Industry forum Review of Electricity Trading Arrangements Sheldon Park Hotel 21 st November 2002

21/11/ These presentation slides were accompanied by an oral discussion, so that the slides alone do not fully represent the presentation content. This presentation represents the views of the speakers only. This presentation does not necessarily represent the views of others at PA Consulting or the views of our clients.

21/11/ Welcome and backgroun d Review timetable Objectives and Terms of Reference High level options Open forum Specific issues for Ireland Tom Reeves Commissioner

21/11/ Timetable for today Chair: Cathy Mannion, Head of Generation and Supply, CER TopicTimingPresenter Registration Tea/Coffee8:30 Welcome and background to review9:00 – 9:05Tom Reeves, Commissioner, CER Objectives and Terms of Reference9:05 – 9:25Keelin O’Brien, Manager, Electricity Trading, CER Timetable for review and consultation process 9:25 – 9:45Stuart Curson, PA Consulting Description of three high level options9:45 – 10:30Ed Kee, PA Consulting Tea/Coffee10:30 – 10:45 Specific considerations for the Irish Market 10:45 – 11:30Ed Kee, PA Consulting Open Forum11:30 – 12:25Cathy Mannion, Head of Generation and Supply, CER Conclusion12:25 – 12:30Tom Reeves, Commissioner, CER Lunch12:30

21/11/ Welcome and backgroun d Review timetable Objectives and Terms of Reference High level options Open forum Specific issues for Ireland Keelin O’Brien Manager, Electricity Trading

21/11/ Rationale for revised arrangements Ministers policy direction: “ The Commission for Electricity Regulation [would] carry out a review of the overall trading arrangements early in 2004, with a view to introducing, after completion of the transitional period, appropriate wholesale market arrangements applying equally to all bulk generation and supply in Ireland.” Accelerated review to help provide certainty in the market and ensure adequate time for any implementation

21/11/ Objective of Review The primary objective of the review is that: the trading arrangements should deliver an efficient level of sustainable prices to all customers, for a supply that is reliable and secure in both the short and long-run.

21/11/ Commissions Duties & Functions Other Objectives of review will be in line with the duties and functions of the Commission: Security of Supply Promoting Competition –Minimising of Entry Barriers –Transparency –Mimimising Risk Minimising Transaction Costs Fostering Renewables and CHP These will be developed over the next few months

21/11/ Scope of Review The scope of the review includes: Trading Arrangement –Pool –Gross or net Market Types –Energy –Capacity –Ancillary services Financial Markets –Spot –Forwards and futures Price Setting Demand Side Options

21/11/ Network Issues A number of network issues must also be considered including: Dispatch Rules Access Rights Constraints and Payments Treatment of Losses Transmission Tariffs –outside trading arrangements but could impact on trading

21/11/ Market Structure Issues Market structure issues are also need to be addressed: Impact of Market Power Arrangements for PES post 2005 –Supplier Of Last Resort –Tariff Regulation –Economic Purchase Obligation Transition for Existing Competitors

21/11/ External Environment There are a number of external factors which may impact on our market: EU Developments –New directive –Cross border tariffs Interconnection with NI / Scotland E/W Interconnection Possible Convergence of Markets Inter-relationships between Gas / Electricity

21/11/ Welcome and backgroun d Review timetable Objectives and Terms of Reference High level options Open forum Specific issues for Ireland Stuart Curson PA Consulting

21/11/ Consultation process for the review Principles of the review: To begin with a broad range of possible options To hold structured consultation throughout the review To facilitate one to one discussion between stakeholders and the review team To incorporate stakeholder feedback into the review To gradually focus upon a single option following the consultation periods This review does not begin with a pre-formed solution for the Irish Market.

21/11/ Consultation timetable J FMAON D Review framework Stakeholder consultation Option analysis Stakeholder consultation Detailed design Implementation planning Project plan Deliverable CER workstream Consultation period Today’s forum to present high level options Stakeholder consultation period, bi-lateral meetings included. Concludes with a summary paper Forum to present more detailed options and areas requiring further consideration Consultation period on option detail, concludes with decision on way forward by CER Detailed design and implementation planning begins before decision to allow improved decision making

21/11/ Welcome and backgroun d Review timetable Objectives and Terms of Reference High level options Open forum Specific issues for Ireland Ed Kee PA Consulting

21/11/ High level options The purpose of this section is to: Consider basic market structures used around the world Gain a common understanding of the status quo Consider which basic structures may be appropriate for Ireland

21/11/ High level generic market types Vertical Integration France, US (pre-market) Mandatory Pool Financial CfDs Australia, Singapore PPAs Bilateral Contract Czech Republic, Malaysia Generation Transmission Supply/Retail Distribution Balancing market Physical supply contracts NETA, California, FERC SMD Dispatch Pool Balancing market Examples

21/11/ Areas not for consideration It has been decided that that the following models are not considered to be suitable future market types for Ireland: Vertical integration Bi-lateral contract only It is unlikely that either of these would satisfy EU requirements

21/11/ ESB - PES Distribution ESB - PG Transmission ESB - PES Independent market and system operator Current industry structure Generation Supply Customers Independents

21/11/ Currently there is a regulated tariff arrangement between ESB PG and PES ESB - PES Distribution ESB - PG Transmission ESB - PES Independent market and system operator Regulated tariff arrangement Tariff based upon cost to serve analysis

21/11/ Independents enter the market via bi-lateral contracts ESB - PES Distribution ESB - PG Transmission ESB - PES Independent market and system operator Bi-lateral contracts Independent generators and retailers enter in bi- lateral contracts to hedge customer prices

21/11/ VIPP contracts ESB - PES Distribution ESB - PG Transmission ESB - PES Independent market and system operator VIPP contracts VIPP contracts allow ESB to supply independents, but these contracts expire before the end of the transitionary period

21/11/ The transitionary arrangements have evolved into the current status quo ESB - PES Distribution ESB - PG Transmission Regulated top- up and spill market Congestion managemen t ESB may be able to directly supply independ ents Regulated tariff arrangement Bi-lateral contracts VIPP contracts

21/11/ Features of the status quo

21/11/ Decentralised market ESB - PES Distribution ESB - PG Transmission Balancing market & system operator Power Exchange Contracts for power can be bi-lateral or via a power exchange Current regulated arrangements possibly stay in place, although their form may change The exact nature of the power exchange may be defined or left to independent providers

21/11/ Features of a Decentralised market

21/11/ Centralised market ESB - PES Distribution ESB - PG Transmission Mandatory spot market All power is bought and sold through the spot market Current regulated tariff may be replaced with financial contracts Financial CfDs between parties to hedge prices in the spot market

21/11/ Features of a centralised market

21/11/ Welcome and backgroun d Review timetable Objectives and Terms of Reference High level options Open forum Specific issues for Ireland Ed Kee PA Consulting

21/11/ A number of issues face Ireland Some issues are specific to Ireland and some are common in all markets, although their relative importance may be different Short-run issues: Optimal real-time dispatch Real-time locational price signals for generation or load Liquidity in the contract or imbalance markets Longer-run issues: Generator investment incentives Transmission congestion Locational signals for new generation/new load Cost recovery (congestion, PSO, etc) Market dominance of ESB Options for customers with access to market

21/11/ There are also important economic and physical inter- dependencies to be considered Britain is interconnected to continental Europe for both gas and electricity Interconnection between England and Scotland is being upgraded The Irish economy has grown dramatically over the last decade and so has the consumption of electricity. The Irish economy is approximately 1% of the total EU economy. Existing wholesale market structure (e.g., small numbers of participants, ESB dominance etc.) must be reflected in any new market design. Interconnection with Northern Ireland which is, in turn, connected to Scotland Low wholesale electricity prices due to overbuilding, NETA, and other issues. Continental Europe in the process of major electricity industry and market reform Potential for direct connection to England & Wales

21/11/ Two important institutional and structural issues The paper highlights two key issues in Ireland: Generation adequacy Market dominance There are a number of different possible solutions to these issues There are also a number of other issues which also are very important and will be considered in due course, including: Security of supply Promotion of competition Minimising transaction costs Fostering renewables

21/11/ Generation adequacy Generation adequacy is a key concern. Electricity markets address this by: Energy and contract market price signals; or Separate capacity markets or mechanisms There is concern that markets alone may not deliver adequate generation Separate capacity markets or mechanisms could include: A default buyer who can enter into contracts to encourage new entry Development incentives (outside market) tender for new generation Capacity requirements upon retailers

21/11/ Default buyer in a centralised market ESB - PES Distribution ESB - PG Transmission Mandatory spot market Default buyer Possible new IPP The default buyer may enter into financial contracts with any new IPP and retailers if the market is not delivering sufficient reserve capacity Current regulated tariff may be replaced with financial contracts and may remain in place

21/11/ Market dominance ESB PG currently controls more than 70% of generation capacity, new entrants may see this as a risk to entering the market In some markets, hedging and vesting contracts have been imposed to reduce the impact of market dominance and maintain acceptable retail prices Such contracts can be achieved in a number of ways including: Direct regulated contracts between incumbent generators and retailers Customers have contract rights and can transfer them between retailers A third party regulated dominant buyer for all incumbent generation Alternatively, price or bid caps could be imposed to control market power

21/11/ Dominant buyer in a centralised market ESB - PES Distribution ESB - PG Transmission Mandatory spot market Dominant buyer The dominant buyer is a party in all transactions between the business units of ESB and may enter into contracts with IPPs and retailers if the market is not delivering sufficient reserve capacity

21/11/ Welcome and backgroun d Review timetable Objectives and Terms of Reference High level options Open forum Specific issues for Ireland Cathy Mannion Head of Generation and Supply

21/11/ Welcome and backgroun d Review timetable Objectives and Terms of Reference High level options Open forum Specific issues for Ireland Conclusion