5. ELECTRICITY AND RENEWABLES
Market design
Ireland’s electricity market entered a new and more competitive phase when the new allisland wholesale electricity market, the integrated single electricity market (I-SEM), went live on 1 October 2018. The I-SEM replaced the existing market arrangements of the SEM to bring the electricity wholesale market into compliance with the EU Third Energy Package through the introduction of the “target model”, the common set of rules and standards for the wholesale markets, and the capacity allocation mechanism regulation.
It is important to note that the all-island electricity market is still called the SEM, even after the introduction of the new market rules. The I-SEM was the name of the project to develop and introduce the target model modalities. However, to avoid confusion, this chapter refers to the old market rules as the SEM and the new rules as the I-SEM.
From the SEM….
The SEM has been operating since 2007 as the all-island wholesale electricity market covering two jurisdictions, Ireland and Northern Ireland (part of the United Kingdom), with one set of rules and regulations.
The SEM was operated as a mandatory pool until the end of September 2018. All electricity generated (above 10 MW) or imported had to be sold in the SEM. And all electricity for consumption or export had to be purchased from the SEM. Bids for generation were made once daily for the day ahead and matched with demand to arrive at the single island-wide system marginal price (SMP). In addition, generators received a capacity payment if they were available to generate (even if not called upon), and they received constraints payments if delivered and scheduled generation differed due to technical operating constraints of the SEM.
The market operator, the single electricity market operator (SEMO), settled the market based on the SMP as there was no separate balancing market. The SMP was therefore an ex post clearance price, and market participants did not know in advance what price they would receive or pay. However, they were also not exposed to the risk of having to use a balancing market to meet their commitments.
The SEM lacked flexibility as it allowed trading in only one market and was not designed to best accommodate the sharply increasing production from variable renewables. As part of Ireland’s commitment to integrate the SEM with European electricity markets through market coupling, the I-SEM project has been pursued under the general supervision of the SEMC, to reform the existing market structure towards the target model.
…to the I-SEM
The I-SEM market rules went live on 1 October 2018. The I-SEM is now coupled with the other EU member states via Great Britain using single day-ahead market coupling. This has facilitated Ireland’s participation in the EU internal energy market.
The new arrangements provide the benefits of European market integration, by maximising the efficient use of interconnectors and through competitive outcomes. The impact assessment of the new market design indicates that it will deliver reduced curtailment of variable generation and more-efficient flows across the interconnectors, dictated by the price signals.
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ENERGY SECURITY
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5. ELECTRICITY AND RENEWABLES
The I-SEM consists of five markets: forward, day ahead, intraday, balancing and capacity. Each of the five markets covers different periods with a separate, but related, clearing and settlement mechanism, covering energy and non-energy supplies. However, prices in the ex ante and balancing energy markets make up the bulk of the wholesale electricity price in Ireland. There is a possibility that rising wholesale gas prices will continue to feed through to higher wholesale electricity prices in coming months.
The forward market is operated as a financial market only where no physical trade will take place. The SEMC, which remains the decision-making body for the I-SEM, commissioned several consultation papers to assess the benefits and challenges of a physical forward market. It eventually concluded that the small size and relative isolation of the Irish market made its introduction challenging. Instead, physical trading should be concentrated on the day-ahead and intraday markets to ensure maximum transparency of the markets.
The new I-SEM day-ahead market offers hourly contracts and complex orders. Furthermore, three intraday auctions have been set up. Two of them will be coupled with Great Britain, and one remains local within the I-SEM. The I-SEM also offers a local continuous trading platform for electricity.
It might be prudent to closely monitor the functioning of the I-SEM on a regular basis, in particular price volatility, and to reconsider the introduction of a physical forward market if market participants appear unable to satisfactorily deal with uncertainties.
The I-SEM is expected to provide a range of benefits to the Irish consumers and the energy system. The new and more competitive trading arrangements will allow better use of existing infrastructure assets in the electricity system, and will ensure that the interconnectors operate in the most-efficient way, especially for system balancing. Moreover, the I-SEM is expected to send clearer signals to investors and to reward those generators that are best meeting the needs of the Irish market. The I-SEM will also facilitate continued growth of renewable generation, which is expected to reduce prices for consumers and which is critical for long-term decarbonisation of the Irish energy system.
The new capacity remuneration mechanism (CRM) is a competitive auction that determines the value of capacity in the market. It introduces penalties for generators that receive reliability option payments after a successful bid but are then not available to produce. In systems with high variable electricity production, such as in Ireland, energyonly markets can make it difficult for the thermal capacity to recover long-term investment as they are called upon last in the merit order and therefore earn less revenue. This is of particular concern for isolated island markets such as the Irish one. Yet, the electricity system still needs thermal capacity in periods of high demand and low renewable output.
The regulatory authority and the SEMC estimated a savings potential of EUR 200 million for 2018-19 from the competitive bidding compared to the earlier procedure of marketwide capacity payments. Only those capacity providers with successful bids will receive payment in the CRM. All suppliers pay the cost of purchasing capacity; however, capacity providers are obliged to refund revenues above a regulated maximum price back to suppliers. The capacity market also allows the aggregation of small or intermittent generators.
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