FUI electricity region:

Which kind of market integration

are we looking for?

CRE

SG FUI – 4 July 2008

2

Background

Objectives of the ERI process: Regional market integration as a first step towards a single integrated

market

Obstacles towards regional market integration: Volunteering-based process Lack of incentives for TSOs Lack of human and financial resources Differences of market designs Regulatory gap

Despite these numerous obstacles, a growing consensus, at European level, towards target congestion management methods Towards a harmonized set of auction rules and interfaces for long term

cross-border rights Towards an implicit allocation method for the day-ahead timeframe Towards an implicit and continuous trading platform for the intraday

timeframe

3

Obstacles towards “regional” market integration in FUI region

Three very different market designs : SEM, NETA, French market

Specificity regarding the status of « interconnectors » in the FUI region: Is Moyle an interconnector? Is the Irish North-South line an interconnector? Separation between NGIL/NGT for IFA From UK side, IFA is

operated as a merchant line, that is the cost for the cable is covered by the IFA users (no part of the cost is included in the calculation of UK grid tariffs)

Consequences for the development of cross-border trade? Consequences on the OFGEM’s role once the interconnector license has

been granted? Consequences on the regulatory gap?

4

Status on ongoing projects on IFA Improvement and “Harmonization” of explicit auction rules

Some expected progress: compliance with EC regulation, hourly product, marginal price, firm deadline for nomination, UIOSI, etc.

But some concerns in terms of efficiency and harmonization: Purpose of developing a specific interface for one single

interconnector? Purpose of implementing an intraday explicit auction? Purpose of implementing secondary capacity market in intraday? Purpose of implementing UIOSI between day-ahead and intraday? Why is the firmness of nominations not implemented? Why should technical losses keep on being paid in nature?

Development of cross-border balancing exchanges An excellent and ambitious project Nevertheless, several concerns regarding the fee NGIL intends to

apply for each MWh traded on IFA: It is a clear obstacle to the development of cross-border balancing

trade 2.51£/MWh! What is the logic behind? To remunerate the cable? IFA cannot be a

merchant line! How is this fee determined? By whom? Who is approving this fee?

Appendix

5

Next steps for “regional” market integration ?

To which extent do we want to harmonize explicit auction rules with the Continental European ones ? What are the obstacles to guarantee physical firmness for nominations?

What are the obstacles to internalize the treatment of losses?

When will we start discussion on market coupling? CRE’s report on interconnector use and management assesses the

economical benefit of developing market coupling on IFA at 57M€ in 2007!

When will we start discussion on implicit continuous intraday trading? Is the implicit continuous intraday trading (a priori free) compatible with the

particular status of IFA?

When will we discuss new cross-border investment? Do we have to rely only on merchant investors to build new lines?

Appendix

Appendix

6

Annexes

7

Use in the opposite direction and under-use of daily capacities in 2007

capacity used inopposite directionto price differential

(MW)

Proportionof hours

concerned

capacity notused in the

PriceDifferential

direction (MW)

Proportionof hours

concerned

GermanyExport 298 80 % 843 83 %

Import 732 86 % 2,159 88 %

EnglandExport 317 69 % 612 73 %

Import 110 27 % 1,150 97 %

SpainExport 350 97 % 86 28 %

Import 13 13 % 127 42 %

ItalyExport 336 81 % 91 13 %

Import 24 9 % 849 94 %

SwitzerlandExport 2,911 100 % 111 50 %

Import 332 98 % 1,219 98 %

Source: CRE’s report on use and management of French interconnections in 2007

8

Loss in social welfare due to the absence of implicit mechanism in day-ahead

Loss in social welfare

estimated (M€)

Total (M€)

Export 45 Germany

Import 65 110

Export 22 England

Import 34 57

Export 3 Spain

Import 18 21

Export 18 Italy

Import 29 47

Export 32 Switzerland

Import 65 97

Total: 332

back to presentation

Source: CRE’s report on use and management of French interconnections in 2007

9

Total gross income from auctions (M€) for 2006

Total gross income from auctions (M€) for 2007

GermanyExport 21 34

Import 53 78

EnglandExport 221 87

Import 11 35

BelgiumExport 41 33

Import 2 3

SpainExport 35 50

Import 17 24

ItalyExport 134* 400

Import - 1

SwitzerlandExport - -

Import - -

* Auctions were held on half capacity only in 2006

Source: CRE’s report on use and management of French interconnections in 2007

Congestion income on French bordersback to presentation

10

Unused interconnection capacity available for balancing exchanges, in 2007

Average capacity available for

export(MW)

Percentage of hourly steps when capacity available for balancing exports is above

500 MW

Average capacity

available for import(MW)

Percentage of hourly steps when capacity

available for balancing imports is above 500 MW

Germany 1 180 50 % 3 970 97 %

England 1 000 50 % 880 90 %

Belgium 1 180 70 % 2 280 99 %

Spain 300 23 % 1 060 80 %

Italy 120 8 % 3 400 100 %

Cross-border balancing back to presentation

Source: CRE’s report on use and management of French interconnections in 2007