Ireland successfully held its first ever offshore wind auction. But what does it mean for the consumer? And will it lead to lower electricity prices?
Ireland’s first offshore wind farm was developed off the coast of Arklow way back in 2002. It was a small wind farm comprising seven turbines capable of producing 25 MW (megawatts) of electricity.
It was expected to be the first of many, many offshore projects built over the following years. Yet for various reasons, nothing more was developed - with the focus on onshore wind farms instead which were cheaper and easier to build.
However over the past few years, and spurred on by the recent energy crisis, the Government has looked again at tapping into Ireland’s huge offshore wind potential.
And this culminated in the successful completion of the country’s first-ever offshore wind auction this month.
We look at what this all means for you, the consumer.
What was announced?
Four new offshore wind farms were awarded a licence in the auction: two off the coast of Dublin, one off Wicklow and one off Galway. Combined they have a capacity of 3 GW (gigawatts) of electricity. So 120 times the capacity of the Arklow wind farm and enough to power over 2.5 million Irish homes with clean electricity.
Renewable energy projects are developed in Ireland under a scheme called the Renewable Electricity Support Scheme (RESS). This is an auction-based process which invites renewable energy projects to compete against each other, by bidding as low as possible, in order to win contracts to provide electricity at the bid price for a set number of years.
There have been two onshore auctions to date: RESS 1 in 2020 and RESS 2 in 2022, and a third is planned for this summer. But this was the first offshore auction, which has been called ORESS 1.
The average price of the winning bids for this auction was just over €86 per MWh (megawatt-hour), which was much lower than expected. The wind farms are guaranteed this price for the electricity they produce regardless of the cost of electricity on the wider wholesale market (see PSO levy below for more details).
However each of the four successful projects will have put in their own bid. For commercial confidentiality reasons only the average price of the winning bids is made public. So some would have come in above €86 and some below.
The price of €86 is largely fixed for 20 years, which is a big benefit of renewable energy schemes. As we all know how wildly fossil fuel prices can fluctuate!
However 30% of the price is index linked to inflation to allow the operators to deal with increased operational and maintenance costs over the lifetime of the wind farms’ operation (in this case 20 years). So the initial price of €86 will likely rise a bit into the future.
Further auctions are planned over the coming decade.
The Government wants to have 5 GW of offshore wind capacity and a further 2 GW of floating wind capacity under development by 2030. And by 2050 the plan is to have 37 GW of offshore wind!
How will this benefit Ireland?
At the moment around 40% of Ireland’s electricity comes from renewable sources. However under the Government’s Climate Action Plan, this needs to hit 80% by 2030.
This development will help us achieve that target and help Ireland decarbonise its economy, which is more important than ever given rapidly evolving climate change. And with the increased electrification of our home heating, and public and private transport, it’s vital the electricity that’s being used to power all this is as green as possible. There’s no point in us buying electric cars and installing heat pumps if we’re using lots of gas and coal in the generation of the electricity that fuels them for example.
Having more offshore wind will also help us diversify our renewable energy sources. At the moment the vast majority of our renewable energy comes from onshore wind - although we are finally starting to ramp up our solar output. However as we all know, the wind on land doesn’t always blow and the sun doesn’t always shine. However there is almost always a breeze out at sea.
More offshore wind also reduces our dependence on fossil fuels, such as oil, coal and gas, the vast majority of which we have to import. So it helps us with our energy security too as we’re relying less on our neighbours for our energy needs.
The provisional results of the ORESS 1 auction are not just a hugely positive story for Irish energy consumers, but for Ireland as a whole. The results are further evidence of what many of us have known for a long time; that we, as a nation, can develop and produce enormous quantities of clean energy – securely and at low cost.
Minister Eamon Ryan
Will it lead to lower prices?
Not necessarily. At least in the short to medium term despite what the Government might lead you to believe.
Back in 2020, the average price of electricity on the wholesale market in Ireland was €38 per MWh.
This left our electricity prices around the third highest in all of Europe with households paying a rate of around 20 cent per kWh once supplier margins, government taxation, and network/grid fees and charges were added on.
Although the average price came in well below the maximum bid price of €150 per MWh which the Government had said it was prepared to accept, it’s well above what would have been considered ‘normal’ levels not so long ago i.e. €38 per MWh.
It’s also well above recent offshore auctions in Scotland which have come in under £40 per MWh. However the Scottish offshore industry is far more developed than Ireland’s and it’s hoped further auctions for additional wind farms over the coming years will come in at a lower price. Scotland’s initial auctions came in well over £100 for example.
The price struck was also less than the most recent auctions for onshore wind. And it’s below the current price of around €100 per MWh that electricity is currently trading at.
And of course the price is largely fixed for two decades, which provides certainty. And depending on how gas prices go, €86 per MWh may look more attractive in a decade’s time.
Nevertheless, no matter what way you look at it, the price struck isn’t exactly dirt cheap, and if all our electricity was to be generated at this price, it would leave our electricity prices higher than in most other countries. And higher than what we were paying only a few years ago - which was already high by European standards.
There is a narrative that renewable energy is extremely cheap or ‘free’. It’s far better and greener for the environment of course but it’s definitely not ‘free’. This is particularly the case for offshore wind given the huge construction costs that are needed to install wind turbines far out at sea.
Indeed our goal of having 80% of our electricity coming from renewable sources by 2030 has the potential to lead to higher electricity prices for consumers over the short to medium term as we make the difficult transition.
However the environmental costs of not doing so are probably far, far greater than the financial cost.
But don't expect dirt cheap electricity anytime time soon...
Under the terms of the deal, the successful projects are also required to make payments to local marine and coastal communities. These will benefit by over €24 million a year, starting before construction and for up to 20 years after the wind farms start producing electricity.
This payment would probably have been factored into the bid price so when we look at the average price of €86 we need to bear this in mind too.
The PSO levy
We’ve probably all seen the PSO levy on our bills.
In Ireland it has been determined that certain types of power generation e.g. wind and solar, should be protected from sharp market price fluctuations. In other words, they should be guaranteed a minimum price for the electricity they generate.
And in this auction the guaranteed price is just over €86 as discussed.
Under older renewable energy auctions, if the price of energy on the wholesale market rose above the wind farms' guaranteed price, they got to keep the difference.
Under RESS, the money is paid back. So in the event that the price of electricity on the wholesale market goes above €86 per MWh, we, the consumer, get to pocket the difference through a refund via the PSO levy.
In fact this is what is happening right now. Due to recent record electricity prices as a result of an increase in the price of gas, wind farms have received much more money for the electricity they produce and this is now being refunded through our electricity bills. You can read more about this here.
However, if the price of electricity on the wholesale market goes below €86 then the wind farm operators will need a top-up payment to meet their guaranteed price of €86. And this money will be paid via an increase in the PSO levy.
Many hurdles to overcome
Although the results of the auction were widely celebrated in the media and by Government, we’re still a long way from the wind farms actually being built.
All the projects are contractually obliged to be producing power by 31st December 2031. So almost a decade away. And none have even applied for planning permission yet. And as we know from the housing crisis and numerous public transport initiatives, getting things through our outdated and creaking planning system and actually built can take years (Metro North, anyone!?)
Expect lots of court challenges and potential delays.
The other major concern is the lack of port infrastructure.
There is currently no port in the Republic of Ireland with the necessary infrastructure to handle the equipment needed to build offshore wind farms.
Belfast has the infrastructure but it may not be available, meaning ports in the UK and France may have to be used instead which could slow things down.
Work also needs to be done to ensure Ireland has the necessary skills, manpower, and supply chains to support an entirely new industry effectively.