The Irish energy regulators announced on Friday 31 August 2018 that the I-SEM wholesale market project – a major redesign of the wholesale electricity market on the island of Ireland – will “go live” on 1 October 2018.

A process of integration

Rather than being a new market, the I-SEM can be regarded as a particularly wide-ranging change to the rules, practices and hardware of the Single Electricity Market (SEM) – the wholesale electricity market for the island of Ireland that has been trading since 2007.

The SEM in its current form has established a solid platform on which to eliminate the inefficiencies caused by decades of separate development of the Irish and Northern Irish electricity infrastructure. However, its interface with the neighbouring British system did not meet the requirements of the EU Third Energy Package of 2009, or the guideline on capacity allocation and congestion management (EU Regulation 2015/1222) – and hence the need for I-SEM.

EU Regulation 2015/1222 set out the measures that were required to be introduced by EU Member States in relation to the cross-border electricity flows between them, in order to achieve a fully functioning and interconnected internal EU energy market. In recognition of the work that would be required, the Regulation allowed Ireland and Northern Ireland a dispensation until the end of 2017.

A draft high level design for an “Integrated SEM” (i.e. “I-SEM”) was published for consultation in February 2014. In October of that year, a project plan was produced that contemplated I-SEM go-live in October 2017, in time to meet the European deadline.

In late 2016, the energy regulators “re-profiled” delivery of the I-SEM project so that electricity trading would commence at the later date of 23 May 2018. Then, in April 2017, go-live was further delayed until 1 October 2017 due to concerns around the performance of central IT systems during market trials.

Responsible balancing

A new and key feature of I-SEM is the choice of temporal markets upon which a market participant can trade electricity. It will now be possible for participants to price and sell their electrical output in the “day ahead” and “intraday” markets, each of which close before the time at which the output is generated. Any imbalances between the traded position and the actual output are required to be settled in a “balancing” market, on which large projects are required to trade.

This “balance responsibility” is a particular challenge for the many intermittent renewable generators – wind farms being prime examples – that have connected to the Irish electricity system during SEM and before. A glance at the “Smart Grid Dashboard” maintained by EirGrid, the operator of the Irish electricity system, illustrates clearly the gap between forecast wind output and actual wind output.

In June 2018 it was confirmed that the REFIT support scheme, under which many RoI wind farms receive financial support, would not insulate supported projects from the financial consequences of these imbalances. In order to optimise their revenues, REFIT generators will therefore need to forecast their output (based on historical wind turbine performance and expected wind conditions), trade accordingly in the new I-SEM markets, and stand ready to take corrective trading actions as and when inaccuracies in their forecasts are revealed.

Niche marketing

Although trading has not yet commenced in I-SEM, major efforts are already ongoing across the Irish electricity sector in order to meet the challenges presented by balance responsibility. In particular, a range of local, European and global trading houses have entered the Irish market to assist in mitigating the new risks – effectively filling a new niche in Ireland’s energy ecosystem.

The sponsors of Irish wind farm projects are now presented with a range of contractual solutions, among which financial products, such as contracts for difference, feature prominently. While Enron is probably the name that most consumers associate – negatively – with sophisticated financial products based on energy, it should also be noted that trading in such products continues to be a major feature of energy markets across Europe and the world. Regulators in the energy and financial sectors are awake to these trends and have legislated accordingly.

What’s Next?

I-SEM go-live is likely to be the most significant single event to occur in the Irish energy sector during 2018. However, it comes amid a turbulent period in Irish energy, and particularly in electricity regulation. As well as digesting the operational requirements of trading in I-SEM, industry participants are engaged in:

  • Positioning themselves to compete for the award of support in the new Renewable Electricity Support Scheme (RESS), the high level design of which was announced by the Irish government in July 2018
  • Understanding the new ECP regime for the allocation of grid connection capacity, the first iteration of which was open to application during 2018 and the results of which were also announced on Friday 31 August 2018, and
  • Figuring out how to assemble RESS support, grid capacity and other key components of the electricity projects that will be necessary for Ireland to meet its renewable energy targets.