by Dan Quinn, Head of Energy Markets, SSE Airtricity
As the clock ticks down to the imminent go-live of I-SEM, energy industry players are wracked by the I-SEM ‘fear factor’ that dominates every waking moment of our working days. Will ‘imbalance cost’ narrative continue to dominate route-to-market negotiations? Will it still be necessary to incur higher start-up costs, annual transaction fees and the additional administration burden associated with ‘Supplier Lite’? Or will we all revert to the long-term security of Power Purchase Agreements with an imbalance cost embedded, just as happened in Great Britain?
‘Supplier Lite’ was originally designed as a creative response to a couple of rather unique challenges in Ireland’s energy market.
Firstly, wind development was happening at a faster pace than supply market liberalisation. This meant that the market for PPAs wasn’t very well developed and access to the market could be difficult to negotiate.
Just how difficult can be illustrated through the origins of the SSE Airtricity supply business. This was primarily set up over 15 years ago, to facilitate market access at the time for our emerging renewable generation fleet. While this was a resource-intensive and complex way to sell renewable energy, it was better than some of the alternatives available at the time – and it was a notable success, as it led to the creation of what is now Ireland’s largest provider of 100% green energy to home and business customers.
Secondly, the relatively ‘benign’ gross pool structure of the new Single Electricity Market meant renewable generators faced only a limited range of risk compared to other market designs. Absolute wholesale power price risk wasn’t a worry if you had a REFIT contract and any forecast errors in the scheduling and dispatch of your units were the responsibility of the TSO. ‘Supplier Lite’ took advantage of the simple gross pool structure to fix the lack of the ‘route-to-market’ problem. This ‘Supplier Lite’ mechanism resulted in a couple of trade-offs however in terms of higher administration and additional working capital costs, but five years-ago these seemed a small price to pay for reliable market access.
However, as we move into I-SEM, the industry landscape is very different. And with established utilities now providing a secure long-term route to market, are the trade-offs associated with ‘Supplier Lite’ still required?
One key concern for industry players under the new I-SEM arrangements has been the cost of balancing. Industry focus has been on who takes the imbalance risk, what the cost will be, and whether it will be fixed-price or market-tracked.
Balancing has been touted as the most concerning aspect of I-SEM and has been a key aspect of off-take agreement negotiations. We will all be familiar with the scare stories from the GB market. On May 17 last year, the GB supply margin was unusually tight for the time of year – renewables generation was low, the BritNed interconnector was on a planned outage, and a number of gas plants were also forced off. As a result, the imbalance price hit £1,500/MWh.
Events outside the power market can also end up feeding into the imbalance price. On the morning of December 12 last, a hairline crack in a pipe caused the shutdown of Britain’s largest oil pipeline system, the Forties, causing rapid gains in the NBP gas price. This disruption fed through into the GB power market, driving the GB balancing market to a peak of £160/MWh.
While these market scare stories provide insight into the functioning of the market and the challenges for energy market traders, they should not cause concern to project developers and financiers. The risk should be managed so that the developer and financier is protected and assets can perform unaffected, regardless of thrilling market-disrupting events – and that can be the case under I-SEM.
Once the balancing costs of the initial period of I-SEM have been analysed the cost of imbalance will merely be embedded in the cost of managing the off-take agreement. It will be for the PPA provider to take the imbalance risk and therefore to react and optimise the portfolio under their management during market-disrupting events. Fast forwarding a year into I-SEM, PPA counter-parties will be protected from these effects with the PPA provider taking the imbalance risk.
At SSE, we’ve been through a lot of market change. We’ve seen the England and Wales Electricity Pool morph into NETA and subsequently BETTA. Under the comparable GB BETTA market, we already operate 24/7 electricity trading and renewables operations desks to maximise revenues. So, for the Energy Markets team at SSE Airtricity, it makes simple sense to expand SSE’s established trading experience and operations desks to manage third party assets alongside the assets in our own generation portfolio. In doing so, we can optimise and de-risk your assets as we optimise and de-risk our own.
By May 2019, the I-SEM project will have been well-completed, the I-SEM ‘fear factor’ will be a thing of the past, and it will be business as normal once again in the SEM. And based on GB experience the PPA market will similarly return to a steady and familiar arrangement.
The risk will sit where it is best managed – with the experienced and well-equipped trading teams of large scale portfolio managers. And market scare stories can be consigned to intriguing light reads for market enthusiasts.