Review of Market Prices
A Decision by the Commission for Energy Regulation
CER/02/113
16th August 2002
Introduction
This document contains a decision by the Commission for Energy Regulation
under Regulation 3(4) of SI No. 49 of 2000 – Electricity Regulation Act, 1999
(Trading Arrangements in Electricity) Regulations, 2000.
Commission’s Decision on Market Pricing
The Commission hereby decides that the following amendments to the
market pricing, will be put in place in the Trading and Settlement Code (“the
Code”):
1. There will be a new payment made to some participants who spill energy.
A Capacity Related Spill Payment shall be made and it will be based on
the volume of spill and a flat price across all days and seasons, subject to
conditions set out below1.
2. This payment, the Capacity Related Spill Payment, is in addition to the
current payment (Bilateral Imbalance Payment) based on the spill price.
3. This payment will be made for all spill energy (i.e. positive Bilateral
Contract Imbalances) by non-green, non-CHP, non-VIPP participants.
Green and CHP participants will continue to get 100% access to Top Up
at the first tier price (as per the current Rules) but will not be allowed
avail of the Capacity Related Spill Payment.
4. The Capacity Related Spill Payment is calculated per trading period and
is defined (for those who are eligible to receive it) as:
Bilateral Contract Imbalance (where that is positive – i.e. spill) x
Capacity Related Spill Payment Price.
5. The basic rate (price) is euro 5.94/MWhr2. The actual price in any trading
period may vary between zero and this amount based on the principles in
points 6 and 7 below.
6. The Capacity Related Spill Payment Price will be capped to ensure that it
does not exceed the difference between the Spill Price and the Top Up
Price.
Thus in periods where:
o the Spill Price resets the Top Up price (i.e. the Spill Price exceeds the
ex-ante Top Up Price) – the price (and hence the payment also) will be
zero.
This will be an additional payment and will be included in the normal monthly settlement
invoice. It will be calculated after all bilateral trading has occurred and final Bilateral
Contract Imbalances are established. Information on the final Capacity Related Spill Payment
price will be made available to all participants, in conjunction with their final imbalance
position and associated payments.
2 The basic price for the Capacity Related Spill Payment price of euro 5.94/MWhr is subject to
change by the Commission.
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2
o
the Spill Price is within euro 5.94/MWhr3 of the Top Up Price – the
Capacity Related Spill Payment price will be reduced such that it plus
the Spill Price equals the Top Up Price
o
the Spill Price is below the Top Up Price by euro 5.94/MWhr4 or more,
then the Capacity Related Spill Payment price will be unchanged.
7. There shall be a 350 MW limit to the amount of spill energy that receives
the Capacity Related Spill Payment. This limit is subject to change by the
Commission. If the actual quantity spilled exceeds this limit the Capacity
Related Spill Payment price (for all spill receiving this payment) shall be
reduced, pro-rata, from euro 5.94/MWh.
8. The current Spill Cap will no longer apply.
9. A minimum Spill Price shall be set at the best new entrant fuel price.
This floor price will apply to all units spilled including spill from ‘green’
and CHP generators and suppliers.
10. The current estimated BNE avoidable fuel price, and hence the Spill Price
floor, is euro 28/MWhr. This floor price will be updated in the settlement
system as and when the Commission updates the BNE avoidable fuel
price.
11. The implementation date for the above spill-pricing regime shall be 1st
September 2002.
Interim Solution
The Commission wished to implement this decision on Market Prices from
1st August but was advised that implementation of this decision in full from
the intended date of 1st August would unduly interfere with the settlement
process. However, it is possible to put in place an interim solution to apply
for settlement of the month of August 2002 only. The Commission hereby
decides that this interim solution shall be put in place with effect from 1 st
August 2002. This interim solution implements the Commissions decision
with the exception of the application of the 350MW spill cap limit referred to
in item 7 above. Thus the Capacity Related Spill Payment shall apply to all
energy units spilled by non-green, non-CHP, non-VIPP participants. This
interim solution shall apply until settlement of 1st September 2002.
As this arrangement is temporary for the month of August 2002 its
application is outside of the scope of the Market Audit. However, the SSA
shall make available full details of the payment to all affected participants.
The basic price for the Capacity Related Spill Payment price of euro 5.94/MWhr is subject to
change by the Commission.
4 The basic price for the Capacity Related Spill Payment price of euro 5.94/MWhr is subject to
change by the Commission.
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3
Top Up and Secondary Top Up Prices
1. The Top up price shall continue to be calculated and applied to
generators and suppliers as currently set out in the Code. The current
Top Up prices will continue to apply until such time as the Commission
updates the BNE price and publishes a new set of Top Up prices. All
limits on access to first tier top-up remain unchanged.
2. The second tier Top Up Price will be set by reference to ESB Power
generation’s sales price to ESB Supply and shall be profiled over time.
The Commission will publish a new set of Top Up Multipliers to give effect
to this by 1st September 2002.
3. The implementation date for the above secondary top up pricing regime
shall be 1st September 2002.
The modifications required to the Code to give effect to the Spill Price floor
are contained in Appendix 1. These are hereby approved by the Commission.
A complete set of revisions to the Trading and Settlement Code and Rules to
give effect to this decision will be issued in the near future.
Background
The Minister for Public Enterprise issued a Policy Direction in July 1999
setting out the high level principles for the electricity trading system for the
period to February 18th 2005. The Direction required the Commission to
review the market pricing arrangements in early 2002 and the overall
trading arrangements in 2004. This paper relates to the review of market
prices.
According to the policy direction, the Commission may change the pricing
arrangements if they are found to be inadequate when compared with the
stated objective for the trading arrangements. The objective of the trading
arrangements is the promotion of “efficient competition amongst licensed
generators and suppliers within the market segment being opened to
competition.”
This review was initiated in September 2001, largely in response to concerns
about market conditions. The Commission began by inviting interested
parties to submit comments on the current pricing arrangements.
Comments and submissions received seemed to suggest that these
arrangements might be inadequate when compared with the objective of the
trading arrangements, and should therefore be modified.
Subsequently, on 11th January last the Commission issued a consultation
paper (Ref.: CER/02/07) reviewing the present pricing arrangements. The
paper examined the effectiveness of the current imbalance pricing
arrangements in meeting the overall objective of the Minister’s policy
direction and set out a number of options for change. Comments were
invited on the ideas included in the paper.
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While the Commission was considering the different responses made to the
consultation paper, an industry meeting was held in the Commission’s
offices on 26th February 2002. This was held to provide the Commission with
the opportunity to further discuss these issues with the industry prior to
making its decision about the current pricing arrangements.
The Commission wanted to focus discussion on two main areas. The first
related to possible changes to the top up and spill pricing mechanisms (if the
Commission was to decide that the present pricing arrangements do not
meet the objective of the policy direction). At that time, the Commission was
considering the option of one market price for both top up and spill. This
price could include both an energy and capacity element and be set, to the
greatest extent possible, by market forces. Another area the Commission
wanted to focus on was the issue of market information and the calculation
of imbalance market prices.
Another meeting was held on 13th March 2002 where a single price was
discussed further. On 20th March 2002 the Commission published a
discussion paper on Market Pricing (Ref.: CER/02/32) setting out an
approach where the single price could be calculated with reference to a
Marginal Energy Price plus a capacity component, calculated as Value of
Lost Load (VOLL) times Loss of Load Probability (LOLP), where VOLL =
€7,550. The Commission was of the view that this would (a) provide existing
and potential market participants with a capacity value signal and (b) reduce
some of the complexity in pricing arrangements as illustrated by the number
of different prices in the market.
In addition the Commission held a series of bilateral meetings with market
participants. In general there was support for a single market price
(although not unanimous) but there was some concern about the effects on
a supplier of a market price that was not known in advance.
At this time, the Commission considered this approach to pricing in more
detail and a number of issues became clear.
1.
There is a strong possibility that, depending upon what is happening
in the market at a particular point in time, the single market price
can fall below the PG, VIPP and top up prices (thereby undermining
the market).
2.
This pricing mechanism does not provide a sufficiently advanced
investment signal to generators with a construction lead-time of two
to three years.
3.
This approach can lead to volatile pricing which is a concern to some
suppliers.
4.
During the transitional period, PG may face potentially considerable
financial exposure from this approach to the extent that the single
market price falls below the PG sales price to PES.
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Reasons for Commission’s Decision
The Commission has carefully considered the question of whether or not
current pricing arrangements meet the main objective of the trading
arrangements – the efficient competition amongst licensed generators and
suppliers within the market segment being opened to competition. The
Commission is of the view that the initial interest in the market by new
generators and suppliers has diminished in part due to the overall structure
of the market but also due to the operation of top up and spill. It would
appear that potential new generators face a significant level of risk in
securing a revenue stream in the bilateral contract market. The current
pricing regime does little to abate this risk.
The Commission accordingly has decided to amend the current market
pricing arrangements as part of an overall plan to provide an environment
that will encourage market entry by efficient generators and suppliers. In
this manner, customers will be provided with a sustainable supply of
reasonably priced electricity. The Commission is aware that changing the
calculation of market prices will not, in itself, secure market entry. However
it will provide a signal to interested parties of the Commission’s intention.
It is worth noting that the Commission has decided to instigate the review of
the overall trading arrangements earlier than anticipated in the Minister’s
policy direction. This second review is underway and the Commission aims
to set out the high level principles of the post February 2005 market early in
2003. This will provide interested parties (existing and potential) with a clear
signal of how the market will develop and should reduce the level of
uncertainty faced by parties considering entry into the Irish electricity
market. It will also allow for the timely development and implementation of
any necessary systems required to underpin the post February 2005 market.
Tom Reeves
Commission for Energy Regulation
16th August 2002
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Appendix 1
Revisions to the Trading and Settlement Code to effect Spill Floor
Price
Trading and Settlement Code - Appendix 7
Electricity Trading and Settlements Rules
7.4.3 Spill Price
A value of the “Spill Price” (SPh) in €/MWh per Trading Period will be determined as
part of the EPUS run and will be included in the EPUS output files.
This Spill Price is the highest decremental price of any Unit with a value of XNOMguh
> 0 and that can be decremented.
For the avoidance of doubt, a non-exclusive list of the circumstances which would
preclude a Unit from being decremented is given below.
1)
2)
Where the decrementing of the Unit would involve it being desynchronized.
Where the decrementing of the Unit would involve it being scheduled at less
than Min Gen.
There will be a ‘floor’ applied to the Spill Price, such that if the EPUS derived Spill
Price, above, is below this ‘floor’ price, then the Spill Price, for this trading period,
will be reset to the ‘floor’ price. This ‘floor’ price is the Best New Entrant Avoidable
Fuel Cost (BNEAFCh). Therefore,
If SPh < BNEAFCh , then SPh = BNEAFCh
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