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I-SEM – the Reasons for Change 07 Mar 2016

Have you ever been to a conference where the Chairpersons opening remarks didn’t include a statement like “our industry is facing a period of unprecedented change?” I certainly haven’t attended such an event.  Change is always with us yet we always seem to be uncomfortably surprised by it. 

One of the most important changes in the Irish electricity landscape will be the upgrade of the existing electricity market, the SEM, to a new electricity market called the I-SEM in 2017.  Sadly, despite its name, it is not a sleek product brought to us by Apple!  The EU’s desire to create an “internal energy market” materialised through the Third Energy Package which has seen the rollout of the European Electricity Target Model across member states over the past few years.  One of the main goals of this Target Model is to streamline cross-border flow of power between coupled markets.  Markets such as Great Britain, France and Germany have been operating under the new Target Model for several years, and now it is Ireland’s turn to belatedly join the party.

Changing an electricity market can instil fear and dread in companies.  The market is, after all, where the rubber hits the road in our industry.  Assets with modest IRRs and retailers with low margins are justified in having concerns about even small changes in their revenue streams.  But as the conference chairs remind us: unprecedented change is somehow ever-present.  The key for all us is to understand the changes in front of us and prepare for them as best we can.

The current SEM is a pool market.  Pool markets are a little like markets with training wheels and often are the first market type implemented post deregulation, for example the first open electricity market implemented in England and Wales was a pool market.   It is possibly the lack of confidence system operators and regulators have in pure market forces that leads them to opt for a centrally controlled pool system.   But pool markets have drawbacks.  In Ireland the market is rigid and cannot dynamically react to changes in system fundamentals such as wind output or within day gas and coal price fluctuations.  The SEM only publishes its price four days after delivery of power, making demand participation and efficient cross border trade much less effective than it could be.  Other drawbacks of the current market include poor traded volumes in the futures market which make it difficult for small retailers to get a foot on the ladder when managing their market risks.  By 2017 we will have had the SEM market in place for around 10 years, which judging by international standards seems to be the average lifespan for an energy market design.     

So with EU compliance, better cross border trade, more dynamic pricing, better futures liquidity and the enablement of the smart grid as potential prizes for getting the I-SEM right, it now falls to the Regulators, system operators and the Industry here to design and execute the market itself. 

The I-SEM represents Ireland’s opportunity to finally enter the modern age of liberalised, dynamic, open energy markets and to take advantage of all the benefits (and challenges) that these markets entail.  It is a significant departure from the known safety of the SEM, but it is a departure which should be reacted to not with fear, but rather willingness to change and rise to the challenge. 

Through our new series of Insights we hope to offer unique insights based on our experiences abroad which will help inform our readers and enable them rise to the challenge.

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