I-SEM – Experiences from the GB Market 12 Mar 2016

One of the best way to gain understanding and experience in the world is to travel abroad.  It’s the reason we send our kids on foreign exchange programs.  Driving on right hand side of the road for the first time or eating outdoors after 9pm are all good developmental experiences.  In a similar way experience abroad can tell us a lot about electricity markets and what we can expect when they change.

Energy market design is not quantum physics, but one moustachioed quantum physicists does offer some guidance through the often quoted one liner: “Everything should be made as simple as possible, but not simpler.” This is easily said but the regulators will have a difficult task in creating a design which considers our isolated island system, its high renewable penetration, thin market liquidity and dominant market power from incumbents, while still providing stable investment signals.  Oh and of course keeping it simple (but not too simple) along the way!  

The principles on which the I-SEM market will be designed are borrowed heavily from electricity markets operating in the heart of Europe.   Experiences from these markets can help to greatly demystify the type of markets that will be in situ in Ireland post 2017.  Looking abroad can not only help us understand possible downside scenarios but can also illuminate the upsides possible in this new market.

One particular resource which is available and should be used to the maximum extent possible is the market design and lessons learnt from our closest neighbour, Great Britain.  In late 2015 the GB market switched to a single imbalance price with the instigation of Mod P316, which is the same format which will be used to calculate imbalance cash out prices in the I-SEM balancing market.  And the I-SEM day ahead and intra-day markets are to be operated by one of the same power exchange operators currently active in GB.  The I-SEM balancing market, intraday market and day ahead market can therefore be modelled extremely closely on the GB market design, albeit with some modifications to the balancing market mechanism. 

Of course emulating the balancing, intra-day and day ahead markets in GB will not complete the entire I-SEM picture.  The GB market itself has substantially failed in providing liquidity in the future markets to new retailers and the regulators would do well to learn from the principles implemented in the German market in how to instigate liquidity and foster competition.  The market power of incumbents in both generation and retail will have to be dealt with comprehensively though a suite of measures including mandatory market maker status in the I-SEM futures market.

Thus far the Regulators in Ireland have done a good job in transposing the requirements of the EU target market model into a high level market design.  But it is at this point, the commencement of the detailed market rules, that going will get more difficult and the opportunity for the conflicting and diverse motivations of the stakeholder to become apparent.  But accepting that change is indeed coming and preparing ourselves by learning the lessons available in other European market will be key to success.  

The capacity market and DS3 system services elements of the new I-SEM landscape are opportunities not for Ireland to emulate other jurisdictions, but to lead the way in Europe in providing investment signals for the increasingly important non-energy parts of the market.  The fact that these elements of the market may provide multi-year price certainty for new investments is indeed a good decision.  If the detailed design of the mechanisms can be got right, Ireland may well lead in Europe in terms of developing the required set of system and capacity products to deal with the challenges of a modern power system with high renewable integration. 

In our next Insight, we look at the opportunities presented by DS3 for generators in Ireland.