FUI Electricity Regional Initiative Stakeholder Group Meeting

1. FUI Electricity Regional InitiativeStakeholder Group Meeting Update on Single Electricity Market Michael G Tutty Commissioner, CER 4 July 2008

2. 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.“

3. 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

4. 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

5. 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)

6. 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

7. 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

8. 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

9. Generator MO Supplier Pool & CPM Cashflow Energy Capacity Constraints Make Whole Energy Capacity Imperfections Claire Madden and Peter McLay

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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!

17. 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

18. 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

19. 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!

20. The End