1 October 2007
On 3 July 2007, the first parties signed up to unique contractual trading arrangements for the Irish Single Electricity Market (SEM). What makes this special is that the SEM forms part of the All Island Project, representing the culmination of a joint British-Irish governmental initiative to create a single cross-border wholesale energy market for the whole island.
At the heart of the SEM is the Trading and Settlement Code governing these trading arrangements. The SEM is seen as a flagship project for the All Island Project, with more industries expected to follow this all-island model leading to greater economic unification of the island's two jurisdictions.
The gross mandatory pool model was chosen after detailed consultation. Within the code governing it, new statutory provisions and licensing regimes have been implemented north and south of the border.
The Irish system has a market operator and a de minimis threshold (currently 10MW) required for generators to trade their electricity through a pool mechanism to all retail suppliers.
Under the code, all generators are deemed to be selling collectively to all suppliers who take electricity from the grid in the relevant trading periods. With the exception of a transitional intermediary arrangement to accommodate certain legacy power purchase agreements, bilateral agreements for sale and purchase of electricity will not be recognised under the SEM at the wholesale level.
The market design is partly reminiscent of other cross-jurisdictional markets - such as Nordpool, the Eastern Australian market and the former British pool - but on the whole the project is uniquely complex, given its international and mandatory character.
The operation of the market will be administered by a licensed entity, the market operator, which is a contractual joint venture between the respective system operators for Ireland and Northern Ireland - EirGrid and Soni respectively. Each entity is licensed to act as market operator in its own jurisdiction and the licences require them each to cooperate with the other in performing this function for the SEM.
Consequently, in drafting the code, it was necessary to provide for the joint and several liability of the entities constituting the market operator on the one hand, while providing for discharge of participants' obligations to a single interface (being the contractual joint venture) on the other.
The market operator is also responsible for administering money flows under the code. However, unlike some other jurisdictions with a pool structure, the market operator will not take title to the electricity.
Invoicing and bank accounts
Although the market operator does not have any beneficial interest in the electricity traded through the pool, it issues invoices and self-billing invoices (credit notes) as agent on behalf of market participants. The code therefore had to provide that it receives and holds payments on trust in favour of all participants to whom payments are owed.
Where payments in and out of the trading accounts do not balance - due, for example, to currency fluctuations - the code provides that any balance in the accounts following payment out to participants is held for redistribution pro rata to the participants' entitlements.
To keep the market whole, the code requires participants to have credit cover in place before they can commence trading to cover potential liabilities. This may take the form of a letter of credit or the provision of cash collateral.
There is a strict timetable for trading and settlement under the code, which is fundamental to the operational success of the market. Appropriate charging provisions have also been incorporated to take account of some very specific legal issues arising due to the cross-border nature of the code and the trust arrangements - particularly as the code is governed by Northern Irish law, but comes under the jurisdiction of both Belfast and Dublin courts.
Enforcement of debts
If a supplier does not pay for the energy it takes from the pool and its credit cover does not meet the debt, it owes a debt to all generators that provided electricity in the relevant trading period. The amount becomes an unsecured bad debt for the purposes of the code, although this term is not intended to imply that the debt cannot be pursued.
The electricity sold by any one generator to the defaulting supplier cannot be identified as there is no bilateral contract between them. As such, arguably, to recover a debt, all generators would have to take a collective action against the defaulting supplier. This is clearly cumbersome and could lead to the defaulting supplier taking legal action against itself, if it is both a generator and supplier. Even if a participant could successfully take a claim for its portion of the debt, this could lead to a lengthy intricate recovery process if done one by one with no guarantee of success.
So what is the solution? The code allows the market operator to pursue debts as agent and trustee on behalf of participants and sue for a debt to the market on trust for participants. In determining whether to pursue a debt, the market operator must consult with a committee, which includes industry participants.
The intermediary arrangements in the SEM are of particular interest both to participants and to the banking community as they have implications for existing power purchase arrangements (PPAs) between generators and suppliers.
Under pre-SEM arrangements in both jurisdictions, participants may have PPAs in place. Often, complex financing structures will support such agreements. Generally, the arrangements in the SEM and the code do not allow for recognition of such bilateral PPAs unless the relevant generator unit is below the threshold of 10MW.
However, in recognition of these legacy contracts, the regulatory authorities provided for the limited concept of the appointment of an intermediary under the code to trade the electricity produced by that generator. The aim is to facilitate maximum participation in the SEM.
Intermediary arrangements may only be put in place for a limited duration. To qualify, there must be a pre-existing contract between the generator and the proposed intermediary, which was entered into prior to 27 February this year.
The purchaser under a PPA becomes the intermediary and is essentially the generator for the purposes of the code. The intermediary registers the generator unit(s) and is liable as principal. It resells the electricity purchased pursuant to the PPA through the pool.
Currently, the SEM is in a transitional phase. Market go-live is scheduled for 1 November, on target with the SEM timetable.
Despite the lengthy consultation process, experience of these markets dictates that there will inevitably be initial teething issues. There is a process to deal with these through the Modifications Committee, with final approval on any modification proposal by the Regulatory Authorities.
Expect to see more of these all-island markets in Ireland in the future and this model is a good example of what is achievable.
John Kettle is a partner and Emma Keavney is a senior associate at Mason Hayes & Curran