Industry forumReview of Electricity Trading Arrangements

Sheldon Park Hotel

21st November 2002

21/11/2002 - 2

These presentation slides were accompaniedby an oral discussion, so that the slides alonedo 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 atPA Consulting or the views of our clients.

21/11/2002 - 3

Welcome and

background

Review timetable

Objectives and Terms

of Reference

High level options

Open forum

Specific issues for

Ireland

Tom ReevesCommissioner

21/11/2002 - 4

Timetable for today

Chair: Cathy Mannion, Head of Generation and Supply, CER

Topic Timing Presenter

Registration Tea/Coffee 8:30

Welcome and background to review 9:00 – 9:05 Tom Reeves, Commissioner, CER

Objectives and Terms of Reference 9:05 – 9:25 Keelin O’Brien, Manager, Electricity Trading, CER

Timetable for review and consultation process

9:25 – 9:45 Stuart Curson, PA Consulting

Description of three high level options 9:45 – 10:30 Ed Kee, PA Consulting

Tea/Coffee 10:30 – 10:45

Specific considerations for the Irish Market

10:45 – 11:30 Ed Kee, PA Consulting

Open Forum 11:30 – 12:25 Cathy Mannion, Head of Generation and Supply, CER

Conclusion 12:25 – 12:30 Tom Reeves, Commissioner, CER

Lunch 12:30

21/11/2002 - 5

Welcome and

background

Review timetable

Objectives and Terms

of Reference

High level options

Open forum

Specific issues for

Ireland

Keelin O’BrienManager, Electricity Trading

21/11/2002 - 6

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

21/11/2002 - 7

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.

21/11/2002 - 8

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

21/11/2002 - 9

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

21/11/2002 - 10

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

21/11/2002 - 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

21/11/2002 - 12

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

21/11/2002 - 13

Welcome and

background

Review timetable

Objectives and Terms

of Reference

High level options

Open forum

Specific issues for

Ireland

Stuart CursonPA Consulting

21/11/2002 - 14

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.

21/11/2002 - 15

Consultation timetable

J F M AO N 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

21/11/2002 - 16

Welcome and

background

Review timetable

Objectives and Terms

of Reference

High level options

Open forum

Specific issues for

Ireland

Ed KeePA Consulting

21/11/2002 - 17

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

21/11/2002 - 18

High level generic market types

Vertical Integration

France, US (pre-market)

Mandatory Pool

Fin

anci

al C

fDs

Australia, Singapore

PP

As

Bilateral Contract

Czech Republic,Malaysia

Generation

Transmission

Supply/Retail

Distribution

Balancing market

Phy

sica

l su

pply

con

tra

cts

NETA, California, FERC SMD

Dispatch

PoolBalancing

market

Examples

21/11/2002 - 19

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

21/11/2002 - 20

ESB - PES

Distribution

ESB - PG

Transmission

ESB - PES

Independent market and

system operator

Current industry structure

Generation

Supply

Customers

Independents

21/11/2002 - 21

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

Reg

ulat

ed t

ariff

arr

ange

men

t

Tariff based upon cost to serve analysis

21/11/2002 - 22

Independents enter the market via bi-lateral contracts

ESB - PES

Distribution

ESB - PG

Transmission

ESB - PES

Independent market and

system operator

Bi-l

ater

al c

ontr

acts

Independent generators

and retailers enter in bi-

lateral contracts to

hedge customer

prices

21/11/2002 - 23

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

21/11/2002 - 24

The transitionary arrangements have evolved into the current status quo

ESB - PES

Distribution

ESB - PG

Transmission

Regulated top-up and spill

marketCongestion managemen

t

ESB may be able to directly supply

independents

Reg

ulat

ed ta

riff a

rran

gem

ent

Bi-lateral contracts

VIPP contracts

21/11/2002 - 25

Status Quo

Regulation Detailed

Industry Structure Largely vertical – some independents

System Ops & Dispatch Bi-lateral and Balancing

Energy Markets Tariff arrangements & Bi-lateral balancing

Ancillary Services Self-provision and contract

Price Setting Contract and Tariff

Settlement Relatively simple

Capacity Planned?

Green Some advantages

Retail Competition Access and supply competition

Vesting Contracts Tariff arrangements

Transmission Access Firm access rights

Features of the status quo

21/11/2002 - 26

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

21/11/2002 - 27

Features of a Decentralised market

Decentralised Market

Regulation Balancing market monitoring (perhaps contracts)

Industry Structure Atomised structure is better

System Ops & Dispatch Bi-lateral and balancing market

Energy Markets Bilateral; maybe spot balancing market

Ancillary Services Contract or market

Price Setting Balancing market with two-part or single spot price

Settlement Can be very complicated (many parties)

Capacity Market driven

Green Separate, two-part balancing price hinders

Retail Competition Access and supply competition

Vesting Contracts Tariff arrangements

Transmission Access May be part of balancing market

21/11/2002 - 28

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

21/11/2002 - 29

Centralised Market

Regulation Spot market monitoring

Industry Structure Atomised structure is better; may rely on tariff arrangements as substitute hedge contract

System Ops & Dispatch Central

Energy Markets Centralised spot market

Ancillary Services Contract or market

Price Setting Spot price, SMP or administered (uniform, zonal, or LMP)

Settlement Simple, with hedge contracts outside market operator

Capacity Market driven

Green Separate, incentives outside spot market

Retail Competition Access and supply competition through CfDs

Vesting Contracts Tariff arrangements

Transmission Access TBD if uniform pricing chosen

Features of a centralised market

21/11/2002 - 30

Welcome and

background

Review timetable

Objectives and Terms

of Reference

High level options

Open forum

Specific issues for

Ireland

Ed KeePA Consulting

21/11/2002 - 31

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

21/11/2002 - 32

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

21/11/2002 - 33

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

21/11/2002 - 34

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

21/11/2002 - 35

Default buyer in a centralised market

ESB - PES

Distribution

ESB - PG

Transmission

Mandatory spot market

Default buyer Possible

new IPPThe 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

21/11/2002 - 36

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

21/11/2002 - 37

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

21/11/2002 - 38

Welcome and

background

Review timetable

Objectives and Terms

of Reference

High level options

Open forum

Specific issues for

Ireland

Cathy MannionHead of Generation and Supply

21/11/2002 - 39

Welcome and

background

Review timetable

Objectives and Terms

of Reference

High level options

Open forum

Specific issues for

Ireland

Conclusion