Through the implementation of the European Electricity Target Model, the EU is in the process of building a harmonised internal cross-border market for trading electricity and gas, to help deliver energy that is affordable, secure and sustainable across the European Union.
The European Electricity Target Model ("Target Model") is a set of harmonised arrangements for the cross-border trading of wholesale energy and balancing services across Europe. This will impact on all participants in the market and ultimately consumers, and will be implemented on the island of Ireland via the Integrated Single Electricity Market ("I-SEM").
The Single Electricity Market (“SEM”) Committee, comprised of both the Commission for Energy Regulation and Northern Ireland's Utility Regulator, published its final decision on the high level design ("HLD") for I-SEM on 17 September 2014. This will replace the existing rules for the wholesale trading of electricity on the island of Ireland in 2017.
The HLD sets out key decisions on principles adopted in the way that I-SEM will be developed. A significant amount of the detail of the manner in which these decisions will be implemented at a practical and technical level is left to the detailed design phase, which is just now being embarked upon. The detailed design and implementation stage is scheduled to last for two years, during which time stakeholder review groups will be established to facilitate industry engagement.
Energy Trading Arrangements
Currently, the SEM is based upon a gross mandatory pool. All generators of electricity have to sell their output into this SEM, and a market price is settled after the fact.
The new market arrangements will require producers and consumers of electricity to forecast their generation and consumption and to bid at the price at which they are prepared to buy and sell.
Market participants will be financially responsible for ensuring that their actual physical generation and demand is in balance with their contracted position, i.e. they will still have to pay even if they do not produce or consume what they predicted they would.
Previously, all market participants shared a “capacity payment”, which was essentially a payment for providing generation capacity on the system, equally divided out of a total sum calculated at the start of every year.
Under I-SEM, it is proposed instead that a competitive auction process will be used.
The key difference here from the existing arrangements is that all market participants will not automatically qualify to receive capacity payments; they must participate in the auction and bid successfully to benefit.
The key elements of the new market which will impact upon electricity generators’ and suppliers’ day-to-day trading will only be revealed when the detailed design phase progresses over the next two years. It is only when that is developed that participants will know how it will practically impact upon their businesses.