Alan Bissett of John McKee Solicitors considers the implications of recent developments in the electricity sector including I-SEM implementation and market reform.
After various delays, the Integrated Single Electricity Market (I-SEM) finally went live on 1 October 2018. This involved a transition from the mandatory pool structure to a bilateral trading mechanism based on the EU target model. In addition to the introduction of day-ahead, intraday and forward markets, I-SEM will also see payment for capacity only being made to successful bidders in an auction process.
The I-SEM is intended to deliver a range of benefits and the Utility Regulator has an expectation that it will deliver increased levels of competition and assist in putting a downward pressure on prices. It is key from the Utility Regulator’s point of view that this should then go some way to address the higher electricity prices that consumers in Northern Ireland have faced for a number of years when compared to the rest of the UK.
Aside from the delays caused by issues with the IT systems associated with the project, the Regulatory Authorities in both jurisdictions have taken what could be viewed as a number of controversial steps for the purpose of ensuring go-live of I-SEM on 1 October 2018. These include pushing ahead in spite of an Appeal Panel decision in the Republic of Ireland that was critical of the manner in which I-SEM had been implemented.
The Appeal Panel case was brought by Viridian in relation to Huntstown Power Station in Dublin. For the purpose of implementing I-SEM, the Regulatory Authorities had made a decision to amend the licences of electricity suppliers and generators to bind those market participants to comply with a new Balancing Market Principles Code of Practice and a new Capacity Market Code. Although the appeal was brought on a number of grounds concerning the effect of the licence modifications on the two Viridian licence holders associated with Huntstown, the grounds of the challenge primarily focused on issues associated with cost-reflective bidding in the balancing market and the effect of the Capacity Market Code.
One of the two generating units at Huntstown had been unsuccessful in the first capacity auction and Viridian had announced its intention to close both units at Huntstown upon I-SEM implementation. This was on the basis that the power station would be operating at a loss beyond that date and it would be rendered unfinanceable. However, the Regulatory Authority in the Republic of Ireland (the CRU) had refused to grant Viridian a derogation from the provision of the Grid Code that requires a generator to give a period of three years’ notice to close a generating unit.
The Appeal Panel decided that the CRU had erred in seeking to enforce its decision to modify the licences that related to Huntstown Power Station and that these licence modifications should not apply in the case of Viridian. The documents relating to the design of the I-SEM had referenced the inclusion of a Targeted Contracting Mechanism (TCM) to deal with the interim phase where capacity auctions were being stepped up to four-year ahead auctions by way of initial one-year ahead auctions. The TCM was intended to enable financial or other arrangements to be put in place to assist a generator that had received an early exit signal from the results of a capacity auction in the interim phase but which did not then receive a derogation from the three years’ notice period for closure. However, the Appeal Panel noted that the CRU was seeking to implement the I-SEM without the TCM being in place that would enable Viridian to manage its exit from the market. The evocative language of the Appeal Panel decision noted that the CRU had “effectively turned up the heat and locked the door of the kitchen”.
“We are continuing to see a worrying trend whereby the Regulatory Authorities are moving market participants’ obligations from licences to market codes that the Regulatory Authorities can amend unilaterally.”
In a further concerning signal for market participants as to how the Regulatory Authorities intend to deal with challenges, the matter did not rest there. On 13 August 2018, the SEM Committee issued an information paper stating that, as a consequence of the Appeal Panel decision, the licence condition requiring compliance with the new Balancing Market Principles Code of Practice would not be switched on in any generator’s licence as an interim measure. In addition, on 31 August 2018, the CRU filed papers in the High Court in Dublin to judicially review the Appeal Panel decision in relation to Viridian.
From a wider point of view, there are also further observations that can be made concerning the method of I-SEM implementation. These should be of interest to market participants as they seek to protect their positions.
As an initial point, we are continuing to see a worrying trend whereby the regulatory authorities are moving market participants’ obligations from licences to market codes that the Regulatory Authorities can amend unilaterally. When market participants’ obligations are changed in this manner, this effectively side-steps the statutory process for licence modifications which includes a right of appeal to the Competition and Markets Authority for those based in Northern Ireland and to an Appeal Panel for market participants based in the Republic of Ireland.
In addition, we have also seen the market redesign happening in incremental stages leaving market participants out of time to bring challenges to particular steps by way of judicial review when the full picture of their cumulative effect emerges. This time limit and the significant costs involved for a market participant in bringing a challenge by way of judicial review would also appear to bias matters in favour of the Regulatory Authorities.
Although it is clearly much too early to assess whether the I-SEM will deliver the expected benefits which include addressing the differential between electricity prices in Northern Ireland and the rest of the UK, an interesting perspective on this has recently been revealed concerning the first major reform of the electricity industry in 1992. Papers made available at the Public Record Office in Belfast under the 30/20 Year Rule show that the UK Treasury knew that the privatisation of the Northern Ireland electricity industry in 1992 would lead to consumers paying higher prices for electricity here. For the purposes of maximising the price that purchasers of the power stations would be prepared to pay, it was recognised by the Government at the time that provision would need to be made for electricity prices to rise for a number of years following privatisation and that this would lead to a widening gap.
When receiving advice on any energy matter, it is key that your lawyer has the full picture on all of the issues. Members of the energy team at John McKee Solicitors have been involved in all aspects of the development of the gas and electricity markets since electricity privatisation in 1992. If you require advice, please contact Alan Bissett or any other member of the energy team.
Alan Bissett, Partner
M: 075 0104 0717
T: 028 9023 2303