The Single Electricity Market

As ESB mobilises in preparation for the new all-island Single Electricity Market, EM talks to Brian Dowd, AIM Programme Manager, about the enormous changes now taking shape.

What exactly is the Single Electricity Market, Brian?
The Single Electricity Market – or SEM – is the name given to the wholesale "electricity pool" being implemented for the whole island. This market will replace the current trading arrangements in the Republic of Ireland and the current arrangements in Northern Ireland. Simply put, it's a pool market for the wholesale trading of electricity. All electricity for the whole island will be traded through the Single Electricity Market pool for each half hour period of every day.

Why do we need it?
In November of 2004, the Minister for Communications, Marine and Natural Resources and his Northern The Single Electricity Market Ireland counterpart, the Minister with responsibility for Enterprise, Trade and Investment, agreed on a development framework for an all-island energy market. Both governments decided to implement a Single Electricity Market for the whole island of Ireland because of the benefits it will bring to electricity customers North and South. A larger single market, rather than two smaller markets, will bring greater consumer choice. In addition, open, transparent competition and a more stable and attractive location for investment will lead to lower prices than two separate markets could achieve on their own. And finally, an all-island market will offer much greater security of supply.

Who is responsible for putting the Single Electricity Market in place?
The regulatory authorities North and South have joint responsibility for the implementation. All electricity generators and electricity suppliers – other than very small-scale generators – North and South, as well as both Transmission System and Distribution System Operators are involved in the SEM Implementation Programme. The goal is straightforward, but the process involved in getting there must be rather complicated.

It's a very complex undertaking. The fact that the new market will span two different jurisdictions which have in the past adopted quite different approaches has made it much more challenging than if it were happening in one jurisdiction only. There is therefore a need for a high degree of co-ordination between all the parties involved. The regulatory authorities – the Commission for Energy Regulation (CER) and the Northern Ireland Authority for Energy Regulation (NIAER) – together with the two Transmission System Operators – EirGrid and System Operators Northern Ireland (SONI) – have established a programme to design and deliver the all-island wholesale electricity market trading arrangements.

How far along is the process at this point?
The high-level design of the SEM has been determined. Draft rules, known as the Trading and Settlement Code, have been published. These set out the rules of the new market which will have to be obeyed by all participants.

The two Transmission System Operators have started jointly implementing the central IT systems and processes that they will use to enable the new market to function. Market participants, such as ESB, have started their own implementation programmes in order to be ready for the new market when it goes live in November 2007.

What will the SEM look like when it's finished?
The two Transmission System Operators will co-operate to jointly establish a Single Market Operator which will be responsible for operating the Single Electricity Market. Generators will compete to be dispatched on the basis of bids that they submit to the Single Market Operator.

A single wholesale price for electricity will be determined for each half-hour of every day and will be paid to generators North and South for the energy that they produce. The Single Market Operator will clear all payments from suppliers to generators for the energy they purchase or produce. Generators will also be entitled to earn revenues for the provision of generation capacity.

Apart from the cross-border element, how does that differ from current practice?
At the moment, generators and suppliers enter into bilateral contractual arrangements between themselves for the purchase and supply of electricity. What we call "top up and spill" arrangements apply for imbalances – excesses or shortfalls – between the contracted volumes of electricity and suppliers requirements. In the new Single Electricity Market all electricity will be bought and sold through the pool at prices that are set by the market. This will lead to variations in the wholesale price of electricity over different periods of the day and over different seasons. Suppliers will have to set their tariffs taking these variations into account.

Another effect will be to make entry into the market easier for new retail suppliers who will be in a position to purchase wholesale electricity from the pool itself rather than necessarily having a bilateral contract in place with a generator. It will also be easier for new generators to invest and enter the market as they will not need a customer base to be able to sell electricity.

This sounds like a very big cultural and commercial change for ESB. Does ESB welcome these developments?
ESB has been very positive and proactive in implementing the new market structures right from the start, when the Commission for Energy Regulation was established. When we see the way that markets are evolving in Europe we know that in order to be successful we're going to have to engage on those terms. The harmonisation and integration of markets across borders is part of a broader European strategy. The company has been proactive in this area because we see that this is the best way of securing our future.

What new systems and processes will ESB need to establish?
ESB needs to put in place new business processes and supporting IT systems in order to participate in the market. The new IT systems need to be able to communicate with the Single Market Operator's central systems, so that bids can be submitted and market information received. In addition, because market prices can vary, both generators and suppliers need to have the data, the business processes and the tools to analyse it so that they can manage their businesses in a prudent fashion. ESB has established the AIM Programme with implementation programmes in each business to ensure that each of ESB's businesses have the processes and necessary IT systems in place for the new market.

It sounds like the Single Electricity Market will have a huge impact on all aspects of ESB.
The trading environment in which ESB's businesses will operate will be greatly different from the environment in which they operate today. There will be new risks to be managed and new opportunities. New skills and capabilities will need to be developed to operate successfully in this new environment.

Will there be a direct effect on customers?
Unlike the retail market opening, which directly affected all customers in the Republic of Ireland who are now free to choose their supplier, the Single Electricity Market is concerned with the wholesale trading of electricity and the impact of the new arrangements is greatest for generators and suppliers. Of course, the benefits of a larger market and greater competition, of more efficient dispatch and of greater system security will be enjoyed by all customers.

Who in ESB is directly involved?
Power Generation, Customer Supply and ESBI will all be participating as traders in the Single Electricity Market and will all have to implement significant new business processes in their trading and risk management operations. ESB Networks is also impacted by the work required since there are changes to be made in the retail market processes for meter data aggregation and provision.

Who will be responsible for running the market?
The regulatory authorities – CER and NIAER – are responsible for implementing the SEM. The Transmission System Operators – EirGrid and SONI – are responsible for the delivery of what are known as the "Central Market Systems" with which all other participants systems will have to communicate. Industry participants are responsible for ensuring their own business readiness for the new trading environment and for ensuring that they have appropriate commercial strategies in place.

How will it be regulated?
In addition to the implementation of Single Market Operator and participant IT systems, there is a very large regulatory workload to be completed by the regulatory authorities as well as legislation to be drafted by the Department of Communications, Marine and Natural Resources and the Northern Ireland Department of Enterprise, Trade and Investment and passed through the Oireachtas and in Westminster respectively. The regulatory programme includes licencing arrangements, harmonisation of certain transmission arrangements and many other issues.

Will the market eventually include other utilities, like natural gas?
The arrangements being put in place are for the Single Electricity Market and are the wholesale trading arrangements for electricity only. The framework document which the Departments and the two Ministers put together and which launched this process was a broader framework for an allisland energy policy and structures, and that did include gas, but the focus at present is on the challenge of implementing the Single Electricity Market.

When will the Single Electricity Market come into effect?
The "go-live" date for the Single Electricity Market will be the 1st of November 2007. From that date forward all electricity will be sold by generators and bought by suppliers through the new wholesale electricity pool.

Would it be fair to say that, like so many other industries in recent years, the ESB is entering a more dynamic and vigorous environment?
When I think of when I started working for ESB, the notion that people would be trading in a spot market for electricity on a half-hourly basis would have seemed like science fiction, and yet that's the environment that we will be operating in post November 2007.

Now that it's become a reality, as ESB's AIM Programme Manager are you confident that everyone will be ready for on time?
We shouldn't underestimate the challenge posed to the market participants, regulatory authorities and legislators both north and south in creating this new market. A similar initiative to create an Iberian electricity market incorporating Spain and Portugal has been dealing with similar challenges since the project began in January 2004. The establishment of a new electricity market on the island of Ireland requires significant legislative and regulatory changes on both sides of the border. It also requires the Transmission System Operators to put in place a range of complex systems and processes. Market participants are, as a result, required to implement comprehensive business readiness programmes to ensure that they will be capable of interacting fully with the Single Market Operator and ready to participate in the new, more complex trading environment. The responsibility of ESB's AIM programme is to ensure that ESB's businesses are fully equipped and ready to compete successfully by the "go-live" date. Highly competent, motivated teams at corporate and business unit levels have been mobilised and are already working to define and deliver the capabilities required. November 2007 is not a long way off… but rest assured ESB will be ready.EM