Creating an all-island market

What is the Single Electricity Market (SEM) and when did it come into being?

Until November 1st, 2007, there were two separate electricity markets in Ireland – one in the
Republic and one in Northern Ireland.

The Single Electricity Market (SEM) is the result of an EU-driven policy to integrate markets across
the Member States. The creation of an all-island market is the first step in the development of an all-islands market, including Ireland and Britain.

Ireland’s SEM came into operation on 1st November with the introduction of a single electricity pool system.

How will the new SEM operate?

The Republic’s Systems Operator, Eirgrid and its Northern counterpart, SONI, will be responsible for the operation of the new pool system. They have set up a body, the Single Market Operator to run the new market functions. All generators and all suppliers now trade in this market. Generators compete to dispatch power on the basis of bids that they submit to the Operator every half hour. In the past, the Regulator set the wholesale price of electricity but this is now set by the market.

Additionally, generators are paid what is known as a “capacity payment”, or a retainer to keep their
plants available in the new market to meet demand. In the SEM, generators are not required to have a customer base to participate in the
market. Suppliers, on the other hand, are
able to purchase power, certain about their electricity source, and sell it on to their customers.

Who devised the Single Electricity Market?

The Regulatory Authorities, North and South, devised the model that came into effect on November 1st. They worked with ESB, NIE, the two
governments and other industry participants in the development and implementation of the new system.

The Regulatory Authorities are jointly responsible for the regulation of the new market. Similar models have been adopted in other markets.

How did ESB prepare for the new market?

Very significant resources went into preparing for the new market – from all industry participants. ESB completed a major IT project to ensure that its businesses were ready and in a position to fully compete in the new trading environment.

In readiness for the SEM, ESB’s businesses have separately developed and successfully implemented trading strategies to manage their exposures in the market.

In addition the following work
was completed:

• The Market Operator’s IT systems
  which are needed to operate the
  market were built.
• Market Participants developed
  their systems in readiness to
  implement new processes and
  procedures.
• The Market Operator and all
  Participants participated in
  detailed Market Trials prior to
  going live.
• Trading in financial contracts
  which are used to manage price
  risks between Market Participants
  had already taken place.

Will the changes take immediate
effect?

Since November 1st electricity on the island has been bought and sold through a pool system at prices that are set by the market.

The new environment makes access to the market easier for new retail suppliers thereby increasing
competition. Suppliers are now in a position to purchase wholesale electricity from the pool itself rather than necessarily having bilateral contracts in place with generators.

It is now easier for new generators to invest and enter the market as they do not need a customer base to be able to sell electricity.

What is the impact of the SEM on
the customer?

Electricity is a capital intensive business and bringing two small markets together into one larger
market allows greater economies of scale to be captured for customers.

The SEM trading arrangements are designed to promote competition, improve system security, increase industry efficiencies and minimise costs, all of which will be enjoyed by customers and the economy.

What does it mean for ESB?

ESB has been an enthusiastic supporter of the SEM for the benefits it will bring customers. ESB has
worked closely with the regulatory authorities (North and South) in implementing new market
structures and operations.

It presents many opportunities and challenges that ESB is fully confident it can meet. The introduction of the all island pool market was a step change in
how ESB Power Generation carried out and managed its business.

Prior to the start of the SEM, Power Generation sold its power to ESB Customer Supply under a highly
regulated agreement. The SEM has heralded a new era of lighter regulation and commercial freedom for ESB Power Generation. It now sells its power
into the pool like any other generator.

In preparation for this step change, ESB Power Generation initiated a comprehensive SEM
business readiness programme in 2006 to ensure that it had at its disposal all of the resources and
capabilities necessary in trading, asset management and production to compete aggressively in this new competitive environment.

This programme contained a number of strands; organisational realignment; a new trading strategy,
the execution of power, fuel and currency derivative trades. It also involved the implementation of a newly developed bidding strategy; an enhanced risk management
structure and the counterparty credit management and settlement associated with all of those activities.

Who in ESB is directly involved?

ESB had put in place a central programme to oversee and coordinate its SEM projects.

The responsibility of ESB’s implementation programme was to ensure that ESB’s businesses were fully equipped and ready in time for the “go-live” date. Highly skilled and experienced teams were put in place and worked to define, deliver
and test the capabilities required.

Power Generation, Customer Supply and ESBI are participating as traders in the Single Electricity
Market and have had to implement significant new business processes in their trading and risk
management operations.

ESB Networks is also affected by changes and has developed a new mechanism for meter reading
collection, which will be necessary for the new retail market processes. EM

Key Facts About Single Electricity Market

The overall capacity 9,624 megawatts
Number of customers 3 million
Number of generating plants 30 power plants
Wind installed capacity 820 MW
Total network 8,000 kms of Transmission Network