Energy Market and the SEM

Energy Market and the SEM

Richard Murphy discusses the progress to date on the creation of an All-Island Energy Market.

Energy Market and the SEM

The establishment of an All-Island energy market for Northern Ireland and the Republic of Ireland should come as no surprise to market participants. Co-operation on common energy issues has been long standing, with both Governments having a shared interest in more competitive energy markets, reduced energy costs and improved reliability of supply. It is hoped that the All-Island project can deliver on these key policy objectives.

In August 2004, the Northern Ireland Authority for Energy Regulation and the Commission for Energy Regulation (the "Regulators") signed a Memorandum of Understanding to develop an all-island electricity market. In November of that same year, both Governments jointly published an All-Island Energy Market Development Plan, setting out their plan for an all-island energy market. The creation of a single electricity market (the "SEM") is the first stage of this plan to achieve an all-island energy market.

SEM

The SEM will be a single wholesale electricity market on the island of Ireland and is scheduled to "go live" on 1 November 2007. In this market, all generators will sell all of their electricity to a gross pool and all suppliers will buy their electricity from that pool.

The SEM will provide for a competitive, sustainable and reliable wholesale market in electricity at a minimum cost necessary and should deliver long term economic and social benefits that are mutually advantageous to both Northern Ireland and the Republic of Ireland. It is expected to improve competition and investment opportunities by replacing two smaller markets with a larger all-island market of around 2.5 million customers.

Key Changes

Whilst the process of consultation on design, licensing and documentation to deliver the SEM is ongoing, some key changes will follow, in that:

• Parallel legislation will be needed in both jurisdictions to implement the SEM. The new legislation is now the subject of consultation;
• Licensing and contractual changes will be required to reflect the all-island nature of the SEM;
• A Single Market Operator will be established to manage day to day trading in the SEM; and
• A SEM Committee will be set up by the Regulators with power to make decisions in relation to cross-jurisdictional issues.

Single Gas Market

As we move beyond the SEM, the next stage of the project will include the establishment of an all-island gas market.

The paths of gas market development in both jurisdictions have followed very different routes. There are, therefore, some key issues to be addressed by the Regulators and industry generally before we can move to an all-island gas market, including the removal of existing gaps and bottlenecks in gas infrastructure, the harmonisation of trading arrangements and a co-ordinated approach to address the issue of dominance and market power.

Given the similarities between the two industries, the possible action points in creating an all-island gas market could be similar to the changes which will be introduced under the SEM.

Sustainable Energy

The all-island energy market must be capable of meeting the increasing energy requirements of the island in ways that are compatible with national and EU sustainable energy policies and targets. There needs to be co-operative development on policies that encourage and facilitate greater contributions from renewables, CHP and energy efficiency.

Conclusion

There is widespread support amongst market participants for the development of an all-island energy market but industry has been frustrated by the slow progress to date. The potential benefits of a mature all-island market include a more robust infrastructure, greater security of supply and a more stable and attractive investment location. The test, however, will be when it is up and running and whether energy users in both jurisdictions are better off than they would be in two smaller markets which are mutually supportive good neighbours, but which trade together opportunistically rather than systematically.

Richard is a Solicitor in the firm's Corporate Department. He advises a number of energy sector participants on a range of matters including corporate restructurings, commercial agreements and regulatory/competition issues.

Richard can be contacted at richard.murphy@lestrangeandbrett.com

Quote: More competitive energy markets