16 October 2006
On 31 March 2005, following several months of review, the Commission for Energy Regulation in the Republic of Ireland and the Northern Ireland Authority for Energy Regulation published a joint proposal for the creation of a wholesale electricity market for the whole of Ireland, the single electricity market (SEM).
The development of the SEM is the first step towards the establishment of the all-island energy market as outlined in the joint-framework development document agreed upon by the minister with responsibility for enterprise, trade and investment (Northern Ireland) and the minister for communications, marine and natural resources (Republic of Ireland) in November 2004. It is intended that the SEM will allow participants to buy and sell wholesale electricity across the whole of Ireland regardless of the demand or supply location.
Of course, the members of the business community in the North and South of Ireland have been ignoring the border for a number of years. However, it is of great economic and political significance that the two governments are now taking steps to endorse this attitude in the energy market.
The SEM will be based on a gross mandatory pool, through which all electricity (with limited exceptions) will be bought and sold. Generators will make offers to sell their electricity into the pool and will be dispatched centrally on the basis of their bids. Suppliers will purchase all of their wholesale requirements from the pool. The regulatory authorities hope that the SEM will be more efficient since the lowest-cost generating plant on the island of Ireland will be run first, which will result in lower electricity costs.
It is anticipated that there will be a single system marginal price (SMP) for the whole island that will be set for every half hour. The amounts paid to generators and the amounts charged to suppliers will be functions of the SMP, together with a range of other components. These will include: capacity payments (payments to generators for making their capacity available); constraint payments (payments to generators when they are constrained on or off for reasons relating to operation of the transmission system); and ancillary service payments (payments to generators for services they provide to maintain the stable operation of the transmission system and to restore the power system in an emergency).
Renewables and the SEM
The regulatory authorities have stated their commitment to developing a market that will provide a competitive environment and foster the development of renewables. As wind generators tend to have a lower variable cost of production, the market price these generators receive for their electricity will reflect a relatively higher fixed-cost recovery compared with thermal plant.This may well result in wind generators being dispatched ahead of conventional plant under the normal operation of the market.
The regulatory authorities have also recognised that the market design must give effect to the EU Renewables Directive provisions regarding priority dispatch.
Article 7 of the EU Renewables Directive states: "Without prejudice to the maintenance of the reliability and safety of the grid, member states shall take the necessary measures to ensure that transmission system operators and distribution system operators in their territory continued #+ continuedguarantee the transmission and distribution of electricity produced from renewable energy sources."
Priority dispatch in essence means that there should be no impediment to a renewable generator exporting power whenever they wish, subject to system security and stability.
While such arrangements must be facilitated, it is the view of the regulatory authorities that renewable generators that opt to avail of priority dispatch must not be allowed to set the price in the market. Renewable generators are therefore afforded the choice of opting for priority dispatch and becoming price-takers or alternatively they can participate fully in the market and have price-setting capabilities.
The two options for renewable generators under the SEM are outlined below.
Dispatchable renewable generators that have completed the relevant commissioning test will be permitted to submit bids to the market operator for dispatch in the same way as any other generator. This allows the renewable generator to set the price. However, they run the risk of not being dispatched if the price is too high.
The offers of dispatchable renewable generators will be automatically set at the lowest price offer received by the market operator for that trading period. This ensures that renewables will always be dispatched, subject to system security constraints, and will always receive the market clearing price.
A renewable generator must confirm in writing to the market operator on an annual basis about which of these options it wishes to use, and this is to be fixed for the following year.
Implementation of the SEM
The introduction of the SEM involves making a number of changes to the various licences, contracts and regulatory arrangements. In addition, it will be necessary to enact corresponding legislation in both jurisdictions simultaneously. As can be imagined, all this has led to a veritable bonanza of work for legal, financial and other advisers and it appears set to continue. Although the SEM was originally scheduled to be established by 1 July 2007, this date has recently been revised and is now intended to be 1 November 2007.
There has been some criticism that the mandatory pool structure too closely follows the pool system that was introduced in mainland Britain and later discarded due to its failings. The SEM will have to overcome the obstacles arising from the fact that it is being created across two jurisdictions, each of which has their own legal system and currency.
However, all of the effort and fees will have been worth it if the SEM achieves the stated goals of leading to lower electricity costs and improving the security and reliability of electricity supplies across the whole of Ireland. n
Alan Bissett is head of the energy and natural resources at Carson McDowell