On Wednesday 5 February 2014, the Irish and Northern Irish energy regulators[1] published a consultation on the high level design of the wholesale electricity market that is to replace the Single Electricity Market (SEM).

The SEM, which has been live since 1 November 2007, is a gross mandatory pool market through which most of the electricity generated on the island of Ireland must be traded.  It embodies innovative measures for addressing the challenges associated with multiple jurisdictions and currencies, and features a mechanism of “capacity payments” to reward the availability of generators (whether or not they are called upon to generate).

While the SEM has generally been regarded as a success, particularly in relation to the accommodation of renewable generation, its design is not consistent with the “European Target Model” that is being developed by ACER – the European energy regulator – on foot of the 2009 Third Energy Package of European legislative measures. The Target Model imposes requirements on wholesale electricity markets across Europe, with a view to establishing common mechanisms for the trading of electricity across national borders, and the “coupling” of electricity prices in neighbouring regions.

The incompatibility of the SEM with the Target Model was formally recognised some time ago. In January 2012, the Irish and Northern Irish energy regulators produced a list of differences, which revolve around the number of temporal “markets” on which bids and offers can be matched, and the consequent timing of wholesale price-setting.  In broad terms, the Target Model requires more of these markets than the SEM currently facilitates, up to and including “continuous intraday trading” of transmission capacity across electricity interconnectors.

These differences were also recognised and accommodated at a European level. In mid-2012, the Irish and Northern Irish energy regulators sought and obtained, for the SEM jurisdictions, the deferral until 31 December 2016 of the requirement that Ireland and Northern Ireland comply with the Network Code on Capacity Allocation and Congestion Management (CACM) – one of the key documents through which the Target Model will be enforced. 

With a view to resolving these and other inconsistencies, the February 2014 consultation presented four alternative models for the high level redesign of the SEM, referred to respectively as the “Adapted Decentralised Market”, the “Mandatory ex-post pool for net volumes”, the “Mandatory Centralised Market” and the “Gross pool – Net settlement market”. While these options are each understood, by the regulators, to comply with the Target Model, they differ in the extent to which they emphasise and facilitate trade in the various temporal markets.

The response period for the current consultation on the high level design of the reformed market – which has been given the working title of “I-SEM” (“Integrated – SEM”) – closes on 4 April 2014.  A decision on the high level design is expected in around August 2014, followed by a period of development of the new market and its ultimate go-live at or before the 31 December 2016 deadline for CACM Network Code compliance.

Assuming the redesign proceeds smoothly, it is unlikely to command significant public attention – indeed, it is doubtful that the wider public is even aware of the existence of SEM, notwithstanding its impressive cross-border credentials.  However, the design and implementation of “I-SEM” will rewrite the contractual and regulatory mechanisms that are used to price and settle energy transactions worth almost €3 billion every year, and represents, in practical terms, a complex information technology challenge at the very least.  The redesign process will therefore command considerable attention from those whose businesses depend on it – most immediately, the generators and electricity suppliers of Ireland and Northern Ireland.

The full consultation is available to read here.