Investigation of combined economic benefits of Interconnection and Offshore wind development

1. Investigation of combined economic benefits of Interconnection and Offshore wind development Ken McDonnell EirGrid Economics of Marine Renewable Energy forum, UCC 13th June 2011

2. Combined economic benefits of Interconnection and Offshore wind development • The study is a follow on from our previous Interconnection Economic Feasibility Report 2009. • Its focus is to examine large offshore wind development withfurther interconnection in 2020. • The analysis takes into account: • Production cost savings based on a detailed European generation model • A range of capital cost estimates for offshore wind and interconnection • A wide range of interconnection and offshore wind capacities. • Potential additional revenues for renewable electricity generation in Great Britain

3. Assumptions overview • Onshore wind consistent with NREAP 42.5% target. At least 555MW of offshore in every scenario. • Northern Ireland has 1,000MW onshore and 600MW offshore. • Demand forecasts based on 2010-16 Generation Adequacy Report. • IEA World Energy Outlook 2009 fuel price forecast. • Two CO2 price scenarios: €25/tonne and €75/tonne. • At least 1GW of interconnection rising to 8GW to Great Britain and France. • Offshore wind capacity up to 7GW. • Fixed conventional portfolio • No internal transmission limitations were modelled.

4. Cost Assumptions * Low Carbon Generation Options for the All-Island Market, Poyry, March 2010 † The Renewable Energy Review, DECC, May 2011

5. Production Cost Results

6. What is value of renewable element? • Renewables Obligation Certificate (ROC) is paid to wind generation in excess of base-case; the renewable element of this wind generation is assumed to be eligible for ROC payment in UK at the buy-out price. • Assume ROC (at buy-out price) = 36.99 £/MWh • Exchange rate = 0.85 £/€ (present-day value) • Therefore ROC price = 43.5 €/MWh approximately • ROC assumed to apply whether wind exported to GB or FR. • Savings from two sources, assumed to be additive: • Reduction in Production Costs, relative to base-case; • Revenue from ROC at buy-out price, applied to all wind in excess of NREAP amount.

7. €25/tCO2 Cost Benefit Analysis: Combined Production Cost Savings, ROC revenue* and Annualised Capital Costs Include ROCs, Lower Capex No ROCs, Higher Capex *Note that it is assumed that ROC payments are an obligation on suppliers and are therefore not considered as a cost in this analysis.

8. €25/tCO2 Cost Benefit Analysis: Combined Production Cost Savings, ROC revenue* and Annualised Capital Costs *Note that it is assumed that ROC payments are an obligation on suppliers and are therefore not considered as a cost in this analysis.

9. €75/tCO2 Cost Benefit Analysis: Combined Production Cost Savings, ROC revenue* and Annualised Capital Costs Include ROCs, Lower Capex No ROCs, Higher Capex *Note that it is assumed that ROC payments are an obligation on suppliers and are therefore not considered as a cost in this analysis.

10. €75/tCO2 Cost Benefit Analysis: Combined Production Cost Savings, ROC revenue* and Annualised Capital Costs *Note that it is assumed that ROC payments are an obligation on suppliers and are therefore not considered as a cost in this analysis.

11. Caveats • Single wind profile used (EWIS 2006: offshore capacity factor 39%) • No market inefficiencies assumed. • Very sensitive to capital cost and discount rates assumptions • Assumes ROC price applies to France also, not only Great Britain. • Production cost savings apply to the total area, not just Ireland. • There is evidence of wheeling between Great Britain and France. Similar savings could possibly be achieved by cheaper interconnection between Great Britain and France. • No interconnector losses modelled. • 75€/tonne CO2 in 2020 is higher than any forecast we have seen. • No capital cost savings have been assumed.

12. Study findings • Wide range of combinations of offshore wind deployment and further interconnection was considered. • Indications are that there is an optimal amount of interconnection for a given amount of installed wind capacity • Largest annual savings in cases with: • a balance between the level of interconnection and offshore wind • Higher CO2 prices and additional ROC revenue included • Lower capital cost assumptions • ROCs or high CO2 prices are required to make many of the cases economically feasible.

13. TSO perspective on issues to be resolved • Who pays for interconnectors? Benefits tend to be “societal” in nature. • High cost of capital and challenging financing environment. • Renewable exports based on marginal pricing will not be enough so there is a need for a trade mechanism to allow for the value of the renewable component of offshore wind to be obtained other countries. • Balancing levels of further interconnection (or storage)with future wind developments.