Happy Birthday I-SEM – Part 2

In Tuesday’s blog, we celebrated the birthday of I-SEM by taking a look at the 365 days (or 8,760 hours, or 17,520 half hours, or 105,120 5-minute periods) of prices experienced in the electricity industry. In this blog, we take a look at how the new I-SEM market has performed compared with the well-matured market in GB. We also take a look at how much has changed since SEM by comparing the final year of SEM prices with the new I-SEM prices.

I-SEM Prices vs GB Prices

BETTA (the GB electricity market) has been trading energy using Day-Ahead, Intra-Day and Balancing Markets since 2005. Although it has gone through some Balancing & Settlement Code changes, it is still quite a mature market with pretty consistent and stable energy prices.

In the graph below, we illustrate the distribution of Day-Ahead and Imbalance Prices in I-SEM and GB over the past year (October 2018 to September 2019). GB Prices have been converted to €/MWh using historic daily FX rates sourced from APX.

Average GB Day-Ahead prices were €55.00/MWh which is €1.84/MWh less than average Irish Day-Ahead prices (€56.84/MWh). Average Imbalance prices in GB were €53.87/MWh, which is €0.53/MWh higher than Irish Imbalance prices (€53.34/MWh). The price spread (Day-Ahead – Imbalance price) in GB is €1.11/MWh (or £1.01/MWh equivalent) compared to €3.73/MWh in I-SEM.

In terms of volatility, the GB market produced more stable prices than the Irish market with standard deviations of €16.63/MWh in Day-Ahead and €27.52/MWh in Imbalance, compared to the Irish equivalents of €26.71/MWh and €68.91/MWh. To be fair though, the GB market is far more mature than the I-SEM market, with much larger fleet of baseload units and a smaller proportion of variable generation so you’d expect this to be the case. But hey, although our prices are more volatile, at least we didn’t have a black out!

It’s no surprise that I-SEM market participants were exposed to large volatility and unknowns in the opening months of I-SEM (it probably didn’t help that it started on the first day of the week, first day of a quarter, and first day of Winter!), however things have settled down quite substantially as shown in the results of the first 6 months versus second 6 months of I-SEM in part 1 of this series. Therefore, the above comparison with GB may actually no longer be a true reflection of market differences.

How about if we look at the last 6 months of I-SEM and GB prices? There are much more similarities between I-SEM and GB if you look at the distribution below. Although the tails of Irish price distributions are still larger than GB price distributions, it has become more closely aligned in the last 6 months.

I-SEM Prices vs SEM Prices

Naturally you’d expect a new market to present some level of variability compared to an old, well-settled market such as SEM. Actually, we’ve found there hasn’t been much difference at all! In fact, average Day-Ahead prices in I-SEM were lower than average SMP prices in the previous year by €1.70/MWh. The table below shows the average, minimum and maximum prices as well as the standard deviation over the last three Oct-Sep periods. If anything, the first year of I-SEM looks a little like the status quo for price movements. It has the highest standard deviation, but not by much. All in all, there doesn’t seem to be much difference between baseload prices in I-SEM compared to the old SEM world.

Another observation worth pointing out is that although this last year has produced similar prices as the final SEM year (2017/18), why are they so alike if underlying gas prices have fallen so significantly? We’ve stacked up the building blocks of electricity prices below using the Clean Spark Spread formula:

Where Gas is NBP prices (p/th) converted to €/MWh; ER is the Efficiency Rate of a typical Gas CCGT (which we assume to be 49%); and CO₂ is assumed to be the December EUA futures price in €/tonne converted to €/MWh using a carbon emission intensity factor of 0.375.

Looking at the graph below, all things remaining equal, the electricity price should have reduced in the last 12 months versus the previous 12 months based on the changes to gas and carbon prices. While electricity prices have reduced, they did not decrease at the same rate that gas fell (even if you take the rising carbon prices into account), so why might this be true? For one, generator bids in the Day-Ahead market are no longer restricted to the rules of the Bidding Code of Practice, so could this be a re-adjustment to the clean spark spread values? The clean spark spread seen in this year’s prices is very similar to spark spreads seen in 2016/17 of approximately €5/MWh, so perhaps this is simply the status quo. In any outcome, it’s probably too early to make any hard conclusions about the I-SEM market fundamentals, so maybe best to wait at least until its second birthday before doing anything.

Here at ElectroRoute, we offer products to clients that remove the risks of these price spikes and large standard deviations.

If you find this series interesting and would like to find out more about what we offer at ElectroRoute, please get in touch anytime with our Client Services team at clientservices@electroroute.com.