GUEST BLOG: I-SEM Sets New Challenges for Energy Suppliers 06 Jul 2017
In today's Insight, Gareth Miller of Cornwall Insight gives his views on the new challenges facing electricity suppliers in the I-SEM based on his experience in the GB electricity market.
The recent SEM Committee (SEMC) decision not to introduce either a Forward Contract Selling Obligation (FCSO) or a Market Making Obligation (MMO) in the new I-SEM wholesale power market will emphasise the challenges of trading in the new world for many, especially the smaller competitors. We are moving from a world under SEM where imbalance risks have been smeared through its single price to one under I-SEM which is intended to bring them out and allocate them to those deemed cause them.
Smaller and one-sided parties (those who “just” generate or supply electricity) have perhaps the biggest challenges. The I-SEM regime is being orientated around a balancing market that is designed to be far more volatile than the current SEM. This is by design as price volatility is intended to incentivise companies to trade. Put bluntly, the message the market designers are sending is trade or you will be worse off.
For suppliers, and intermittent generators, this means a change in outlook is required to ensure their viability under the new rules. They will need to become informed traders of the product they are selling, knowing in each period how much they need and understanding how that volume will change depending on many external variables, notably weather and temperature. To the extent they get it wrong they will have to pay a price, probably worse than market, for their short volumes and be paid a price, again probably worse than the market price they paid for it, for volumes they overbought.
New disciplines and skills will need to be learned overnight as we move to the new regime. For suppliers, they will involve buying and selling blocks of wholesale power reflecting the needs of their customers. For generators, sales will need to be made reflecting their expected production. Both sides will need to monitor carefully, and respond with further trading if necessary, the extent to which actual consumption and production differs from their expectations. Forecasting and responding to the forecasts will be critical.
It is to be hoped that a widening array of choice opens up for wholesale electricity trading. Exchange and brokered trading of standardised products for different time periods—from within day to longer-term covering months if not years—should evolve if the vision involved in the I-SEM design comes to fruition. Already parties such as ElectroRoute are developing these kinds of services.
To the extent there will be no FCSO or MMO, many suppliers fear their task will be harder as short duration, small quantity products may not be made available. The expectation on the part of the designers is that the market will provide the solutions. After all both generators and suppliers should stand to gain from trading with each other rather than falling in to imbalance. There is scepticism amongst some on the supplier side of the market that this will happen, especially given the experience of the BETTA market for Great Britain.
After an initial surge of activity, the British experience of a similar change in market design was of a collapse in liquidity and extreme difficulty for small generators and suppliers to source product in the right durations and quantities. Regulatory intervention of the kind the SEMC has disavowed obligated the large suppliers to offer such products and, at least as importantly a burgeoning market in wholesale services for small suppliers has grown in the last three years. There is no guarantee of course that the I-SEM will follow that experience, but perhaps Irish suppliers will be a lot less on their own as the new market beds down than their British counterparts were.
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