Mr. Evan Walker:

I will take the Deputy through how the caps were calculated. With regard to the €120, every year reference prices are published for what the Renewable Energy Feed-In Tariff, REFIT, prices would be, that is, the contracts that are already in existence for wind and solar. There are not too many solar projects in REFIT, but in 2023, the reference prices were to be €71 for small wind farms and €81 for large wind farms, plus a capacity-balancing market payment of approximately €10. By that calculation, it looks as though the expected normal rate of return on a unit cost basis was approximately €91. Anything above €91 could be considered a windfall gain, because it was beyond the expectation of the market, what they would receive with regard to euros per MWh. That was considered in terms of the options. Anything above €90 is considered a windfall. That might be the ceiling, all the way up to €180. The options were taken with regard to €90, €120 and €180, as per European regulation. They were put in to a multi-criteria analysis, basically, which is how we decided at what level it should be or which option one would go for.

The criteria in the multi-criteria analysis were to capture windfall gains but maintain positive investment signals and minimise country-specific risk. Going with €90 would capture the windfall gain to the fullest extent but it was deemed it would deliver negative investment signals. It would also be an outlier relative to other European countries with regard to €180. This is where the €120 figure came from. There is a windfall gain and it is captured but at an extent that maintains positive investment signals. It was the appropriate rate that came out of the multi-criteria analysis. That is technically how €120 was decided. For all of the other sectors, the €180 figure just comes from the European regulation.

The variable cap is not a fixed figure. It is cost plus a maximum marginal limit. Recital 33 of the European regulation states there should be differential caps where there are differential marginal costs. For example, a wind farm might have smaller marginal costs and a very different cost structure to a coal plant that has fluctuating market prices that could go way beyond €180. If we set the cap at €180 while market prices are above €180, the unit would not run. As per recital 33 of the regulation, the solution is to apply the cost structure. The company is allowed to maintain a maximum margin limit to incentivise it to run. Otherwise it would not run in the morning. This is on an adjustable basis and is reflected by what the market price would be for coal, biomass or oil. This is technically how the caps were set.

With regard to the hedging structure, once we have a cap, the regulation is very clear that how we implement it is based on realised market revenues. It is very strict on this. It states we have to incorporate and account for hedging operations to reflect realised market revenue. While €120 might be the market price in March, the average cost per megawatt hour was €147. According to our market engagement and research, at least 50% of the book of most of these companies is hedged on a 12- to 18-month basis. Hedging means contracts engaged in by the firms and other parties to make sure they are not fully exposed to the daily volatility. The cap will be based on realised market revenue and this does take account of hedging operations. In the Bill, we have given the CRU full remit to verify fully an account. This is backed by the regulation. The regulation states the competent authority, in this case the CRU, will have full visibility in order to verify and allow for it.