A New Integrated Single Electricity Market for Northern Ireland and Ireland From 2016

25 June 2014

D_mccann

Introduction

On 9 June 2014, the SEM Committee (SEMC) published a draft decision paper on the redesign of the Single Electricity Market (SEM).  The SEM has been in existence since 2007 and has allowed wholesale electricity to be traded on an all-island basis through a gross mandatory pool.

The changes in energy market arrangements of the SEM are required in order to bring the SEM in line with the EU’s Third Energy Package, and specifically the European Target Model, thus creating an Integrated Single Electricity Market (I-SEM).  The I-SEM is intended to harmonise cross border trading arrangements across Europe and coordinate national and regional market designs.  Changes in the energy market arrangements of the SEM are necessary to ensure compliance with the European legislation.

The draft decision paper sets out the main elements of the new Energy Trading Arrangements (ETAs) in the I-SEM and a high-level design for a Capacity Remuneration Mechanism (CRM). 

Energy Trading Arrangements

The SEMC is proposing a centralised market which it believes will provide a strong day-ahead and intraday market while incentivising responsibility for market participants to fully account for the balance of their generation or demand.  The SEMC believes that this would provide the best means of compliance with the European requirements. 

The European Target Model provides several forms of risk hedging instruments for energy market participants in relation to cross border trading.  The SEMC believes that Financial Transmission Rights (FTRs) will promote efficient trading across the interconnector without ‘locking-out’ 20% of the market from the day-ahead market, which may arise from the use of physical transmission rights.  FTRs are financial contracts which allow the holder to access a revenue stream based on the day-ahead hourly energy price difference but do not give rights to physically dispatch generation.

Capacity Remuneration Mechanism

The SEMC also recognises the need for a CRM in order to offset periods of low variable generation with periods of high variable generation capacity.  In line with the EU emphasis on interconnection and generation with other Member States, a CRM must not create any barriers which would prohibit trade with other Member States or create distortions in the European single market.

The SEMC is proposing a quantity-based CRM in which the quantity of capacity required would be set and in which market participants can compete in respect of the price of capacity.  The SEMC proposes that financial call options would be issued by a centralised party through a competitive auction, creating price benefits to end consumers. 

The CRM would be implemented through Centralised Reliability Options (CROs) which would have a reference price and a pre-set ‘strike price’.  Should the reference price rise above the strike price, the CRO holder will pay the difference to the transmission system operator.  The CRO receives an option fee, set in a competitive auction, in return for handing back the difference. 

Comment

Further work is required by the SEMC, for example, market mitigation powers to ensure competition in the market and measures to promote liquidity.  In relation to the CRM, a number of outstanding issues need to be resolved such as how capacity is to be procured, when and by whom, how an option is auctioned and the potential outcome of a failure to deliver capacity.  These are issues which the SEMC hopes to address at the detailed design stage. 

Responses to the draft decision paper are required by 25th July 2014 and the final I-SEM high level design is expected to be published by September 2014.  The new I-SEM design will apply from 2016.

The draft decision paper can be viewed at:

http://www.uregni.gov.uk/uploads/publications/SEM-14-045_I-SEM_HLD_Draft_Decision.pdf

If you would like to discuss this article or if you have any other queries, please contact Dorit McCann or another member of our Energy and Renewables Team.

 

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