Energy Update 21/22 Energy Update 21/22 Energy Update 21/22

2021 was a pivotal year for the Power & Utilities (P&U) sector in Ireland. The publication of the Irish Government’s Climate Action Plan 2021 underlined the importance of the P&U sector in the country’s decarbonisation strategy, with a strong emphasis on decarbonising our economy and wider society through green electrification, with a particular focus on wind electricity generation. The scale and ambition of the plan is notable and will require the P&U sector to make significant changes in the coming months, years and decades. Colm O'Neill, Head of Energy, Utilities and Telecoms takes a look at recent trends and future developments below.

While the Climate Action Plan 2021 has created a pathway to decarbonising the Irish energy sector, several challenges emerged around the time of its publishing that highlighted the difficulties we face to meet the country’s climate targets. A sharp rise in energy prices towards the end of the year led to calls for government intervention in the energy markets; electricity security and supply challenges have fostered doubts over the ability of the Irish electricity grid to transition to renewable sources; and policy challenges surrounding the future role of data centres and other large energy users in the Irish economy surfaced as 2021 drew to a close.

Energy prices and the security of energy supply have continued to dominate headlines in 2022, with several government initiatives announced this year to curb price hikes. In addition to these measures, progress has been made towards improving the security of electricity supply, with the RESS 2, T-3 and T-4 Auctions taking place earlier this year, resulting in significant gains in electricity supply in the coming years.  

We saw sharp increases in power prices across Europe in 2021, led primarily by increased energy demand as COVID-19 restrictions eased and economic activity neared a return to pre-pandemic levels. Energy prices in Europe faced further upward pressure from geopolitical tensions, high coal and gas prices, and infrastructure challenges.

Governments across Europe reacted to the energy price increases with a variety of policy and regulatory interventions, including tax cuts, subsidies, policy changes and price limits. In many cases, the short-term price-dampening interventions have come at the expense of green initiatives. In Italy, coal-based electricity generation increased in the second half of the year to moderate electricity price rises, while France announced plans to smoothen electricity supply disruptions by increasing coal-based electricity output in two plants in early 2022.

Despite the challenging economic and political situation unfolding in late 2021, the financial performance of the largest players in the European P&U sector was generally strong. Most companies in the sector surveyed by KPMG reported revenue and share prices increases during Q4 2021, although the trend indicated a drop in EBITDAs amongst the cohort of companies. The deal value in the sector was strong across Europe, with a 25% increase from the previous quarter, bringing the value of deals struck to €25.4 billion^[1].

Coinciding with the COP26 UN Climate Change Conference in Glasgow, the Irish Government published the Climate Action Plan 2021 (CAP21) in November. The CAP21 sets out the ambitious target of a 51% reduction in total CO₂ emissions by 2030, from a 2018 baseline, and achieving net-zero emissions by 2050.

The Power and Utilities sector will be key to Ireland achieving its CAP21 decarbonisation targets. The electricity sector is required to reduce its carbon emissions by up to 81% by 2030, while electricity demand could grow by up to 48% in the same timeframe. Widescale decarbonisation of the electricity sector and upgrades to the national electricity grid will be necessary to increase the proportion of renewable electricity produced in Ireland to the 80% targeted in the CAP21 from the 39.1% achieved in 2021^[2].

Wind energy will be the driving force behind the electricity sector’s decarbonisation. An additional ~8GW and ~5GW of onshore and offshore wind capacity, respectively, is targeted in the CAP21 – a significant increase from the 4.5GW total renewable energy generation capacity in Ireland at the time of the CAP21’s publishing. Approximately 2GW of solar capacity will be added by 2030 to help achieve the 80% renewable target for electricity generation^[3].

As wind and solar energy are non-synchronous, variable generation sources, a further ~2GW of flexible gas-fired power stations are expected to be built to strengthen the security of electricity supply across the country.

There are several challenges for the P&U sector and Irish Government to overcome to meet the targets laid out in the CAP21. Increased public opposition to wind farms, rising energy prices, data centre policy and securing Ireland’s electricity supply are amongst the hurdles to be overcome in the coming years.

Electricity prices in Ireland rose sharply in the second half of 2021, with the 13% rise in household electricity prices in the second half of 2021 outstripping the 7% average price increase across the EU27 for the same period. A number of factors were responsible for this steep rise, including the post-COVID economic revival, increased seasonal demand and geopolitical tensions increasing the price of natural gas in Europe. 

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The second half of 2021 brought even sharper price increases in gas than electricity. Residential gas prices increased 27.1% compared to the first half of the year, with businesses facing a 65.7% price hike in the latter half of 2021^[5].

2021 drew to a close with the Irish Government facing calls to address rising energy prices with similar interventions to those seen across Europe, including policy changes, subsidies, tax cuts and price limits.

Securing Ireland’s electricity supply is an increasingly significant challenge for the P&U sector to overcome. Demand for electricity will rise sharply in the coming decades, while decarbonising electricity generation will lead to an increasing proportion of electricity in the grid coming from variable, non-synchronous sources. These two factors will place strain on the national electricity infrastructure and will present a significant policy challenge going forward.

There are several drivers of the forecast increase in electricity demand. Transitioning our economy from fossil fuels to electric sources – most notably in transport and heating – will add to the demand increases arising from data centres and a growing population.

Although renewable electricity generation is due to increase drastically in the coming years, the variable nature of wind and solar energy presents significant challenges for the security of the electricity grid. While battery and demand-side flexibility technologies (such as smart meters) are improving year-on-year, there are serious concerns that the development and roll-out of these technologies may not come quickly enough to facilitate the targeted decarbonisation of electricity generation while maintaining adequate security of electricity supply.

In November 2021, the Government released a Policy Statement on Security of Electricity Supply approving the development of new gas-fired electricity generation stations and extending the use of existing conventional fossil fuel-based electricity generation capacity, including coal and heavy fuel oil plants^[6]. Taking this step so shortly after the publication of the Climate Action Plan 2021 earlier in the month indicated the scale and difficulty of the challenge faced in managing the conflicting targets of rapidly decarbonising electricity generation and maintaining the security of the electricity supply.

Policy surrounding data centres and other Large Energy Users (LEUs) came under increased scrutiny in 2021. CSO figures showed that data centre electricity consumption tripled between 2015 and 2021, while data centres’ share of the total national metered electricity consumption rose from 5% to 14% in the same period. EirGrid estimates that this percentage could rise to 27% of all electricity demand by 2029^[7].

To address these concerns, the Commission for Regulation of Utilities (CRU) updated their guidelines to the national grid System Operators – EirGrid and ESB Networks – in relation to data centres in November 2021. The new assessment criteria will only allow permits to be granted to new data centres if:

• The data centre has onsite dispatchable generation capacity equal or greater to its demand/
• It can reduce its consumption from the national grid on request from the System Operator, through using onsite dispatchable generation and/or reducing electricity consumption/
• The data centre is located in a suitable region, based on the electricity network capacity.

These updated measures aim to strike a balance between the economic benefits of further developing the data centre industry in Ireland and maintaining a sustainable and secure electricity network^[8]. The CRU had considered requests to place a moratorium on new data centre connections to the grid, but ultimately decided against it in favour of implementing the above criteria.

The final months of 2021 saw several mergers and acquisitions in the Irish Power and Utilities sector. Key inbound deals included:

• Canada-based Vermillion Energy’s acquisition of a 36.5% stake in the Corrib Natural Gas Project from Equinor ASA for $434m (€384.82m). The deal was announced in November 2021 and is expected to be completed later this year.
• Flex Ltd (Singapore) acquisition of Anord Mardix (Ireland) Ltd from its previous owners, Bertram Capital Management LLC. The deal was completed in December 2021 for a reported $540m (€465.64m)

There were a number of notable outbound deals in the final quarter of 2021, including:

• DCC plc subsidiary, Flogas Ireland Ltd, acquired Naturgy Ireland from its Spanish parent company Naturgy Energy Group SA in December 2021 for an undisclosed fee.
• Greencoat Renewables plc completed the acquisition of a 101.1MW power station from the German manufacturer of turbines and wind power systems, Enercon GmbH.

In addition, the renewable energy markets remained extremely active, with multiple late stage development assets trading in Q4 2021 in advance of the RESS 2 auction. KPMG has seen this activity continue into 2022, where there are a number of offshore wind M&A processes ongoing whereby developers seek investment and development partners for their projects.

Overall the level of M&A activity in the power and utilities sector remains high and we expect this trend to continue driven by both the significant capital investment in renewable energy projects to realise the government’s Climate Action Plan ambition of delivering 80% renewable electricity by 2030, and the further investment in traditional thermal and gas generation assets that will be required to build resilience into the country’s electricity generation capacity to enable the renewables transition.

The first half of 2022 has proven to be challenging for the Power & Utilities sector in Europe and Ireland. Here we outline the key events and trends that have emerged this year to date.

The continued rise in energy prices has created headlines this year. Russia’s invasion of Ukraine and the subsequent sanctions on Russian oil and gas have created fears over the security of energy supply across Europe, with several EU member states preparing for energy rationing later this year^[9].

Although only 3% of Ireland’s energy consumption is met by Russian natural gas, our high dependency on imported energy exposes our domestic energy market to external factors^[10]. This has resulted in Irish homes and businesses feeling the sting of energy price hikes this year. In March, Electric Ireland announced 23.4% and 24.8% increases in residential electricity and gas prices^[11], respectively, while petrol and diesel prices have surpassed €2 per litre at the pumps^[12].

As one of the primary contributors to the cost of living squeeze in Ireland, the government has announced several interventions to dampen energy price rises this year. In March, a Bill providing a €200 rebate on electricity bills was signed^[13], while a temporary VAT reduction on gas and electricity was announced in April, bringing the rate down from 13.5% to 9% until October^[14]. In addition, excise duties on petrol and diesel were temporarily cut by 20 cent and 15 cent per litre, respectively, effective from March until October^[15].

Concerns surrounding Ireland’s energy security have mounted this year, fuelled by the war in Ukraine and the resultant effects on the European energy market. Our high reliance on imported energy, at over 70% of the energy we use, leaves us vulnerable to supply issues, geopolitical tensions, and international market forces^[16].

In April, the Department of the Environment, Climate and Communications (DECC) published the National Energy Security Framework. The framework seeks to address the country’s energy security issues through several short-term measures aimed at securing our oil, natural gas and electricity supplies, and long-term measures to reduce our dependency on imported fossil fuels.

At present, approximately three quarters of Ireland’s natural gas supply is imported via the UK, with the Corrib gas field providing the remainder of our gas requirement. With the output of the Corrib gas field forecast to decline in coming years and the future of our trading relationship with the UK appearing less certain in recent months, the DECC is currently conducting a review on our single-source dependency on the UK for such a vital energy resource^[17]. Natural gas currently forms approximately 40% of our electricity mix, while the CAP21 has targeted a ~2GW increase in gas-fired electricity generation capacity by 2030^[18].

June saw a further announcement by the DECC on the security of our electricity supply. The measures include funding for an additional 450MW of back-up electricity generation capacity, an increased borrowing limit for EirGrid to upgrade the national grid, and an increased borrowing limit for Bord na Móna’s transition to supplying sustainable renewable energy at scale.

Three significant electricity capacity generation auctions have taken place in Ireland this year. In January, an extraordinary T-3 Capacity Auction (to allocate electricity generation capacity in 3 years’ time) awarded capacity for 1,445MW of gas-fired generators, with a further 100MW of demand side units, 144MW of battery storage and 96MW of new steam turbine generation capacity for the 2024/25 period. The average price of awarded capacity was €146,919.99 per MW per year^[19].

The outcome of January’s auction ensures that we remain on course to achieve the CAP21 target of adding ~2GW (~2,000MW) of gas-fired electricity capacity generation across the country by 2030. This will help to bolster the security of electricity supply as the grid increasingly relies on variable renewable sources.

The annual T-4 Capacity Auction in March, pertaining to the 2025/26 period, resulted in a net 8,845MW of capacity awarded at an average cost of €56,009.15 per MW per year. The locational capacity constraint for Ireland was not satisfied by 102.35MW, while the locational capacity constraint for Greater Dublin fell short by 350.5MW^[20].

Earlier this month, the second Renewable Electricity Support Scheme (RESS) auction took place, with the results marking a significant forward step in the country’s aim to achieve an 80% renewable electricity supply by 2030. This month’s RESS auction was the second of five planned RESS auctions, with the remaining three scheduled to take place before the end of 2025.

The RESS initiative aims to provide support for renewable electricity projects in Ireland. The RESS 2 auction saw a combined 414MW worth of onshore wind and 1,534MW of solar power projects approved, which when constructed will deliver c. 2,750 GWh of electricity per annum. There were 14 successful onshore wind projects and 66 solar developments approved in the auction, with the delivery date for these projects expected to fall between 2023 and 2025^[21].

In May 2022, An Bord Pleanála granted approval for the Celtic Interconnector Project, subject to conditions. This marked a significant forward step in the project, which seeks to link the Irish electricity grid to the French grid, as part of the wider goal to develop an integrated European energy system and market^[22].

When completed in 2026, the Celtic Interconnector will allow the transfer of 700MW of electricity between the two countries – the equivalent of nearly half a million homes’ supply^[23]. Not only will this reduce the cost of electricity to consumers, it will also ease electricity supply issues as the grid’s proportion of variable renewable electricity increases and allow the Irish grid to sell electricity to its French equivalent in times of high electricity generation.

Energy, Utilities and Telecommunications companies are the backbone of Ireland’s economy. If you have any related questions or need further information, please get in touch with Colm O’Neill, Head of Energy, Utilities and Telecoms.