ESB NATIONAL GRID RESPONSE TO CER/03/266 INTERCONNECTOR TRADING PRINCIPLES IN THE MAE

Transcription

1 ESB NATIONAL GRID RESPONSE TO CER/03/266 INTERCONNECTOR TRADING PRINCIPLES IN THE MAE ESB NATIONAL GRID PAGE 1

2 EXECUTIVE SUMMARY There are a number of considerations to be made in relation to interconnector trading in the MAE. In particular, the level of interconnection both direct and indirect, via other interconnected markets, impacts on the respective design arrangements and harmonisation initiatives such as EU Cross Border Trading. In choosing an appropriate interconnector trading mechanism for Ireland, ESBNG believes that a merit order dispatch at the interconnector node could produce the correct economic signals to facilitate cross-border trade. However, in attempting to create firmness through capacity auctions, ESBNG believes that options 2 and 3 differ from the MAE nodal design which provides implicit access through strategic bidding. The use of the boundary entity in the submission of bid offers is not clearly specified. ESBNG believes that this entity could have a degree of market power in that they are responsible for the bidding strategy adopted for all trading participants in the interconnected market. Specific rules could be developed that would reduce the likelihood of the entity maximising its trading position at the expense of MAE participants. ESBNG would like to raise the important issue of seams and their effect on the trading across all interconnectors. At present, there are a number of differences with the Northern Ireland system which create challenges in both markets for system operators and participants. For example, the imbalance pricing mechanisms differ such that it is more worthwhile for participants to spill or top-up their traded amounts in Ireland than in the Northern Ireland system. This has impacted system and market operations in both Ireland and Northern Ireland. This could become even more of an issue in the MAE, where wholesale market prices are transparent to all, while in Northern Ireland they are hidden through bilateral contracts. Ideally, ESBNG would like to have little or no seams across the interconnector. Realistically there will always be some; how they are dealt with and their impact to both markets needs to be given due consideration especially when moving to transparent wholesale pricing in the MAE. ESBNG believes that there are a number of scenarios that could be envisaged for interconnector trading with Northern Ireland. However, we would like to reserve our position on recommending a preferred scenario until the results of the NERA report are known. All of the scenarios will require clear interconnector capacity definitions namely TTC, NTC, TRM, ATC and CBM such that ESBNG can have the facility to obtain or share sufficient operating reserves. ESB NATIONAL GRID PAGE 2

3 LIST OF ABBREVIATIONS ATC Available Transfer Capacity CBM Capacity Benefit Margin CER Commission for Energy Regulation CfD Contract for Differences CHP Combined Heat and Power ESBNG ESB National Grid ESB PES ESB Public Electricity Supplier FTR Financial Transmission Right LMP Locational Marginal Price LMP Locational Marginal Pricing MAE Market Arrangements in Electricity MCE Market Clearing Engine NTC Nett Transfer Capacity REC Renewable Energy Certificate RES Renewable Energy Sources PSO Public Service Obligation SMO System and Market Operator SONI System Operator of Northern Ireland TRM Transmission Reliability Margin TTC Total Transfer Capacity UWSP Uniform Wholesale Spot Price ESB NATIONAL GRID PAGE 3

4 1. INTRODUCTION ESBNG has comments regarding the consultation document on interconnector trading in the MAE. Generally, interconnectors can be used to facilitate competition in a fully open de-regulated market. However, in order to promote the flow of trade across markets, interconnector arrangements must also take account of the varying requirements of TSOs in different jurisdictions. In this response, ESBNG would like to address the particular issues that affect Ireland and its existing and potential interconnections with other markets. Though Ireland is a small system on the world scale, due to the discreteness of generation portfolio and resulting lack of many competitive players, interconnection has the potential to play a significant role for both system and market operations. Ireland, however, needs to develop robust trading principles without compromising system security. There is no guarantee that any set of principles will deliver cheaper electricity to the Irish consumer. In fact, there is a significant risk that there would be shortages of electricity due to increased exports to other markets. This would arise due to seams issues between the two markets allowing arbitrage opportunities to develop. These have the potential to be detrimental to system security and reliability. The proposal to develop an East-West interconnector must be considered in the light of the seams issue. The UK design is a decentralised one, which means that participants in the UK can use the transparency of the Irish market to their own advantage while not revealing their own commercial position. This needs to be acknowledged. The main focus of this response deals with the interconnector with Northern Ireland as this is currently the only connection Ireland has with another market. ESBNG is open to further discussion on any comments or issues raised as part of this consultation. ESB NATIONAL GRID PAGE 4

5 2. TRADING PROPOSALS ESBNG understands that the option to create a merit offer curve at the interconnector node could facilitate the determination of the cheapest set of offers for trading across the interconnector. In this way option 1 would create an open and fair means of maximising trade across the interconnector with the ability to superposition trades (as is currently done). However ESBNG believes that under this option there will be no special trades 1 and no long-term capacity holding, being offered. Both options 2 and 3 offer long-term physical rights on the interconnector. 2 ESBNG believes that these interconnector rights differ to the implicit rights being offered on other system nodes in the MAE design. By placing firmness on the interconnector node, this would add a significant level of complexity in terms of requirements for: An earlier gate closure, Announcements to the market of NTC and Hierarchies in the MCE engine for determining which participants can/cannot bid. ESBNG believes that options for offering long-term capacity on the interconnector should be considered in light of the above. All three options would result in participants receiving a locational price which would signal what the costs were to inject or take energy off the system at the interconnector trading point. This price would also contain the physical constraints and congestion charges at this point on the Irish network. There would be no special trades other than the system operator s requirement for reserve after gate closure. 1 These are defined as either TSO-TSO trades or the Ballylumford contract between ESB and NIE. 2 Given the Cross-Border Trade Regulation (1228/2003), option 2 is not in harmony with the EU proposals which state that nett transfer capacity must be published by TSOs, in addition to indicating any capacity already reserved. ESB NATIONAL GRID PAGE 5

6 3. TRADING PROTOCOLS It is unclear what the Boundary Entity is within a centralised/decentralised market and there needs to be further clarification on the use of this entity. In particular, ESBNG would view this entity as having significant market power in that it could withhold delivery of energy until the interconnector nodal price is high enough. Given that the MAE prices are transparent while those in a decentralised market are not, this means that unless the prices are worthwhile then the exports from the other market to Ireland will not be made. ESBNG would believe that there needs to be specific rules to address this issue. In order to incorporate two separate systems, operators in each market will require delivery of information in a timely fashion. It is important to decide on the best protocols for both systems such that it maximises all trading positions. ESB NATIONAL GRID PAGE 6

7 4. SEAMS ESBNG believes that there needs to be an acknowledgement of the seams that exist between the two markets. In this response, ESBNG believes it is important to detail what the differences are, given the MAE design in Ireland and the decentralised design in Northern Ireland We believe that there are not just a few technical and institutional differences 3 but rather a number of significant market and system operational issues that are causing challenges in the present market and that have the potential to become more significant in the MAE. 4.1 Trading Regimes The two trading regimes differ completely, the MAE design is a centralised market with transparent prices while Northern Ireland has a decentralised market with administered top-up spill and spill prices. At present both markets have a decentralised design. However, there presently exists arbitrage opportunities for players to avail of differences in the markets. 4 Thus with the implementation of the MAE, ESBNG believes there will be significant asymmetry which will benefit the non- Ireland participant as the wholesale price in Ireland will be known while prices in the interconnected country will not. The MAE design is based on all participants receiving the same information regarding prices (and therefore costs) while the Northern Ireland participant doesn t have a corresponding obligation to share this information. 4.2 System Operator Agreements Operating agreements between TSOs need to be formally agreed to ensure system operation requirements are met while facilitating interconnector market trades. 4.3 Capacity Allocations Northern Ireland has a system of offering long-term rights on the interconnector which will be at odds with the implicit rights being offered on system nodes in the MAE. 4.4 Contracting With the introduction of financial contracts instead of physical contracts the link between generators and suppliers will be broken. This is not the case in Northern Ireland and the UK. 4.5 Market Closure SONI fixes its market trades at Day-1 at 11am, after this time no market offers/nominations are allowed. This means that participants in Northern Ireland will have less time to make changes in the MAE than their counter-parts in Ireland. SONI also sends market and operations information in six hour trading blocks not each half-hour, though there are proposals to change this under the present trading arrangements. This could prove to be a significant stumbling block if at least halfhour updates are not provided. The gate closure for receipt of final nominations from 3 Section 5.1, CER/03/ In Ireland the winter peak top-up and spill prices ( 54/MWh and 32/MWh respectively) make it more favourable to participants to trade out their imbalances in Ireland than in the Northern Ireland market (where winter peak top-up is 70/MWhr and spill is 28/MWHr). ESB NATIONAL GRID PAGE 7

8 SONI is currently four hours ahead, which differs from the MAE gate closure. ESB NATIONAL GRID PAGE 8

9 5. POTENTIAL SCENARIOS Given option 1 for merit order clearing of offers at the interconnector node, there are three potential scenarios envisaged for the way the trading over the Louth-Tandragee interconnector could be arranged. 1. Northern Ireland opts to stay with the status quo. This would mean that the system of sending market nominations data in 6 hour blocks would continue. The gate closure for system operation changes between each operator would be the 4 hour gate closure. SONI would be responsible for the nominations that are offered if they are accepted in the MCE. There are issues with this arrangement as now ESBNG will need to create prices for all the nominated flows North-South so that the MCE can output a clearing price at the interconnector node. An error account also will be required as there will be real-time imbalances over the expected trades versus the actual flow An alternative may be where Northern Ireland design does not change but in dealing with the interconnector a boundary entity is set-up with the special purpose of submitting generation offer curves for imports to Ireland, at half-hour intervals up to gate closure. If this entity were to be SONI then they could create this curve from nominations received and determine prices for each offer. This would be directly inputted to the MCE and together with the prices for the exports from Ireland, an LMP is calculated. 3. If Northern Ireland were to change their trading regime to produce LMPs at each node then SONI could send the generation export curve at the interconnector point. This export curve would represent the offers of Northern Ireland participants based on their commercial positions and offer strategy. ESBNG would like to reserve our position on recommending a preferred scenario until the results of the NERA report are known. However in all options ESBNG will need to retain the TRM such that it can have the facility to obtain and share sufficient reserves from interconnection. 5 At present, ESB PES is the counter-party to all non-market trades and imbalances while NIE is the equivalent in Northern Ireland. ESB NATIONAL GRID PAGE 9