The Single Electricity Market in Ireland

1. The Single Electricity Market in Ireland Tony Doherty Northern Ireland Authority for Utility Regulation

2. Outline • Background to the markets • Challenges • Objectives of market • Market Design • What happens next?

3. Northern Ireland 9,026 GWh Installed Capacity 2270MW Around 0.7 million consumers Fully privatised industry Bilateral Physical Contracts Republic of Ireland 26,627GWh Installed Capacity 7920MW Around 1.8 million consumers State control of most of the industry Bilateral Physical Contracts Background Interconnection with GB; 500MW current with another 500MW planned HHI (energy) ~ 3000 Average age of plant (by MW) on island ~18 years

4. Generation Mix

5. Why are we doing this? • Government policy • All Island Development Framework • Political Drivers • Economic Drivers • European policy

6. Challenges for the SEM • Relatively small market with little interconnection • Two Governments; two System Operators; two Regulators • New generation investment needed • Potential for significant market power issues

7. Objectives of SEM • Deliver efficient level of sustainable prices to customers….supply that is secure in short and long run on an all-island basis • Promote competition • Minimise transaction costs for participants and customers; and • Enable demand side management

8. Design Selection – Centralised vs Decentralised • Security of Supply - greater price transparency improves longer term investment signals • Efficiency - transparency helps address dominant structure improving market efficiency • Equity - obviates need for physical contract making access easier for new entrants • Competition – harder to compete in decentralised market with few players

9. Design Selection – Central vs Self Commitment • Security of Supply – greater flexibility to TSO • Stability – greater TSO control • Practicality – reduction in pre-despatch requirements

10. Key Features of the SEM • Gross mandatory marginal pricing pool operated on an unconstrained basis • Short Run Marginal Cost bidding in energy market • Explicit Capacity Payment Mechanism (CPM) • Directed Contracts • Market Monitoring Unit • New regulatory body for oversight of market

11. Directed Contracts Market Power Risk ESB ESB PES NI Gens NIE PES Others Others £ € £ € Single Market Operator (Joint Venture) IT Systems / Invoicing / Settlement / Credit Market Monitoring Unit Suppliers MWh MWh Pool Generators

12. Rationale for a CPM • Prices – prospect of more stable prices; • Market entry and risk – stable predictable cash flows will reduce the risk premia for new investment; • Intervention – energy only pool would attract more political/regulatory intervention; • Transparency – greater transparency in pool prices; • Competition – attract new entry and improved availability; • Dominance – can help with dominance

13. Objectives of the CPM • Incentivise appropriate levels of market entry and exit; • Not ‘double pay’ generators; • Reduce risk premium for investors; • Reduce market uncertainty; • Be compatible with the energy market; • Be transparent, predictable and simple to administrate; • Encourage short-term availability when required; • Encourage efficient maintenance scheduling; • Not increase costs to customers for desired security margin; • Not unfairly discriminate between participants; and • Encourage an efficient mix of plant types.

14. CPM Key Features • Fixed amount of cash (the Pot) per year • Pot determined as Price x Volume • Price: Best New Entrant Peaking Plant fixed costs • Volume: Capacity required to meet adequacy standard • Pot allocated for Generator Payments: • Fixed (year ahead) • Variable (month ahead) • Ex-Post (month end) • Generators paid when available • Pot allocated for Supplier Charges: • Based on demand

16. What happens next? • Market trials on track • Go Live on 1 November • All Island Gas Market • Regional Electricity Markets