A presentation to IBEC conference

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(No Transcript)
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Implications of the SEM for Customers

• A presentation to IBEC conference
• Stephen Woodhouse
• 26 September 2007

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Agenda

• Objectives
• About Pöyry
• SEM and key influences on customers
• Overview
• Capacity payments
• Pool Price Pass through
• Directed Contracts
• SRMC bidding
• Demand side participation under SEM
• Conclusions

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Objectives

• What drives prices in the SEM?
• What are the new charges faced by suppliers
• How may contracting change?
• To outline opportunities for SEM for demand side
  participation

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Agenda

• Objectives
• About Pöyry
• SEM and key influences on customers
• Overview
• Capacity payments
• Pool Price Pass through
• Directed Contracts
• SRMC bidding
• Demand side participation under SEM
• Conclusions

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Pöyry Energy Consulting

• The leading advisor to the European energy sector
• A pan-European energy consultancy formed from the
  merger of five highly respected consultancies
• Over 250 energy market experts in 14 offices
  across Europe
• Copenhagen Düsseldorf Helsinki
• Madrid Milan Moscow
• Oslo Oxford Paris
• Stockholm Stavanger Vienna
• Villach Zurich

Pöyry offices
(c) grafikdienst.com
Pöyry Energy Consulting offices
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We support our clients throughout the energy
business

• Strategy
• We help our clients to build stronger, more
  competitive, long-term positions throughout the
  energy value-chain, by focussing on the goals and
  activities that generate value
• Business Operation
• We improve the performance and competitive
  position of our clients by developing innovative
  energy markets solutions
• Valuation Financing
• We have a wealth of experience in applying our
  expertise, projections and models to the
  valuation of businesses, projects and contracts
  to assist in the financing of our clients energy
  market activities
• Sustainability
• Delivering long term success increasingly
  requires companies to demonstrate environmental
  competence and social responsibility in their
  actions. Our experience helps us to find
  sustainable solutions for business and the wider
  environment

• Utilities
• Generators
• Traders
• Distribution companies
• Shippers
• Suppliers
• Market Operators
• Independent System Operators
• Transmission companies
• Governments
• Large Consumer
• Regulators
• Non-Governmental Organisations
• Financial Institutions
• Trade Associations
• Manufacturing companies
• Wholesalers

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Pöyry Plc global consulting and engineering
company

• Client- and technology-oriented globally
  operating consulting and engineering firm
• Core operations based on three know-how clusters
• Energy
• Forest Industry
• Infrastructure and Environment
• Global market leader in forest industry
• Strong international position in energy, and
  infrastructure environment
• Office network in 45 countries

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Pöyry in Ireland (formerly known as ILEX)

• Draft the SEM Trading and Settlement Code for
  Regulators
• Training courses on the Code
• Support for restructuring and market opening for
  Bord Gáis Networks
• SEM business processes / systems specification
  support to Energia
• Assistance with ESB PES price control for CER
• Design of WPDRS demand side management scheme
  with EirGrid
• Market price projections, market modelling and
  market reports
• Advice on project finance and due diligence to
  IPPs and banks
• Interconnection studies

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Agenda

• Objectives
• About Pöyry
• SEM and key influences on customers
• Overview
• Capacity payments
• Pool Price Pass through
• Directed Contracts
• SRMC bidding
• Demand side participation under SEM
• Conclusions

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Wholesale trading rules will reflect market
fundamentals

• Any set of market-based rules should deliver
  similar outcomes
• Market arrangements should reflect market forces,
  not market rules
• Real differences are due to market power and
  regulatory influence
• In a competitive market, issues affecting
  suppliers will be passed on to their contracts
  with customers

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The context SEM doesnt cover the whole market
Based on 'Proposed Direction to ESB PES on
Electricity Charges (to apply from January 2007)
- September 2006. CER/06/166
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Elements of SEM High Level Design

• Mandatory gross pool
• Day-ahead complex bidding
• Separate capacity mechanism
• Pricing algorithm excludes reserves
• Transmission constraints separated from pricing
• Ex-post pricing (capacity prices at month-end)
• Licence requirements of short-run marginal cost
  bidding principles

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The Context SEM doesnt cover the whole market
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Suppliers Price drivers Pool Charges

• Energy Charges
• common market-clearing price (SMP) for each
  half-hour
• SMP will not be fixed until (at minimum) one day
  after delivery
• Energy charge will also cover distribution
  losses, which do not vary by location
• Capacity Charges
• Paid by demand, charges are set by the RAs at
  575 million for 2008
• Average price for year 1 equates to 14.3/MWh
  (demand weighted average)
• Imperfections Charges
• flat /MWh charge intended to cover the costs of
  constraints and imbalances
• charge has been set at 3.20/MWh for year 1 (to
  September 2008).
• year-on-year reconciliation based on actual spend
• Market Operator Charges
• combination of a fixed (per KW) and variable (per
  MWh) charges
• these cover the Market Operators own costs,
  including central systems
• variable charge to suppliers has been set at
  0.62/MWh for year 1

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Agenda

• Objectives
• About Pöyry
• SEM and key influences on customers
• Overview
• Capacity payments
• Pool Price Pass through
• Directed Contracts
• SRMC bidding
• Demand side participation under SEM
• Conclusions

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Capacity Payments

• Benefits To provide certainty to potential
  investors, to reduce price volatility, and to
  value availability in short-term
• Just as energy has a value to meet energy needs
  capacity has a value to meet capacity needs
• Capacity prices apply to both generation and
  demand (but not equally)
• Total figure and demand profile of payments are
  set in advance of the year
• Intended to increasecertainty comparedwith the
  England and Wales Pool experience

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Demand Capacity Prices (estimates)
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Agenda

• Objectives
• About Pöyry
• SEM and key influences on customers
• Overview
• Capacity payments
• Pool Price Pass through
• Directed Contracts
• SRMC bidding
• Demand side participation under SEM

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Suppliers - Pool Price Pass through

• In September 2006, the CER directed that ESB CS
  should no longer offer tariffs to non PES
  customers connected at MV, 38kV and 110kV (Large
  Customers), or offer tariffs to Large Customers
  returning to ESB CS.
• A further direction on 10 October 2006 stated
  that those Large Customers unable to purchase
  electricity from other suppliers would be able to
  purchase electricity from ESB CS as the Public
  Electricity Supplier (PES).
• CER later stated that these customers could only
  be supplied by ESB CS on the basis of a pool
  price pass through arrangement.
• CER stated that customers must face all costs
  related to acquiring wholesale electricity,
  including
• Pool purchase costs (inclusive of capacity
  payments)
• Market operator and imperfections charges
• Relevant transmission and distribution charges
• Administration charge set by the PES (PSO Levy)
• Credit risk charge set by the PES

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Suppliers - Pool Price Pass Though (2)

• In the CER consultation paper 07/120 ESB CS set
  out their proposal for determination of wholesale
  electricity costs, calculated by
• Where CPP is determined as the aggregate of the
  SMP with the outturn Capacity Payment price and
  the MO and Imperfection charges (The MO and
  imperfections charge are determined ex-ante).
• Wholesale electricity charges will be shown on
  the customer bill for each of the 7 seasonal and
  time of day periods and expressed as an average
  per unit charge for each period
• 4 average prices in winter
• 3 average prices in summer

Customers half hourly settlement period demand
Consolidated Pool Price (CPP)
x
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Agenda

• Objectives
• About Pöyry
• SEM and key influences on customers
• Overview
• Capacity payments
• Pool Price Pass through
• Directed Contracts
• SRMC bidding
• Demand side participation under SEM

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Suppliers - Directed Contracts

• The Regulatory Authorities (RAs) have mandated
  that certain generators contract forward with
  suppliers through Directed Contracts
• The RAs used the Herfindahl-Hirschman Index
  target to determine what level of market power
  should be the trigger for mandated Directed
  Contracts.
• The RAs have set this figure at HHI 1150 for the
  initial period of the SEM, which means that ESB
  PG will be the only seller of Directed Contracts
  in the market for this period. (Note Ofgem have
  previously used HHI of 900 in the GB market).
• The following slide sets out the Directed
  Contract volumes and prices the initial period of
  the SEM between 1 November 2007 and 30 September
  2008.

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Suppliers - Directed Contracts (2)
Volumes of ESB PG Directed Contracts (MW)
Percentage figures refer to these contract
volumes as a percentage of ESBs generation
capacity and total system generation capacity,
respectively (for dispatchable plant only).
ESB PG Indicative Directed Contract Prices (/MWh)
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Agenda

• Objectives
• About Pöyry
• SEM and key influences on customers
• Overview
• Capacity payments
• Pool Price Pass through
• Directed Contracts
• SRMC bidding
• Demand side participation under SEM
• Conclusions

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Suppliers - SRMC bidding

• The Regulatory Authorities set out a licence
  requirement for all generators to bid in line
  with Short Run Marginal Cost principles
• This is intended to ensure that those generators
  with market power are unable to exert it to
  influence SMP determination or to game constraint
  payments in cases of localised market power
• Applying this requirement to all generators is
  also intended to prevent double payment for
  capacity at peak times
• Backed up by SMP (and generator bid) price range
  of 1000/MWhto -100/MWh

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Suppliers SRMC bidding Carbon Price Pass
Through (1)

• The RAs have set out guidance on the
  interpretation of these principles, which clearly
  stated that the full avoidable cost of CO2 should
  be included in generator bids.
• However, the impact of carbon will increase from
  2008 (EUETS Phase II) as full opportunity cost of
  carbon will be passed through into wholesale
  market price (20-25/tCO2)
• The RAs therefore has concerns over this pass
  through of the full opportunity cost of carbon,
  which could result in significant windfall gains
  for generators at the expense of end-customers.
• A further consultation paper stated the RAs would
  apply flexibility in their interpretation of
  the pass through of the avoidable costs of CO2
• Their desire is that the windfall gains
  associated with carbon allocations to generation
  would be competed away.

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Suppliers - SRMC bidding Carbon Price Pass
Through (2)

• This decision would allow generators the
  flexibility to compete away some or all of the
  benefits of the allocation of free carbon
  allowances.
• the RAs clarified that to apply any such
  flexibility would require a change in the licence
  wording and any such change would follow due
  regulatory process and would not be effective
  prior to October 2008
• It is anticipated any change will not occur until
  Oct 2008 at the earliest when the current
  Directed Contracts and Non-Directed Contracts
  with PPB and ESB PG are expected to expire.
• Moves by generators to obtain market share into
  pool may see carbon applicability reduce is
  there sufficient competition to see this happen?

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Agenda

• Objectives
• About Pöyry
• SEM and key influences on customers
• Overview
• Capacity payments
• Pool Price Pass through
• Directed Contracts
• SRMC bidding
• Demand side participation under SEM
• Conclusions

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Participation De Minimis Levels

• 10 MW participation threshold or de minimis
  level for Generators
• Parties owning a Generator or contiguous
  Generators with a Maximum Export Capacity greater
  than or equal to 10MW must ensure the Unit or
  Units are registered.
• Parties owning Generator or contiguous Generators
  with a Maximum Export Capacity lower than 10MW
  may choose whether or not to register the Unit or
  Units under the Code.
• No threshold for mandatory participation by
  Demand Side Units
• Can choose to participate whatever the size

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Participation Demand Site Units

• The aim to allow demand side participation
• requires technical and operational capability to
  deliver Demand Reduction in response to Dispatch
  Instruction i.e. must be Dispatchable
• Can submit Demand Reduction bid at a specified
  price
• Receive (generator) capacity payments when
  available
• Participation must be via your supplier

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Participation Alternative options

• Voluntary demand reduction (e.g. standby
  generation)
• benefits to customer depend on contractual
  arrangements with supplier
• Existing WPDRS
• receive a rebate for reducing demand between
  1700-1900 on winter weekdays
• could direct participation could deliver more
  revenue?
• Interruptible Load/STAR
• ancillary service revenue on offer
• Powersave
• could direct participation could deliver more
  revenue?

• SEM participation not compulsory BUT
• receive Capacity Payments based on submitted
  Availability Profile
• get paid for energy provided via demand reduction
  at SMP, where SMP gt bid price certainty (though
  not paid twice)
• direct opportunities for large consumers to offer
  demand reduction more dynamically

EirGrid/SONI recommend review of DSM arrangements
18 months after SEM implementation
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Agenda

• Objectives
• About Pöyry
• SEM and key influences on customers
• Overview
• Capacity payments
• Pool Price Pass through
• Directed Contracts
• SRMC bidding
• Demand side participation under SEM
• Conclusions

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Conclusions

• SEM offers market transparency
• Price
• Schedules
• Price derivation
• SEM encourages development in generation
  competition
• including opportunities for demand side bidding
• SEM Facilitates new entrants in supply
• Pool trading allows entry without a balanced
  portfolio
• e.g. SSE as a new entrant
• Increased competition gt
• All other things being equal lower prices
• Better response to customers needs
• Customers need to be proactive to ensure that
  they receive the benefits

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• Pöyry Energy Consulting
• King Charles House
• Park End Street
• Oxford, UK
• OX1 1JD
• 44 1865 722660
• www.poyry.com
• www.ilexenergy.com

Stephen Woodhouse 44 1865 812222,
stephen.woodhouse_at_poyry.com
Pöyry Energy (Oxford) Ltd. Registered in England
No. 2573801. King Charles House, Park End
Street, Oxford OX1 1JD.