The literature review should establish a better understanding of how the new electrical wholesale market known as the Integrated Single Electricity Market (I-SEM) works. The review of the literature will provide information on Single Energy Market (SEM) and its challenges.
To understand I-SEM, first the need and the historic conditions of the current renewable energy situation that lead to I-SEM need to be reviewed. Then the introduction of I-SEM and possible effects will be analysed. Books about I-SEM and renewable energy, research papers, journal articles, newspaper articles and Government information were reviewed to provide the insight into this topic.
2.0 From SEM to I-SEM
The “Single European Act “(EU,1988) is the foundation of the single European internal market for goods and services within the European Union (EU). The European Commission (EC) moved from the Single European Act and issued a document on “internal energy market” (EU,1988) as a legislative basis in the 1990s that concentrated on an integrated energy market that is competitive but also reduces the cost for the consumer.
Additional Electricity Directives aimed at lining up common set of rules which national governments had to transfer into their national legislation. The directives in 1996, 2003 and 2009 slowly but surely liberalised national electricity markets. The aim was to facilitate increased cross border trading through specific rules encouraging non-discriminatory access to interconnector capacity. With the introduction of the new legislation it reduced the entry barriers of these markets. The EC had determined a list of key energy infrastructure projects, known as projects of common interest (PCIs). “The projects are designed to help complete the EU’s internal energy market and reach its policy objectives of affordable, secure and sustainable energy.” (EC, 2016). For projects progressing at implementation and draw interest from private investment, the PCIs should be able to have financial support from Connecting Europe Facility (CEF) and the time to grant a permit needs to be significantly shortened.
To understand I-SEM better, the Irish SEM needs to be reviewed under the aspects of changes in the energy Market in Ireland as Ireland had two distinct electricity markets prior SEM. As per Picture 1 below the installed Cross-border Interconnector can be seen which enable Energy Security and reduce costs.
Picture 1: Eirgrid Transmission System (EirGrid, 2016)
2.1 Single Electricity Market (SEM)
The Single Electricity Market of Ireland (Republic of Ireland, Northern Ireland) was an integrate the all-island market. It was established under the requirement to adopt the EU Target Electricity Model and was launched in 2007. It was designed to increase competition, facilitate renewable electricity generation while delivering benefits for all-island consumers and creating optimal use of cross-border transmission assets. This SEM was very special as the two countries traded with different currencies. The arrangement introduced multiple markets and auctions which replaced the existing market. I-SEM required a change how generators and service providers interacted relating to revenue. Thus, the generators and service providers will compete for capacity revenues from the capacity market and for system service revenues from the Transmission System Operators (TSO). Under SEM and I-SEM the TSO’s activities had been separated from companies with stakes in the generation or supply of electricity. This was to eliminate conflicts of interest, that may arise when there is integration in the electricity market, it is necessary to separate system operators from other segments of the market. This will ensure equal access to the grid for all participants, and for new competitors in the market. The East-West interconnector between Ireland and Wales which opened in 2012, having received a grant from the “EC was estimated to bring annual benefits of 66m Euros at an NPV cost of 395m Euros, making it extremely worthwhile” (de Nooij, 2011). Ireland had a number of PCIs that had been granted CEF funding under a second call for proposals in 2015.
The Irish projects included:
• Electricity interconnection between Ireland and France.
• Interconnection between Ireland and Britain to facilitate renewable energy export.
• Electricity storage.
• Ireland/Northern Ireland electricity interconnector.
• The Islandmagee Gas storage facility, (with reverse flow from Northern Ireland to Britain).
• A Liquefied Natural Gas terminal at Shannon.
• Smart Grid Investments.
• Smart Grid Investments North Atlantic Green Zone project.
• Upgrade of the SNIP (with reverse flow from Northern Ireland to Scotland).
SEM was designed in a way that strategically mitigated abuse of market power by participants. This had been achieved by directed contracts being imposed on generators with significant market power, also a licence condition was imposed on generators to strictly adhere to a bidding code of practice. Under SEM large generators with substantial market share were compelled to enter into forward contracts with suppliers for a specified volume at a pre-determined price. The reason for this condition was to prevent those generators from withholding capacity for influencing the market price. A Market Monitoring Unit (MMU) was established to monitor participants bidding behaviour to ensure compliances with the market rules. The Irish SEM had a Capacity Remuneration Mechanism (CRM). In 2017 the offered best new entrant price was set at €70.99/kWyr.
This has since been replaced by auctioned Reliability Options, (ROs). An RO is a one-sided transaction in which the holder pays back any excess of the market price over the strike price. This is to ensure that the market price signals the correct scarcity price while trading across borders. It is the system operator that sets an Administered Scarcity Price and limited to the Pan-European Hybrid Electricity Market Integration Algorithm (EUPHEMIA) price cap to ensure efficient scarcity pricing over I-SEM’s interconnectors. The reliability options are a better alternative to capacity payments, “as they address missing money problems, hedge high and uncertain prices for generators and consumers while ensuring that the wholesale market and international trade clear at efficient prices” (Newbery, 2016b).
The first Irish RO auction had cleared at €41.8/kWyr on 15th December 2017, it should be noted that several stations received higher prices to meet transmission constraints. The previous “CRM paid out €70.99/kWyr on 7,267 MW. This resulted in a CRM fund of €515.9 million” (SEM (ACPS), 2017) to be distributed over all existing, eligible generation. while the new RO auction estimated payment will be circa €379 million, which will be a saving of €137 million per year. It is worth noting that the (SEM) of the “Republic of Ireland and Northern Ireland had one of the highest penetrations of wind power supplying electricity demand in Europe in 2013”. (International EnergyAgency,2014). The SEM of the Island of Ireland currently has an “agreement to counter trade on the interconnectors with the system operator of the British Electricity Trading and Transmission Arrangement(BETTA) market “(EirGrid, 2013a).
2.2 International Single Electricity Market(I-SEM)
Moving on from the initial introduction of the SEM of Ireland, there has been a vast amount of developments in generation. With now a more generation from renewable sources across the Island. The landscape of the electricity markets has undergone significant developments, this is partly due to the advantage and opportunities from the coupling of energy markets across Europe and shared ways of trading electricity. With the improved interconnection between member states and regions, this has led to markets utilising these new linkages. This has enabled the SEM to be replaced by the I-SEM which will start in 2018. The new all-island Integrated Single Electricity Market (I-SEM) comes into operation on 1st October 2018.
There are key differences between the SEM and I-SEM market designs can be seen in the figure 1 below.
Figure 1: Key differences between the SEM and I-SEM (SEM, 2018)
The I-SEM market major attraction is the flexibility that it offers the participants different ways to trade in the market throughout different time periods to meet their requirements and benefit from the incentives in place. With the introduction of I-SEM it introduced markets which allowed participants to spread the risk of their financial commitments by ensuring their contractual investments could be offset or spread. This included the contracts between the generators and suppliers. In some instances, there could be interconnection capacity issues, in some circumstances a financial transmission rights will be included in contracts. This for those who wish to protect themselves from price differences due to when interconnection capacity between the countries or markets is insufficient to harmonize the prices between the markets.
As per Picture 3 below the planned Cross-border Interconnectors will have a significant impact as several European Markets will be interconnected to provide Energy Security and reduce costs.
Picture 2: International Energy Market showing cross-border Interconnectors (European Commission, 2016)
With I-SEM trading, the participants can submit bids in before the delivery of the power. While the day ahead market (DAM) allows for early submitted bids, there is also capacity to accept submitted bids from 19 days out up to a day before trading. Interestingly the price of each one hour of the trading day is determined from the bids of market participants This is managed by an algorithm, called EUPHEMIA. The EUPHEMIA is utilised to set the market price and is also responsible for the best way of distributing the power available. There is also an intra-day market (IDM) which allows market participants to switch their bids closer to the time on which the power is delivered. The intra-day market is available up to one hour before trading.
As per Picture 4 below provides the time frames of the different energy markets in I-SEM, there is a balancing market, two financial markets and a capacity market. Each of the markets are run independent of each other and to distinct timelines.
Picture 3: Market Time Frames (EirGrid, 2016)
Within ISEM the balancing market ensures that energy supply equals energy demand. In the balancing markets only generators can submit bids, which means that suppliers acquire the price that is fixed. Due to this the TSOs will decide how demand is met by calling on generators to deliver energy as needed. These actions are necessary to balance the supply and demand to guarantee sufficient power where required. The Capacity market replaced the previous Capacity Payments Mechanism from the SEM. The aim of the capacity market is to provide a means of generators recovering the fixed costs of power stations. This market will stipulate that there is enough capacity to reliably meet demand and that this capacity is purchased in a cheaper way than under SEM. In this arrangement those whom provide capacity will only be paid if their bid is successful at a capacity auction. With the overall costs of these capacity payments to be disseminated among suppliers. A financial penalty could be imposed on generators that do not deliver capacity when required. It had been seen that “short run marginal cost bids with a capacity payment were shown to reduce wholesale prices significantly relative to average cost bidding or medium run cost bidding” (FitzGerald et al., 2005, p.73).
Renewable energy began to surge at a greater rate with the advent of feed-in-tariffs for the small sources and long-term contracts for the large participants. Electricity demand began to fall and by 2015 the carbon price support drove wind generation to become a viable option to coal or oil. Furthermore, with the Irish Government is phasing out peat and coal-fired generation, plus with the current carbon, gas and coal price trends, it is tightening the emissions standards. This focus is also influenced by the Kyoto Protocol and the United Nations Climate Change Conference (COP21) to reduce emissions and greenhouse gases and maintain global temperature. In the short-term, that leaves gas as the flexible dispatchable fuel to manage renewables intermittency. Over the next few years, changes to subsidy payments for Wind Power generation and the new EU energy target model could have significant impacts on renewable energy.
The impact of ISEM and the market restructuring has numerous potential outcome variables. The price of electricity is an obvious variable, as this was the major motive for market reform at the EU level to lower costs and improve the competitiveness of European industry. For ISEM cost-effective new investment is required to demonstrate suitability. From the literature reviewed capacity auctions work when regulated network tariffs are correctly set. The transmission pricing policy has adapted to the prerequisite to provide better signals for the decentralized smaller generating units that can connect on demand but need good price guidance to locate in the right place. This will minimise market distortion and leads to incentives demand responses. With the introduction of the new RO from the previous mechanism, this should lead directly to more stable mechanism and reduced costs to the end users. It is also evident that the competitive auctions have proven their worth in reducing costs and prices for both renewables and firm capacity. There is a need for, and acceptance of a credible and stable policies which encourage development and deployment which support collaboration and learnings between countries to continue cost reductions for some technologies. Thus far the regulatory journey is far from over. As fixed-price contracts for renewables had been effective in financing and technology reduction costs. This had nevertheless, created some undesired impacts on the wholesale market, and lack any enticement to site renewables efficiently regarding either place or generation timing, and hence the systems costs created. This will be inconsequential when the capacities are small; but it will be far more relevant over the next decade, with more renewables being rolled out.
These additional renewable generators will progressively serve to generate power when it is least required. This may lead to a conflict with other contracted sources as declining costs will be increasingly offset by rising system costs. Similarly, the early glitches within the Capacity Mechanism have been addressed, although further improvements on demand side could be possible envisaged. With the small renewables feed-in-tariffs, along with the combination of the Capacity Mechanism and the benefits provided, this well may have caused a distortion which possibly unwittingly helped to launch a revolution in distributed energy resources. “The optimised scheduling and counter-trading of interconnectors will be vital to the delivery of wind power. In addition, there is uncertainty about how prices will be set in the I-SEM, yet untested, and once the new I-SEM market has bedded down auction prices may fall. Overall the SEM has been judged to working efficiently” (O’Mahony and Denny,2013).
The equilibrium between the state and private sectors is being reassessed and zero and low-carbon generation may perhaps benefit from further changes and investment along with European and National Funding The early evidence suggests that EU Electricity Market Reform has been a major step forward, but a considerable journey remains ahead.