1. Challenges for the SEM

2.  Day-ahead price coupling is a key feature of the final draft Framework Guidelines on congestion management issued by ERGEG in February 2011.  The Framework Guidelines will inform binding network codes to be developed by ENTSO-E over the next two to three years  The network codes for day-ahead and intraday are expected to be developed first, with finalised versions scheduled to be issued by Q1 2012  The key challenge for the SEM is that our market design is fundamentally different from the approach used in the rest of North West Europe 2

3.  The SEM market design is based on a ex-post gross mandatory pool with central commitment. ◦ All electricity must be sold and bought through a central electricity pool. ◦ There is no opportunities for bilateral physical power transactions outside the pool ◦ Generators are required to submit bids which reflect their short run marginal costs and are dispatched according to the merit of their offers. 3

4.  Price Formation ◦ System Marginal Price (SMP) based on a unconstrained stack of available generation optimised over the trading day.  Gate Closure ◦ Set long in advance of real time to allow participants time to plan based on indicative dispatch.  Generator Offers include ◦ Commercial bids (PQ) pairs and start-up costs ◦ And technical parameters such as minimum running levels, ramp rates and minimum run times. ◦ SRMC  Transmission Constraint Payments  Explicit Capacity Payment Mechanism 4

5.  Price Coupling; ◦ Which means, simultaneous calculation of prices and volumes across several markets by a ‘price coupler’ which operates at a trans-national level.  common gate closure times;  comparable prices and bid formats;  participation of buyers and sellers;  Firm day-ahead trades (Price and Quantities).  sharing of all bid data between power exchanges 5

6.  Number of physical markets ◦ SEM: Single Mandatory Pool based on Ex-post Price ◦ NWE: Multiple forward and spot markets  Form of generation bids ◦ SEM: commercial and technical bids (SRMC ) ◦ NWE: Simple and Block bids  Market scheduling and dispatch ◦ SEM: Central scheduling by optimisation algorithm (TSO). ◦ NWE: Self-scheduling based on contracted positions  Timing of gate closure ◦ SEM: Currently day-ahead at 10am for data submissions only. ◦ NWE: Intra-day gate closure within a few hours of real time  Composition of wholesale prices ◦ SEM: Separate prices for energy and capacity ◦ NEW: Prices reflect a single product with no explicit separation of energy and capacity 6

7.  Pöyry provided advice on the options for the development of a day-ahead trading solution for the SEM.  The SEM Committee asked for options for the day-ahead trading solution which: ◦ allow a day-ahead coupling of the SEM and neighbouring markets that is compatible with the requirements set out in the draft Framework Guidelines. ◦ not fundamentally alter the SEM rules. 7

8.  Six conceptual options for a day-ahead trading were propose. They were derived from the answers to three key questions: ◦ Should participation in the day-ahead market be mandatory or voluntary? ◦ What is the form of generation bids into the local day-ahead market? ◦ How are day-ahead volumes made firm? 8 The options were assessed according to TSC Objectives: Promotion of competition; Efficient administration of the SEM Efficient ex-post pricing Opportunities for risk management Size of constraint payments Compliance with European developments

9.  The role of price coupler should be played either by a new Irish power exchange or by some existing in the NEW region.  Given remit, the most plausible solution for the Irish day- ahead market would be a CfD market with settlement in the ex-post SMP.  Common bid format (Simple Vs. Complex) ◦ Market Participants or the price coupler would have to convert the Irish complex bids into simple bids.  Comparable prices (Energy Only vs. Explicit Capacity)(CfD?); ◦ Market Participants or the price coupler would have to bundle energy and capacity in a single energy only bid.  firm day-ahead trades ◦ In order to keep market participants whole between the Day-Ahead and the SEM ex-post market, some sort compensation could be put in place to eliminate the volume risk between the two markets. 9

10.  To a large extent, the SEM HLD reflects the particular challenges that a small, relatively isolated island system faces in maintaining a secure supply and mitigating market power.  Whilst the electricity markets in North West Europe differ from each other in detail, they have similar characteristics for these high- level features. 10