Ireland in the wider European energy market

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Jerome Tyler
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2 Ireland in the wider European energy market MOP Breakfast Briefing Stephen Woodhouse 24 March 2011

3 Pöyry what do we do? employees across 49 countries

4 Pöyry Management Consulting, Energy Europe s leading specialist energy management consultancy. Offering expert advice from strategy to implementation on policy, regulation, business operations, financing and valuation and sustainability. Providing in-depth market intelligence across Europe. Pöyry offices (c) grafikdienst.com Pöyry Management Consulting offices Over 200 energy market experts in 14 offices across Europe: Düsseldorf Oxford Helsinki Stockholm London Stavanger Madrid Paris Milan Vienna Moscow Villach Oslo Zurich 4

5 Agenda 1. Background 2. GB energy market reform and carbon price support 3. European Framework guidelines and future market options 5

6 SEM Long-term uncertainty remains an issue Internal SEM issues driven by expectations of future wind growth and need for flexible plant Wide-ranging consultation on dispatch and scheduling Many issues unanswered What is the future interaction with renewable support payments Review of Capacity Payment Mechanism (CPM) and potential development of ancillary service payments Locational incentives (TLAFs and TUoS) Two wider European developments will could also have a large impact on the SEM over the coming years: Energy Market Reform (EMR) and UK carbon price support and European Target model 6

7 Agenda 1. Background 2. GB energy market reform and carbon price support 3. European Framework guidelines and future market options 7

8 EMR proposals seek to improve investment environment for a sustainable generation mix using four central policy instruments A carbon price underpin to reduce downside carbon price volatility, making low carbon investments more attractive Carbon Price Support Feed-in Tariff Long-term contracts to remunerate low carbon generators at a defined tariff (in addition to, or instead of, energy market revenue) EMR To remunerate capacity providers based on their availability, allowing investment in flexible plant Capacity Mechanism Emissions Performance Standard A regulated limit upon point CO2 emissions allowed from new (or life extended) power stations 8 * The individual application of each of these policies to Northern Ireland is not yet clearly established

9 Carbon price support (CPS) to deliver a defined Target Price Headlines: Fossil fuels used to generate electricity in UK will be taxed at rates relating to their average carbon content upstream carbon tax Applies to all fossil fuel generation in GB and Northern Ireland including CCS (perhaps at a reduced rate), CHP and autoproducers Bid price of NI generators (and potentially SMP) price would rise Paid on exported but not imported electricity potential benefits for RoI generators Source: HM Treasury 9

10 CPS Merit order impact: baseline Merit order: 2010 January business day * NI OCGTs NI CCGT NI steam gas NI coal 10

11 CPS Merit order impact: 25/tCO 2 increment Merit order: 2010 January business day * NI OCGTs NI CCGT NI steam gas NI coal 11 There is a shift in the merit order of plant in the SEM, with those in the North at a disadvantage to those in the Republic

12 CfD FiT preferred option for low carbon generation in GB Difference payments plus wholesale price CfD FIT Difference payments made with reference to an average electricity price difference payment = contract tariff average wholesale price Difference payments not affected by trade price realised by generator Flat revenue stream if match market price Incentive for generator to beat the market price Renewables Obligation (RO) becomes a legacy support after 2017 Other possible features: based on hourly output to reduce cannibalisation risk? allowance for balancing costs? Interaction between capacity covered by FIT contracts and the residual wholesale market will influence future wholesale prices in GB and potentially also in SEM 12

13 What is the impact of the CfD FiT in the SEM? Uncertainty over future of NIRO Can NIRO continue without the GB RO? No firm proposals yet for future rules of renewable support in Northern Ireland in the context of the EMR reforms Complicated by the fact that energy policy is a devolved issued, but funding for renewable support is not Would a CFD FiT be suitable for the SEM market design? 13

14 Other aspects of EMR Emissions Performance Standard (EPS) May impact future power plant investments in Northern Ireland Affects new-build and existing plants that undertake significant investments for life extension Initially will affect conventional coal fired generation, but future reductions in the limits could affect CCGTs Currently no exemption for low-load factor plants Capacity Payment Mechanism (CPM) No indication that this will have a direct impact in Northern Ireland government recognises the need to provide commercial incentives for flexible/peaking capacity in order to create a sustainable generation mix proposals suggest a targeted capacity mechanism to secure a flexible/peaking capacity only a central body will tender to contract with capacity providers in order to secure anticipated capacity requirements 14

15 Agenda 1. Background 2. GB energy market reform and carbon price support 3. European Framework guidelines and future market options 15

16 EU decisions on market design affect all electricity markets in member states The EU third package came into force on 3 March 2011 Aim is to deepen electricity market integration through two stage process: 1. development of framework guidelines (FG) on specific topics by ACER 2. transformation of FGs into legally binding network codes by ENTSO-E Final draft framework guidelines on capacity allocation and congestion management published by ERGEG in Feb 2011 and outlines the principles of: network transmission capacity calculation; day-ahead markets; forward markets; and intraday markets. Defines the target model for European electricity markets 16

New European target model represents a strong move to implicit auctions Future development into legally binding network code Energy and i/c capacity traded separately Implicit auctions: Energy and

17 New European target model represents a strong move to implicit auctions Future development into legally binding network code Energy and i/c capacity traded separately Implicit auctions: Energy and i/c capacity bundled together The target model includes day-ahead and intraday implicit price coupling with: use of a single pricing algorithm compatible bids / products sharing of all bid data between power exchanges harmonized gate closure times Guidelines suggest implementation of all aspects by 2014 though some uncertainty over specific timelines 17

18 How are the Irish RAs responding to European developments? SEM consultation on integration with other European markets issued in September 2009 and SEM decision in March 2010 this was before the most recent EU framework guidelines were published Three separate workstreams have been developed and continue to progress: 18

19 How will the Framework guidelines affect the SEM? Day-ahead market Uncertainty over compatibility of the SEM with the European target model? would need firm day-ahead prices SEM work on day-ahead issues may need to focus on price coupling Is fixing prices at the day-ahead stage appropriate for the SEM with high dayahead wind uncertainty? Barrier to efficient interconnector usage and revealing value of flexible generation? Legally binding code may not be much room for manoeuvre. Intraday Market Framework guidelines also put a strong focus on continuous trading as close to real time as possible Will current SEM intraday modification (3 gate closures) be sufficient to cover the, as yet unknown, future legal (and market) requirements? Implication for SEM market design Breaking point? 19

20 What are the options from here? Regulatory aims have been to maintain core principles of the SEM and minimise any changes to the market rules Can this withstand the internal and external market pressures, as well as legal requirements? Alternative regulatory approaches can be envisaged over the coming years: Can a suitable SEM solution be found that mitigates the identified issues around high wind generation, complies with all EU requirements and causes minimal disruption to the current arrangements? 20

21 Stephen Woodhouse +44 (0) , Pöyry Management Consulting (UK) Ltd King Charles House Park End Street Oxford, UK OX1 1JD +44 (0) Pöyry Management Consulting (UK) Ltd. Registered in England No King Charles House, Park End Street, Oxford OX1 1JD.

22 22 Company presentation

ARE MARKETS DEAD? ARE WE HEADING FOR A REGULATED FUTURE? DOES COMPETITION STILL STAND A CHANCE?

ARE MARKETS DEAD? ARE WE HEADING FOR A REGULATED FUTURE? DOES COMPETITION STILL STAND A CHANCE? RIDING THE WAVE TUESDAY, TALLINN STEPHEN WOODHOUSE PÖYRY MANAGEMENT CONSULTING ENERGY Pöyry offices (c) grafikdienst.com