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FUI Electricity Regional Initiative Stakeholder Group Meeting. Update on Single Electricity Market Michael G Tutty Commissioner, CER 4 July 2008. SEM Background (1). MoU signed by both Regulators (CER and NIAUR) in August 2004 SEM is first major step towards All-Island Energy Market

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fui electricity regional initiative stakeholder group meeting

FUI Electricity Regional InitiativeStakeholder Group Meeting

Update on Single Electricity Market

Michael G Tutty

Commissioner, CER

4 July 2008

sem background 1
SEM Background (1)
    • MoU signed by both Regulators (CER and NIAUR) in August 2004
    • SEM is first major step towards All-Island Energy Market
  • SEM Vision (December 2004):

“Wholesale electricity trading arrangements which deliver an efficient level of sustainable prices to all customers, for a supply that is reliable and secure in both the short- and long-run on an all-island basis.“

slide3

SEM Background (2)

SEM Vision is supplemented by 5 objectives:

  • Security of supply
  • Promoting competition
  • Minimising transaction costs
  • Fostering use of renewable, sustainable or alternative energy
  • Demand side management
slide4

SEM Design

  • Mandatory Gross Pool
    • Single System Marginal Price (SMP)
    • Set based on ex-post unconstrained schedule
    • Centralised unit commitment
    • Constraint payments
    • D-1 Gate Closure
    • Complex bid structure
  • Capacity Payments based on annual capacity pot (€569m for 2008)
  • Strategy for Dealing with Market Power Issues
sem pricing gross mandatory pool 1
SEM Pricing - Gross Mandatory Pool (1)

Generator bids in at Short Run Marginal Cost (SRMC) – bidding principle

Complex bidding structure – start up, no load and incremental costs

Single SMP set for each half hour trading period

SMP - cheapest price at which the demand on the system can be met

Suppliers pay SMP (+ capacity payment and imperfections charge)

Generators receive SMP (+capacity payment, constraints payment and make whole payment)

slide6

Generators

SEM Pricing (2)

Suppliers

Generators bid in SRMC and if scheduled generate power

Generators receive SMP

Pool

Wholesale Market

Customers

Suppliers take power at SMP

Suppliers pay SMP

Retail Market

Customers consume power

Customers pay supplier

capacity payments 1
Capacity Payments (1)
  • Fixed revenue capacity mechanism – providing some financial certainty to generators
  • Annual fixed pot broken down 12 monthly ‘capacity periods’
    • Further divided between Fixed and Variable payments, which cluster around high demand or high outage probability trading periods
  • All generators eligible for capacity payments when available
slide8

Capacity Payments (2)

  • Annual Capacity Payment Sum is determined by RAs:
    • peaker cost (€/kW) times capacity (GW) required (security standard)
    • profiled into twelve monthly amounts weighted by demand forecast
  • Monthly amount for generation split into three components:
    • ‘Fixed’: allocated across TPs based on annual load forecast
    • ‘Variable’: allocated across TPs based on ‘month-ahead’ LOLP (λ)
    • ‘Ex-Post’: allocated across TPs based on ‘month-end’ LOLP (Ф)
  • Generators paid pro-rata based on ‘Eligible Availability’ and scaled by a price factor
  • Suppliers charged pro-rata based on metered demand and scaled by a price factor
pool cpm cashflow

Generator

MO

Supplier

Pool & CPM Cashflow

Energy Capacity Constraints Make Whole

Energy Capacity Imperfections

Claire Madden and Peter McLay

slide10

Market Power

Definition

The ability of a market participant, acting independently, to raise market prices consistently and profitably above competitive levels for a sustained period of time.

Market Share 2008 – By Capacity

slide11

Market Power Objectives

To prevent market participants from abusing their market power

To maintain efficient incentives for new entry and exit

To expose the incumbents to competitive pressure, which should lead to increased efficiencies

Not to unfairly discriminate between new entrants and existing players

slide12

Market Power Mitigation Strategy

  • Directed Contracts (2-way CfD)
    • (approx. 1/3 of ESBPG output)
  • Bidding Principles
    • All generators to bid at SRMC
    • Bidding Code of practice established by RAs
  • Market Monitor
  • Ringfencing
hedging in the sem
Hedging in the SEM

All electricity bought through pool

Too risky for generation or supply to rely solely on spot prices

Contracts for Differences (CfDs) used to manage risk by generators and suppliers

A mixture of Directed Contracts and Non Directed Contracts

cfds available in the market directed non directed contracts
CfDs Available in the Market – Directed & Non Directed Contracts
  • Directed Contracts
    • Generators with large market shares required to sell power forward in quantities and according to price methodologies set by the Regulatory Authorities.
      • Removes market price manipulation incentive, where it exists
    • The quantification of these contracts is based on concentration in the market – HHI Index
  • Non Directed Contracts
    • Expect a hedge market to develop for non directed contracts
    • IPPs, ESB PG and NIE PPB to offer hedges for remaining load through non directed contracts
    • PG and PPB Auction Allocation Method
slide15

Generators

Hedging

Generators receive SMP

Generators bid in SRMC

One Way CfD

SMP<Strike Supplier compensates Generator

SMP>Strike Generator compensates Supplier

Pool

Two way

CfD

SMP>StrikeGenerator compensates supplier

Suppliers

Suppliers take power at SMP

Suppliers pay SMP

slide16

SEM Committee

Market overseen by SEM Committee with decision-making powers

Composed of CER, NIAUR and an independent member (from Spain) with one vote each

Working well and already clear that this represents a real pooling of responsibility!

slide17

Experience so far (1)

SEM Working well

Disputes arose on interpretation of bidding principles by some generators

After investigation, SEM Committee issued decisions which have been accepted by participants

slide18

Experience so far (2)

Frequent price spikes experienced

Seem to be due to treatment of a dual-fuel generating station

Measures to resolve this being developed

slide19

Experience so far (3)

Good interest being shown by potential new generators

Directed contracts sold and non-directed contracts auctioned for year from 1 October 2008 – prices much higher than for earlier year!

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