Demand from datacentres makes up a rapidly growing portion of electricity demand in Ireland.
Increased demand in turn gives rise to increased renewable generation, mandated by government targets, and a
corresponding increase in subsidisation levels. The current method of apportioning renewable subsidy costs may
lead to consumers other than datacentres bearing this excess cost of subsidisation. This letter calculates the
expected impact on these consumers

Devine, Mel T.

Lynch, Muireann Á.

English

Demand from datacentres makes up a rapidly growing portion of electricity demand in Ireland.

Increased demand in turn gives rise to increased renewable generation, mandated by government targets, and a

corresponding increase in subsidisation levels. The current method of apportioning renewable subsidy costs may

lead to consumers other than datacentres bearing this excess cost of subsidisation. This letter calculates the

expected impact on these consumers

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ESRI working papers represent un-refereed work-in-progress by researchers who are solely responsible for the content and any views expressed therein. Any comments on these papers will be welcome and should be sent to the author(s) by email. Papers may be downloaded for personal use only. Who pays for renewables? Increasing renewable subsidisation due to increased datacentre demand in Ireland Muireann Á. Lyncha,b and Mel T. Devine*a,b Abstract: Demand from datacentres makes up a rapidly growing portion of electricity demand in Ireland. Increased demand in turn gives rise to increased renewable generation, mandated by government targets, and a corresponding increase in subsidisation levels. The current method of apportioning renewable subsidy costs may lead to consumers other than datacentres bearing this excess cost of subsidisation. This letter calculates the expected impact on these consumers. *Corresponding Author: muireann.lynch@esri.ieKeywords: Capacity markets; Reliability; Mixed complementarity problem; Stochastic modelling JEL Codes: Q4, D43, D47, L13, C61 Acknowledgements: Lynch and Devine are funded by the Energy Policy Research Centre (EPRC). We are grateful to Seán Lyons and Valentin Bertsch for helpful comments and suggestions. All omissions and errors are our own. a The Economic and Social Research Institute, Dublin b Department of Economics, Trinity College, Dublin Working Paper No.  566 June 2017 Subsequently published in "Who pays for renewables? Increasing renewable subsidisation due to increased datacentre demand in Ireland", Applied Economics, Vol. 5, Issue 1, 2019, pp. 25-29, https://doi.org/10.22440/wjae.5.1.2ARTICLE TEMPLATEWho pays for renewables? Increasing renewable subsidisation due toincreased datacentre demand in IrelandM. A´. Lyncha,b and Mel T. Devinea,baEconomic and Social Research Institute, Dublin, Ireland; bDepartment of Economics,Trinity College, The University of Dublin, IrelandARTICLE HISTORYCompiled June 7, 2017ABSTRACTDemand from datacentres makes up a rapidly growing portion of electricity demandin Ireland. Increased demand in turn gives rise to increased renewable generation,mandated by government targets, and a corresponding increase in subsidisationlevels. The current method of apportioning renewable subsidy costs may lead toconsumers other than datacentres bearing this excess cost of subsidisation. Thisletter calculates the expected impact on these consumers.KEYWORDSRenewables; electricity; subsidy; datacentres;1. IntroductionIn response to European targets requiring 20% of total energy demand to be met byrenewable energy (European Commission 2009), Ireland has set a target for 40% ofelectricity demand to be met by renewable generation, primarily wind energy (DCENR2009). In order to incentivise the deployment of sufficient renewable electricity gener-ation capacity to meet this target, renewable generators are compensated by means ofa renewable energy feed-in tariff. In Ireland, when the market price drops below thetariff, the generator receives the tariff for each unit of electricity generated, while whenthe market prices rises above the tariff, the generator receives the market price. Thedesign of the feed-in tariff in Ireland can thus be considered a floor price. The revenuesnecessary to fund this subsidy mechanism are levied on consumers through a PublicService Obligation levy. The proportion of the levy paid by small commercial con-sumers, residential consumers and medium and large profile consumers is determinedby their contribution to peak demand (Statutory Instrument 217 2002).There has been a significant increase in the number of datacentres located in Irelandin recent years, with a corresponding increase in electricity demand. The total elec-tricity demand from these datacentres is set to rise further still (EirGrid 2017). Giventhat the target for renewable electricity is set as a proportion of the total electricitydemand, this increase in electricity demand from datacentres necessitates higher abso-lute levels of renewable generation in order to meet the targets, with a correspondingrise in renewable subsidisation. However, the method of apportioning the cost of thisCorresponding author M. A´. Lynch. Email: muireann.lynch@esri.iesubsidisation across consumer categories (residential, small commercial and mediumand large profile) means consumers that did not give rise to the increase in renewablesubsidisation must nevertheless bear the cost of same. This could give rise to equityconcerns and potentially feed public opposition to renewable energy projects and/ornew datacentres.This letter quantifies the total expected increased subsidy cost arising from the in-creased demand from datacentres. The increased cost is calculated twice, assuming inthe first instance that the extra renewable generation is met by onshore wind gen-eration, and in the second instance that it is met by photovoltaic solar generation.We apportion this expected cost increase across the different consumer categories ac-cording to the current method of PSO cost allocation. On the basis of our resultswe propose that an alternative method for distributing the cost of subsidisation beexplored, which would see the cost incurred by datacentres being borne by consumersin that sector only.2. Calculation of impact of datacentresThe present value of the PSO cost over the lifetime of the renewable capacity invest-ment is calculated in the same manner as in Devine, Farrell, and Lee (2017). The costis calculated for three different levels of renewable capacity, corresponding to three dif-ferent levels of demand, which are largely driven by the rollout of datacentres. Thesedifferent levels of datacentre connection are estimated by the Transmission SystemOperator of Ireland, EirGrid (EirGrid 2017).We assume new renewable generation capacity arising from the increased demandfrom datacentres is met either by new onshore wind or by photovoltaic solar generation.The majority of renewable generation in Ireland at present is met by onshore wind(EirGrid 2017). There is also growing interest in solar generation; the Government’sEnergy White Paper states that “The deployment of solar in Ireland has the potentialto increase energy security, contribute to our renewable energy targets, and supporteconomic growth and jobs” (DCENR 2015) and there are discussions around a subsidyfor solar generation. For this reason we consider the effect of meeting the new renewablegeneration required with either wind or solar. We assume the onshore wind required tomeet the underlying renewable target in the low demand scenario, which correspondsto a low connection rate of datacentres, is 3942MW (calculated from EirGrid (2017)).This level of onshore wind generation is assumed to exist also in the median and highdemand scenarios. We calculated the cost of the extra renewable generation requiredunder median and high demand scenarios twice. In the ‘wind’ scenario we assumethe extra renewable generation is met by extra onshore wind generation and in the‘solar’ scenario we assume the extra renewable generation is met by photovoltaic solargeneration. The extra renewable capacity required under the median and high demandscenarios is calculated using a capacity factor of 31% for onshore wind, as per EirGrid(2017), and 9% for solar (Ryan et al. 2016). The demand and renewable generationcapacities required (on top of the 3942MW of onshore wind in the low demand scenario)are given in table 1. Note that these figures apply to the Republic of Ireland only ratherthan the whole all-island market of Ireland.The total expected cost of subsidising the different levels of renewable capacityover twenty years is calculated using, for the most part, the same cost and technicalassumptions as Devine, Farrell, and Lee (2017). In addition, the feed-in tariff for wind isset at e72/MWh, as this was the level of the tariff in 2017. At present solar generation2Low demand Median demand High demandDemand (TWh) 30 31.2 32.6Wind scenario (MW) - 157.7 341.7Solar scenario (MW) - 543.2 1176.9Table 1. Demand (TWh) and renewable generation capacities (MW) scenariosdoes not have a feed-in tariff, so we used the figure of e130/MWh from Ryan et al.(2016).The total expected cost under each scenario is shown in table 2.PSO costs Low demand Median demand High demandWind scenario 3092 3708 4352Solar scenario 3092 3171 3307Table 2. Total subsidy cost for each of renewable installation scenario (Me)As expected, the higher renewable generation targets give rise to higher costs withthe solar scenario giving rise to higher costs again. Table 3 shows the contributionto peak demand by each consumer category in 2016, according to CER (2016). Wecalculate the new contribution from each under the median and high demand scenarios,taking the new demand from datacentres into account, and assuming there is no changein demand from other consumers.Consumer category Low Median HighSmall Commercial 10.6 10.31 10.08Residential 36.8 35.79 34.99Medium and High Profile 52.6 53.9 54.93Table 3. Share of peak demand made up by each consumer category under each demand scenario (%)Taking these shares, the proportion of the subsidy cost in table 2 can be dividedbetween the various consumer categories. In particular, the extra subsidy cost at-tributable to the demand from datacentres, under the median and high demand sce-narios, is decomposed between the three consumer categories in table 4.Focusing on residential consumers, the increase in annual PSO costs they bear is 3%and 7% for the median and high demand scenarios, relative to the low demand scenario,when the increased renewable generation is provided by onshore wind generation. Ifthe extra generation is provided by solar, the annual increase in the PSO costs ismuch higher, at 20% for the median demand scenario and 41% for the high demandscenario. Given that our analysis assumes the residential consumer does not changetheir demand at all, any increase in PSO costs for these consumers, however small,could be seen as an unfair imposition on these consumers. This inequity is even morepronounced considering that datacentres based in Ireland will service their consumers3PSO costs Median HighWind Solar Wind SolarSmall Commercial 8.3 65.22 22.7 133.5Residential 28.8 226.4 78.9 463.4Medium and High Profile 41.2 323.7 112.7 662.3Table 4. Portion of extra costs borne by each consumer group (reference scenario: low demand wind scenario)(Me)all over the EMEA area and yet Irish consumers would bear the cost of the associatedrenewables.This change in PSO cost burden has its roots in the PSO mechanism design. Ap-portioning the cost on the basis of peak demand places a greater share of the burdenon consumers with a more variable demand pattern. As industrial loads in general,and datacentres in particular, have relatively fixed demand profiles, they consequentlybear only a portion of the subsidisation cost for which their demand is responsible.In 2016, the majority of the gross PSO cost was attributable to renewable and peatsubsidisation (67.9% and 28.2% respectively (CER 2016)). Peat stations are run atmaximum output regardless of the market demand and so the first order effect ofchanges in demand on peat station subsidisation is zero1. As the required quantityof renewables is determined on the basis of total demand rather than total capacity,there may be an argument for apportioning PSO cost according to the contribution ofeach sector to average rather than peak demand. This would mean each sector wouldbe responsible for the proportion of PSO costs that arose due to their contribution tomarket demand.3. ConclusionThis letter calculated the increased renewable subsidy costs that increased loads fromdatacentres may impose on consumers in Ireland. The extra cost arises from EU man-dated government targets for renewable generation, which are calculated as a portionof total demand. Assuming the current method of apportioning PSO costs is appliedas these new loads come on stream, residential and small commercial consumers willface increased PSO payments. The level of these costs increases considerably if theextra renewable requirement is met with solar generation.Datacentre owners may prove unwilling to inflict higher costs on consumers, throughPSO payments or otherwise. Therefore datacentre owners and/or energy regulatorsmay wish to explore an alternative method of calculating and apportioning PSO coststo new loads of this type. The findings of this letter suggest that such an approach isprudent and may inform discussions on an alternative mechanism.1The level of subsidisation required is determined by the peat stations’ profitability, which in turn is a functionof electricity prices. Given that electricity prices are a function of demand, one could argue that higher demandleads to higher prices and lower subsidisation costs. The modelling of these effects is beyond the scope of thisletter.4AcknowledgementsLynch and Devine acknowledge funding from the Energy Policy Research Centre. Theusual disclaimer applies.ReferencesCER. 2016. “PUBLIC SERVICE OBLIGATION LEVY 2016/17.” Available on-line: http://www.cer.ie/docs/001074/CER16252%20PSO%20Levy%202016-17%20-%20Revised%20Decision%20Paper.pdf.DCENR. 2009. “National renewable energy action plan Ireland.” Available online:http://www.dccae.gov.ie/documents/The%20National%20Renewable%20Energy%20Action%20Plan%20(PDF).pdf.DCENR. 2015. “Irelands Transition to a Low Carbon Energy Future 2015-2030.”Available online: http://www.dccae.gov.ie/documents/Energy%20White%20Paper%20-%20Dec%202015.pdf.Devine, Mel T, Niall Farrell, and William T Lee. 2017. “Optimising feed-in tariff design throughefficient risk allocation.” Sustainable Energy, Grids and Networks 9: 59–74.EirGrid. 2017. “All-Island Generation Capacity Statement 2017-2026.” .European Commission. 2009. “DIRECTIVE 2009/28/EC OF THE EUROPEAN PAR-LIAMENT AND OF THE COUNCIL of 23 April 2009 on the promotion ofthe use of energy from renewable sources and amending and subsequently re-pealing Directives 2001/77/EC and 2003/30/EC.” Available online: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0016:0062:EN:PDF.Ryan, Lisa, Joseph Dillon, Sarah La Monaca, Julie Byrne, and Mark O’Malley. 2016. “Assessingthe system and investor value of utility-scale solar PV.” Renewable and Sustainable EnergyReviews 64: 506–517.Statutory Instrument 217. 2002. “S.I. No. 217/2002 - Electricity Regula-tion Act 1999 (Public Service Obligations) Order 2002.” Available online:http://www.irishstatutebook.ie/eli/2002/si/217/made/en/print.5For earlier Working Papers see http://www.esri.ie Year Number 2017 565 564 563 562 561 560 559 558 557 556 555 Title/Author(s) ESRI Authors and Affiliates Italicised Can tenants afford to care? Investigating the willingness-to-pay for improved energy efficiency of rental tenants and returns to investment for landlords Matthew Collins and John Curtis  Female participation increases and gender segregation Claire Keane, Helen Russell and Emer Smyth Pike (Esox lucius) stock management in designated brown trout (Salmo trutta) fisheries: Anglers’ preferences John Curtis Financial incentives for residential energy efficiency investments in Ireland: Should the status quo be maintained? Matthew Collins, Seraphim Dempsey and John Curtis Does a satisfied student make a satisfied worker? 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Who pays for renewables? Increasing renewable subsidisation due to increased datacentre demand in Ireland. ESRI WP566, June 2017

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