Challenges for the SEM

Day-ahead price coupling is a key feature of the final draft Framework Guidelines on congestion management issued by ERGEG in February 2011.

The Framework Guidelines will inform binding network codes to be developed by ENTSO-E over the next two to three years

The network codes for day-ahead and intraday are expected to be developed first, with finalised versions scheduled to be issued by Q1 2012

The key challenge for the SEM is that our market design is fundamentally different from the approach used in the rest of North West Europe

 

2

The SEM market design is based on a ex-post gross mandatory pool with central commitment.◦ All electricity must be sold and bought through a

central electricity pool. ◦ There is no opportunities for bilateral physical

power transactions outside the pool ◦ Generators are required to submit bids which

reflect their short run marginal costs and are dispatched according to the merit of their offers.

3

Price Formation◦ System Marginal Price (SMP) based on a unconstrained

stack of available generation optimised over the trading day.

Gate Closure ◦ Set long in advance of real time to allow participants

time to plan based on indicative dispatch. Generator Offers include

◦ Commercial bids (PQ) pairs and start-up costs◦ And technical parameters such as minimum running

levels, ramp rates and minimum run times.◦ SRMC

Transmission Constraint Payments Explicit Capacity Payment Mechanism

4

Price Coupling;◦ Which means, simultaneous calculation of prices and volumes

across several markets by a ‘price coupler’ which operates at a trans-national level.

common gate closure times; comparable prices and bid formats; participation of buyers and sellers; Firm day-ahead trades (Price and Quantities). sharing of all bid data between power exchanges

5

Number of physical markets◦ SEM: Single Mandatory Pool based on Ex-post Price◦ NWE: Multiple forward and spot markets

Form of generation bids◦ SEM: commercial and technical bids (SRMC )◦ NWE: Simple and Block bids

Market scheduling and dispatch◦ SEM: Central scheduling by optimisation algorithm (TSO).◦ NWE: Self-scheduling based on contracted positions

Timing of gate closure◦ SEM: Currently day-ahead at 10am for data submissions only.◦ NWE: Intra-day gate closure within a few hours of real time

Composition of wholesale prices◦ SEM: Separate prices for energy and capacity◦ NEW: Prices reflect a single product with no explicit

separation of energy and capacity

6

Pöyry provided advice on the options for the development of a day-ahead trading solution for the SEM.

The SEM Committee asked for options for the day-ahead trading solution which:◦ allow a day-ahead coupling of the SEM and

neighbouring markets that is compatible with the requirements set out in the draft Framework Guidelines.

◦ not fundamentally alter the SEM rules.

7

Six conceptual options for a day-ahead trading were propose. They were derived from the answers to three key questions:◦ Should participation in the day-ahead market be mandatory or

voluntary?◦ What is the form of generation bids into the local day-ahead market? ◦ How are day-ahead volumes made firm?

8

The options were assessed according to TSC Objectives:

•Promotion of competition;•Efficient administration of the SEM•Efficient ex-post pricing•Opportunities for risk management•Size of constraint payments•Compliance with European developments

The role of price coupler should be played either by a new Irish power exchange or by some existing in the NEW region.

Given remit, the most plausible solution for the Irish day-ahead market would be a CfD market with settlement in the ex-post SMP.

Common bid format (Simple Vs. Complex)◦ Market Participants or the price coupler would have to convert the

Irish complex bids into simple bids. Comparable prices (Energy Only vs. Explicit Capacity)

(CfD?);◦ Market Participants or the price coupler would have to bundle energy

and capacity in a single energy only bid. firm day-ahead trades

◦ In order to keep market participants whole between the Day-Ahead and the SEM ex-post market, some sort compensation could be put in place to eliminate the volume risk between the two markets.

9

To a large extent, the SEM HLD reflects the particular challenges that a small, relatively isolated island system faces in maintaining a secure supply and mitigating market power.

Whilst the electricity markets in North West Europe differ from each other in detail, they have similar characteristics for these high-level features.

10