The Supreme Court dismissed an appeal by Viridian Power Limited and Huntstown Power Company Limited over whether they could include the carbon revenue levy in the costs used to bid electricity into Ireland’s wholesale market.
In a judgment delivered on 23 February 2012, Mr Justice William M. McKechnie held that the levy did not qualify as an “opportunity cost” under the generators’ licences and the Bidding Code of Practice. Without an opportunity cost, it could not form part of the short run marginal costs used to set bids.
The dispute followed a Commission for Energy Regulation direction issued on 8 October 2010, prohibiting the generators from including the levy in their bid costs. The companies sought judicial review. The High Court dismissed their applications in June 2011, and they appealed. A related application by Endesa Ireland Limited had also been dismissed, but Endesa did not appeal.
The levy, established by the Electricity Regulation (Amendment) (Carbon Revenue Levy) Act 2010, is calculated by reference to generator emissions and allowance prices. The judgment said the appellants estimated their liability at about €18 million a year. The companies argued that the levy arose when their plants generated electricity and was therefore a cost that should be reflected in their bids. The Commission maintained that it had no realisable alternative use and no opportunity cost.
The court treated the Generation Licence and the Bidding Code as the contractual rules governing the dispute. Under those rules, bids must reflect short run marginal costs, which are valued by reference to opportunity costs. The code defines opportunity cost by the benefit a generator forgoes by using a cost item for electricity generation instead of its most valuable realisable alternative use. Where there is a market, the code looks to the prevailing price; otherwise, it looks to replacement cost.
The judge concluded that a statutory liability imposed on revenue had no separate use, alternative use, market value or replacement cost in the sense required by the code. He distinguished the levy itself from the cash cost of discharging the statutory liability, saying the two could not be treated as the same cost item. He also concluded that the levy was incidental or consequential to generation, rather than a direct input into it.
The court did not rule on the validity of the levy or determine any challenge to the 2010 Act. Its decision concerned whether the levy could be included under the contractual bidding rules. The appeal was dismissed.