Irish Electricity Market Overview

& Procurement Opportunities Peter Duffy

Enercomm International

• Current electricity market • New electricity market • The Supply business & Suppliers in the market• Electricity Tariffs • Components of electricity prices & Price Increases• Supply Options & Scope for savings• Seeking the ‘best’ deal for your company• Suggested approaches• Longer-term options including multi-utility supply

Overview of Presentation

Today’s Electricity Market

• Licenced generators sell bulk power to licenced suppliers– These are termed ‘Bilateral Contracts’– Shortfalls & surpluses are dealt with by Top-Up & Spill

• TSO dispatches conventional plant – Wind generators (normally) self dispatch– Wholesale settlement done by SSA

• Suppliers supply customers & issue bills– Based on their tariffs & electricity usage (metering)

• Green suppliers must balance on an annual basis– Green tracking done through settlement system by SSA

• Mandatory centralised pool (all* gens/suppliers)• Eirgrid will be the SMO (System & Market Op.)• LMP (locational marginal pricing /nodal pricing)• CER & SMO will determine the nodes to be used• SMO will dispatch energy & reserve together• Settlement at spot market prices for actual vol.s

– Generators will be paid LMP– Suppliers will buy at Universal Price (ex.dispatchable)

• Gens & suppliers can hedge risks (CFDs/FTRs)

Ireland’s New Electricity Market

Supply Business with TU & Spill

Gen2

Gen3

Gen1 Sup1

Sup2

Sup3

Bilateral Contracts

• All electricity traded bilaterally between Gens to Suppliers

• Shortfalls & Surpluses addressed through TU & Spill

Top-Up & Spill

Cus.1

Cus.2

Cus.3

Cus.4

Supply Business with Pool

Gen2

Gen3

Gen1 Sup1

Sup2

Sup3

POOL

SMO

• All electricity traded through pool, not from Gen to Supplier

• Hedge is bilateral contract between Gen & Supplier

Hedge

Cus.1

Cus.2

Cus.3

Cus.4

• Airtricity

• Viridian Energy (Energia)

• ESB Independent Energy (ESBIE)

• Bord Gáis

• CH Supply Ltd.

• Bord Gáis - Cogen

• ESB Customer Supply (ESB PES)

Suppliers in the Market

• Regulated tariffs– Approved/published by the CER for ESB PES– ESB PES cannot vary these

• Unregulated tariffs– Driven by competition– Independent suppliers can devise/develop

their own tariffs, and compete in the market

Electricity Tariffs

• Urban (Standard, Nightsaver and Group); • Domestic Rural (Standard, Nightsaver and Group); • Residential Business Premises; • Commercial and Industrial General Purpose

(Standard and Nightsaver); • Commercial and Industrial Maximum Demand

(low voltage); • * Maximum Demand (medium voltage); • * Maximum Demand (38kV); • * Maximum Demand (110 kV) – transmission; • Public Lighting

Regulated Tariff Categories

• Come in all shapes & sizes• Some simply track the equivalent PES tariff

– offer a percentage discount

• Some broadly track equivalent PES tariff– May offer a flat winter/summer price element– Result in majority savings achieved during winter

• Others are more sophisticated, numerous elements– Can be quite opaque & difficult to compare– Can deliver good savings– More suitable to large & very large users

Unregulated Tariffs

• Essentially five compnents in the price: – * Energy (generation & losses)– TUoS (Transmission Use-of-System Charge)– DUoS (Distribution Use-of-System Charge)– * Supplier’s margin– Levies (PSO & Capacity Margin)

• * Energy & Supplier’s margin are the competitive elements

Components of Electricity Prices

Approx. Break-down of Price

Energy 75%Wires Charges 23%

PSO 2%

Energy Cost: Supplier Wires & PSO: Regulator

For Large Customers

• Assume independent suppliers buying most of their power from new independent generating plant

• BNE price reasonably represents capital/fuel costs• BNE price for 2004, fuel = 61%, all other costs 39%

– Approx 6 to 4 ratio

• Assume fuel costs in 2005 increase 10% over 2004– Then this should increase energy costs by 6%

• In last slide, energy is approx 75% of supply costs– 10% increase in fuel costs 4.5% increase in elec. Costs– 20% increase in fuel costs 9 % increase in elec. costs

Basis for Price Increases

• Fuel– To what extent have independent generators hedged their

fuel (gas) prices versus spot purchases

• Wires Charges– CER reviewing the wires charging regime

– 4% increase in these would result in approx 1% increase

• PSO– CER has published possible levy

– 50% increase in these would result in approx 1% increase

What is Driving Price Increases

EU Emissions Trading

• On average the powergen sector has received 77% of its CO2 permit requirements free

• Wholesale prices should reflect the full costs of CO2

• Intended to claw back all windfall gains

• Pass Through of Allowance Shortfall Cost in 2005– Gens to submit quarterly reports to CER

• 100% Allowance Cost Pass-Through and Recycling in 2006– Enabling legislation required to levy generators

• Consider 2006• Assume 30 TWh total elec. & 16.5 Mtonne CO2• Assume €10/tonne CO2• 23% shortfall 16.5 Mtonne CO2• Cost of 23% is €38m• Represents 0.127 cent/ kWh• BNE 2004 price is €4.79/kWh• Represents approx. 2.6% increase relative to BNE

Impact of EU Emissions Trading

• Stay with or revert to PES on published tariffs• Sign suply contract with independent supplier

– One or two-year contract or longer– Fixed energy price with pass-through of reg. Charges– Variable energy price with pass-through of reg. Charges

• Take out a supply licence (self supply)– Must now negotiate with generator rather than supplier– Greater admin costs, low economy of scale– Difficult to cut a better deal or costs than supplier

Supply Options Short & Medium Term

1-year v. 2-year Contract Offer

• No advantage for wires charges & levies– Cannot avoid them; will be included in both

• Advantage in 2-year contract if gas prices rise– Possible advantage in production planning when energy

costs are largely fixed for two years

• Disadvantage in 2-year contract if gas prices fall– It is hard to see energy prices falling significantly

• Ensure there is common understanding in applying CER-approved increased charges for 2nd year

2-Year Contract

• Changes in both Wires’ charges and PSO levy will be passed through

• In effect, approx 75% of the electricity price for 2004 is fixed at the 2003 price– The remaining 25% (approx) subject to change– Price clarity for the year & low risk

• Supplier takes the risk of fuel (gas) price increases and other generation costs– Makes sound economic sense in a price-rising market

Suggested Approach

• If large production facility seeks to fix its costs over a longer rather than shorter period– For example labour, input and energy costs

– Then 2-year contract offer is the better option• This fixes approx 75% of electricity costs

• Enables better financial/production planning over 2-year horizon

• If seeking to fix costs over a short period– Then 1-year contract offers the better option

Seeking the ‘Best’ Deal

• Forecast demand for next two years based on historical demand & future production plans

• Invite bids from independent suppliers– both 1-year and 2-year bids

• Analyse bids against forecast– Suppliers usually have their own bid format– Is bid for forecasted (not supplier’s) profile? – Check supply conditions, no hidden costs/surprises

• Seek last minute negotiations; can bring results• Check that savings achieved during contract

• Is natural gas coming to your location?• Is there scope for CHP or polygeneration

(electricity/heating/cooling)?• Is there scope for autoproduction (on-site

generation)?; significant wires’ savings• Stake in gen plant?; multinational supply?• Possible savings through multi-utility supply?

– Electricity, gas and telecoms

Supply Options Longer Term Considerations