Out-Law News | 11 Jun 2014 | 9:38 am | 2 min. read
The SEM Committee, which is the decision-making authority on all matters concerning the SEM, has published a draft decision paper based on feedback from an earlier consultation exercise. The paper sets out the features of proposed new energy trading arrangements (ETAs) within the new integrated SEM (I-SEM); as well as the need for and proposed design of a new capacity remuneration mechanism (CRM).
The proposed changes are designed to meet the requirements of the EU Target Model, developed as part of the EU's Third Energy Package to harmonise cross-border trading rules and coordinate national and regional market designs. The SEM Committee intends to publish its final decision on the proposals set out in the paper in early September 2014 and expects the new arrangements to apply from 2016, according to the decision paper.
"The electricity market in Ireland has grown steadily with additional investment in power generation and increased interconnection with Great Britain since the introduction of the SEM in 2007," said Richard Murphy, an energy expert at Pinsent Masons, the law firm behind Out-Law.com. "It is important that the market design of I-SEM allows that investment climate to continue."
"The draft proposals have put the more efficient use of interconnectors and security of supply at the heart of the design agenda to ensure robust compliance with the Target Model. The draft proposals around the need for and the type of capacity mechanism will also be of particular interest to stakeholders," he said.
The SEM Committee is seeking feedback on the decision paper from consumers of electricity, market participants and other interested parties until 25 July 2014.
Since the SEM began in 2007, wholesale electricity in Ireland and Northern Ireland has been traded on an 'All-Island' basis. All electricity generated on or imported onto the island of Ireland is now fed into a gross mandatory pool market, from which all wholesale electricity for consumption on or export from the island must be purchased.
Once the European requirements come into force, all energy market arrangements will be required to implement a set of prices that would change for a particular trading period the closer the market moved to real-time. This is different from the current SEM where there is a single price for a particular trading period. The SEM Committee has proposed concentrating trading in the day-ahead and intra-day markets so that the all-island market would be tightly integrated with the wider European market. However it has dropped a previous proposal that participation in these markets would be mandatory.
To allow energy market participants to hedge the risks of cross-border trading, the SEM Committee proposes the use of Financial Transmission Rights (FTRs) as opposed to Physical Transmission Rights (PTRs). FTRs are financial contracts entitling the holder to a stream of revenue based on the day-ahead hourly energy price difference across an energy path, but they do not provide the right to physically dispatch generation. The SEM Committee said the use of this mechanism would allow "efficient trading across the interconnector without 'locking out' 20% of the market from the DAM that might arise from the use of PTRs".
In its decision paper, the SEM Committee also recognised the need for an "explicit" CRM on the island of Ireland, to take account of the "potential shortcomings" of a European Internal Energy Market for "a small island system with high penetration of variable renewable generation". It has proposed the adoption of a quantity-based capacity market, under which market participants would compete to offer an administratively-set level of energy capacity at the lowest price.
The SEM Committee has proposed that the CRM would be implemented through centralised reliability options (CROs) issued by a central party. According to the paper, a reliability option is essentially a financial one-way contract for difference (CfD) issued to all successful bidders for capacity in a competitive auction. The CRO holder would receive a set option fee even if the market reference price drops below a pre-set 'strike' price. If the reference price goes above the strike price, the holder of the CRO would pay the difference back to the centralised counterparty.