Download I-SEM context, status and commercial implications

I-SEM context, status and
commercial implications
Brady seminar presentation
Date:
Version:
13 December 2016
1.0
Copyright © Baringa Partners LLP 2016. All rights reserved. This document is subject to contract and contains confidential and proprietary information.
Copyright © Baringa Partners LLP 2016. All rights reserved. This document is subject to contract and contains confidential and proprietary information.
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About Baringa
We work with many of the world’s leading energy and commodity clients
 Market-leading consulting company with a focus on
energy, commodities and financial services
 Offices established in London, New York,
Dusseldorf, Abu Dhabi and Dublin
 Market turnover of approx. £100m, circa 500
professionals
 Strong track record across Trading Strategy, Risk
Policy, IT Strategy & Delivery, Business Change and
Energy Advisory
 Reputation-driven business, with over 80% of our
work coming from repeat business
Copyright © Baringa Partners LLP 2016. All rights reserved. This document is subject to contract and contains confidential and proprietary information.
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Any plans for mid-May 2018?
Wednesday
May
23
 Proposed go-live for I-SEM
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3
I-SEM high level drivers
 A new market design – the Integrated Single Electricity Market – is being introduced in
Ireland with an expected go-live of May 2018
 The aim is to develop a new market design for an Integrated Single Electricity Market (I-SEM)
which:
‒ complies with the EU Target Model required by Third Energy Package
‒ complies with new EU State Aid guidance on capacity markets
‒ allows the integration of increasing volumes of intermittent renewable generation
 A final decision on the I-SEM High Level Design (HLD) was published on 17 September 2014
endorsed by DETI and DCENR
 The detailed design and implementation phase (Phase 3) is now under way, and will run
through to ‘Go Live’ which has been pushed back to May 2018
I-SEM high level roadmap to ‘Go Live’
Phase 1:
Agreement of Principles and
Objectives
March 2013
Phase 2:
(i) Project scoping
(ii) High Level Design
Phase 3:
(i) Detailed design and rules
(ii) Systems implementation
September 2014
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Go
live
May 2018
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I-SEM overview
Energy
 Centralised bilateral trading
 Financial forward trading
 Financial Transmission Rights
for cross-border trading
 New European coupled dayahead, intra-day markets
 New balancing market
 Participants become balance
responsible
 All key design details have
now been decided
Capacity
 New volume-based capacity
remuneration mechanism
(CRM)
 Based on Reliability Options
 Competitive allocation by
auction
 All technologies eligible, but
risk profile of RO product
makes wind participation
challenging
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DS3
 Delivering a Secure
Sustainable Electricity
System while achieving 2020
renewable energy targets
 New ancillary services
regime replacing the current
Harmonised Ancillary
Services arrangements
 New set of 14 system
services products
 Long term aim is for
competitive allocation via
auction
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Energy Trading Arrangements: Forward market
Long term
hedging
Day-ahead
market
Intra-day market
 Financial forward trading – no physical forward trading
permitted under I-SEM
 Forward products are likely to look similar to current
SEM CfDs
 Potential obligations to provide forward liquidity for
some players
 Cross-border trading will be via Financial Transmission
Rights which will be auctioned on the European Joint
Allocation Office platform
Balancing and
dispatch
Imbalance
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Energy Trading Arrangements: Day-ahead
market
Long term
hedging
Day-ahead
market
Intra-day market
Balancing and
dispatch
 European day-ahead market using EUPHEMIA algorithm
 EUPHEMIA sets the I-SEM day-ahead clearing price, unit
schedules and interconnector flows
 Exclusive route to physical day-ahead contract
nomination
 Optional participation – but strong incentives to do so
for most participants
 Mainly unit-based bids, gross portfolio bids for (some)
variable renewables
 EPEX Spot selected by SEMO as services provider
Imbalance
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Energy Trading Arrangements: Intra-day
market
Long term
hedging
Day-ahead
market
Intra-day market
 Exclusive route to physical intra-day nomination
 Ultimate aim is for continuous intra-day trading via the
European XBID platform – I-SEM accession expected
around 2020
 Interim solution will be used at I-SEM go-live
 Local continuous trading with three daily cross-border
intra-day auctions
 EPEX Spot selected by SEMO as services provider
Balancing and
dispatch
Imbalance
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Energy Trading Arrangements: Balancing
market
Long term
hedging
Day-ahead
market
Intra-day market
Balancing and
dispatch
Imbalance
 Mandatory participation
 Feasible schedules from ex-ante markets are starting
point for dispatch
 Market participants must submit incremental /
decremental offers / bids to move away from their
contracted position
 TSO will accept offers / bids to balance the system
 Marginal pricing for energy balancing actions, pay-asbid for non-energy (system) actions
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Energy Trading Arrangements: Imbalance
Long term
hedging
Day-ahead
market
Intra-day market
Balancing and
dispatch
Imbalance
 All market participants are balance responsible
 Differences between contractual position at ‘gate
closure’ and metered generation are settled at the
‘imbalance price’
 Imbalance price is intended to reflect the marginal cost
of energy balancing actions taken by the TSO
 ‘Tagging and flagging’ process to remove system actions
from the imbalance price calculation
 There will be a single imbalance price
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Capacity Remuneration Mechanism
Schematic of I-SEM RO auction stack
Difference payments under a Reliability Option
 The capacity product under I-SEM will
take the form of Reliability Options
 These are one-way CfDs or call options
 Volume of ROs to be procured will be
determined centrally to meet the
security standard
 Competitive allocation by auction
 Successful participants are paid the
€/kW auction clearing price ‘option fee’
 Contract holder must make ‘difference
payments’ if the market reference price
exceeds the contract strike price
 Stop loss limit set at 1.5 times the
contract value
 One year contracts for existing plant,
up to ten years for new build
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DS3
‘Pillars’ of the DS3 programme
 The DS3 programme is expanding the scope
of system services
‒ New set of 14 system service products
 Designed to ensure that increasing amounts
of non-synchronous renewable generation
can be accommodated
 Enduring tariffs will be set for five years,
with providers on rolling one-year contracts
 Competitive auctions held if supply and
demand balance for services are deemed
‘appropriate’
 Industry pushback on auction design
proposals and tight timelines caused
postponement of the final auction design
decision
 First auction deferred to the first half of
2018 at the earliest
 Payments will largely be based on
‘availability’ to provide each of the services
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Value of some markets could change
significantly under I-SEM…
Approximate market size
I-SEM?
Market size
Market size
SEM
€2.5bn
€2.5bn
€500m
€235m
€60m
Energy Capacity
A/S
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€150m
Energy Capacity
A/S
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…as could the degree of volatility
Additional scarcity
premium during
times of system
tightness
… in energy …
Out-turn SMP
Scarcity
Bid Price &
Out-turn SMP
Start costs
Bid price
Running
cost of
marginal
plant
Running
cost of
marginal
plant
I-SEM Out-turn Wholesale Price
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…as could the degree of volatility
… and capacity
 Market volatility could also change significantly – likely to increase in most cases
 Could reduce year-to-year revenue certainty
 But will bring new opportunities such as in risk management and flexibility
Copyright © Baringa Partners LLP 2016. All rights reserved. This document is subject to contract and contains confidential and proprietary information.
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I-SEM open issues
Title
Status
Key open questions
Forward market
Forward and Liquidity Decision
Paper 2 pushed back to March 2017
Nature of forward hedging instruments
‘Truncated’ CfD?
Energy
Trading and Settlement Code out
for consultation – publication
March 2017
Final EUPHEMIA bid formats
Agreement with GB on ID auctions
Capacity
CRM parameters out for
consultation
Final CRM rules June 2017
Nature of forward hedging instruments
‘Truncated’ CfD?
Market Power
Proposed Generation and Supply
Licence changes June 2017
Form of balancing market bidding
principles / controls
DS3
Final auction design decision
deferred
First auctions in 2018 at the earliest
Timelines for enduring arrangements
DS3 auction format
Methodology for enduring tariff rate
setting
Other
Treatment of I-SEM under REFIT
uncertain
Pending EU State Aid approval
Will imbalance costs be compensated
under REFIT?
Will CRM be approved under EU State
Aid?
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I-SEM ‘Level 1’ timeline
Publication of TSO
and MO proposed
licence changes
Final ‘CRM rules’
Publication of final
Trading and
Settlement Code
FTR auctions
commence
Interface
testing
Go-Live
23 May 2018
2018
2017
2019
Market trial
Public consultation
on draft ‘CRM rules’
Proposed changes
for Gen and
Supply licences
Forwards and
Liquidity 2 Decision
Paper
First capacity
auction
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Commercial challenges…
Trading and thermal generation

Investment signals linked to new
markets and timelines

Asset values could change
fundamentally (positive for some,
negative for others)


Optimisation across multiple
market timeframes – more
optionality
Renewable Assets / PPAs

Likely loss of capacity payments –
compensated under REFIT but not
for NIRO or merchant plant

Short-term demand forecasting
capabilities required to minimize
imbalance cost exposure

Requirement to find a route to
market

Requirement for active trading as
demand forecasts evolve

Renegotiation of existing PPAs


Need to actively manage imbalance
cost exposure – either by
offloading to a third party of
through improved forecasting and
intra-day trading (liquidity risk)
Flexibility in hedging strategy to
deal with low forward liquidity

Change in effectiveness of proxy
hedges

Managing the transition and I-SEM
‘cliff edge’

Forecast future supplier capacity
charges for tariff setting
Interdependency between DS3 and
short term energy

New exposures under RO

Management of credit / collateral
Retail

Requirement to take a view on
future imbalance cost exposure
Modelling / forecasting / analytics
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…and opportunities
Trading and thermal generation
Renewable Assets / PPAs

Growing value of flexibility in shortterm energy markets as well as DS3

New requirement for imbalance
risk management services

Removal of mandatory costreflective bidding in ex-ante
markets


Potential to capture value from
high price spikes during periods of
system tightness (up to the RO
strike price cap)

Long term capacity contracts to
support new build

Potential to capture value by
outperforming peers in trading /
operational strategy

Retail

Demand for third party trading and
balancing service providers
Opportunities to monetize
demand-side flexibility in energy,
DS3 and capacity markets

Driver for new innovative route to
market solutions such as corporate
PPAs
Growing demand for aggregation
services

New opportunities to provide
‘sleeving’ services for corporate
PPAs

Potential new DS3 revenue streams
for wind

Increased portfolio / diversity
benefit
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Any questions?
?
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Contacts
Dr Mark Turner
Senior Manager
Mobile: +44 7584 290310
Email [email protected]
Baringa Partners LLP
3rd Floor, Dominican Court
17 Hatfields
London SE1 8DJ
UK
www.baringa.com
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Copyright © Baringa Partners LLP 2016. All rights
reserved.
Copyright © Baringa Partners LLP 2016. All rights reserved. This document is subject to contract and contains confidential and proprietary information.
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