2. TRANSITION TO I-SEM
Agenda
2
All-Island ESB Generation Assets
I-SEM: Capacity Revenue Mechanism
I-SEM: Energy Trading Agreements
I-SEM: Forward Trading Agreements
Conclusions and Opportunities
Key Figures
All-Island Demand and Generation Capacity
I-SEM: Market Power
3. TRANSITION TO I-SEM
Key Figures
3
SMP and System Load – Typical Day Ahead
Single-zone pool for Republic of Ireland and Northern
Ireland
One daily peak on typical day around 6 pm
Average System Load around 4000 MW
Downwards trend of SMB and BETTA due to slow
economic recovery and deployment of renewables
Pricing arbitrage opportunties with UK market
Decreasing spark and dark spreads and
backwardation of fuel commodity price curves
Current all-island electricity demand around 36 TWh
High variability in future energy demand according to
economic outlook
SMP vs BETTA, Spark Spread, Dark Spread All-Island Forecast Energy Demand
0
1,000
2,000
3,000
4,000
5,000
6,000
0
20
40
60
80
100
SYSTEM LOAD SMP
€/MWh MW
0
10
20
30
40
50
60
70
Spark Spread Dark Spread SMP BETTA
€/MWh
34
38
42
46
50
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Middle High Low
€/TWh
Source: SEM-O Market Data
Source: OFGEM and SEM-O Market Data Source: All Island Generation Capacity Statement 2016
4. TRANSITION TO I-SEM
4
Dispatchable Generation Capacity
0 2,000 4,000 6,000 8,000 10,000 12,000
Gas
Coal
Oil
Peat
Waste
Net Import
Wind
Hydro
Other RES
Ireland
Northern Ireland
GW/h
Thermal generation covers about 70%
of the all-island demand, and 76% of all
electricity generated
Gas is the predominant fuel (~44%)
Wind is significantly increasing (~18%)
Net imports via the Moyle and East-
West interconnectors supply about 10%
Northern Ireland is heavily reliant on
imported electricity (~15%), with existing
bottlenecks along the North-South
interconnection with EIRE
Participation to the market is compulsory
for generation units ≥ 10MW, giving
space to PPAs and trading agreements
Gradual phasing-out of existing thermal
generation and spinning reserve
Aggregated Generating Units and
Demand Side Units cover up to 300MW
Second North-South interconnector to
be completed in 2019
8 new Interconnections with UK and
France at preliminary stage
0
2,000
4,000
6,000
8,000
10,000
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
East West Int.
EIRE Extra Planned
EIRE DSU
EIRE Hydro
EIRE Thermal
Moyle Int.
NI Thermal
Installed
MW
All-Island Demand and Generation Capacity
2015 All-Island Energy Demand
Source: All Island Generation Capacity Statement 2016
Source: All Island Generation Capacity Statement 2016
5. TRANSITION TO I-SEM
All-Island ESB Generation Assets
5
8.4%
6.3%
35.3%
18.8%
19.9%
5.1%
6.2%
Hydro
Hydro Pump
Gas / Distillate
Gas
Coal
Peat
Wind
ESB Dispatchable Assets: Category and Age
ESB is the market incumbent in Ireland, a vertically-integrated company whose activities cover electricity
generation, transmission, distribution, sales and international energy deployment
Overall generation capacity (Ireland and UK) in 2015 is 4,827MW, representing 4% of the market in the two isles
By 2025 assets will grow to 7,000MW, up to 7% of the UK and Irish market
Thermal generation is the majority of dispatchable assets in Ireland, while renewables are ~20%
Lifespan of thermal assets is generally below 20 years. In compliance with the Industrial Emissions Directive,
some ESB thermal plants (Aghada, Marina, North Wall) have been designated a ‘Limited Life-time Derogation’,
and will close some units by 2023, for a total of 547 MW
Wind makes up to 400MW of the generation portfolio in Ireland
According to the 2015 Annual Report, ESB identifies Regulatory Outcomes, Disruptive Markets/Technology
and Competitive Intensity as the greater concerns for risk management, according to the two parameters of
Likelihood and Impact
0 200 400 600 800 1000
<10 years
10-20 years
21-50 years
>50 years
Peat
Coal / Oil
Gas / Distillate
Gas
Installed MW
Source: www.esb.ie and All Island Generation Capacity Statement 2016
6. TRANSITION TO I-SEM
I-SEM: Capacity Revenue Mechanism
6
Risk Elements
In former SEM, a pot of money is available to generators to cover the Capacity Payment Mechanism based on the fixed
costs of the generating plant. This money is annually distributed to all generators based on a set calculation
Transition to Capacity Revenue Mechanism to remunerate generators when available and ready to supply electricity to the
grid when necessary
Reliability Options scheme, where a seller receives an upfront payment in exchange for the guarantee of supply and for
hedging the customers above a certain strike price. Penalty to be paid for unavailability during system stress. Socialisation of
shortfalls in difference payments across suppliers
Strike price to be determined taking into consideration commodities and carbon prices
Length of options to be discussed (depending on new or existing capacity)
Introduction of a competitive auctioning (transitional, T-1 and T-4) process to allocate options. Three auctioning options are
currently under appraisal. Efforts and key metrics to avoid market concentration and collusion.
First CRM auction date scheduled for June 2017
High Risk
Low Risk
Strike Price
Reliability
Option
Auctioning
Socialisation
of Costs
New /
Existing
Capacity
o Strike Price – Limited Risk. Calculation formulas will be discussed
with all involved stakeholders; big generators such as ESB already
hedge their commodity purchases
o Reliability Option Auctioning – Moderate. ESB is deemed a
pivotal supplier by Regulators when trying to limit potential bidding
abuse. As the principal price maker on I-SEM, the new regulation
may constitute an issue
o New and Existing Capacity – Low. ESB shall be able to modulate
the phasing-out of old plants and commissioning of new capacity,
specifically wind power
o Socialization of RO shortfalls – Potentially High. Not clear how
the mechanism will be implemented. Given the status of market
incumbent of ESB, these costs may be relevant
7. TRANSITION TO I-SEM
I-SEM: Energy Trading Agreements
7
0
2,000
4,000
6,000
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
NI Wind NI Hydro
NI Thermal RES NI Solar
EIRE Wind EIRE Hydro
EIRE Thermal RES EIRE Solar
EIRE Waste
Installed
MW
Structuring of pool into five areas: Forward Trading; Day Ahead Market
(DAM); Intra-Day Market (IDM); Balancing Market; and Imbalance
Market, in order to align it with best European practices
In former SEM, renewables enjoy priority of dispatching
Introduction of bids for non-dispatchable renewable generators bid through
an Aggregator of Last Resort mechanism (AOLR), with a formula
approach to forecast the demand. Potential pooling of risks
Renewable generators are currently offered revenue certainty by support
mechanisms (e.g. REFIT). Potential differences between the AOLR price
and support prices may reduce confidence in RES generators. Hedging
may be required
Potential mechanism to abandon incentive schemes and move towards a
full merchant approach for renewables
Target 40% RES generation by 2020
Risk Elements
New Pool
Arrangements
Priority of
Dispatching
Aggregator of
Last Resort
RES Incentives
o New Pool Arrangements – Low Risk. Extra lump-sum costs
will occur for ESB, for the education of operators on the new
market and administrative requirements
o Priority of Dispatching – Moderate. If priority of dispatching
mechanism is to be superseded by the AOLR, it is relevant to
understand when and how. As SRMCs for wind generation tend
to be uniform, there will not be any competition issues
o RES Incentives – Moderate. The legislation will not likely
affect existing capacity, but it is to understood if AOLR will be
adequate to recover generation costs for ESB new capacity.
o AOLR – Moderate. The non-compulsory mechanism is not
completely defined, but will likely support risk pooling. It is not
certain the degree of acceptance among suppliers
High Risk
Low Risk
Source: All Island Generation Capacity Statement 2016
8. TRANSITION TO I-SEM
I-SEM: Forward Trading Agreements
8
0
200
400
600
800
1,000
1,200
Baseload
MidMerit
Peak
Baseload
MidMerit
Peak
Baseload
MidMerit
Peak
Baseload
MidMerit
Peak
Q1 Q2 Q3 Q4
2012 2013 2014 2015 2016
GWh
In former SEM, Directed contracts (DCs) are contracts for
difference set by Regulators on incumbent generators (ESB
and Power NI), to be offered to licensed suppliers on the
island of Ireland. Non-directed Contracts are similar but
not regulated
DCs are negotiated on quarterly basis, and divided into
three categories: Baseload, Mid Merit and Peak Merit.
DCs provide liquidity and hedging for suppliers with limited
market power.
Introduction of a centralized platform for forward trading to
enhance liquidity; DCs may possibly be phased-out
Introduction of Forward Contracting Obligations (FCO) to
mitigate physical market power
Working Group meetings are being held in spring 2016
Risk Elements
Directed
Contracts
Non-
directed
Contracts
Centralized
Platform
Forward
Contractig
Obligations
o Directed Contracts – Limited Risk. A more liquid forward market
is likely to be beneficial for ESB as incumbent. As DC represent an
obligation to ESB, their ruling out does not represent a significant
element of risk
o Non-directed Contracts – Low. These are non-compulsory and
non-regulated contracts. Low risk for ESB
o FCO – Moderate. Potentially one of the most liquid contracts of the
new I-SEM, their features and characteristics are yet to be
discussed
o Centralize Platform – Low. Extra lump-sum costs will occur for
ESB, for the education of operators on the new market and
administrative requirements
High Risk
Low Risk
Source: SEM Monitoring Report 4Q 2015
9. TRANSITION TO I-SEM
I-SEM: Market Power
9
38%
11%10%
7%
5%
21%
8%
ESB PG (Non
Wind)
SSE (Non Wind)
AES
Viridian
NIE PPB
Other
In former SEM, ESB de-rated market share is about 38%
Market concentration is currently mitigated via the application of Bidding
Principles and Market Monitoring Unit, with oversight of participant behaviour
and market outcomes, such as prices and trading quantities
Due to increased wind penetration, structural market power is expected to
decline, but installed capacity will remain concentrated, according to forecast
for 2019 and 2024
The increased complexity and liquidity introduced by I-SEM will require
additional monitoring capacity, and the choice of applicable metrics for
Structure, Conduct and Performance (ex ante, ex post, long term, short term)
Methodology suggested is Short Run Marginal Cost (SRMC) approach, with
limitation to withholding capacity or predatory bidding
Ring fencing for vertically-integrated operators will be kept
Risk Elements
Ring Fencing
Market Power
Metrics
Reputational
Risk
o Ring Fencing– Moderate Risk. ESB is an integrated utility, with
regulated assets in transmission / distribution. The approach
followed by Regulators over Electric Ireland is a delicate issue that
may affect the group as a whole
o Reputational Risk – Moderate. ESB faces a reputational risk,
with potential economic and legal implications, both at national and
EU level, over its market share or bidding behaviour. The
approach followed by Regulators tends towards a more liberalized
market, and this is likely to affect decisions over deployment of
new generation assets
o Market Power Metrics – Limited. ESB is a key stakeholder and
exercises a certain degree of control over the proposal and
negotiation of key metrics to define market power
High Risk
Low Risk
Source: SEM CRM Third Consultation Paper
10. TRANSITION TO I-SEM
Conclusions and Opportunities
10
The Integrated Single Electricity Market (I-SEM) will be operational by the end of 2017. I-SEM will
deliver enhanced levels of competition which should help decrease prices as well as encourage
greater levels of liquidity, security of supply and transparency
The Irish electricity wholesale market is rapidly evolving: while currently reliant on fossil fuels and
imported electricity from UK, the market is going through a relevant change. By targeting 40%
renewables generation by 2020, the market is gradually phasing-out older thermal assets and
increasing its share of renewables, in particular wind generation
While fully liberalized in compliance with European directives, the wholesale electricity market is
highly concentrated: ESB in particular, as market incumbent, still owns the bulk of all-island
dispatchable generation assets and an even increasing de-rated capacity
I-SEM presents potential risks to the generation portfolio of ESB, in particular:
o the mechanism and economics of the new CRM are yet to be defined
o the adoption of the new AOLR is matched by criticalities over the continuation of current
renewables incentive schemes
o the measures targeting the mitigation of market power are likely to impact ESB more than
competitors
I-SEM offers also opportunities to be pursued by an integrated utility such as ESB:
o a more transparent market will allow many new market players to enter forward contracts
and PPAs with big utilities, when lacking the technicality to enter the wholesale pool
o the deployment of renewables is likely to prompt research and development in new
technology areas, such as battery storage, smart and mini-grids for net metering schemes
