Single Electricity Market (SEM) and interaction with EMIR. Central Bank of Ireland

Transcription

1 Single Electricity Market (SEM) and interaction with EMIR Central Bank of Ireland 11 th July 2014

2 About EAI

3 Overview of SEM and its Participants The market is a gross mandatory pool and consists of generators and suppliers, some of whom are vertically integrated. All generators & suppliers above a de minimus level trade via the pool. EirGrid and SONI (TSOs) operate the transmission network on the island. The wholesale pool price is set in each half hour effectively by the most expensive generator required to run to meet demand in that half hour. Demand is estimated daily by the TSOs on an all-island basis. On a daily basis, generators bid their short run marginal costs (mostly fuel related operating costs) into the pool for each half hour of the trading day (which runs from ). The System Market Operator (SEMO a joint venture of Soni/Eirgrid) will try to keep the pool price low by picking the cheapest bids first, until it has sufficient electricity to meet demand in that half hour. This determines the pool price or Single Marginal Price (SMP) All suppliers buy from the pool & pay the same pool price as the generators.

4 SEM Market Physical & Financial PHYSICAL POOL GENERATOR SUPPLIER Financial Contracts FINANCIAL

5 Setting the Pool price - Principle In advance of this ½ hour period all Generators offer prices and volumes to the TSO who stacks them in merit order to meet the demand System Demand MW Generator 4 Price 60 Generator 3 Price 50 Generator 2 Price 40 Generator 1 Price 30 Time of Day Generator 4 sets the Pool price for this ½ hour period

6 Financial Contracts CFDs

7 Daily Price Profile /MWh Pool Price = Load curve Generators on load receive Pool Price Suppliers taking load pay Pool Price Time of Day

8 The Purpose of a Contract For Difference Unpredictability of Pool price exposes trading entities to a volatile revenue stream / cost base A CFD is a fixed price agreement between a generator and a supplier in order to avoid the risk associated with the pool price A CFD is a financial contract independent of the pool Fixing Fuel, CO 2 and fixing the pool price allows the generator to lock down profit margin CFDs enable the supplier to offer predictable, stable prices to end consumers

9 Price Financial Contract For Difference CfD Generator gets pool price and pays supplier the difference between pool price and CfD strike Generator gets pool price and receives from supplier difference between CfD strike and pool price CfD strike Financial Contract

10 Two-way CFDs /MWh 19.00= 62 Generator pays Supplier (62-47) = 15 Contract Strike Price SMP@ 8.00 = 25 Supplier pays Generator (47-25) = Time of Day Generator must be able to forecast availability + to set strike price Generator must run to afford CfD cash payments to supplier under CfD

11 Price Volatility creates uncertain Gross Margin No financial Contracting Using Financial Contracting gross margin SMP SMP Sell power CfD stable gross margin Fuel Fuel Buy fuel swap Pool s Single Marginal Price (SMP) follows gas much more so than any other fuel Hedging power income and fuel costs = > stable gross margin => price stability Gross Margin = Power Sales Income Fuel costs

12 Overall approach to Power Contracting and fuel hedging

13 Energy Margin Volatility Generator s revenue driven by volatile SMP Energy Margin 95% worst case expected Energy margin Generator s cost driven by volatile fuel prices portfolio risk (EMaR) portfolio energy margin distribution Highly variable fuel prices and resulting variable power prices (System Marginal Price (SMP)) variable energy margin, large energy margin at risk

14 Contracting to Reduce Energy Margin Volatility Sell fixed price power financial power contracts against forecast production 95% worst case expected energy margin Buy matching volumes of fixed price fuel contracts portfolio risk (EMaR) Generator/Supplier reduces energy margin at risk by locking in a margin. It does this by: Selling/buying power Contracts for Differences (CfD) Hedging fuel, foreign exchange and carbon associated with these power CfDs.

15 Approach to Power Contracting

16 Types of CfDs Directed Contracts Example CfDs used in SEM As part of their market power mitigation strategy, the Regulatory Authorities instruct ESBPG (and NIE PPB if applicable) to sell Directed contracts The price and volume of DCs are decided by the RAs Suppliers are apportioned the right to subscribe to DCs by the RAs Non-Directed contracts ESB and a small number of other entities auction NDCs via Tullet Prebon platform Reserve price, volumes and product structures determined by the entity selling on Tullet PSO supported contracts ESB acts as an agent for the CER and facilitates the process of selling and settling these PSO CfDs, but it does not make any money from this process Market participants may also utilise other exchanges and broker platforms to hedge their commercial risks

17 Summary Hedging plays a specific and defined purpose in SEM to manage day-to-day commercial and treasury risks Need to recognise role of RAs/ACER in monitoring energy markets EAI considers Information Sheet and external audit sign-off should be sufficient Would welcome cooperation with CBI in developing proposed Information Sheet

18 Additional info

19 How SEM CfDs are priced Directed Contracts Price based on formula determined by Regulatory Authorities based on their own computer models Non-directed Contracts Average forecast SMP is determined from computer models Model inputs include: Gas Prices, Carbon Prices, System Demand, Plant availability, Wind production forecasts A risk premium is then added to determine reserve prices, taking account of market assessment CfDs are auctioned with this reserve price and the price achieved (clearing price) can be higher if sufficient market demand

20 CfD product Types Baseload means at the same Contract Quantity and Settlement Quantity for all Settlement Periods during the Contract Period. Mid-Merit ( ) means at a Contract Quantity which has the same value during all Settlement Periods during the Contract Period, and where the Settlement Quantity is equal to:100% of the Contract Quantity in all Settlement Periods beginning at 07:00 and ending at 23:00 on Business Days; 80% in all Settlement Periods beginning at 07:00 and ending at 23:00 on Non-Business Days; and zero at other times. Mid-Merit 2 ( ) means at a Contract Quantity which has the same value during all Settlement Periods during the Contract Period, and where the Settlement Quantity is equal to: 100% of the Contract Quantity in all Settlement Periods beginning at 07:00 and ending at 19:00 on week days; zero at other times. Peak ( ) means at the same Contract Quantity for all Settlement Periods arising during the Contract Period, and where the Settlement Quantity is equal to: 100% of the Contract Quantity in all Settlement Periods beginning at 17:00 and ending at 21:00 on all days during the Months of October, November, December, January, February and March during the Contract Period; zero at other times.