Deserting the island

The UK energy market must fit within an EU-wide framework being developed in parallel - that means EMR will not be the last word, says Janet Wood

We could be forgiven in Great Britain for thinking that once Electricity Market Reform (EMR), in all its complexity, is complete our energy markets will be unchanged for a while. But that would be missing the bigger picture painted by Alastair Buchanan in his recent lecture on our energy sources for the next decade, and summed up by Alan Whitehead MP in a recent meeting: is Great Britain going to be an energy island, or will it increase its links with a bigger European market?

In practice, that question is already answered. As part of the Third Energy Package adopted by the European Union in 2009, all member states will become part of an Internal Energy Market (IEM) across the EU, which will require all states to adopt a common framework on cross-border trading.

Member states will retain their own market structures, but they will have to comply with the rules of the larger market. That has implications for domestic market designs.

At the moment, Great Britain could be characterised as an island with limited interconnection. Compared with a capacity requirement of between 50GW and 70GW, we can import or export just 4GW. That is set to grow to 17GW in the next few years, and it is needed not just to import cheap power – the GB market is one of several in Europe where there is concern that as renewable capacity grows, nighttime generation could soon exceed demand, and we have to pay for that power even if we cannot use it. We want to be able to export it to our neighbours.

The IEM framework, known as the Target Model, is being developed under the auspices of the Agency for the Co-operation of Energy Regulators (Acer) in a timetable even that organisation admits is “ambitious”. The Target Model is due to be completed, and the IEM go into operation, in 2014.

The ideal, for the IEM, is that gas and electricity would be traded across Europe so that all countries could sell their excess and buy in any shortfall – whether that is a long term arrangement or one that helps system operators to balance supply and demand within hours or minutes.

The IEM and the Target Models for both gas and electricity will influence the design of our energy market. Take, for example, the capacity mechanism for electricity supply, which is one of the four pillars of EMR (even if the government at this stage professes itself no more than “minded to” introduce it). The reasoning behind it is well known: the presence of a large fleet of renewables on the system makes it necessary to have balancing plant, but it is doubtful whether companies will invest in plant that is seldom used. Similar concerns across the EU have prompted most countries to operate, or propose, capacity markets of one sort or another.

Acer believes that if its IEM was allowed to operate freely – without political interference – no capacity markets would be required. It reiterated that view in February in an opinion requested by the European Parliament’s Industry, Research and Energy committee.

Acer said an energy market would offer both the security of supply and the flexibility required – but only if the market were able to “function unhindered”, if prices were allowed to rise freely, and if demand-side response was included and materialised. However, even Acer conceded that there was a problem. A fully functioning market would include painful price rises, either as spikes or for longer periods. That was politically unacceptable, it acknowledged, and it noted there was already interference in price formation in some markets. Perhaps an even bigger problem is that potential investors would never believe such interference would not be forthcoming.

Reluctantly, Acer has accepted that many member states will develop capacity mechanisms, and its concern is to make sure that they do not distort the IEM. As a result, it wants to set requirements for any new mechanism – including that proposed here. Acer says all national mechanisms should all have the same standards for system adequacy and security. They should all be open to participants from other countries and they should anticipate issues that might arise in that situation. That means a GB operator could offer capacity into the GB market from parts of its generating fleet sited elsewhere in Europe, and vice versa. However, keeping that promise, even if there were a shortage in the local market, could be tricky in political terms. Also, Acer says, any capacity mechanism must be understood to be time-limited.

Clearly, these requirements will help determine the design of a capacity market here. And although the 2014 Target Model is intended to ease trading between national markets, leaving member states to set their own internal market rules, in practice it will force changes in existing market structures across the UK and Europe. How much change will depend on the market.

In a 2012 assessment of the principles behind the IEM, Ofgem chairman Lord Mogg said: “The scope and depth of these new instruments will increasingly drive our regulatory agenda here”, and in an open letter on the 2014 framework, Ofgem said it would have a “significant impact” on GB rules.

Ofgem has been consulting on changes that will be required in current GB arrangements to meet the IEM. Some chime with current workstreams: the IEM’s day-ahead market requires a liquid market so that a reference price can be set for Britain, which reinforces current activity to improve liquidity. Others have already been implemented, such as changing interconnector charging rules.

Ofgem will also have to take account of the Target Model in its current review of cash-out, in Project Transmit, and other workstreams.

Janet Wood is a freelance journalist

Rethink for all-island Ireland

If changes in the GB market could be relatively straightforward, the same will not be true of the Single Electricity Market (SEM) that encompasses the markets of Northern Ireland and the Irish Republic.

The SEM Committee has also been consulting on how it can move towards the Target Model and has come to the conclusion that evolution is neither sufficient nor advisable. Modifying the existing market “risks compromising the integrity of the market infrastructure”, the committee says. Instead, it has decided to redesign the SEM from scratch just four years after it launched, using the same process that it did to design the original market.

The committee plans to begin high-level design at the end of May this year, and the current timetable would see market trials begin in late 2016. It has a detailed timetable for the development, but it does have concerns about starting market design before final details of the Internal Energy Market (IEM) are settled, saying it is designing “around a moving Target”.

That raises co-ordination issues for the GB market because Acer envisages the IEM progressing in regional stages, and the first would see the GB and SEM markets linked, and then grouped with France. It’s a complex process, and a hint of the intricacies to come if we want to gain the benefits of being less of an energy island.

This article first appeared in Utility Week’s print edition of 12th April March 2013.

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