1. SEM Regional Integration FUI Stakeholder Group November 2009

2. SEM Legislation Legislation in Ireland and Northern Ireland established the All Island electricity market - SEM Generators and Suppliers operate under licences granted by the regulatory authorities – CER and NIAUR Regulators have licence enforcement powers re: Grid Code, TSC and Bidding Code of Practice Market is governed by the SEM Committee – no ministerial policy decisions on SEM matters SEM Committee – CER / NIAUR and two independent members Identical legal powers to SEMC in both jurisdictions

3. AII Island Regulation Regulation Hierarchy Regulation of the SEM jointly managed by CER and NIAUR SEMC (Commission members, NIAUR members and independent members) Oversight Committee (Directors of CER and NIAUR) Joint Management Units The work of the different divisions are led in one regulatory office with shadow unit in the other TSC management – Dublin Market Modelling – Dublin Market monitoring – Belfast SMO regulation - Belfast

4. 4 SEM Key Features Gross Mandatory Pool Day-ahead complex bidding A single system marginal price (SMP) that is set for each trading period, based on a market schedule that is unconstrained by transmission limitations Central Dispatch Separate Capacity Payments Mechanism Locational transmission losses

5. 5 SEM Key Features Sale and purchase of electricity is conducted on a gross basis, with all generators/suppliers receiving/paying the same price for the electricity sold into/bought via the pool Bilateral financial contracting (e.g. contracts for differences) can still occur, but the arrangements for doing so are separate from and not covered within the Code

6. Moyle IC Moyle currently the only “IC” ATCs of 450MW/400MW imports and 80MW exports Sealed envelope auctions of –Long term capacity (1 – 3 years) auctions RAs to consult on 2009 scope in April/May –Monthly capacity Reserve prices of £2,078/MW/month Standard and non-standard products (recently oversubscribed)

7. ICs & the TSC IC users treated as predictable price makers Uniquely allowed to submit half hourly commercial offers IC dispatch quantities set at 12 noon on D-1 Imports across the Moyle from GB are likely to reduce SMP Exports are likely to increase SMP IC users get capacity payments on imports and pay on exports Rules primarily designed with Moyle in mind Moyle not subject to EU regulations

8. Analysis of Trading Moyle April 2009 Interconnector Issues paper ref: 09/042 No relationship between IC use and price differentials pre- SEM Some influence of price on flows post-SEM – 25%of flows relate to price differential Barriers to trade –Lack of alignment of gate closure and expost pricing in SEM BETTA – one hour rolling gate closure while SEM is 10am D-1 Pricing SEM D+4 –Other market misalignments Half hourly prices SEM versus BETTA EFA blocks 50MW Lack of liquidity in day head BETTA market Lack of liquid day ahead market SEM Charging - TNUoS and BSUoS in BETTA Transactions costs 80MW limit Moyle

9. SEM Regional Integration Paper – 09/096 March 2009 SEMC requested paper –Market coupling –Indicative proposals for intra day trading on ICs, facilitate compliance with CMG –Acknowledge potential costs and benefits of increased interconnection for SEM Methodology –Review of policy developments in Europe – ERGEG and EC –Meetings with Ofgem / National Grid / APX / ERGEG / SEMO / EirGrid / SONI –Consultants analysis of compliance issued raised by East West IC and feasible intra day trading options Not a paper on market coupling –implicit auctioning of capacity along with trades in electricity through power exchanges with firm day ahead price

10. Legislative Context Regulation 1228/2003 - conditions for access to network for cross borders exchanges in electricity Annex to Regulation – Congestion Management Guidelines (CMG) – detailed rules for management of congestion in market based, non discriminatory way UILOLI to apply to cross border capacity and intra day trading by 1 January 2008 East West subject to Directive and CMG in 2012 How will UILOLI work in our market? Updated by Third package measures to further strengthen internal energy market – common codes etc.

11. Regional Initiatives ERGEG Regional Initiatives Framework (ERI) 2006 created seven regional markets with aim of developing integrated regional markets in a coordinated manner FUI – France, UK, Ireland Focus of FUI work on transparency, IFA IC and balancing, SEM at margin Work within regions progressing at different speeds with different focus Efforts by ERGEG and EC to refocus efforts on integration PGG established by Florence Forum – EC, regulators, ENTSO, EurElectric and EFET – task of developing a practical and achievable model to harmonise interregional and then EU wide co-ordinated congestion management propose a roadmap with measures and timetables –Target 2015 day ahead implicit price coupling, roadmap Nov. 2009 RIG – Regional initiatives role in 3 rd Package EC study on regional initiatives – deliverables after adoption of 3 rd Package

12. Integration to date Different experiences of regional integration to date –Central West region –Nordpool –Iberian market Long /medium term capacity allocation before gate closure (explicit auctioning) – Moyle / IFA - likely to be drive for greater cooperation in this area Day ahead – most progress at integration made at this stage, price and volume coupling (BRITNED developments and issues for SEM) Intra day – between gate closure and trading, important for renewables and compliance Balancing – SO integrating neighbouring systems

13. Implication for SEM of developments At a time of reviews of regional integration policy it is important in context of SEM and East West to become increasingly involved SEM different trading arrangements to GB and France as outlined Key issues for SEM in terms of future longer term coupling – no day ahead market impediment to price coupling, no trading post gate - closure interconnector capacity not used is lost – important for CMG compliance – key design changes required? Some indicative loose coupling options outlined in paper using CfDs BETTA Illiquidity problems day ahead market and rolling gate closures also issues with coupling with continental markets – however Ofgem policy evolving over next 2 years in relation to BRITNED and IFA – important for SEM Increased cooperation on explicit auctioning of capacity on regional interconnectors with BETTA and France increasing in importance

14. Future Interconnection Potential Impacts Rising costs for consumer potentially driven by high wind and low interconnection –Low returns SEM plant –Higher emissions –More backup plant needed –Increased subsidies for wind –Compliance with CMG –Costs of East / West - recovery –Longer term security and integration benefits - isolation

15. Do nothing not an option Compliance UIOLI / intra day trading TSC rules inadequate Longer term higher prices Hoarding of capacity on IC New entrants Wind curtailment and costs Wider integration issues

16. Interconnector Use Policy Options Intra-day trading options Congestion management guidelines require such options Essential features of SEM assumed –Day ahead gate closure / 30hrs optimisation –Single market clearing price –Some explicit auctioning –No constraining down of IC at some point during D-1 Assessment criteria proposed Options –revised bids for constraint management –As above but change MSQs and SMP –As above all units –Day ahead redistribution of capacity SEM Market Coupling Options –Price coupling –Volume coupling

17. Conclusions Next Steps Develop UIOLI and intraday trading options with SO / MO and industry Bring required TSC modifications to implementation in time for East / West Work with OFGEM / CREG to develop a coordinated approach to implicit/explicit auctions and efficient use of cross-border capacity in FUI Engage with stakeholders and policymakers and evolving European policy developments

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