Northern Ireland: The north/south connect

Since the development of a single electricity market between Northern Ireland and the Republic in 2007, there have been moves afoot to create other common energy projects between the north and the south. Mark Thompson and David Flinn report

Energy has come to the forefront of economic and environmental attention globally, and Ireland north and south is no exception to this trend. The energy sector in Ireland has remained driven North by an all-island agenda and ern Ireland, in particular, has seen ongoing development in energy matters. Much emphasis has been on the development of renewables and achieving cost savings and efficiencies through the development of an all-island energy market.

Single energy market developments

The single electricity market (SEM) for the whole of Ireland, i.e. both Northern Ireland and the Republic of Ireland, became live in November 2007 and was the largest reconstruction of the industry in Northern Ireland since privatisation in the early 1990s. SEM introduced a pool arrangement for the whole of Ireland whereby generators producing more than 10MW of electricity must sell into a pool and those generators who bid at or above the system marginal price will be dispatched and paid by the market operator.

In addition to payments for energy provided, generators get capacity payments for making their generating capacity available. When a generator cannot deliver electricity due to system factors or problems, they can receive constraint payments.

Following the introduction of SEM, a challenge arose in the form of a judicial review application by Kilroot Power (one of the two base load power stations in Northern Ireland) to the cancellation of their generator unit agreements with Northern Ireland Electricity. The judicial review challenge to the decision of the Northern Ireland Authority for Utility Regulation (NIAUR) to cancel these contracts was on the basis that: there was inadequate consultation in relation to the cancellation of generator contracts; the decision to cancel was unreasonable; and SEM did not meet the criteria of the cancellation condition in the generator contracts in that it did not increase competition for the benefit of consumers in Northern Ireland.

The judicial review application was unsuccessful and judgment was given in favour of NIAUR. A different outcome would have impacted substantively on the rationale for and the introduction of SEM.

The increasing connection of wind generation capacity into the SEM has created new system operational challenges, which may in turn affect the SEM revenue model in a manner that conflicts with the economic principles underlying the design of the market.

As the availability of wind capacity is dependent upon meteorological conditions it is not always reliable. Large increases in the amount of wind generation capacity will have knock-on effects in the calculation of the SEM revenue streams, under the existing market rules, through a number of mechanisms including:

• the need for system operators to dispatch significant quantities of conventional energy plant when the intermittent nature of wind generation leads to high constraint payments, lower energy payments and a related diminution in the ability of the system marginal price to address the supply/demand balance in the market with regard to trading payments; and
• the need for this suggests that the contribution of each installed MW of wind generation capacity to security of supply may, under the current regime for the distribution of the annual capacity payment sum, not properly reflect the actuality of the market in operation.

The treatment of wind-generated energy in SEM is likely to have implications for both major SEM trading and capacity revenue, and will therefore have an effect upon any wind projects on the island.

Developers, financiers or lawyers with an interest in wind energy projects will have to familiarise themselves with this process, particularly if they are contemplating a first entry into the market.

Clearly there will continue to be a level of modification to SEM as it matures as a market, and the wind market and other participants will continue to require guidance.

The other major SEM development of 2008-09 was the completion in 2009 of the acquisition of SONI (the electricity system operator for Northern Ireland) by Eirgrid, the system operator in the Republic of Ireland. Prior to this acquisition SEM had been operated on a joint venture basis by Eirgrid and SONI. This acquisition seems to have advanced the integration of the two grids and should, hopefully, create synergies for participants and stakeholders in the market, north and south.

Common arrangements for gas

Following on from the successful launch of SEM, the major development project in the
gas energy field for 2009 has been the commencement of the Common Arrangements for Gas project (CAG). This project, which is a collaboration between the NIAUR and the Commission for Utility Regulation in the Republic of Ireland, is seeking to develop a single market for gas on the island comparable to SEM. It was established with the support of the UK Government and the Irish Government.

The project’s aim is to create a second single energy market for the gas supply chain where the following will be carried out on an all-island basis:

• long-term management of the transportation arrangements including product offerings;
• day-to-day operation of the transportation system (e.g. moving gas around the system, dealing with nominations etc);
• balancing the system;
• planning and development of the transmission system on a high level and ensuring that capacity is maximised;
• capacity trading;
• connections to the transmission system – who approves the connections?
• maintenance of the transportation system; and
• collection and disbursement of transportation charges.

There has been some speculation as to what CAG might look like. The regulators have issued a paper in which they considered which options relating to the gas transmission system operation might operate best in an all-island market given that there are currently multiple operators on the system.

The options considered were:

• multiple transmission system operator (TSO) and transmission owners (TOs) who contract with a single service provider (SSP) for the provision of all-island system operator services;
• dual TSOs would be licensed to provide system operator functions on an all-island basis; or
• a single TSO would be licensed to provide system operator functions on an all-island basis.

The first option would involve complicated interface agreements between the SSP and TSO and TOs while the latter two options should be more straightforward from a legal point of view.

The regulators’ consultation papers, published in May and October, suggest that a single TSO as a single entity, who would be responsible for performing all-island TSO functions across the two jurisdictions and would be licensed by both regulators may be the preferred route at the end of the process. This is because:

• a single TSO would be licensed therefore would be directly regulated by the regulators;
• a single entity is responsible for all-island SO functions so there is no need for coordination between TSOs;
• a single IT interface can be provided;
• there should be better all-island decision-making;
• there is greater flexibility to amend the operational rules in future; and
• there should be better interaction with the electricity system operators

It is perceived wisdom that the single TSO model will result in better all-island decision making compared to the SSP model because the CAG TSO/SO, as a single entity licensed north and south, will contribute a single all-island perspective to decision-making. A single TSO should be accompanied by a harmonised Transmission Code to cover Northern Ireland and the Republic of Ireland.

It remains to be seen if there is the political will in relation to this project, especially in Northern Ireland, and SEM developments will be watched closely by parties interested in CAG.

Green energy

Green energy continues to be a focus of much development work in Northern Ireland. In particular, Northern Ireland has a substantial wind energy resource and there are numerous wind energy projects which have already been built or are proposed or at development stage. Significant legal work exists in relation to financing and developing such sites. Airtricity, recently acquired by Scottish and Southern Energy, alone owns wind farms at Bin Mountain, Bessy Bell and Tappaghan in Northern Ireland.

In addition, the first fully-operational tidal turbine was installed in Strangford Lough by Marine Current Turbines in 2009. Again, the tidal energy resource off the Northern Ireland coast is significant and there will be more projects like this.

While the success rate for wind developments in Northern Ireland in the planning process has been impressive, new planning guidance relating to wind projects may have a restricting effect on the development of wind unless pressure on the Government achieves an amendment of the guidance. Again this is an area that will have to be monitored by firms working in this area.

Development in the renewables field will be encouraged by the enactment of the Renewables Obligations (NI) Order 2009 which re-enacts the Renewable Obligation Certificate (ROC) legislation in Northern Ireland and introduces banding of ROCs. This should encourage other renewable technologies in addition to wind.

Transmission developments

A proposed second north/south electricity interconnector between Northern Ireland and the Republic of Ireland is likely to have a significant impact on SEM in the near future. This proposed addition to the existing North/South electricity interconnection between Louth in the Republic of Ireland and Tandragee in Northern Ireland is likely to lead to a planning inquiry.

The Scotland-to-Northern Ireland electricity interconnector owned by Moyle Interconnector (a subsidiary of Northern Ireland Energy Holdings) continues to operate successfully as a mutualised asset as does the Scotland/Northern Ireland gas pipeline owned by Premier Transmission (a subsidiary of Northern Ireland Energy Holdings).

In 2008, Phoenix Gas sold its interest in the Belfast Transmission gas pipeline to Northern Ireland Energy Holdings and this asset is financed by Bond Holders in a similar manner to the Scotland/Northern Ireland electricity interconnector and Scotland/Northern Ireland gas pipeline.

Ultimately, the energy sector in Northern Ireland has, notwithstanding the broader economic environment, continued to develop and mature and remains a challenging legal market. Legal work on infrastructure development such as the second north/south interconnector, wind farm and other renewables developments and ongoing regulatory development of the all-island gas and electricity market will continue to be the main focus for lawyers.

Mark Thompson is a partner and David Flinn a consultant at A&L Goodbody.