Transcript Industry forum - Commission for Energy Regulation | CER.IE

Industry forum
Review of Electricity Trading Arrangements
Sheldon Park Hotel
21st November 2002
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by an oral discussion, so that the slides alone
do not fully represent the presentation content.
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speakers only. This presentation does not
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PA Consulting or the views of our clients.
21/11/2002 - 2
Tom Reeves
Commissioner
Welcome
and
backgroun
d
Review
timetable
Objectives
and Terms
of
Reference
High level
options
Open forum
Specific
issues for
Ireland
21/11/2002 - 3
Timetable for today
Chair: Cathy Mannion, Head of Generation and Supply, CER
Topic
Timing
Presenter
Registration Tea/Coffee
8:30
Welcome and background to review
9:00 – 9:05
Tom Reeves, Commissioner, CER
Objectives and Terms of Reference
9:05 – 9:25
Keelin O’Brien, Manager, Electricity
Trading, CER
Timetable for review and consultation
process
9:25 – 9:45
Stuart Curson, PA Consulting
Description of three high level options
9:45 – 10:30
Ed Kee, PA Consulting
Tea/Coffee
10:30 – 10:45
Specific considerations for the Irish
Market
10:45 – 11:30
Ed Kee, PA Consulting
Open Forum
11:30 – 12:25
Cathy Mannion, Head of Generation and
Supply, CER
Conclusion
12:25 – 12:30
Tom Reeves, Commissioner, CER
Lunch
12:30
21/11/2002 - 4
Keelin O’Brien
Manager, Electricity Trading
Welcome
and
backgroun
d
Review
timetable
Objectives
and Terms
of
Reference
High level
options
Open forum
Specific
issues for
Ireland
21/11/2002 - 5
Rationale for revised arrangements
Ministers policy direction:
“ The Commission for Electricity Regulation [would] carry out
a review of the overall trading arrangements early in 2004,
with a view to introducing, after completion of the
transitional period, appropriate wholesale market
arrangements applying equally to all bulk generation and
supply in Ireland.”
Accelerated review to help provide certainty in the market
and ensure adequate time for any implementation
21/11/2002 - 6
Objective of Review
The primary objective of the review is that:
the trading arrangements should deliver an efficient
level of sustainable prices to all customers, for a supply that
is reliable and secure in both the short and long-run.
21/11/2002 - 7
Commissions Duties & Functions
Other Objectives of review will be in line with the duties and
functions of the Commission:




Security of Supply
Promoting Competition
– Minimising of Entry Barriers
– Transparency
– Mimimising Risk
Minimising Transaction Costs
Fostering Renewables and CHP
These will be developed over the next few months
21/11/2002 - 8
Scope of Review
The scope of the review includes:





Trading Arrangement
– Pool
– Gross or net
Market Types
– Energy
– Capacity
– Ancillary services
Financial Markets
– Spot
– Forwards and futures
Price Setting
Demand Side Options
21/11/2002 - 9
Network Issues
A number of network issues must also be considered
including:





Dispatch Rules
Access Rights
Constraints and Payments
Treatment of Losses
Transmission Tariffs
– outside trading arrangements but could impact on
trading
21/11/2002 - 10
Market Structure Issues
Market structure issues are also need to be addressed:



Impact of Market Power
Arrangements for PES post 2005
– Supplier Of Last Resort
– Tariff Regulation
– Economic Purchase Obligation
Transition for Existing Competitors
21/11/2002 - 11
External Environment
There are a number of external factors which may impact on
our market:





EU Developments
– New directive
– Cross border tariffs
Interconnection with NI / Scotland
E/W Interconnection
Possible Convergence of Markets
Inter-relationships between Gas / Electricity
21/11/2002 - 12
Stuart Curson
PA Consulting
Welcome
and
backgroun
d
Review
timetable
Objectives
and Terms
of
Reference
High level
options
Open forum
Specific
issues for
Ireland
21/11/2002 - 13
Consultation process for the review
Principles of the review:

To begin with a broad range of possible options

To hold structured consultation throughout the review

To facilitate one to one discussion between stakeholders and the review
team

To incorporate stakeholder feedback into the review

To gradually focus upon a single option following the consultation periods
This review does not begin with a pre-formed solution for the Irish Market.
21/11/2002 - 14
Consultation timetable
Today’s forum to present
high level options
Forum to present more
detailed options and
areas requiring further
consideration
Project plan
O
N
D
J
F
M
A
Review framework
Consultation period on
option detail, concludes
with decision on way
forward by CER
Stakeholder consultation
Option analysis
Stakeholder consultation
Detailed design
Implementation planning
Stakeholder consultation
period, bi-lateral meetings
included. Concludes with a
summary paper
Detailed design and
implementation planning
begins before decision to
allow improved decision
making
Deliverable
CER workstream
Consultation period
21/11/2002 - 15
Ed Kee
PA Consulting
Welcome
and
backgroun
d
Review
timetable
Objectives
and Terms
of
Reference
High level
options
Open forum
Specific
issues for
Ireland
21/11/2002 - 16
High level options
The purpose of this section is to:

Consider basic market structures used around the world

Gain a common understanding of the status quo

Consider which basic structures may be appropriate for Ireland
21/11/2002 - 17
High level generic market types
Vertical
Integration
Bilateral Contract
Mandatory Pool
Balancing market
Pool
Physical supply contracts
Financial CfDs
PPAs
Generation
Dispatch
Balancing
market
Transmission
Distribution
Supply/Retail
France, US
(pre-market)
Czech Republic,
Malaysia
Australia,
Singapore
NETA, California,
FERC SMD
Examples
21/11/2002 - 18
Areas not for consideration
It has been decided that that the following models are not considered to be
suitable future market types for Ireland:

Vertical integration

Bi-lateral contract only
It is unlikely that either of these would satisfy EU requirements
21/11/2002 - 19
Current industry structure
Generation ESB - PG
Independent
market and
system
operator
Independents
Transmission
Distribution
Supply
ESB - PES
Customers
ESB - PES
21/11/2002 - 20
Currently there is a regulated tariff arrangement
between ESB PG and PES
Regulated tariff arrangement
ESB - PG
Tariff based upon
cost to serve analysis
Independent
market and
system
operator
Transmission
Distribution
ESB - PES
ESB - PES
21/11/2002 - 21
Independents enter the market via bi-lateral contracts
Independent
market and
system
operator
Transmission
Distribution
ESB - PES
Bi-lateral contracts
ESB - PG
Independent
generators
and retailers
enter in bilateral
contracts to
hedge
customer
prices
ESB - PES
21/11/2002 - 22
VIPP contracts
VIPP contracts
ESB - PG
Independent
market and
system
operator
Transmission
Distribution
ESB - PES
VIPP contracts
allow ESB to
supply
independents, but
these contracts
expire before the
end of the
transitionary
period
ESB - PES
21/11/2002 - 23
The transitionary arrangements have evolved into the
current status quo
VIPP contracts
Congestion
managemen
t
Transmission
Distribution
Regulated topup and spill
market
Bi-lateral contracts
Regulated tariff arrangement
ESB - PG
ESB
may be
able to
directly
supply
independ
ents
ESB - PES
21/11/2002 - 24
Features of the status quo
Status Quo
Regulation
Detailed
Industry Structure
Largely vertical – some independents
System Ops & Dispatch
Bi-lateral and Balancing
Energy Markets
Tariff arrangements & Bi-lateral balancing
Ancillary Services
Self-provision and contract
Price Setting
Contract and Tariff
Settlement
Relatively simple
Capacity
Planned?
Green
Some advantages
Retail Competition
Access and supply competition
Vesting Contracts
Tariff arrangements
Transmission Access
Firm access rights
21/11/2002 - 25
Decentralised market
ESB - PG
Current
regulated
arrangements
possibly stay
in place,
although their
form may
change
Power
Exchange
Transmission
The exact
nature of the
power
exchange may
be defined or
left to
independent
providers
Balancing
market &
system
operator
Contracts for
power can be
bi-lateral or via
a power
exchange
Distribution
ESB - PES
21/11/2002 - 26
Features of a Decentralised market
Decentralised Market
Regulation
Balancing market monitoring (perhaps contracts)
Industry Structure
Atomised structure is better
System Ops & Dispatch
Bi-lateral and balancing market
Energy Markets
Bilateral; maybe spot balancing market
Ancillary Services
Contract or market
Price Setting
Balancing market with two-part or single spot
price
Settlement
Can be very complicated (many parties)
Capacity
Market driven
Green
Separate, two-part balancing price hinders
Retail Competition
Access and supply competition
Vesting Contracts
Tariff arrangements
Transmission Access
May be part of balancing market
21/11/2002 - 27
Centralised market
All power
is bought
and sold
through
the spot
market
ESB - PG
Mandatory spot
market
Current
regulated
tariff may be
replaced
with financial
contracts
Financial
CfDs
between
parties to
hedge prices
in the spot
market
Transmission
Distribution
ESB - PES
21/11/2002 - 28
Features of a centralised market
Centralised Market
Regulation
Spot market monitoring
Industry Structure
Atomised structure is better; may rely on tariff
arrangements as substitute hedge contract
System Ops & Dispatch
Central
Energy Markets
Centralised spot market
Ancillary Services
Contract or market
Price Setting
Spot price, SMP or administered (uniform, zonal,
or LMP)
Settlement
Simple, with hedge contracts outside market
operator
Capacity
Market driven
Green
Separate, incentives outside spot market
Retail Competition
Access and supply competition through CfDs
Vesting Contracts
Tariff arrangements
Transmission Access
TBD if uniform pricing chosen
21/11/2002 - 29
Ed Kee
PA Consulting
Welcome
and
backgroun
d
Review
timetable
Objectives
and Terms
of
Reference
High level
options
Open forum
Specific
issues for
Ireland
21/11/2002 - 30
A number of issues face Ireland
Some issues are specific to Ireland and some are common in all markets,
although their relative importance may be different
Short-run issues:



Optimal real-time dispatch
Real-time locational price signals for generation or load
Liquidity in the contract or imbalance markets
Longer-run issues:






Generator investment incentives
Transmission congestion
Locational signals for new generation/new load
Cost recovery (congestion, PSO, etc)
Market dominance of ESB
Options for customers with access to market
21/11/2002 - 31
There are also important economic and physical interdependencies to be considered
Interconnection with
Northern Ireland which is, in
turn, connected to Scotland
The Irish economy has grown
dramatically over the last
decade and so has the
consumption of electricity.
The Irish economy is
approximately 1% of the total
EU economy.
Existing wholesale market
structure (e.g., small numbers
of participants, ESB dominance
etc.) must be reflected in any
new market design.
Interconnection between
England and Scotland is
being upgraded
Low wholesale electricity
prices due to overbuilding,
NETA, and other issues.
Britain is interconnected to
continental Europe for both
gas and electricity
Continental Europe in the
process of major electricity
industry and market reform
Potential for direct connection
to England & Wales
21/11/2002 - 32
Two important institutional and structural issues
The paper highlights two key issues in Ireland:

Generation adequacy

Market dominance
There are a number of different possible solutions to these issues
There are also a number of other issues which also are very important and will
be considered in due course, including:

Security of supply

Promotion of competition

Minimising transaction costs

Fostering renewables
21/11/2002 - 33
Generation adequacy
Generation adequacy is a key concern. Electricity markets address this by:

Energy and contract market price signals; or

Separate capacity markets or mechanisms
There is concern that markets alone may not deliver adequate generation
Separate capacity markets or mechanisms could include:

A default buyer who can enter into contracts to encourage new entry

Development incentives (outside market) tender for new generation

Capacity requirements upon retailers
21/11/2002 - 34
Default buyer in a centralised market
Default
buyer
The default buyer
may enter into
financial contracts
with any new IPP and
retailers if the market
is not delivering
sufficient reserve
capacity
Current regulated
tariff may be
replaced with
financial contracts
and may remain in
place
Possible
new IPP
ESB - PG
Mandatory spot
market
Transmission
Distribution
ESB - PES
21/11/2002 - 35
Market dominance
ESB PG currently controls more than 70% of generation capacity, new
entrants may see this as a risk to entering the market
In some markets, hedging and vesting contracts have been imposed to
reduce the impact of market dominance and maintain acceptable retail
prices
Such contracts can be achieved in a number of ways including:

Direct regulated contracts between incumbent generators and retailers

Customers have contract rights and can transfer them between retailers

A third party regulated dominant buyer for all incumbent generation
Alternatively, price or bid caps could be imposed to control market power
21/11/2002 - 36
Dominant buyer in a centralised market
Dominant
buyer
ESB - PG
The dominant
buyer is a party
in all
transactions
between the
business units
of ESB and may
enter into
contracts with
IPPs and
retailers if the
market is not
delivering
sufficient
reserve capacity
Mandatory spot
market
Transmission
Distribution
ESB - PES
21/11/2002 - 37
Cathy Mannion
Head of Generation and Supply
Welcome
and
backgroun
d
Review
timetable
Objectives
and Terms
of
Reference
High level
options
Open forum
Specific
issues for
Ireland
21/11/2002 - 38
Conclusion
Welcome
and
backgroun
d
Review
timetable
Objectives
and Terms
of
Reference
High level
options
Open forum
Specific
issues for
Ireland
21/11/2002 - 39