As the first month of the post Brexit trading arrangements has come to an end, it is time to look back and see how I-SEM has been affected.

What happened?

On January 1st at the end of the Brexit Transition period the GB market decoupled from the European Internal Energy Market (IEM). The lead up to this has been covered in a previous blog here. (https://electroroute.com/interconnecting-the-dots-on-future-brexit-arrangements/).

The channel interconnectors IFA (2,000 MW), IFA2 (1,000 MW), BritNed (1,000 MW) and NemoLink (1,000 MW) now have their capacity allocated via explicit daily auctions rather than the implicit auctions that are used as part of the Euphemia Price coupling mechanism. As Ireland was connected to Europe through our interconnection with GB we also decoupled from the IEM. Ireland and GB moved to local day ahead power auctions with the full capacity of Moyle (500 MW) and EWIC (500 MW) available to be allocated implicitly in the SEM-GB coupled auctions IDA1 and IDA2.

How did the GB and I-SEM Markets react to all this change?

January has been overshadowed by periods of low generating margins in GB and Ireland and the high prices that followed these. The imbalance price in GB reached £4,000/MWh on Friday 8th of January. The I-SEM imbalance price reached a high of €1,720/MWh for two periods on Tuesday 12th of January.

Were these high prices a result of the change to the markets? Or would they have happened anyway?

January saw high demand in GB due to colder temperatures, unavailability of some gas and nuclear plants and low renewable output due to the calm weather. This, along with the reduction in coal generation over the last number of years in the UK led to very tight generation margins and market notices, such as the below, being published.

If generation margins on the Irish system are tight during these times and if the interconnectors are due to export over the evening peak, then EirGrid may be required to reduce or even reverse the flows of the interconnectors. This will come at high cost through a series of SO-SO trades with National Grid.  So, the high imbalance prices are not necessarily a result of the new trading arrangements. The auction prices are a different story…

While the new arrangements do not guarantee higher auction prices, they have led to a greater price divergence between the UK day ahead market and the Continental markets.

BritNed has been on an outage and is not due back until early February. IFA2 (1,000 MW) was only commissioned on 24th of January. So that left only Nemo Link and IFA flowing power into GB for most of the month. With low generating margins forecast over hours of peak demand, this was only going to send GB day ahead prices one way, upwards! As Ireland experiences similar weather conditions to GB and had a number of significant outages over the month I-SEM Day ahead prices also followed suit. But what about the intraday auctions… In December we posed some questions on how the I-SEM market, particularly the intraday auctions, would be affected. These are addressed below.

Have intraday traded volumes increased?

The below chart shows the IDA1 and IDA2 average traded volume per month since January 2020 as well as the average baseload auction price for each month. There is a clear step change in volumes traded in IDA1 since the start of January. IDA2 has not seen as significant an increase in volumes. This is likely because the buying demand was coming from GB and all the room on the interconnectors was taken up in IDA1. The increase in the baseload prices is due to an increase in gas prices and GB buyers willing to pay a premium to the I-SEM Day ahead price.

Has the volatility between I-SEM DA and IDA1 increased?

The below chart shows the spread between DA and IDA1 prices for the hours of peak demand (17:00-19:00) for each day of November, December, and January. Greater than zero means that the IDA1 price cleared higher than the DA price.

The volatility has increased significantly on tight margin days due to the magnitude of the GB day ahead price and GB balancing prices. On days where generating margins are not an issue the volatility is not as high. More data will be required to see whether this relationship holds over the long term.

Will there be enough GB participants willing to trade in IDA1 and IDA2?

So far it seems as though there are enough GB participants willing to trade in IDA1 as GB traders look to take advantage of lower prices compared to the GB day ahead price. The issue may be that there could be too many I-SEM sellers in IDA1 and IDA2 under certain conditions.

Taking January 15th for example, wind was forecast to ramp up in Ireland across the day, while the wind in GB was forecast to remain low. The GB Day Ahead price cleared at an eye watering £1253/MWh for the peak hour, while the I-SEM Day Ahead price cleared at €130.97/MWh on the peak. I-SEM traders looked to IDA1 as an opportunity to sell at a better price. As the chart below shows, this worked out for the day off peak hours, but it backfired over the evening peak with IDA1 prices dropping relative to DA as too many sellers tried to clear their volume.

Conclusion

Tight winter margins are here to stay particularly during periods of cold weather, plant outages, and low renewable generation. The unavailability of the interconnectors in the day ahead auctions in GB and I-SEM will continue to affect Day Ahead prices particularly on low margin days. This will also increase the volatility between Day Ahead and IDA1 prices. However, if too many participants try to take advantage of this it will likely work against them as there is only so much room on the Irish Sea interconnectors.

If the GB and I-SEM markets had remained in the Internal Energy Market this would have provided downwards pressure on the GB Day Ahead prices in January and less volume being traded in IDA1 along with less volatility. The interconnectors going explicit has been good for dispatchable generators but will cause some pain for suppliers due to higher power prices. More data will be required to fully assess the impact of the post-Brexit trading arrangements over the long term.

For intermittent generators who also have to worry about forecast errors these price spreads on tight days can cause a headache. Some form of price coupling is due in April 2022 [1]. However, the timeline for getting this done seems ambitious.

Please contact our Client Services team if you would like to explore the trading services ElectroRoute can offer to allow you to mitigate the risks or maximise the opportunity of these new market conditions.

[1] https://ec.europa.eu/info/sites/info/files/draft_eu-uk_trade_and_cooperation_agreement.pdf

The post Life after Brexit appeared first on ElectroRoute.

On 1^st January 2021, the Brexit transition period will end and the UK will irrevocably cut any last remaining ties to the EU and head out to forge its own future, with or without a trade agreement in place. Many energy market participants may feel understandably uncertain about what this landmark political milestone will mean for their day-to-day business, particularly with the possibility of a last-minute deal still on the table. In this Insight, we pull together the various decisions and alternative arrangements that will come into effect from the start of 2021 to provide a clearer picture of what the energy market will look like.

Too late in the day (ahead)

The consensus from the various market operators is that even if there is an agreement made before the end of 2020, it is too late to update systems and implement the new deal before the transition period ends, except in the case that the EU agree to let GB participate in the energy markets exactly as they do now. Consequently, the GB zone will be decoupled from the European Internal Energy Market in January.

In practice, this means that the interconnectors serving GB will cease to use the Harmonised Allocation Rules and no longer be part of the Single Day Ahead Coupling [1]. In order for these interconnectors to still serve a purpose, alternative arrangements have been put in place.

Fig. 1. The expected market arrangements after the Brexit transition period (Taken from [1])

The Channel interconnectors (IFA, BritNed and NEMO) will now have capacity allocated via explicit capacity auctions [1] and will create a new set of Allocation Rules. Market participants successful in acquiring capacity in these auctions will be required to nominate that capacity or they will forfeit the right to use it, similar to the process that was previously ongoing in SEM through the Long Term and Intraday allocation timeframes. Another interconnector, IFA2, is currently commissioning and will be available for trading in the near future.

The Irish Sea interconnectors (Moyle and EWIC) will not be available in the SEM day-ahead market – effectively leaving the Irish market decoupled from Europe at this point. They will however be available in the Intraday 1 & 2 auctions, which will still couple the GB and Irish markets and allocate capacity on the two interconnectors implicitly [1]. All FTRs sold on the interconnectors will be reimbursed on the initial price paid for them, in accordance with Article 27 of the EU Guideline on Forward Capacity Allocation [2]. SEMO has indicated that no transmission rights products will be sold in the short-term until a new product offering is known [3].

Will the SEM markets Remain strong?

How the SEM markets change depends a lot on how market participants react to the new arrangements. The current expectation is that the magnitude and volatility of day-ahead prices will increase, and that there will be more liquidity in the intraday markets as they become the only markets in which Irish participants can exchange power with Britain. However, this assumes that British participants are as willing to trade in the comparatively smaller Irish market as their Irish counterparts. Equally, Irish participants might want to avoid uncertainty at intraday (which has seen much lower traded volumes than day-ahead since the beginning of ISEM) and may continue to trade primarily at day-ahead to secure their positions.

Not what we’re a-Customs-ed too

The lack of a trade agreement would also mean that declarations will need to be made on the import/export of goods between Ireland and GB. Westminster have stated that goods travelling from Northern Ireland to GB will not require declarations, but the EU insists that any goods imported to Ireland north or south and continental Europe will. In the case of power and gas flows, declarations will be made on behalf of market participants by the interconnector or pipeline operator [3], [5].

Better get EUsed to it

The new arrangements are likely to cause some disruption come January as participants find their feet in the new world, and this confusion combined with tight generating margin this winter [5] could lead to some unexpected market outcomes. In the long-run, inefficient interconnector flows will likely lead to larger wind curtailment levels during periods of high wind when Ireland would usually export, and more expensive wholesale electricity prices during traditional import periods as higher priced conventional power is called on in place of imports from GB, both of which could increase Ireland’s greenhouse gas emissions and make it more difficult to meet our 2030 targets.

A key consideration is that unless a last-minute deal allows GB to participate in the European energy markets exactly as it does now, these measures will come into effect in January 2021 – at best temporarily, until new arrangements struck under a deal can be implemented, or at worst permanently. Preparing now to manage these new risks and becoming familiar with the market changes will help your business make the transition to a post-Brexit world as seamless as possible.

Please contact our Client Services team at clientservices@electroroute.com if you would like to explore the hedging, trading, forecasting and balancing services that ElectroRoute can offer to manage new risks your business may face as a result of Brexit.

References:

[1] EPEX SPOT info, EPEX, 16^th October 2020

[2] COMMISSION REGULATION (EU) 2016/1719: Establishing a guideline on forward capacity allocation, 26^th September 2016

[3] Energy EU Exit Stakeholder Event, Department for the Economy, 11^th September 2020

[4] Nordpool announces GB Auction changes for Brexit, Nordpool, 19^th Oct 2020

[5] Market Operator User Group, SEMO, 8^th October 2020

The post (Inter)connecting the dots on future Brexit arrangements appeared first on ElectroRoute.

Whilst most official Brexit-related activity has been quiet for a while now – perhaps everybody is watching the spectacle of the Conservative Party leadership contest – a few things have been published in the last 24 hours:

1. The Irish Government published its updated Brexit Contingency Action Plan. Section 25 of the document deals with energy. Not much is too new, but we did notice:

• A statement about interconnectors stopping flowing entirely, a thought that has never really been seriously entertained in public (to our knowledge): “emergency plans are in place to minimise supply disruption in Ireland in the event that the gas and electricity interconnectors cease flowing, although such a scenario is not anticipated”;
• The linking of the proposed Celtic Interconnector – lest we didn’t realise already – to Brexit, and the beginning of the heavy sell on that basis;
• As noted in a previous blog post the Omnibus Act seems to have been phrased heavily around altering licences in order to possibly relieve licence holders of their obligations to implement SEM, and instead prioritise any EU law obligations. The revised contingency plan has the following to say:

“Cognisant of Ireland’s ongoing obligationsas an EU Member State, discussions on the technical, operational and legal aspects of the SEM are ongoing between DCCAE and the Northern Ireland and the UK authorities, and between the relevant regulators and system operators.”

…it is unclear what this really means.

2. Secondly the Utility Regulator last night published its Call for Evidence relating to the governance of SONI. The Utility Regulator is pondering whether to require that SONI has an independent board, more independent directors, proper arm’s-length cost allocation, charging and SLAs with EirGrid, and so on.

There are signs of tension:

“while within a single system there may be limited scope to benefit any one set of stakeholders at the expense of any other, any more than is the case through general government policy, in the case of Eirgrid’s acquisition of SONI the state represents only some of the stakeholders that can be affected by TSO decisions and actions. In such circumstances, it would be understandable if group policies and the design of practices were influenced by the priorities in the one jurisdiction more than the priorities in the other.”

“In particular, as the energy transition gathers momentum, Eirgrid ownership of SONI, and in turn ownership of Eirgrid by the Irish government, could arguably have the potential to frustrate government policy in NI in the absence of robust independence arrangements.”

…clearly something to watch.

The post A Couple of Brexit Snippets appeared first on ElectroRoute.

Last night the House of Commons once more rejected the proposed Brexit Withdrawal Agreement, even with accompanying Legal Opinions, Joint Declarations and Unilateral Declarations. Later on today the UK parliament will vote on whether “No Deal” Brexit should be positively embraced, a prospect which seems destined to fall similarly short of a majority. “No Deal” doesn’t need to be positively embraced, however, to occur. All that needs to happen is a lack of a positive parliamentary-majority-galvanising alternative.

The attitude within the electricity industry on the island of Ireland to “No Deal” has largely been that it doesn’t bear thinking about, but from the position we are in this morning that is obviously not sustainable for much longer (but let’s wait for a few more votes, hey…).

In this post we will examine what we know about the Single Electricity Market in a “No Deal” scenario.

Governments, regulators and system operators have generally been tight-lipped on that topic, but the first public material has begun to appear, particularly after the SEM Committee Senior Stakeholder Forum on 18 February. The regulators have posted slides and notes as follows:

CRU, 5 March:

• Group Notice to Industry on Disorderly Brexit
• CRU19022; Notice to Industry on Disorderly Brexit
• CRU19023; Eirgrid presentation Brexit Senior Stakeholder Forum

Utility Regulator, 11 March:

• Electricity and Gas trading arrangements in the event of a ‘no deal’ Brexit
• Brexit Update

The coordinated wording used by the regulators states that, “In the event of a ‘no deal’ Brexit, [the Day Ahead Market] will almost certainly be less efficient than today as Great Britain will no longer be part of the pan-EU market and the SEM will become an isolated market.”

Rodney Doyle’s presentation, provided by the regulators above, similarly explains: “The market will continue as it is today but the day ahead market will no longer be a cross border market.”

And whilst the first quote only talks about GB/SEM borders, the second covers the border within SEM.

Why is this? Well the European Commission considers the Internal Energy Market to be part of the Single Market, which should not be available on a sectoral basis. In recent months one continental TSO did raise the possibility of continuing to couple with GB, only to be told by the Commission that it was out of the question.

The Commission published a notice to stakeholders in April 2018 which contained the following statement:

“United Kingdom based operators will cease to participate in […] single day-ahead and intraday coupling. United Kingdom based NEMOs will become third country operators and will no longer be entitled to carry out market coupling services in the EU.”

The basis for the Commission’s statement that market coupling would no longer be available to the UK has never really been elaborated on – much of coupling is after all based on contractual arrangements between Transmission System Operators, interconnector operators, power exchanges, and so on, rather than EU legislation. Indeed much of the coupling pre-dates the regulations cited by the Commission, but this is perhaps academic because the UK has never challenged the interpretation.

Indeed in Great Britain there has been wholesale rewriting of the retained EU legislation to remove references to the codes, guidelines and regulations that govern the IEM. On the English Channel borders the interconnector operators are preparing for “No Deal” contingencies with new interconnector rules stripped of EU references.

Interestingly this is NOT the case (for the most part) in relation to Northern Ireland. References to EU law haven’t been totally removed, and SONI for instance appears to have EU-derived obligations that mirror its current ones. Similarly the definition of the Single Electricity Market in the NI legislation still points to Regulation (EC) 714/2009.

BEIS (who is driving this area in the absence of NI political functioning) has stated that this is “due to a practical need for the definitions of the SEM in Ireland’s and Northern Ireland’s legislation to continue to align”. Claire Perry similarly commented that, “In a no-deal scenario, EU regulations will oblige EirGrid, Ireland’s system operator, to endeavour to conclude a co-operation agreement with SONI because of the unique shared nature of the single electricity market. For Northern Ireland only, we are therefore retaining a similar requirement for SONI to ensure co-operation with EirGrid south of the border.”

Perry went on to say that whilst the legislation introduced in recent weeks would not provide insurance against all the risks that we would run in a no-deal exit that would “undermine the legal basis of the single electricity market”, they would “facilitate the necessary steps to ensure that such a situation is not prolonged.”

Are we comforted?

Finally, the talk of SEM being booted out of the market-coupling “Euphemia” algorithm on “Exit Day” perhaps isn’t strictly true. It would be very difficult to remove Great Britain and SEM from Euphemia at 23:00 on 29 March, so it is likely that GB and SEM “Available Transfer Capacities” will instead be set to zero until a future release is tested. Of course that will have a very similar effect…

The post Thinking the Unthinkable appeared first on ElectroRoute.

Brexit Decision Time

This is a crunch week in the Brexit saga we assume – although many other such weeks have been and gone with the can kicked a little further down the road. Tomorrow the House of Commons will vote on a motion relating to section 13(1)(b) of the European Union (Withdrawal) Act 2018 asking whether the Prime Minister’s deal should be approved, and should it not be approved MPs have been promised a vote on a “No Deal” exit or alternatively a delay to Brexit.

Last week the five remaining pieces of secondary legislation relating to Brexit and energy were passed by the UK parliament. On the other side of the Irish sea the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019 was passed by Dáil Éireann on 6 March, and now moves onto the next stage. Part 4 of the Bill relates to electricity licences in the case of a “No Deal” Brexit, and alters the Electricity Regulation Act 1999 to grant the CRU powers to amend licences – one presumes the System Operator licence and generator licences being the particular targets.

The newly inserted amending power is phrased as being only in order to enable the State to comply with the various EU energy market rules. Note that it is NOT phrased as the power to alter licences to permit the SEM to continue in its current form – indeed Brian Stanley’s (SF, Laois) amendment requiring the SEM Committee to “[ensure] regulatory alignment” and “aim to maintain the single electricity market” was resisted by the Irish government on technical grounds, but also because the whole point of Part 4, reading between the lines, is to enable licencees to lawfully NOT implement the current SEM, which otherwise they would have to.

So what is it all about? Well firstly Richard Bruton talked about a desire to mitigate against any “unexpected, sudden events disrupt[ing] the market”. This is maybe generators or others attempting to exploit any newfound market power as a result of Brexit. In addition in a “No Deal” scenario Ireland will presumably be expecting a lot of support from Brussels and the EU27, so will have to be the best boys in class in terms of EU rules implementation. Finally, as Eamonn Ryan and others noted during debates on the Bill, there is a belief among policy makers that Northern Ireland is due a capacity squeeze, and that Ireland is therefore in a strong position to use the SEM as leverage.

All of the above may or may not be academic if the House of Commons chooses to back the Withdrawal Agreement, or extend Article 50, which we should hopefully have a better idea about by tomorrow night.

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