TSC Modifications Panel Meeting Contingent Capital TSC Modifications Panel Meeting Jan 2017 Confidential For discussion only

Key Objectives Review of questions from December meeting Proposed changes Vote Option 1 Option 2 Option 3 Confidential For discussion only

Why is contingent capital needed? Accumulated Charges-Payment Contingent Capital Market Payments Market Charges

Purpose of modification Recognise that contingent capital will be required for smooth running of the market Place obligation on Market Operator to seek credit facility Clarify sources of funding for such an arrangement (level of funding to be determined as part of normal revenue control process) RA approval required to change amount of contingent capital Publication of any changes to all participants Funds Available Surplus of Charges over Payments for the billing period Surplus of Charges over Payments as accrued from previous billing periods Contingent Capital remaining Define the Charges and Payments to which the Contingent Capital can apply Remedial measures if Contingent Capital is likely to be exhausted Right to suspend and accrue payments if Contingent Capital is exhausted Confidential For discussion only

Socialisation fund? F.21.1.3 The Market Operator shall determine the Socialisation Balance (CBSOCd) for a Settlement Day, d, through applying any adjustments necessary to the Initial Socialisation Balance calculated in accordance with paragraph F.21.1.1, including: (a) adding the amount of any Termination Charge recovered under section J.7.1 of the Capacity Market Code (and, in the event of a failure by a Participant to pay a Termination Charge invoiced under that section, any amount recovered by the System Operators as a result of a call or demand on the Participant’s Performance Security under that section) and paid to the Market Operator; and (b) to the extent the Market Operator considers appropriate, adding any accumulated over-recovery by the Market Operator in respect of another charge under this Code that is calculated by reference to a parameter or price set by the Regulatory Authorities on the basis of expected costs.

Factors to be considered Extent to which contingent capital is already drawn e.g. if DBC running above or below budget Ability to fill the hole in the hedge Scarcity event – price exposure is 2,500€/MWh 500€/MWhr strike price 3,000 €/MWhr scarcity price 400 MW unit un-available for 8 hours = 8m€

Running Order – prescriptive? Imperfections charge Contingent Capital Requirement Reduce payments Market rules, bidding code of practice Suspend and accrue only after Contingent Capital is exhausted

Transparency DBC is the main driver of contingent capital draw down TSO’s monitor DBC continuously Standing agenda item for fortnightly meeting with RA’s Can include trend alert Decision required to send out Market Message High frequency public reports Illustrate impact of individual participant's bidding behaviour Short term fluctuations may be misleading Early warning to the RA’s may trigger notification to industry

Forecasting Accuracy Difficult to forecast – wide error bars Tariff setting on the worst case scenario? Tariff’s are subject to regulatory approval Contingent capital ~ insurance Insurance has a cap Tariff Contingent Capital TSC Tariff Contingent Capital TSC

End

Change in key assumptions – SEM v I-SEM Category Change in I-SEM Impact Capacity Capacity auction process in I-SEM compared to a “pot” set at the beginning of a year in SEM Capacity is self funded (pass through) on a monthly basis in SEM compared to a Tariff mechanism in I-SEM Monthly payments ≠ receipts in I-SEM Seasonal impact in Year 1 as Go Live is May-18 which is coming into the trough summer months. Payments made on a straight line basis but receipts recovered on a demand profile basis. Likely to result in a cumulative deficit build up during the summer months which should unwind during the winter months. This is a Year 1 funding risk only as the tariff year normally starts in Oct which is coming into peak winter months. Constraints & Residual Error (REVLF) Change in market rules Not required to bid on SRMC basis Participant will be paid the higher of bid price or market price for Constraints REVLF moving from pass through to tariff mechanism in I-SEM Market Interconnector Ramp rate ≠ Physical Expected increase in volatility in imbalance price due to change in bidding rules Market risk Intrinsic risk associated with the introduction of a new market Extremely difficult to quantify. Risks include: Market behaviour Design risk Remedy period Confidential For discussion only

Estimate of how much is needed