Electricity markets: where to?

MarkCoyne-12Mark Coyne outlines how the integration of European electricity markets will affect the SEM and costs for Irish consumers.

The world around us has seen some dramatic changes since November 2007 – banking, property, bailouts and sovereignty crisis come to mind, but one consistent across all that time has been the operation of the Single Electricity Market (SEM) across the island of Ireland.  All this is about to change.

In many ways the SEM was ahead of its time – it was the first electricity market to fully integrate across two jurisdictions and two currencies.  This is both an advantage in terms of stability over the last 5 years, but also an Achilles heel in that the European Commission (EC) is now acting to integrate regional electricity markets across Europe by 2014 in a way which is not consistent with the SEM – a case of first mover disadvantage.

This EC internal market for electricity prompted the electricity regulators North and South to issue a consultation paper in January 2012 on this subject, which closed on the 20 April 2012.  The objective of the EU policy is essentially to enable cross-border electricity trading arrangements. However, it is centred on the prevailing European market design of decentralised bilateral trading with self commitment (so-called ‘target model’).  The target model is significantly different from the SEM mandatory pool design with centralised dispatch – hence the two year derogation for the SEM to 2016.  That changes to the SEM must be made is a given; the choices are to take the evolutionary approach (by keeping what works well), or the revolutionary blank sheet approach.

Just to add to the complexity of these SEM changes, the UK (including Northern Ireland) is going through its own version of electricity market reforms.  The drivers here are different: a pending generation supply crunch post-2015 when the Large Combustion Plant Directive forces coal plant to close, coupled with a policy desire to replace that plant with low carbon generation.  The proposed mechanism is a Carbon Floor Price (CFP), which, at a starting price of £16/tonne CO2, is a multiple times the cost of CO2 under the EU emissions trading scheme.  If implemented, the CFP will have a significant unbalancing impact on generation in Northern Ireland, which would be uncompetitive with generation in the south which is within the same market – an undesirable outcome.

So, there is a lot to ponder for generators on the island of Ireland – but what about consumers. Is this something to be concerned about?  On the positive side, there is a fleet of state-of-the-art Combined Cycle Gas Turbines (CCGTs), which have been installed over the last decade. These have the characteristics of being natural gas consumers and highly efficient, the latter being categorically good for delivering low cost electricity to consumers, the former being volatile, but with potential.  Wind, at 15 per cent of demand, also acts as a natural hedge against high gas prices.  The island of Ireland has none of the generation adequacy concerns facing the UK either – the 2010 demand predicted in 2006 will not be reached until 2020 or beyond.

If the lack of base load generation is not a concern for consumers, one area that does require careful consideration in the revised SEM is in relation to supporting flexible generation plant in response to increased wind penetration.  In 2011, constraint payments under the SEM increased by €40 million compared to 2010, contributed to in no small way by the unavailability of Turlough Hill, the most significant flexible plant on the SEM.  This was paid for by you, the consumer.  Rewarding generators for providing this flexibility, as well as retaining the market signals for peaking plant to operate in the market, should be in the best interest of the consumer and should be retained and enhanced.

Dalkia-logoFor further details, contact:
Mark Coyne, Technical Director
Dalkia, 145 Lakeview Drive
Airside Business Park
Swords, Co. Dublin
Tel: +353 1 870 1200
Email:
info@dalkia.ie
Web: www.dalkia.ie

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