28th March 2014: Integrated Single Electricity Market (I-SEM) High Level Design for Ireland and Northern Ireland from 2016

Independent wind generation is fundamental to the future development of the power system on the island of Ireland. We will be central both to the de-carbonization of the sector and to ensuring that there is a genuine and thriving competitive element in the market, as a counter-weight to the large portfolio generators. Wind is also the island’s best source of security of supply, at a point in time when we have been reminded of the vulnerability of gas supplies due to the emerging conflicts in Eastern Europe.   The design of the I-SEM will determine whether we, and future independent wind generators, will be able to participate. We are deeply concerned that several of the options under consideration would place wind generators in general, and small independent wind generators in particular, at a significant competitive disadvantage – to the extent that we believe many IWFA members would be forced out of business and no new independent wind generators would enter the market in future. If this were to happen, it would be to the long term detriment of all electricity consumers on the island – competition would reduce and prices would rise as a result.   As presented in the Consultation Document, Option 4 is the only option in which IWFA members could survive.   The Consultation Document is very frank that Option 1 has several features which “… advantage portfolio generators…” and that the ex-post imbalance price would be “… less attractive for wind…” than an ex-post pool price. The very fact that Option 1 is being considered when it is so openly acknowledged to tilt the playing field against independent wind generators is extremely worrying. This option would destroy our businesses and lead to a less competitive, less decarbonized sector to the detriment of all consumers. We can think of no modifications that would make it acceptable. It should, in our view, be rejected and taken no further.   Option 2 would, we fear, operate in practice in a very similar way to Option 1. It would be in the portfolio generators’ interest to minimize the volume settled in the ex-post imbalance process. As a result, the ex-post imbalance price to which IWFA members will inevitably be exposed, will again be “… less advantageous for wind …” than in a full ex-post pool. We know of no other market/country in which Option 2 operates. We set out in this response the minimum modifications that would be required for IWFA members to be able to survive in such a model.   Option 3 is the worst of all four options for IWFA members. It has all the disadvantages of Option 1 and, in addition, IWFA members would be forced to trade in a day-ahead market at a time which will only add risk to our businesses. Markets should be created to enable us to manage our risks, not create additional ones. Forcing us to trade at the day-ahead stage, when we do not yet know whether the wind will blow, creates a potentially catastrophic risk for our members. Being told that we can then manage that risk by active trading in Intra Day markets is of no comfort – we have neither the skills nor resources to do so, and in any case we would, at best, be trying to manage down an exposure that we should not have incurred in the first place! IWFA members (or our contract counter-parties) would inevitably still be exposed to the ex-post imbalance price – which, as the Consultation Document again acknowledges in respect of Option 3, would be “… less attractive for wind…” than a full ex-post pool. Since publication of the Consultation Document, there has been informal talk of exemptions and modifications under Option 3. We comment on these and other modifications that would be required to Option 3, in this response. We have two major concerns however. First, the modifications and exemptions that are being considered must, in our view, retain a single market somewhere in the new trading arrangements in which everyone participates. This is of fundamental importance to a small generator. We must be able to rely on the diversity of the entire system – if not the portfolio utilities will be at a huge competitive advantage. Secondly, in our view the interests of consumers on the island of Ireland will be best served by a set of trading arrangements in which small independent wind generators can participate fully and on an equal footing with all other market participants – rather than relying on exemptions and special rules to enable us to survive within trading arrangements that are ill suited to such a key segment of the market.   Option 4 is the only option which offers independent wind generators that level playing field. We strongly support the development of a full suite of forward and future markets, and would support ‘market maker’ obligations on portfolio generators to ensure a minimum volume of trading in those markets. It is essential, however, that these are underpinned by an ex-post imbalance mechanism which reflects the full underlying power system. It is inevitable that independent wind generators (or our counter-parties under contract) will be exposed to the imbalance price – every hour of every day. This price must pay us the full value of our energy on the system (no more, no less). Option 4 is the only option that provides a fully liquid, transparent market for setting that price on a timescale in which independent wind generators can participate. It will give the correct price signals to deliver an optimal plant mix over time, and can be coupled with appropriate ancillary service payments to secure sufficient flexible plant for system operation consistent with the 40% wind target. It also gives a clear and unambiguous REFIT reference price, unlike every other option.     In summary,

1. A fully liquid and transparent ex post imbalance settlement mechanism, voluntary day-ahead and intra-day markets, primed by market maker obligations on the portfolio generators, accompanied by a long-term price based CRM, will provide an entirely level playing field on which generators of all sizes and technologies can participate effectively. It would also provide the best reference price for the various renewable support schemes, while minimizing cost to the consumer (via the PSO). It is the only market model in which small independent wind generators, as represented by IWFA, have any real prospect of survival, in particular where they are out of support.

2. Assuming the known existing anomalies and inefficiencies in the rules for the inter-connectors are resolved, the forward markets in such a market design could to some extent assist inter-connector flows and facilitate DSM, in order to relieve curtailment, even though no market can actually fix the root causes of curtailment. To really address that issue, there is a need for the TSO to be subject to at least some of the curtailment costs (which should be restored by SEMC) and constraining-on costs, arising from schedule adjustments caused by the under development of the island’s system, so as to incentivize the necessary and urgent improvements (DS3, flexible plant, exit signal for redundant plant, mitigate market power, etc). In the meantime, there is a continuing role of the TSO to trade out some of the excess power, in order to keep wind generators operating at or near their availability, while respecting the SEMC’s ‘tie-breaks’ decision.

3. The result will be a thriving competitive market, which will drive efficiency and lower prices to the long term benefit of all consumers. This is by far the biggest prize that the new trading arrangements should seek to secure.

4. All other options, as presented in the Consultation Document, would tilt the playing field so badly against wind generators, especially small independent wind generators, that even with a De Minimis increase to 20MW (as we propose), many such projects could not survive. Competition would be severely weakened and consumers would suffer.

 IERNE Renewable Energy Specialist