background and context to the i-sem market change with a spotlight

1Copyright © Baringa Partners LLP 2016. All rights reserved. This document is subject to contract and contains confidential and proprietary information.

Copyright © Baringa Partners LLP 2016. All rights reserved. This document is subject to contract and contains confidential and proprietary information.

Date:

Version:

I-SEM context, status and commercial implicationsBrady seminar presentation

13 December 2016

1.0


We work with many of the world’s leading energy and commodity clients

About Baringa

Market-leading consulting company with a focus on energy, commodities and financial services

Offices established in London, New York, Dusseldorf, Abu Dhabi and Dublin

Market turnover of approx. £100m, circa 500 professionals

Strong track record across Trading Strategy, Risk Policy, IT Strategy & Delivery, Business Change and Energy Advisory

Reputation-driven business, with over 80% of our work coming from repeat business


Any plans for mid-May 2018?

Wednesday

23May

Proposed go-live for I-SEM


A new market design – the Integrated Single Electricity Market – is being introduced in Ireland with an expected go-live of May 2018

The aim is to develop a new market design for an Integrated Single Electricity Market (I-SEM) which:

‒ complies with the EU Target Model required by Third Energy Package

‒ complies with new EU State Aid guidance on capacity markets

‒ allows the integration of increasing volumes of intermittent renewable generation

A final decision on the I-SEM High Level Design (HLD) was published on 17 September 2014 endorsed by DETI and DCENR

The detailed design and implementation phase (Phase 3) is now under way, and will run through to ‘Go Live’ which has been pushed back to May 2018

I-SEM high level drivers

Phase 1: Agreement of Principles and

Objectives

Phase 2: (i) Project scoping

(ii) High Level Design

Phase 3: (i) Detailed design and rules(ii) Systems implementation

March 2013 September 2014 May 2018

Go live

I-SEM high level roadmap to ‘Go Live’


Centralised bilateral trading

Financial forward trading

Financial Transmission Rights for cross-border trading

New European coupled day-ahead, intra-day markets

New balancing market

Participants become balance responsible

All key design details have now been decided

I-SEM overview

Energy Capacity DS3

New volume-based capacity remuneration mechanism (CRM)

Based on Reliability Options

Competitive allocation by auction

All technologies eligible, but risk profile of RO product makes wind participation challenging

Delivering a Secure Sustainable Electricity System while achieving 2020 renewable energy targets

New ancillary services regime replacing the current Harmonised Ancillary Services arrangements

New set of 14 system services products

Long term aim is for competitive allocation via auction


Imbalance

Balancing and dispatch

Intra-day market

Day-ahead market

Financial forward trading – no physical forward trading permitted under I-SEM

Forward products are likely to look similar to current SEM CfDs

Potential obligations to provide forward liquidity for some players

Cross-border trading will be via Financial Transmission Rights which will be auctioned on the European Joint Allocation Office platform

Energy Trading Arrangements: Forward market

Long term hedging


Imbalance


Intra-day market

Day-ahead market

European day-ahead market using EUPHEMIA algorithm

EUPHEMIA sets the I-SEM day-ahead clearing price, unit schedules and interconnector flows

Exclusive route to physical day-ahead contract nomination

Optional participation – but strong incentives to do so for most participants

Mainly unit-based bids, gross portfolio bids for (some) variable renewables

EPEX Spot selected by SEMO as services provider

Energy Trading Arrangements: Day-ahead market

Long term hedging


Imbalance


Intra-day market

Day-ahead market

Exclusive route to physical intra-day nomination

Ultimate aim is for continuous intra-day trading via the European XBID platform – I-SEM accession expected around 2020

Interim solution will be used at I-SEM go-live

Local continuous trading with three daily cross-border intra-day auctions

EPEX Spot selected by SEMO as services provider

Energy Trading Arrangements: Intra-day market

Long term hedging


Imbalance


Intra-day market

Day-ahead market

Mandatory participation

Feasible schedules from ex-ante markets are starting point for dispatch

Market participants must submit incremental / decremental offers / bids to move away from their contracted position

TSO will accept offers / bids to balance the system

Marginal pricing for energy balancing actions, pay-as-bid for non-energy (system) actions

Energy Trading Arrangements: Balancing market

Long term hedging


Imbalance


Intra-day market

Day-ahead market

All market participants are balance responsible

Differences between contractual position at ‘gate closure’ and metered generation are settled at the ‘imbalance price’

Imbalance price is intended to reflect the marginal cost of energy balancing actions taken by the TSO

‘Tagging and flagging’ process to remove system actions from the imbalance price calculation

There will be a single imbalance price

Energy Trading Arrangements: Imbalance

Long term hedging


The capacity product under I-SEM will take the form of Reliability Options

These are one-way CfDs or call options

Volume of ROs to be procured will be determined centrally to meet the security standard

Competitive allocation by auction

Successful participants are paid the €/kW auction clearing price ‘option fee’

Contract holder must make ‘difference payments’ if the market reference price exceeds the contract strike price

Stop loss limit set at 1.5 times the contract value

One year contracts for existing plant, up to ten years for new build

Capacity Remuneration Mechanism

Schematic of I-SEM RO auction stack

Difference payments under a Reliability Option


The DS3 programme is expanding the scope of system services

‒ New set of 14 system service products

Designed to ensure that increasing amounts of non-synchronous renewable generation can be accommodated

Enduring tariffs will be set for five years, with providers on rolling one-year contracts

Competitive auctions held if supply and demand balance for services are deemed ‘appropriate’

Industry pushback on auction design proposals and tight timelines caused postponement of the final auction design decision

First auction deferred to the first half of 2018 at the earliest

Payments will largely be based on ‘availability’ to provide each of the services

DS3

‘Pillars’ of the DS3 programme


Value of some markets could change significantly under I-SEM…

SEM I-SEM?Approximate market size

€2.5bn

Capacity A/S

Mar

ket

size

Energy Capacity A/S

Mar

ket

size

€500m

€60m

€2.5bn

€150m

€235m

Energy


…as could the degree of volatility

Bid Price & Out-turn SMP

Additional scarcity premium during times of system tightness

I-SEM Out-turn Wholesale Price

Bid price

Running cost of

marginal plant

Running cost of

marginal plant

Scarcity

Start costsOut-turn SMP

… in energy …


…as could the degree of volatility

… and capacity

Market volatility could also change significantly – likely to increase in most cases

Could reduce year-to-year revenue certainty

But will bring new opportunities such as in risk management and flexibility


I-SEM open issuesTitle Status Key open questions

Forward market Forward and Liquidity Decision Paper 2 pushed back to March 2017

Nature of forward hedging instruments‘Truncated’ CfD?

Energy Trading and Settlement Code out for consultation – publication March 2017

Final EUPHEMIA bid formatsAgreement with GB on ID auctions

Capacity CRM parameters out for consultation

Final CRM rules June 2017

Nature of forward hedging instruments‘Truncated’ CfD?

Market Power Proposed Generation and Supply Licence changes June 2017

Form of balancing market bidding principles / controls

DS3 Final auction design decision deferred

First auctions in 2018 at the earliest

Timelines for enduring arrangementsDS3 auction formatMethodology for enduring tariff rate

setting

Other Treatment of I-SEM under REFIT uncertain

Pending EU State Aid approval

Will imbalance costs be compensatedunder REFIT?

Will CRM be approved under EU State Aid?


I-SEM ‘Level 1’ timeline

2018 2019

Publication of TSO and MO proposed licence changes

Forwards and Liquidity 2 Decision Paper

Public consultation on draft ‘CRM rules’

Publication of final Trading and

Settlement Code

2017

Proposed changes for Gen and Supply licences

Market trial

Interface testing

First capacityauction

Final ‘CRM rules’FTR auctions commence

Go-Live23 May 2018


Commercial challenges…

Investment signals linked to new markets and timelines

Asset values could change fundamentally (positive for some, negative for others)

Optimisation across multiple market timeframes – more optionality

Interdependency between DS3 and short term energy

New exposures under RO

Management of credit / collateral

Trading and thermal generation Renewable Assets / PPAs Retail

Likely loss of capacity payments –compensated under REFIT but not for NIRO or merchant plant

Requirement to find a route to market

Renegotiation of existing PPAs

Need to actively manage imbalance cost exposure – either by offloading to a third party of through improved forecasting and intra-day trading (liquidity risk)

Requirement to take a view on future imbalance cost exposure

Short-term demand forecasting capabilities required to minimize imbalance cost exposure

Requirement for active trading as demand forecasts evolve

Flexibility in hedging strategy to deal with low forward liquidity

Change in effectiveness of proxy hedges

Managing the transition and I-SEM ‘cliff edge’

Forecast future supplier capacity charges for tariff setting

Modelling / forecasting / analytics


…and opportunities

Growing value of flexibility in short-term energy markets as well as DS3

Removal of mandatory cost-reflective bidding in ex-ante markets

Potential to capture value from high price spikes during periods of system tightness (up to the RO strike price cap)

Long term capacity contracts to support new build

Potential to capture value by outperforming peers in trading / operational strategy

Trading and thermal generation Renewable Assets / PPAs Retail

New requirement for imbalance risk management services

Demand for third party trading and balancing service providers

Driver for new innovative route to market solutions such as corporate PPAs

Potential new DS3 revenue streams for wind

Increased portfolio / diversity benefit

Opportunities to monetize demand-side flexibility in energy, DS3 and capacity markets

Growing demand for aggregation services

New opportunities to provide ‘sleeving’ services for corporate PPAs


Any questions?

?


Contacts

Baringa Partners LLP3rd Floor, Dominican Court17 Hatfields London SE1 8DJUKwww.baringa.com

Dr Mark TurnerSenior Manager

Mobile: +44 7584 290310Email [email protected]

This document: (a) is proprietary to Baringa Partners LLP(“Baringa”) and should not be re-used for commercialpurposes without Baringa's consent; (b) shall not formpart of any contract nor constitute an offer capable ofacceptance or an acceptance; (c) excludes all conditionsand warranties whether express or implied by statute,law or otherwise; (d) places no responsibility or liabilityon Baringa for any inaccuracy, incompleteness or errorherein; and (e) the reliance upon its content shall be atuser's own risk and responsibility. If any of these terms isinvalid or unenforceable, the continuation in full forceand effect of the remainder will not be prejudiced.Copyright © Baringa Partners LLP 2016. All rightsreserved.

background and context to the i-sem market change with a spotlight

Documents