One of the major changes brought about by the new I-SEM design is the way the interconnectors between the Irish market and great Britain are traded and scheduled. Under the previous SEM structure, the power moving across the EWIC and Moyle interconnectors was often flowing against the economic fundamentals at the time – that is, it was exporting from the higher priced market to the lower priced market. This was a result of two things – no firm Day Ahead prices against which to nominate physical flows and participants buying capacity ahead of time and using it to manage longer term contract positions in other markets.
In ISEM interconnector capacity is traded through the sale of Financial Transmission Rights (FTRs), that give participants exposure to the price difference between the two markets in any period. For example, in any hourly trading period if the Day Ahead price in GB is €80 MWh, and in ISEM the price is €65 MWh, then the holder of an export FTR will receive €15 MWh (adjusted for the transmission losses of the relevant interconnector). The owner of an import FTR for the same period will not receive anything. Participants bid for FTRs in regular auctions based on their expectations of these price variances and their direction.
The scheduling of the interconnectors (which will determine physical flows) is also determined by the price variances resulting from the Day Ahead auctions in both markets. In ISEM, the Day Ahead auction is run using the Euphemia algorithm, which couples the Irish market with GB and other European markets to ensure the most economic flow of power. Scheduling the interconnectors on this basis allows for the exporting from the lowest price market to the highest price market, to reduce the overall cost of electricity. We can see from the below graph how the pattern of interconnector flows changed from predictable, to price responsive on the 1st October.
While the new designs provides for optimal energy flows at Day Ahead stage, we have seen in the opening weeks that they do not respond to price signals after this point, particularly in the Balancing Market. In previous articles we have described the volatile BM price periods that have been one of the main features of the new market structure. In many of these instances the interconnectors have been flowing in the opposite direction to the price signal; for example, when plant has been paid €1,000 to turn down due to excess power in the system, the market has been paying to import power from GB. The ability to adjust interconnector scheduling to optimise flows closer to real time (and react to these price signals) is a to be enabled in the near future, and will provide a valuable means of minimising balancing volatility and cost.